Are we set to benefit or lose from large-scale foreign investments? | Interview

Are we set to benefit or lose from large-scale foreign investments? | Interview

Inflation Puzzle in Ethiopia

Single Digit Inflation Undesirable during Economic Takeoff

Source: addis fortune

Published On  Oct 30,  2011

by Eyob Tesfaye (PhD)

this article is written by Eyobe Tesfaye(PhD) under economic commentary page in addis fortune news paper and the whole idea of the article is solely to the writer.

Whilst the US economy teeters on the brink of a recession and many European economies are besieged by colossal public debt, several emerging and a few developing economies continue to enjoy robust growth.

Similar to other rapidly growing economies, the Ethiopian economy carries on to register vigorous Gross Domestic Product (GDP) growth. Although the growth performance remains exhilarating, the country’s economy remains in the grip of double digit inflation, currently standing at 40.1pc.

Apparently, the runaway inflation, together with the high inflation expectation, has become a serious predicament to the administration. Indeed, in early 2011, the country was able to achieve single digit inflation, leading everyone to believe that this nemesis was overcome.

Nevertheless, the inflation has once again resurfaced with a vengeance. The whole situation is reminiscent of a family that expressed gratitude for the survival of their home from a powerful hurricane but failed to prepare for more storms to come.

Inflation is an inevitable byproduct of economic growth, just like the increased exhaust emitted from a speedy car as it accelerates. As economies grow faster, it is inevitable for their engines to overheat.

The Ethiopian government has taken several policy and administrative measures to cool down the economy and keep a lid on the inflationary pressure. Despite these measures, inflation has refused to go away; its pressure has not yet been abated.

During his annual state of the union speech, President Girma Woldegiorgis indicated that fighting inflation will be the chief concern of the government in the 2011/12 fiscal year. He has vowed that the government will do everything possible to bring down inflation to a single digit soon.

Yet, whether it is possible to attain single digit inflation and there is a framework in place to attain it, it remains uncertain.

With inflation hovering and expectations remaining high, obtaining an easy answer to such a million dollar question is unimaginable.

Indeed, inflation provides an important insight on the state of the economy and the policies that govern it. Stable inflation provides impetus for economic growth. There is no doubt that stable prices are good for healthy economic growth.

There is no economic theory that states that an inflation rate of five per cent is better than one of 15pc. It is the structure of the economy that determines the threshold of healthy inflation.

Ethiopia has a chronically supply constrained economy with excess demand. Increasing government investment in infrastructure, rapidly growing private consumption, influx of foreign capital, and remittances have all exacerbated demand that outsprints supply at a haggle speed. Much of the resulting growth is gulled by real estate investment and property market.

Ethiopia's economy lacks financial depth and highly liquid marketable financial instruments. Domestic investment tends to get channeled into non-productive sectors over productive ones, which could have helped in correcting the imbalance between demand and supply. In a situation where there is a dearth of savings instruments to which people can turn, prices for consumer products tend to rise, creating ground for an inflationary spiral.

Addressing the demand and supply imbalance and spurring long-term growth requires vigorous infrastructure investment.

Infrastructure is a capital stock that provides public goods and services. It creates an environment for productive activities and allows wider movement of goods and people. It helps to commercialize and diversify the economy. Squeezing infrastructure spending to curb inflation does more harm than good to the economy.

Correcting the rise in food prices will also require structural changes in food production. This, on the other hand, requires increasing agricultural activities. Until meaningful and radical output increasing measures have taken root, it is hardly possible to head off inflationary expectations.

In the face of a chronic structural bottleneck and the need for increasing infrastructural investment activities, a single digit inflation target is neither attainable nor desirable. Curbing inflation must walk hand in hand with growth, as neither can walk alone to a useful end.

Instead of burdening itself with the task of achieving single digit inflation in a short span of time, the government would rather opt for moderate inflation ranging between 10pc and 15pc until the gap between demand and supply closes.

“capitalism with Chinese characteristics”

Bamboo capitalism

March 10, 2011

Source: The Economist

This article is taken from The Economist magazine under economics section, hence the whole ideas of the article is exclusively the reflection of the authors not necessarily the bloggers.

FEW would deny that China has been the economic superstar of recent years. Thanks to its relentless double-digit annual growth, it has become the world’s second-largest economy and in many ways the most dynamic. Less obvious is quite what the secret of this success has been. It is often vaguely attributed to “capitalism with Chinese characteristics”–typically taken to mean that bureaucrats with heavy, visible hands have worked much of the magic. That, naturally, is a view that China’s government is happy to encourage.

