Wednesday, June 12, 2024

Financial storm should slide

By Asseged G/Medhin


Since from the  reform Ethiopian government is  introduced , changes on  all  macro-economic factors i.e  , exchange rate , inflation , repeated devaluation of  money as a measurement , stringent move towards import substitution  , incentive for export market  , providing duty free right to capital goods and investment machineries , access to land to investor  were employed . However none of these assisted the economy internally and uncontrolled external variables like CIVID-19  AND  ITS IMOPACT DUE TO MISSINK LINK IN SUPPLY CHAINE recent war between Ukraine –Russia ,  civil war between and among the same nation , political violence and incidents here- and -there –Now –and –Then ,create a more complex business economy  in the first two years of the transformation.  From the edge of spectrum of the change, change resistance forces hammered the transformation using hierarchical bureaucracy which hinders the transformation or momentum of changes.  In the  local affairs of Ethiopia huge resource were wasted due to war , civil war and ethnic conflicts  unexpectedly  consumed quarter of Ethiopia’s  fiscal year budget constituted out of collected taxes , donations , aids, and through loan.

On aggregate these external and internal factors, aggravates the storm of the economy reach to the level that  the government lift up all form of  subsided and leave shock today beyond the shock absorbing capacity.

IN our economy, where by individual income is not rising as rapidly as the desires of the community that create personal savings to be low, so that only limited resources are released for the expansion of the community’s capital. At the same time, the tax systems provide only enough revenue to meet part of the community’s desires for government services, with very small surpluses available to finance development. Under these circumstances, inflation may appear to be an easy method of providing finance to expand investment and hence to be an easy way of obtaining capital for a more rapid expansion of output. If a government can persuade the central bank to create money to finance a development program, or if the banking system freely makes loans to private investors for the finance of physical investment, the problem of expanding the community’s real assets may appear to be easily solvable. Consequently, it is sometimes argued that “a case could be made for making inflation an instrument of (development) policy, rather than the control of inflation an object of policy. This theoretical frame work creates an endless imbalance and shocks in our traditional banking and resource mobilization.

As a measure the government recently, opt inflation controlling strategy including devaluation. In order to maximizes production control, as a mechanism of controlling the rate of inflation impact, mechanized farm is in place. (Significantly reduce shortage of hard currency through import substitution).

There is no doubt that, on occasion, a monetary expansion somewhat greater than the current increase in real output will introduce an element of flexibility in an economy, and lead to some “forced saving” releasing resources for development. However, there are strict limits to the amount of development which may be fostered in this way. Admittedly, the available simple evidence on the relation between inflation and growth is difficult to interpret. The difficulty is common in analyses of the effects of pervasive influences, like the degree of inflation, on phenomena which are also subject to other, complex, forces..

The moment the government pool out its hand from inflation -aggravated  activities like treasury bill , and borrowing from commercial banks and  created more access to individual investors to invest in strategic developmental economic sectors  , i.e mechanized farm , mining , service  , aggregate production will absolve  the impact of inflation. More production will help the economy to use competitive advantage as Ethiopia has more land and labor than any other country in the region. The government should look for other workable strategy, that will increase production, individual income on the nation. 

in any economy,   The monetary system operates on the assumption that money serves as a satisfactory medium of exchange, numéraire, standard for debt repayment, and store of value. If prices are stable or rising imperceptibly, money will be accepted by the community for all these purposes

If prices rise markedly, individuals and businesses will cease to hold money for the latter two of these four purposes. If prices are not expected to remain stable, the economic adjustments attempted by the community will be different from those which will be attempted when price stability is expected.

 In some respects, the problem facing the analyst is the comparison of these different adjustments.  What if prices increasingly disturb the economy or increased at an increasingly rate? And or the storm of inflation could not be stable?  Analysts need to provide their genuine opinion considering the real economic pressure the country is facing.

Shortage of production, low investment, low saving,  high unemployment ( cost of the government )low export in one hand , budget revision , devaluation , mechanized-farm  mainly by the government ,cost of rehabilitation( due to war)  , dinners and lenders compulsory requirement , tax envision, bureaucratic service delivery and corruption  on the other hand  stretched  spectrum of the change. 

If you’re not careful measure impact sand provide proper intervention, , it could sweep any  wealth away. A long-dormant inflation looks to be catching fire. The price of goods and service   is increased the nation history and reached the high- up. The disposable income of the citizen is very low and it is shrinking day by day and   shocks becoming high.  And subsidies and taxes to fund deficits and social programs look to be rising to punishing levels not seen in a generation. This threat could mean a financial apocalypse from which many active participants in the economy (investors) won’t ever recover. Only few, the corrupters and political- mongers navigate in the economy. Getting straight talk on current economic issues, especially the impact of inflation on the daily earning capacity of the citizen should be government’s priority agenda. it is true that individual units of investment financed by bank credit are likely to be created even in inflationary conditions. It is not the immediate products of monetary expansion which are in question; rather it is the over-all effect on the supply of money in the market where by the real purchasing power of money /the real value is significantly discounted by the marginal rate  of inflation over interest rate. Such trend at some point will create financial crises since the collateral size  or real value of the asset  might be  drop down  as a result of  latent economic growth and subsequent impact  on demand in deposit.

An inflationary economy will create a decrease in domestic deposit. to adjust the drop in deposit bankers will not adjust their interest rate  , they may follow expansion of  monetary system.   An expansion of the monetary system’s assets involves an equal expansion of its liabilities. Unless members of the community are willing to increase the real value of their money balances by an amount equal to the increase in bank credit, and thereby indirectly to provide finance for the new investment, either prices will rise, or imports will be so encouraged and exports discouraged that there will be a fall in the community’s capital held in the form of exchange reserves, i.e., a disinvestment in reserves offsetting the newly financed domestic investment. If prices rise, the real value of any increase in money holdings will be eroded. This fall in the real value of money may be considered as a tax on money holders. Inflationary policies, or policies which lead a government to be weak in resisting inflationary pressures, may be assessed by criteria similar to those used in assessing alternative taxation proposals. We need a wise, compressive and effective price adjustment intervention for our economic advisor before the rate of infixion boil the economy and reach beyond the capacity of absorbing the shock.  The storm of the economy should be slide before it creates financial storm and crises the end of policy stance.

Asseged G/Medhin is C.E.O,  AT(@t) Insurance Brokerage & Consulting Firm  

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