It is very refreshing to see the compassionate side of Ethiopia’s Parliament. Last Friday, July 4, a number of opposition MPs were seen expressing respective condolences to Prime Minister Meles Zenawi, whose father recently passed away. This was indeed a demonstration of considerate feelings dictated by human relationship, regardless of views and believes across the political divide. Lidetu Ayalew (MP-UEDP) should be credited for spearheading this show of sympathy to the Prime Minister; it only demonstrated his coming of age in the political landscape.

For once, Parliament was seen to reflect on an important human dimension that no matter how different and opposing people are to the Prime Minister and the ideals he stands for, he too feels as any one would at the loss of a parent.

This is not to say that Parliament was not up to talking about an issue of importance to the larger public. And talk they did. In fact, one of the issues tabled last week was a matter of bread and butter: It approved Ethiopia’s largest ever budget of 54.3 billion Br for the fiscal year 2008/09, although five MPs voted against it and 67 opposition MPs abstained. For the first time, Ethiopia’s budget has passed the five billion dollar threshold.

Sufian Ahmed, minister of Finance and Economic Development (MoFED), spent a day justifying his government’s budget proposal during the first hearing, followed by questions and comments from the MPs to the Prime Minister on Friday. It is good to note that the Federal Budget is always discussed and debated in the public domain, and with full transparency, as was the case last week.

The federal budget for the coming fiscal year exceeded the current one by 21pc. The increase is attributed to price escalations on global oil, construction materials, salary expenditure, and the growing demands from regional states for federal subsidies, which were put up by 2.2 billion Br. To the credit of the administration, a significant slice of it goes to investments on capital projects, such as roads, and social sectors, including health and education.

It is a conservative budget that demonstrated the fiscal discipline of the administration, which is careful in limiting its budget deficit to 1.5pc of the GDP, half of what the European Central Bank requires member countries in the Euro Zone to maintain. With a proposed five billion Birr borrowing from domestic sources, up by 200,000 Br from the phasing year, it is difficult to criticize this administration for fiscal recklessness.

The administration, however, would like to see the budget promote two policy objectives: The speeding up of economic growth and fending off inflation. It is a hardball game, particularly at a time when the whole world is going wild due to inflation as a result of growing demand, and a rising cost of oil in the global market.

Here too, Lidetu proved to be an outstanding voice in his comments on the budget, although his party voted for it later on. He is worried about slow structural transformation in the economy, and how inflationary the budget itself would become. He is concerned about the uncertainty in budget financing, and the poor ratio on growth as opposed to revenue collections. He is alarmed by a growing balance of trade gap in favour of Ethiopia’s trading partners.

These are all valid comments, with the exception of what he said about the business of transformation.
 

One interesting element of Ethiopia’s economy, as non-oil producing as it remains to be, is it has been supported by continuous structural reforms and impressive investment on infrastructure. Indeed, the size of the economy has been expanding for the past five years, with unabated growth forecast for the current and coming fiscal years. The IMF projected that real GDP would expand by 8.4pc this year (the government figure is 11.3pc) and by 7.1pc in 2008/09.
 

As usual, talking about budgets and macro economic policy issues in general is again the domain of the Prime Minister. He justified the slow growth of revenues from domestic sources as being due to tax exemptions given to investors; the lifting off of taxes to fight inflation (including a loss of half a billion Birr from edible oil); and a limited capacity by the tax agents to collect what is due to the state, particularly from small and medium sized businesses.

It is true that deficits, both on balance of trade and current account, are due to five times more imports than exports. It is hard to disprove Meles’s assertions that in the long term, these will pay off, for much of the imported items are for investments with a proven rate of return than that on consumptions. Spare the spending on oil that is now claiming four per cent of the GDP.

He sees the negative balance of trade as “worrisome” but not “alarming”; it is not caused by declining revenue from export, which peaked at 1.5 billion dollars this year, although the target was for 1.7 billion dollars.