But is it true? Of course, the state’s activity has been vast and important. It has been effective in eradicating physical and technological obstacles: physical, through the construction of roads, power plants and bridges; technical, by facilitating (through means fair and foul) the transfer of foreign intellectual property. Yet China’s vigour owes much to what has been happening from the bottom up as well as from the top down. Just as Germany has its mighty Mittelstand, the backbone of its economy, so China has a multitude of vigorous, (very) private entrepreneurs: a fast-growing thicket of bamboo capitalism.

These entrepreneurs often operate outside not only the powerful state-controlled companies, but outside the country’s laws. As a result, their significance cannot be well tracked by the state-generated statistics that serve as a flawed window into China’s economy. But as our briefing shows, they are an astonishing force.

The Mittel Kingdom

First, there is the scale of their activities. Three decades ago, pretty much all business in China was controlled by one level of the state or another. Now one estimate—and it can only be a stab—puts the share of GDP produced by enterprises that are not majority-owned by the state at 70%. Zheng Yumin, the Communist Party secretary for the commerce department of Zhejiang province, told a conference last year that more than 90% of China’s 43m companies were private. The heartland for entrepreneurial clusters is in regions, like Zhejiang, that have been relatively ignored by Beijing’s bureaucrats, but such businesses have now spread far and wide across the country.

Second, there is their dynamism. Qiao Liu and Alan Siu of the University of Hong Kong calculate that the average return on equity of unlisted private firms is fully ten percentage points higher than the modest 4% achieved by wholly or partly state-owned enterprises. The number of registered private businesses grew at an average of 30% a year in 2000-09. Factories that spring up alongside new roads and railways operate round-the-clock to make whatever nuts and bolts are needed anywhere in the world. The people behind these businesses endlessly adjust what and how they produce in response to extraordinary (often local) competition and fluctuations in demand. Provincial politicians, whose career prospects are tied to growth, often let these outfits operate free not only of direct state management but also from many of the laws tied to land ownership, labour relations, taxation and licensing. Bamboo capitalism lives in a laissez-faire bubble.

But this points to a third, more worrying, characteristic of such businesses: their vulnerability. Chinese regulation of its private sector is often referred to as “one eye open, one eye shut”. It is a wonderfully flexible system, but without a consistent rule of law, companies are prey to the predilections of bureaucrats. A crackdown could come at any time. It is also hard for them to mature into more permanent structures.

Cultivate it, don’t cut it

All this has big implications for China itself and for the wider world. The legal limbo creates ample scope for abuse: limited regard for labour laws, for example, encourages exploitation of workers. Rampant free enterprise also lives uncomfortably alongside the country’s official ideology. So far, China has managed this rather well. But over time, the contradictions between anarchic opportunism and state direction, both vital to China’s rise, will surely result in greater friction. Party conservatives will be tempted to hack away at bamboo capitalism.

It would be much better if they tried instead to provide the entrepreneurs with a proper legal framework. Many entrepreneurs understandably fear such scrutiny: they hate standing out, lest their operations become the focus of an investigation. But without a solid legal basis (including intellectual-property laws), it is very hard to create great enterprises and brands.

The legal uncertainty pushes capital-raising into the shadows, too. The result is a fantastically supple system of financing, but a very costly one. Collateral is suspect and the state-controlled financial system does not reward loan officers for assuming the risks that come with non-state-controlled companies. Instead, money often comes from unofficial sources, at great cost. The so-called Wenzhou rate (after the most famous city for this sort of finance) is said to begin at 18% and can even exceed 200%. A loan rarely extends beyond two years. Outsiders often marvel at the long-term planning tied to China’s economy, but many of its most dynamic manufacturers are limited to sowing and reaping within an agricultural season.

So bamboo capitalism will have to change. But it is changing China. Competition from private companies has driven up wages and benefits more than any new law—helping to create the consumers China (and its firms) need. And behind numerous new businesses created on a shoestring are former factory employees who have seen the rewards that come from running an assembly line rather than merely working on one. In all these respects the private sector plays a vital role in raising living standards—and moving the Chinese economy towards consumption at home rather than just exports abroad.

