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UN’s economic outlook projects inflation to moderate in Ethiopia

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UN World Economic Situation and Prospects (WESP) 2023 report, projects Ethiopia’s inflation rate to fair on at 24.9 percent in 2023, signaling a decrease from 34.5 percent in 2022 which at the time was catalyzed by war and crises.
The report indicates that Central banks including Ethiopia, Ghana, Sierra Leone, Sudan and Zimbabwe face the most pressing needs for monetary policy tightening.
“The sociopolitical and security conditions in several countries remain challenging for the continent, particularly in Burkina Faso, Cameroon, Central African Republic, Chad, Ethiopia, Mali and Mozambique,” stated the release.
To combat inflation and exchange rate pressure, about two thirds of African countries increased domestic policy interest rates in 2022. The report reveals that most countries will likely further increase rates in 2023 in parallel with the projected monetary stance of the Federal Reserve in the United States and the European Central Bank.
In line with the global pickup in inflation, price levels have risen significantly in African countries but are projected to moderate in 2023. The share of African countries experiencing double-digit inflation rocketed to 40 per cent in 2022, driven mainly by supply chain disruptions and the fallout from the war in Ukraine, which made essential food and energy items more expensive.
The war in Ukraine has further weakened the growth prospects of African economies since it came at a time when countries were reeling from the adverse impacts of the COVID 19 pandemic, climate shocks and heightened security risks in some countries. Global commodity price shocks have reverberated through African economies, especially through rising energy, fertilizer and food prices. These have translated into increasing import bills for most net food and oil importers and shrinking GDP. The crisis has further highlighted vulnerabilities due to supply constraints, weak infrastructure, economic dependence on external partners and volatile global markets, all of which leave the poor more at risk of extreme poverty and food insecurity.
The persistence of the war is projected to push an additional 1.8 million people into extreme poverty in 2022 and 2.1 million in 2023 (AfDB, 2022). The Economic Commission for Africa estimates that the crisis could cut GDP growth by up to 0.7 percentage points in 2022 and drive poverty up by 0.5 percentage points. Many African countries have a high share of food weight in the consumer price index, averaging 41.9 (higher than in many advanced economies), which weighs heavily as indicated on the report.
Food items occupy the largest share in many household consumption baskets across Africa, with an expenditure share of about 42 per cent, compared to 13 per cent and 6 per cent for France and the United States, respectively. The expenditure share is much higher in fragile States, where food consumption can reach well over 60 per cent of total expenditure. Further, social protection coverage is limited in Africa as a whole. Only 17 per cent of people receive at least one social protection benefit compared with the global average of 47 per cent. This leaves 1.2 billion Africans without any social protection coverage (ILO, 2021), a situation expected to further exacerbate food insecurity.
Aggregate output in Africa is projected to remain subdued amid a volatile and uncertain global environment compounding domestic challenges. The continent has been hit by a confluence of shocks, comprising weaker demand from key trading partners, a sharp uptick in global inflation, higher borrowing costs and adverse weather events.
“These are undermining its full recovery from the pandemic. Real output losses compared to pre-pandemic projections continue to be large, with Africa remaining a full 2.4 percentage points below its pre-pandemic projected real output. This contrasts with developed economies, which have more than recuperated from their 2020 losses in terms of real output,” the report explains.
Aggregate economic growth is estimated to weaken to 3.8 per cent in 2023 from 4.1 per cent in 2022, due to subdued investment and deteriorating export volumes. In 2023, growth is expected to pick up in East Africa and West Africa while stabilizing in Central Africa.
As the report indicate commodity exporters in Africa will likely face weaker market conditions given the expected global economic slowdown. Export prices will probably remain high, however, amid fierce competition for the continent’s primary commodities.
As indicated several countries are still coping with the repercussions of the COVID 19 pandemic. With under a quarter (24.1 per cent) of people in Africa fully vaccinated against the virus, the continent remains vulnerable to renewed outbreaks and the possible arrival of new variants. Accordingly extreme poverty is projected to become increasingly concentrated in sub-Saharan Africa.
On the bright side, the economy is expected to grow by 4.8 percent in 2023, compared to the growth of 3.0 percent in 2022.

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