No Risk of High Inflation Next Year




The budget bill for the 2014/15 fiscal year was tabled to Parliament early last week. It will now receive legislators’ scrutiny before it becomes the law of the land. As much as there are concerns of inflationary threats due to a budget deficit with the potential to increase, senior administration officials are confident that the budget will rather promote growth, employment and expansion of public infrastructure.

Senior administration officials, such as Abraham Tekeste (PhD), state minister for Finance & Economic Development (MoFED), bet on the prospect of a bumper harvest, as well as increases in domestic revenue mobilisation and export earnings. Tamrat G. Giorgis, managing editor, questioned Abraham on the latest budget.

 

Fortune: In what macroeconomic context has the budget been designed to have more than a 15pc increase from the current fiscal year?

Abraham Tekeste (PhD): It assumes that the economy will sustain the rapid growth; inflation will remain stable, as it has been for the last 16 months; tax revenues will increase and export earnings will increase significantly. The budget proposal is drafted in the context of rapid economic growth and a stable macroeconomic environment.

Q. What policy objective is it designed to achieve?

The budget aims to support the rapid economic growth and employment expansion; expand the delivery of basic services and infrastructure, and ensure macroeconomic stability.

Q. Regional and international finance organisations project that Ethiopia’s GDP will grow by 7.5pc. Growing by 15pc, how is next year’s budget affected by such moderate growth?

The prospect for next year is much more favourable than that. All the indications are that the upcoming main harvest season is set to see a significant increase in crop yields: the extension system is strengthened, the necessary farm inputs have been put into place on time and the weather is forecasted to be good. In addition, the services and industrial sectors driven by private investment will serve as additional sources of growth next year. On the demand side, we expect the consolidation of private investment in manufacturing and services, with many of them starting operations.

Next year, growth in the export of goods and services will pick up with the finalisation of numerous projects that are in the pipeline. Public investments in human development, social services and infrastructure will also provide additional impetus to growth. The outlook for next year is rapid growth under a stable macroeconomic environment.

Q. Do you see the possibility of inflation rearing its head again, and posing a challenge to the budget’s vision?

I expect stable inflation for next year. Given the prospect of the prices of some of the major commodities in the world market, the risk of imported inflation is low. The proposed budget sees only a budget deficit of 1.8pc of GDP. We expect prudent monetary policy too. Given that inflation has been in single digits for the last 16 consecutive months and that crop production is expected to increase, inflationary expectations are likely to subside.  I do not see the risk of high inflation next year.

Q. Critics have observed a sluggish macroeconomic and business environment in the current fiscal year, due to tight practice in the disbursement of approved budget. What percentage of last year’s budget has been disbursed to date? Will the policy of taming inflation at the expense of economic growth continue next year?

I think that the reality on the ground is very different from what you stated. Even the staunchest critics of our economic model forecast that the economy will grow at 7.5pc. This very conservative estimate is one of the highest growth rates in the entire world. This is also given that the world economy is still largely in trouble and struggling to recover.

We are trying to carefully balance the two policy objectives. And you do not have to sacrifice one to achieve the other. Many countries, including Ethiopia, have demonstrated that you can indeed sustain rapid growth and still maintain a stable macroeconomic environment. We have executed the budget for the current fiscal year according to the plan: over the first nine months, we disbursed over 70pc of the budget. This is about 20pc higher than the spending in the same period last year. There has been no change of practice in disbursing the approved budget for this fiscal year.



Published on June 15, 2014 [ Vol 15 ,No 737]


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