The West should be grateful for that. And it should also celebrate bamboo capitalism more broadly. Too many people—not just third-world dictators but Western business tycoons—have fallen for the Beijing consensus, the idea that state-directed capitalism and tight political control are the elixir of growth. In fact China has surged forward mainly where the state has stood back. “Capitalism with Chinese characteristics” works because of the capitalism, not the characteristics.

Euro Crisis News

This days euro zone is being shocked by debt crisis,by which the symptom of the crisis were began in September 2008, due to the collapse of Lehman Brothers helped trigger an economic and financial crisis that swept across the globe. As guardian wrote Europe's debt crisis has intensified after Greece's embattled government said the country's financial future would rest on a make-or-break conference call with EU and IMF officials on Monday or today.

on the other side,U.K economists announced that  200 pound stimulus in 2009/10 had significant economic effect that would intensifies new quantitative easing according to the central bank of U.K quarterly bulletin.for further reading this and related issues  use under-putted link.

Enjoy world financial latest news !

http://www.telegraph.co.uk/finance/financialcrisis/

http://www.guardian.co.uk/world/2011/sep/18/greece-debt-phone-call
http://www.ft.com/home/uk

Towards Competition on Beer Industry

Surprisingly,the buying of the labels of two beers by Heineken could lead to the sector more competitive in terms of quality and price and would settle issues on privatization.this  action also one part of privatization of state owned industries.

Cheers the news !!!!!!!

Lessons .....Setting Their Hair on Fire-No Hair No Fire

OP-ED COLUMNIST

Setting Their Hair on Fire

By PAUL KRUGMAN

Published: September 8, 2011

Fred R. Conrad/the New York Times

First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment.

Of course, it isn’t likely to become law, thanks to G.O.P. opposition. Nor is anything else likely to happen that will do much to help the 14 million Americans out of work. And that is both a tragedy and an outrage.

Before I get to the Obama plan, let me talk about the other important economic speech of the week, which was given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now.

As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high.

So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”

But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. These days, the best — or at any rate the alleged wise men and women who are supposed to be looking after the nation’s welfare — lack all conviction, while the worst, as represented by much of the G.O.P., are filled with a passionate intensity. So the unemployed are being abandoned.

O.K., about the Obama plan: It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.

Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. As I said, it’s much bolder and better than I expected. President Obama’s hair may not be on fire, but it’s definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.

But his plan isn’t likely to become law, thanks to Republican opposition. And it’s worth noting just how much that opposition has hardened over time, even as the plight of the unemployed has worsened.

In early 2009, as the new Obama administration tried to come to grips with the crisis it inherited, you heard two main lines from critics on the right. First, they argued that we should rely on monetary policy rather than fiscal policy — that is, that the job of fighting unemployment should be left to the Fed. Second, they argued that fiscal actions should take the form of tax cuts rather than temporary spending.

Now, however, leading Republicans are against tax cuts — at least if they benefit working Americans rather than rich people and corporations.

And they’re against monetary policy, too. In Wednesday night’s Republican presidential debate, Mitt Romney declared that he would seek a replacement for Ben Bernanke, the Fed chairman, essentially because Mr. Bernanke has tried to do something (though not enough) about unemployment. And that makes Mr. Romney a moderate by G.O.P. standards, since Rick Perry, his main rival for the presidential nomination, has suggested that Mr. Bernanke should be treated “pretty ugly.”

So, at this point, leading Republicans are basically against anything that might help the unemployed. Yes, Mr. Romney has issued a glossy, well-produced “jobs plan,” but it might best be described as 59 bullet points with nothing there — and certainly nothing to justify his assertion, bordering on megalomania, that he would create no fewer than 11 million jobs in four years.

The good news in all this is that by going bigger and bolder than expected, Mr. Obama may finally have set the stage for a political debate about job creation. For, in the end, nothing will be done until the American people demand action.

Lessons .....Setting Their Hair on Fire-No Hair No Fire

OP-ED COLUMNIST

Setting Their Hair on Fire

By PAUL KRUGMAN

Published: September 8, 2011

Fred R. Conrad/the New York Times

First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment.

Of course, it isn’t likely to become law, thanks to G.O.P. opposition. Nor is anything else likely to happen that will do much to help the 14 million Americans out of work. And that is both a tragedy and an outrage.

Before I get to the Obama plan, let me talk about the other important economic speech of the week, which was given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now.

As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high.

