Economic Paradox: Born Out of Monetary Expansion




Dear Editor,

Public infrastructure and foreign direct investment (FDI), particularly in the services and industry sectors, boost production, albeit with a relatively long and short lag period, respectively. The expected boost in the production of consumer goods drives invigorated consumption, both for domestically produced and imported products.

An Op-Ed piece by Eyob Tesfaye (PhD) headlined “Addressing a ‘Five-star’ Economic Problem” [Volume 19, Number 942, May 20, 2018], takes note of this.

It mentions the fast economic growth driven by “massive investments in public infrastructure development, invigorated consumption and a remarkable upsurge in foreign direct investment.” This though does not tally with “stubbornly high inflation, continuous currency depreciation, widening trade deficit, dwindling forex reserve, ballooning external debt and high unemployment.”

The imbalance may have originated from the disparity in trade exchanges of capital goods, which is likely to be the case in a developing country such as Ethiopia.

Imports of capital goods are assumed to be partly financed by the “remarkable upsurge” in FDI which should have mitigated the “dwindling” of forex reserves. And an average annual growth rate of eight per cent, considered high by any measure, should have dampened inflation.

Continuous currency depreciation in the context of a real annual GDP growth rate of eight per cent would predominantly be a result of imprudent monetary expansion. And a “ballooning” external debt would be the result of a disproportionately high new external loan disbursements or a low contribution of foreign debt to building the forex generating capacity (including physical exports) of the economy.

Similarly, high youth unemployment in the face of high overall real economic growth implies relatively high capital intensity of production methods and capital resource leakage through inefficiency, corruption or embezzlement of public funds.

The upshot of high real economic growth in the face of worsening macroeconomic fundamentals would constitute a paradox worth mulling over for quite a while. I suspect false economic statistics, disproportionately high monetary expansion, corruption and embezzlement of public funds, inefficiency, relatively high capital-intensity of production methods, and low productivity of investment (particularly those by the government) as the main culprits.

The task, therefore, becomes identifying the most significant causes, at least two or three, of the apparent economic paradox. I am more inclined to excessive monetary expansion as the single most important reason. It is the abundant availability of paper money which encourages corruption, falsification of economic statistics, incompetence and inefficiency.

The excessive monetary expansion is solely the responsibility of the National Bank of Ethiopia (NBE). The central bank should wake up and slumber no more.

Eyob’s piece has inspired me to grapple once again with an apparent economic conundrum. It could have been written by the technocrats at the Finance Ministry or the National Planning Commission.

Teklebirhan Gebremichlael

Addis Abeba



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