Ethiopia Q3 2022/2023 Inflation Analysis

Inflation, a term often heard in economic discussions, refers to the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. Essentially, when inflation rises, every unit of currency buys fewer goods and services. The National Bank of Ethiopia's Quarterly Bulletin for the third quarter of 2022/23 provides a comprehensive insight into the inflationary trends observed in both the global and Ethiopian economic landscapes. This article delves into the specifics of inflation as presented in the bulletin, offering a research-based analysis without the influence of personal opinions.

The global economic landscape, as depicted in the bulletin, has been influenced by various factors, with inflation being a significant player. The bulletin highlights:

Inflation across Organisation for Economic Co-operation and Development (OECD) economies has been on a decreasing trajectory. Specifically, the annual headline consumer price index (CPI) inflation across OECD countries (excluding Türkiye) saw a sharp decline to 5.8% year on year in March, down from 7.3% in February. However, when food and energy prices are excluded, the core inflation remains persistently high, signaling more persistence in underlying price pressures. This decelerated to 4.5% in March from 4.8% in February.

Inflationary pressures in Ethiopia have been a focal point of the bulletin. Here's a detailed breakdown:

During the third quarter of 2022/23, headline inflation in Ethiopia increased to 5.5% from 5% in the previous quarter. This rise was attributed to a 2.2 percentage point increase in food & non-alcoholic beverages and a 0.4 percentage point rise in non-food inflation. On an annual basis, headline inflation decreased by 0.1 percentage points, mainly due to a 0.4 percentage point decline in food & non-alcoholic beverages inflation. To provide a clearer picture:

Monetary policy and its instruments play a pivotal role in influencing inflation. The National Bank of Ethiopia's bulletin provides insights into the monetary developments during the third quarter of 2022/23:

The M2, which encompasses both cash and near-cash assets, stood at Birr 2.06 trillion at the end of the third quarter. This reflects a substantial 30.1% annual growth. The expansion in domestic credit, which grew by 28.5%, was a major contributor to this growth. However, there were contractions in external asset (net) by 71.5% and other items net by 41.6%.

This is the base money or a primary form of money supply in an economy. By the end of the third quarter, reserve money reached Birr 448.9 billion, indicating a 27.1% annual and 6.8% quarterly growth. A significant rise in banks' deposits at the National Bank of Ethiopia (NBE) and a 26.0% growth in currency circulation were the primary drivers behind this increase.

The banking sector, with its ability to influence money supply and credit availability, has a direct impact on inflation:

By the end of the third quarter, Ethiopia had 30 banks, with 28 being private and 2 state-owned. These banks opened 746 new branches during the quarter, bringing the total number of bank branches to 10,967.

The total capital of the banking system reached Birr 234.1 billion. Private banks accounted for 64% of this capital, while state-owned banks held 36%. The banking sector disbursed Birr 123 billion in new loans during the quarter, marking a 13% annual growth. State-owned banks contributed 39.6% to this, while private banks accounted for 60.4%.

Banks collected Birr 97.3 billion in loans, which was 78.2% higher than the previous year. This indicates an improvement in banks' capacity to collect disbursed loans and the loan servicing ability of customers.

The external sector, encompassing trade and foreign exchange, plays a crucial role in shaping inflationary trends. The bulletin provides a comprehensive overview of the external sector's developments during the third quarter of 2022/23:

Total receipts from commodity exports experienced a slowdown of 17.1% compared to the same quarter in the previous year, amounting to USD 873.5 million. This decline was attributed to reduced revenues from several commodities, including coffee, gold, chat, and meat products, among others. However, there were notable improvements in the export receipts from pulses, oilseeds, flowers, and electricity.

The bulletin reported that merchandise imports reached USD 4.2 billion during the review quarter, marking a 9.7% year-on-year drop. This decline was primarily due to reduced import values of capital goods, consumer goods, and miscellaneous goods.