So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”

But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. These days, the best — or at any rate the alleged wise men and women who are supposed to be looking after the nation’s welfare — lack all conviction, while the worst, as represented by much of the G.O.P., are filled with a passionate intensity. So the unemployed are being abandoned.

O.K., about the Obama plan: It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.

Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. As I said, it’s much bolder and better than I expected. President Obama’s hair may not be on fire, but it’s definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.

But his plan isn’t likely to become law, thanks to Republican opposition. And it’s worth noting just how much that opposition has hardened over time, even as the plight of the unemployed has worsened.

In early 2009, as the new Obama administration tried to come to grips with the crisis it inherited, you heard two main lines from critics on the right. First, they argued that we should rely on monetary policy rather than fiscal policy — that is, that the job of fighting unemployment should be left to the Fed. Second, they argued that fiscal actions should take the form of tax cuts rather than temporary spending.

Now, however, leading Republicans are against tax cuts — at least if they benefit working Americans rather than rich people and corporations.

And they’re against monetary policy, too. In Wednesday night’s Republican presidential debate, Mitt Romney declared that he would seek a replacement for Ben Bernanke, the Fed chairman, essentially because Mr. Bernanke has tried to do something (though not enough) about unemployment. And that makes Mr. Romney a moderate by G.O.P. standards, since Rick Perry, his main rival for the presidential nomination, has suggested that Mr. Bernanke should be treated “pretty ugly.”

So, at this point, leading Republicans are basically against anything that might help the unemployed. Yes, Mr. Romney has issued a glossy, well-produced “jobs plan,” but it might best be described as 59 bullet points with nothing there — and certainly nothing to justify his assertion, bordering on megalomania, that he would create no fewer than 11 million jobs in four years.

The good news in all this is that by going bigger and bolder than expected, Mr. Obama may finally have set the stage for a political debate about job creation. For, in the end, nothing will be done until the American people demand action.

Ethiopian Economics - News Views and Researches.: Macro Modeling

Ethiopian Economics - News Views and Researches.: Macro Modeling

Macro Modeling

By Paul Krugman,1999

 

THE WORLD'S SMALLEST MACROECONOMIC MODEL

I learned this model from Robert Hall back in 1975. It can seem silly and trivial; but it seemed to me then, and still seems to me now, to capture the essence of what is going on in "demand-side" macroeconomics, and to clarify points that both the general public and, I'm sorry to say, quite a few Ph.D. economists often seem to find confusing. It also maps pretty well into my favorite economic parable, the story of the baby-sitting coop ("Baby-sitting the economy") that I have put to good use a number of times.

There is only one good, produced at constant returns by the single factor of production, labor. Choose units so that one unit of labor produces one unit of the good; then the price level and wage rate must be the same, and can be referred to with a single symbol, P.

There is also only one asset, money. Agents start the current period with M dollars, and end with M' after spending on consumption and earning from the sale of their labor. They derive utility both from consumption and from the expected purchasing power of the money they hold at the end of the period. (The utility of money presumably reflects its usefulness in providing future consumption; but we sweep this implicit dynamic problem under the rug). The utility function is assumed to take a specific form:

U = (1-s) ln(C) + s ln (M'/P^e)

Where P^e is the expected price level. However, consumers are also assumed to have static expectations, so that P^e = P.

Finally, people are assumed to be endowed with L units of labor.

First, let us consider the full-employment version of the model. If labor is fully employed, then the budget constraint is

C + M'/P = L + M/P

But if the money supply is constant, M' = M; also, C = L. Given the utility function, consumers will spend a share 1-s of their initial wealth on goods, s on money. So we can represent equilibrium either by the condition that demand for goods equal supply,

L = (1-s)(L + M/P)

or by the condition that demand for money equal supply,

M/P = s(L + M/P).

Both ways of looking at it imply the price-level equation

P = [(1-s)/s)](M/L)

so the price level is proportional to the money supply.

But now let us introduce some rigidity of prices. Suppose that for some reason - never mind why - the price (wage) level is fixed above the level consistent with full employment, so that real balances M/P are too low. There are two ways of describing the problem this poses. You could say that at full employment the demand for real balances would exceed the supply:

M/P < s(L + M/P)

Or you could say that at full employment aggregate demand would fall short of output:

(1-s)(L + M/P) < L

These are just different ways of looking at the same thing.