Indeed, the cost the nation incurs to buy oil, and the administration’s lack of political courage to stop sheltering consumers from the stress of global prices, is a major cause for concern and to the diminishing amount of foreign exchange reserve, which is now estimated to cover imports for less than two months. Meles hopes increased revenues in foreign exchange from services (such as the Ethiopian Airlines and tourism), growing remittance, foreign direct investment, and loans and grants would help him raise this level to at least a three-month comfort zone. It is not an unrealistic expectation. Nevertheless, it would have yielded more results if his administration was keen in aggressive privatization bid, selling not only bleeding state enterprises, but also the lucrative ones such as the banks and the state telecom monopoly.

Where this administration is most pressed is not in the way it crafted the budget, but rather on how to finance it, and striking a prudent balance between its desire to push for further growth, and its ability to keep inflation at bay. Although it succeeded in the first part, it has miserably failed on the latter, as the Prime Minister was compelled to admit.

Ever since December 2005, inflation was roaring in Ethiopia, threatening to disarm the government from the economic gains it has under its belt so far. Lately, general inflation is hovering at nearly 20pc, while year-on-year price rises on food reached 36pc, according to the Consumer Price Index (CPI) released in May 2008 by the Central Statistical Agency (CSA).
 

The source of these increases is diverse; neither is it a peculiar phenomenon to Ethiopia. Imported inflation due to the rise in global prices of oil to 145 dollars per barrel last week, and record high prices on steel, is ploughing at the heart of many economies across the world. This administration could be forgiven on that front. The other source of inflation is more local; a while back, it was due to increased domestic demand, which is lately exuberated by what economists describe “inflation expectations”.
 

It is wise of the Prime Minister to send a signal to the market that half a million tonnes of imported wheat will be dumped on the market in the next three months, beginning this month. Whether or not the administration does this, the mere news will shake the market, hopefully forcing grain traders to rush to clear their warehouses before they suffer devastating losses. This is provided that they have their produce hoarded in warehouses as is so often alleged.
 

But, what more pleasure is there to hear a Revolutionary Democrat admit that the cure for speculation and inflationary expectation is to awash the market with more supply? In a country where business-bashing is a preferred sport by the state media, and the majority of the private newspapers, who are fond of sounding populist, this administration appears to be sane in accepting the power of demand and supply in macro economic stability.

However, macro economic stability needs a lot more than making supplies as much, or more than, what is on demand. States need to take a mix of fiscal and monetary policy measures.

This administration’s reluctance not to tighten domestic economic activities, largely financed by the state as the approved budget demonstrates, is understandable. It could be politically sensitive to cut back public investments on major infrastructure works that will not only pay back in the near future, but also provide employment for thousands of people, if not generate business for the majority of private companies. And it is an economy that started from a low base.
 

But nothing justifies the administration’s inability to combat inflation by employing its arsenals on the monetary policy front. It is true that the central bank, which was meant to act free from worries on how the politicians up in Arat Kilo react, began to take some measures last year, although belatedly. It had adjusted interest rates on deposit by one percentage point to four per cent; and put up reserves held by banks from five per cent to 10pc, and recently to 15pc.

These are measures that arrived too late and remain to be too weak to fulfil the administration’s desire to see inflation slide down to a single digit. It took a while for the Prime Minister to admit Ethiopia’s inflation is a partly monetary phenomenon; where authorities at the central bank were when the money they pumped into the economy increased and its velocity grew, no one could tell. They simply have failed to play their key role in the economy.
 

High monetary inflation results in high price inflation; and broad money supply in Ethiopia grew by almost 20pc last year, and a little over 23pc this year to 65.7 billion Br. The government has plans to bring this amount below to 20pc next year; and Meles told Parliament that his government has gone as far as the monetary policy could take it.

This is the part where he needed to be challenged on, for Ethiopia’s is an economy where few are still enjoying negative real interest rates when borrowing from banks, where the vast majority of depositors are penalized for saving. In spite of the monetary policy measures so far taken, it is great to be in Ethiopia and to be a borrower. In effect, you are paid to borrow.