Transfer receipts saw an increase of 3.3% to USD 2.2 billion, driven by a 7.5% rise in private transfers. This growth offset the decline in official transfers, which decreased by 20.2%.

Foreign exchange rates and their fluctuations can have direct implications for inflation:

During the third quarter of 2022/23, the weighted average official exchange rate depreciated by 6.7% compared to the same quarter in the previous year. This rate stood at Birr 53.6179/USD.

The REERI appreciated by 10.3%. This appreciation was a result of rising domestic inflation combined with the appreciation of the Birr exchange rate against trading partner currencies.

Government fiscal operations, encompassing revenue collection, grants, and expenditure, can have significant implications for inflation. The National Bank of Ethiopia's bulletin provides insights into the fiscal operations of the Federal Government during the third quarter of 2022/23:

The total revenue and grants collected by the Federal government reached Birr 87.7 billion, marking an 11.1% annual growth. This growth in revenue and grants is crucial as it indicates the government's capacity to finance its operations without resorting to excessive borrowing, which can be inflationary.

Government expenditure for the quarter stood at Birr 164.3 billion, showing a 5.6% annual decline. This reduction in government spending can have deflationary effects, especially if the decline is in capital or development expenditure that stimulates economic activity.

The fiscal operations resulted in an overall fiscal balance (including grants) depicting a deficit of Birr 76.5 billion for the review period. Persistent fiscal deficits can exert inflationary pressures, especially if financed by domestic borrowing.

Investment activities, both domestic and foreign, can influence demand patterns, employment, and, consequently, inflation:

During the third quarter of 2022/23, 9 investment projects with a total investment capital of Birr 132.6 million became operational. When compared to the same quarter in the previous year, both the number of investment projects and the investment capital showed declines of 79.1% and 68.5%, respectively.

Investment activities can influence inflation in multiple ways. New investments can increase demand for goods and services, pushing prices up. However, once these investments become operational, they can increase the supply of goods and services, potentially exerting downward pressure on prices.

Having explored the various facets of inflation as presented in the National Bank of Ethiopia's Quarterly Bulletin, it's essential to synthesize this information and understand its broader implications for the Ethiopian economy.

The inflationary trends in Ethiopia are influenced by both domestic and global factors. While the global economic landscape, especially the OECD economies, witnessed a decline in inflation, Ethiopia experienced a slight uptick. This suggests that domestic factors, such as monetary developments, fiscal operations, and investment trends, played a more significant role in shaping the inflationary landscape.

Monetary policy, as reflected in the broad money supply and reserve money, has been expansionary. The substantial growth in M2 and reserve money can exert inflationary pressures, especially if the money supply growth outpaces the growth in real output.

The banking sector's role in influencing inflation cannot be understated. The sector's ability to provide credit, especially in an environment where the number of bank branches is increasing, can stimulate economic activity. However, the sector's capacity to collect loans and manage its capital efficiently is crucial in ensuring that credit growth does not lead to excessive inflation.

The external sector, especially the trade balance and foreign exchange developments, can have direct implications for inflation. A depreciating exchange rate can increase the cost of imports, leading to imported inflation. However, the appreciation of the REERI suggests that the Birr's value against trading partner currencies has been improving, potentially offsetting some of the inflationary pressures.

Investment activities can have a dual role in influencing inflation. While new investments can push up demand and prices, operational investments can increase supply, potentially exerting downward pressure on prices. The decline in both the number of investment projects and investment capital suggests that the investment's inflationary pressures might have been subdued during the review period.

Inflation, as a macroeconomic variable, is influenced by a myriad of factors, both domestic and global. Understanding these factors and their interplay is crucial for policymakers, investors, and the general public. The National Bank of Ethiopia's Quarterly Bulletin provides a comprehensive overview of these factors, offering insights that can guide policy decisions and investment strategies. As Ethiopia navigates its economic landscape, staying informed and understanding the broader implications of inflationary trends becomes paramount.