What must happen, then, is that output is demand-constrained. But that in turn means that employment, and hence income, is also demand-constrained: the equation for consumption, which must equal output, is

C = (1-s)(C + M/P)

which has an immediately identifiable "multiplier" flavor.

The clear policy implication is that one should increase output by increasing the money supply; after all,

C = ((1-s)/s)(M/P)

Or, to put it differently, the problem is that at full employment the public would want to hold more real balances than there are available; and because P will not fall, M must be increased.

This is presumably the meaning of John Maynard Keynes' famous remark in The General Theory:

"Unemployment develops, that is to say, because people want the moon: men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot readily be choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. central bank) under public control."

What is wrong with this model? Don't get me started ... but actually there are three main objections that macro economists are likely to raise:

1. What happened to the interest rate? For most purposes we will want at the minimum a theory of employment, interest, and money; that means a model with bonds as well as money and goods, which means IS-LM. (See my note "There's something about macro").

2. More fundamentally, the quasi-static approach here is at best a crude approximation to a dynamic model in which behavior results from plans that are based on expectations about the future.

3. Finally, the output effects of money come from the assumption of price rigidity. Where does that come from? (Overwhelming empirical evidence, that's where - but why?).

All these objections help to set the agenda for the last six decades of research.

But if you are one of those people to whom macroeconomics always sounds like witch craft, who is hung up on Say's Law, who cannot even comprehend how a shortfall of aggregate demand is possible - then the world's smallest macro model is a good place to start on the road to enlightenment.

Deposit vs Inflation

DEFYING THE PRINCIPLES OF                      ECONOMICS

Saturday, 20 August 2011 09:23

By HAYAL ALEMAYEHU

Hits: 293 

source: The Reporter

Despite the bitingly rising inflation that results in negative interest rate, deposits has been marking a significant growth to the surprise of many an economists. And the fact that the conclude budget year has exhibited a record growth in deposit has raise many eyebrows, where some professionals and bankers are optimistic that the trend will last longer, while others cast their doubts that it will never be sustainable, writes Hayal Alemayehu.



Only during the concluded budget year the Commercial Bank of Ethiopia had mobilized a record 30 billion birr-plus while the 30 micro financial institutions operating in the country were able to make over 1.5 billion birr in deposit during the same period of time, an amount that they failed to raise over the previous ten years.

Some professionals explain the growth in deposit as lack of alternative market instruments in the country, while others attribute it to efforts undertaken by the government to promote saving nationwide by opening scores of bank branches nationwide, including the rural parts of the country.

While more economists question whether or not the trend in deposit growth against the negative interest rate will keep up on sustainable basis, others, including bankers, are taking it for granted it will last.

More and more professionals are suggesting that the government should keep the inflation at bay if the trend in deposit growth should continue, and hence the investment in infrastructure while most of them are advising the government to stop or minimizing printing money, which they take us the culprit-in-chief for the rising inflation. 

What explains the growth in deposit

Despite the prevailing negative interest rate, deposit at both banks and micro financial institutions has increased, according to Dr. Wolday Amaha, Ethiopian Micro Financial Institutions Executive Director. Deposit at micro finance institutions has increased from 1.6 billion to a staggering 3.1 billion birr during the concluded budget year, he says. Yet, although the volume of deposit has increased, the number of creditors has not increased, according to the economist. “What is being observed is that it is rather the volume of loan request that has increased instead. For instance, farmers who used to request a 1,000 birr to buy an ox are now asking for 3,000 birr for the same purpose. This shows that it is the average loan request that has increased, and not the number of creditors.”

All the same, there are some stark reasons why deposit is still increasing when it was supposed to contract because of the negative interest rate, a phenomenon that works against the principle of economics, says Dr. Wolday. “Individuals who do not have enough money to invest in some investment ventures or to buy cars or houses opt to deposit their money at banks or micro financial institutions, which they consider as a safe box,” he says. “And because of the fact that much work has been done by banks and micro financial institutions to encourage saving, the saving culture has been boosted nationwide.” A number of new branches have been opened across the country to provide nationwide saving facilities. The Commercial Bank of Ethiopia alone has opened 160 branches nationwide, including the rural parts of the country during the concluded budget year alone. Banks have even been [unethically] competing neck to neck with micro financial institutions by opening branches in the rural parts of the country especially in Amhara and Tigray regional states where there are stronger micro financial institutions which have earlier on established their presence there, according to him. And this has significantly contributed to boost saving and deposit nationwide, he asserts.

Indicating the growth in deposit is the same story at the bank he serves, Anteneh Asefa, vice president of Bank of Abyssinia, says that his bank has been able to mobilize over 950 million birr in deposit during the concluded budget year, the amount significantly higher than the previous year.

Michael Melaku, an economist, says on his part that for mysteriong reasons private credit demand has decreased, and it is not the rate of the deposit that has actually increased. The ecnomist says that the other factor attributable to the growth is growing saving awareness and outreaching of bank branch facilities entering rural parts of the country. He says, the growth in deposit circulates around this.

“Deposit has its own growth trend,” a prominent macro economist says. “As the economy expands and the government invests, micro and small enterprises as well as big companies will participate in that. And one’s expenditure will serve as another’s income. And it is that income that one will be saving and as such the saving grows,” he says. “As the government’s spending increases, so does the income of the private sector, which will save some of that income.” According to the macroeconomist, high income makers may not only save in banks but in a bid to hedge inflation, they diversify their asset by buying houses or investing in other ventures. And people with less income which makes the majority will simply dump their money in banks. On surprise that deposit is growing, he asserts.

I think two things explain most the growing deposit against the negative interest rate, says a senior macro economist who ought not to be named. “According to a research I conducted recently, most of depositors do not seem to know that they will get much less than they deposit. About 90 percent of my respondents do not seem to know about the negative interest rate. And those who are conscious about it have no other alternative than saving at banks,” asserts the macro economist. Those who can afford, even though relatively much fewer in number, may spend their money buying cars, houses or other assets  or invest in some ventures,” he says. “But more people may go to other options like buying shares if more of them are being floated. And much of the growing deposit has got to do with government spending.” Yet the volume of the deposit is not significant when compared with the economy, the economist confirms. “According to the research I did recently, the volume of deposit is only five percent of the GDP, whereas that figure stood 18 to 19 percent for sub-Saharan Africa and 30 percent for China,” he says. “At best, that figure has been rising to five percent of the economy here and at worst standing negative two percent. But as deposit has now exhibited a significant growth during the concluded fiscal year, the figure may rise to 10 or 12 percent of the GDP.”

For Ermias Amelga, board chairman of Access Capital and founder of Zemen Bank, says the fact that there are few meaningful options or alternatives for the people is the major element for the deposit growth. And this makes deposit to keep growing despite rising inflation, he concludes. And money in circulation is also growing to further exacerbate the inflation, he says.


Impact on the economy

But when it comes to the potential adverse impact of the negative interest rate, the bankers and economists look to sing from the same sheet in agreement.It goes without saying that the negative interest rate scenario will discourage saving, says Dr. Wolday. Unfortunately that is not what is actually happening here, at least for now. “Negative interest rate would automatically discourage saving because people would rather opt to spend their money on whatever goods they are interested in to buy than losing their money to inflation. But that is not what is happening here,” he says. “Despite the prevailing negative interest rate, deposit at both banks and micro financial institutions have increased. Deposit at micro finance institutions has increased from 1.6 billion to a staggering 3.1 billion birr during the concluded budget year. Yet, although the volume of deposit has increased, the number of creditors has not increased. What is being observed is that it is rather the volume of loan request that has increased instead. For instance, farmers who used to request a 1,000 birr to buy an ox are now asking for 3,000 birr for same purpose. This shows that it is the average loan request that has increased, and not the number of creditors.”

“There is no doubt it will affect the economy as it will affect the purchasing power of the birr which in turn will affect the economy, says Anteneh. “And that is why the government is taking various monetary policies.”

According to the anonymous prominent macro economist, inflation is an eroding factor, which erodes the value of money and the value of saving, thereby discouraging deposit.  In the shorter term, it might not affect the economy as the government expenditure is expanding and those without an option are still dumping their money in the bank, he asserts. According to the macro economist, in the medium term, the trend will only discourage saving and in turn the economy will suffer from losing saving or capital to invest in with and grow.

What should be done?

The government should take concerted efforts to keep the inflation at bay. But I don’t see that comes to pass, says Dr. Wolday. It is not merely the monetary measures or policies that the National Bank of Ethiopia takes that will do away the inflation just by themselves. It should rather be the concerted efforts of all government agencies that could curb the inflation. If the central bank takes some measures to mitigate the inflation while the Ethiopian Revenue and Customs Authority (ERCA) comes up with some new tax system or that the Ministry of Trade (MoT) introduces new regulation that may give way to rising inflation, the right job is not done at all. As such a task undertaken to curb the inflation may entail political risk, an institute led by the prime minister or a higher authority, which will put in place prudent and concerted efforts all focused on curbing the inflation, should be established to do away with the prevailing inflation.

Prudent monetary policy is the only answer, the prominent macro economist asserts. “Money supply should go along or in balance with the DGP that the government should not print money or should print less to bring about the inflation at an acceptable level,” he says. “There is no prudent monetary policy currently that may put the inflation at bay or at an acceptable rate of five percent as the government says. As the result, inflation is still on somewhere at 40 percent for four years or so.”

The inflation should first have to be done away with to make the saving sustainable, according to the senior economist interviewed. “And to curb the inflation,” asserts the economist “the government should have to stop or minimize printing money.” The government has lately admitted that the increase in the amount of money circulating in the economy has given rise to inflation, he says. When the government stops printing money the inflation will slow down, according to him. “The government should stop or minimize borrowing from the National Bank of Ethiopia,” he says. “And if the inflation goes down to some ten percent or lower, it would be easier to adjust the interest rate with the inflation rate which in the end will make the growth in saving sustainable. The IMF has been suggesting to somewhat balance the interest rate with the inflation rate while the latter stood at over 30 percent, which I don’t think is good for the economy.”

Loyal or dedicated customers like Workneh may keep saving their money at banks leaving the results for the uncharted eventualities. But curbing inflation or balancing its rate with interest rate might bring back Esayas and money more like him to their old habit. That will serve a double purpose as it will further boost the saving much need by the GTP.
for full reading of the report  you can access it in this site http://www.thereporterethiopia.com/Business-and-Economy/defying-the-principles-of-economics.html
 

Negadras Gebrehiwot Baykedagn (1886-1919)

 Negadras Gebrehiwot Baykedagn

      from "Pioneers of Change in Ethiopia"

              By Prof. Bahru Zewdehttp://www.damera-poems-web.net/bykeda.htm

 

Often times, contemporary Ethiopian politicians and mercenary historians attribute the backwardness of Ethiopia to the feudal systems of its government and leaders. Although there is truth to this, nothing had been said about Ethiopian intellectuals who, while serving in the Ethiopian governments of Emperors Tewodros, Yohannes, Menelik and Haile Selassie, struggled to bring about meaningful political and social changes in the country. The struggle and work of those intellectuals are glossed over and forgotten whereas the life of the kings and queens are glorified.

            As part of our quest to find and emulate exemplary leaders of change, it is fitting to learn about the lives and contributions of Ethiopia's men of letters and agents of change. Earlier in the year Prof. Aleme Eshete shared with us the life time contributions of the late Dr. Sergew HableSelassie. Thanks to Prof. Bahru Zewde's work we are now able to learn about the lives of "The Reformist Intellectuals of the early Twentieth Century." One among a series of such intellectuals was Neggadras Gabra-Hewat Baykadan. Neggadras Gabra-Hewat Baykadan was among beneficiaries of Western education who came to occupy important positions in both Emperors Menelik and Haile Selassie's governments. The following brief history of Neggadras Gabra-Hewat is adopted from Prof. Bahru Zewde's book, "Pioneers of Change in Ethiopia." His picture is in the attachment.

            The most celebrated of the early twentieth-century intellectuals, Gabra-Hewyat Baykadan led a life that has perhaps been the least documented. His lifespan was also one of the shortest, lasting barely 33 years. He was born on 30 July 1886 in the village of May Mesham in the district of Adwa. His father, Shaqa Baykadan, was in the service of Emperor Yohannes and died with the emperor at the Battle of Matamma on 9 March 1889. The early 1890s were a period of exceptional turbulence in Tegray, where the political disintegration and psychological void created by the death of the emperor, the ravage of one of the longest and most devastating famines the country had ever known, and the depredations that attended Menelik's campaign of 1890 to assert his new imperial authority, all combined to produce great instability.

 

It was in these circumstances that Gabra-Hewat fled with some other companions to Eritrea at the age of seven. According to Richard Caulk, Gabra-Hewat joined the
Swedish mission school at Menkullu, on the mainland off Massawa. A trip to the port of Massawa that he subsequently made with his friends was to change decisively the course of his life. Gabra-Hewat and his friends got permission from the captain of a German ship
docked there to go aboard and look around. When time came for the ship's departure, Gabra-Hewat stowed away. When the captain eventually discovered his 'guest', it was too late to do anything. On arrival at the destination, he entrusted the young boy to a rich Austrian family, which adopted him. Under the benevolent patronage of his Austrian sponsors, Gabra-Hewat learnt the German language, and is said to have gone on to study medicine at Berlin University. After completing his studies in Germany, he returned to his country. In the Ethiopian court, he had the good fortune of winning the friendship of Dejjach Yeggazu BeHabte, who assigned someone to teach Gabra-Hewat Amharic. After seven months of studious application, he was able to master the language to such a degree that he was to emerge as one of the finest writers of Amharic prose. It was also Dajjach Yeggazu, along with Naggadras Hayla-Giyorgis, who recommended Gabra-Hewat to Menilk.

            Gabra-Hewat was reportedly made private secretary and interpreter to the emperor. Apparently in his capacity as interpreter, he also accompanied an official mission to Germany led by Dajjach Mashasha Warqe in the summer of 1907. As in the case of Hakim Warenah and theBritish,theillnessofEmperorMenileklenthimsomediplomatic utility to the German government. He was attached to the German doctor Steinkuhler, and detailed to treat the ailing emperor and thereby promote the fortunes of German diplomacy. Again, like Warqenah, Gabra-Hewat failed to win the confidence of Taytu, who reportedly forbade him to touch the invalid. The acrimony that subsequently developed between the empress and the German doctor, who provoked the controversy about the poisoning of the ailing emperor, could only have reflected badly on his Ethiopian associate. In the potent article "Ate Menilek-naItyopya',there is an allusion to the German minister, Dr. Zintgraff, and his interpreter instigating the nobility against Taytu's ambitious designs on the throne. It was probably under these circumstances that he chose to exile himself to the neighboring British colony of the Sudan sometime in November 1909.

Gabra-Heywat fell critically ill on his return from the Sudan and was hospitalized in Massawa. As the brief preamble suggests, it was apparently while he was convalescing--and not, as Tegabe claims, while in the Sudan that he wrote 'Ate Menilek-na Ityopya'. In the preamble the author pays a glowing tribute to his lifelong friend, Pawlos Manamano, to whom, next to God, he says, he owed his life. Pawlos was to render Gabra-Hewat an equally worthy service a few years later when he published posthumously his major work, a treatise on political economy, Mangest-na Ya Hezb Astadadar.

 

There are two things are worthy of note here. The first is how his sojourn in the Sudan, and much earlier in Eritrea, impressed him deeply and forced him to contrast the backwardness of his country with the progress he believes to have been achieved in the two colonies. As he writes: (Translation from the Amharic version) "If we look around our neighboring countries, we see intelligent people developing them with diligence. In particular, if we look at the Sudan, which had been ravaged by the Dervishes, we realize how a desert can be transformed into a Garden of Eden when ruled by such intelligent people like the British. All around us colonies are marching ahead undeterred by any obstacles. For intelligence can only be checked by intelligence. Woe, then to a people that persists in its ignorance, for it is ultimately bound to perish."

            The second point to note is Gabra-Heywat's balanced appraisal of Empress Taytu, despite all that he had endured at her hands. The major fault that he finds in her otherwise illustrious career is her attempt to disrupt Iyyasu's succession to Meilek, not the hard time she gave him and fellow intellectuals like Afwarq and Gabru. As the last paragraph of the article makes clear, 'Ate Meilek-na Ityopya' was addressed to Iyyasu, the heir to the throne. Disappointed by Menilek as a modern izing monarch,Gabra-He wat apparently pinned his hopes on the young prince. He was soon to be disillusioned, as Iyyasu failed to demonstrate the resolution and consistency necessary for the social and economic change that Gabra-Hewat and his fellow intellectuals recommended. Like Takla-Hwaryat, Gabra-Hewat had no choice but to shift his hopes and his allegiance to another young prince, Tafari Makonnen, the future Haile Selassie. And after Tafari became heir to the throne in September 1916 Gabra-Hewat started to occupy major administrative posts, as inspector of the Addis Abab-Djibout railway in 1916 and Naggadras of Dire Dawa in 1917. He diedon1July1919.