Ethiopia: Strong Monetary Policy, Agricultural Productivity Playing Role in Maintaining Price Stability

In today’s dynamic economic landscape, the interplay between price stability and economic growth remains a pivotal concern for policymakers and economists alike. Price stability, characterized by a low and predictable inflation rate, serves as a foundation for sustainable economic development. Increasing the supply of the volume of consumption products and containing illegal trade through tight control check points on roads stretched towards neighboring countries are essential tools.

In addition it is instrumental to mitigate inflation and economic disruption. It fosters consumer confidence, encourages investment, and supports the efficient allocation of resources.

Conversely, unchecked inflation can erode purchasing power, disrupt savings, and create uncertainty in the marketplace. Inflation deducts the purchasing power of local currency and makes attracting foreign investment unrealistic.

On the other hand when inflation occurs due to soaring of commodities price in the international market taking the price imposed by external factors will be obligatory. Crucial commodities imported from abroad such as petroleum, fertilizer and medicines can be mentioned in this regard. It is unthinkable to run sectors such as agriculture and transportation without importing fertilizers and fuel even the delay of importation will pose unwanted consequence. The same is true to medicines. With the absence of medicines in hospitals, treating patients will be unthinkable.

Stabilizing the price of these importing items costs government coffers by allocating huge amount of subsidy. The other remedy is substituting the products by producing here which takes time.

Therefore, striking a balance between maintaining price stability and promoting economic growth is crucial.

Costentinos Berihe (Phd) is an economist working as consultant in various firms. As to him, the significance of this balance enables to examining how effective monetary policy, fiscal strategies, and regulatory frameworks which can harmonize the dual objectives of stability and growth, ultimately leading to a resilient and prosperous economy.

It is clear that central banks play a crucial role in achieving price stability, which is essential for fostering a healthy economic environment.

Central banks use monetary policy to control inflation and manage economic growth including setting interest rate on borrowers and lenders which serves as tool to control the circulation of money in the market.

In our country, sizable portion of the population particularly in the rural part of the country is not bankable. This to some extent helps to reduce the amount of money circulated in market, which in turn hampers inflation. But the growing middle income population in urban centers who have a disposable income and high consumption habit poses inflation by spending more money in the market. But as mentioned above supplying more products can be taken as remedy.

Adjusting interest rates by banks also influence borrowing and spending behaviors. Lowering interest rates can stimulate economic activity, while raising them can help cool down an overheating economy.

Many central banks adopt an inflation-targeting framework, setting specific inflation rate goals. This transparency helps anchor public expectations regarding future inflation, contributing to price stability. When people trust that the central bank will keep inflation in check, they are more likely to make long-term economic decisions.

Central banks conduct open market operations, buying or selling government securities to regulate the money supply. By increasing or decreasing the amount of money circulating in the economy, they can influence inflation and stabilize prices.

In times of financial distress, central banks act as a lender of last resort, providing liquidity to financial institutions. This role is vital in preventing bank runs and maintaining stability in the broader financial system, which ultimately supports price stability.

According to the National Bank of Ethiopia, Central banks often have regulatory authority over financial institutions. By ensuring that banks operate safely and soundly, they mitigate systemic risks that could lead to economic instability and inflationary pressures.

Atlaw Almaw is an economist working as consultant for various firms. He said that, Central banks continuously monitor economic indicators such as employment rates, consumer spending, and commodity prices. This data-driven approach enables them to anticipate inflationary trends and adjust policies proactively.

Effective communication is crucial in managing expectations. Central banks use forward guidance to inform the public and markets about their future policy intentions, helping to shape economic behavior in anticipation of changes in monetary policy.

Taking into consideration the reality the National Bank of Ethiopia (NBE) convened for its second meeting of the year. The meeting, in line with the NBE’s primary objective of maintaining price stability while supporting economic growth, focused on reviewing inflation dynamics, the financial sector, and global economic conditions on March 25, 2025, the Monetary Policy Committee.

Inflation, a major focus of the MPC, showed signs of improvement. The inflation rate for February 2025 stood at 15%, marking a decrease from the previous period. This positive trend was attributed to tight monetary policies, improved agricultural production, and controlled adjustments in administered prices. Notably, food inflation decreased significantly from 31% a year ago to 14.6%, while non-food inflation also declined to 15.6%. The month-on-month inflation rate of 0.5% in February signals an easing of price pressures.

Economic activity, as measured by the Composite Index of Economic Activity (CIEA), remains strong. Indicators from key sectors, including agriculture, industry, and services, endorsed the witnessed sustained growth.

A favorable rainy season has bolstered agricultural outputs, while easing foreign exchange constraints have supported industrial activity. The export sector, particularly in coffee and gold, continues to perform well, and services such as air transport and tourism have seen strong performance.

The MPC also reviewed monetary aggregates, noting a significant increase in broad money and base money growth, which stood at 22.8% and 42.0%, respectively, as of January 2025. This growth reflects a moderate easing of credit policies and recent fiscal and external sector developments. Meanwhile, domestic credit growth remained stable at 19.8%.

In terms of interest rates, the MPC noted that short-term market rates have turned positive in real terms. The weighted average yield on 364-day Treasury-bills rose to 17.7% in February 2025, up from 15.9% at the end of 2024. The inter-bank money market also showed growth, with transaction volumes reaching Birr 338.8 billion by the end of February.

The banking sector remains stable with low non-performing loans and adequate capital, although some institutions continue to face liquidity challenges. To address these, the NBE has introduced measures like the inter-bank money market and a Standing Lending Facility.

The fiscal stance remains prudent, with zero monetary financing of the deficit for the fiscal year. The external sector also saw improvements, marked by strong export growth, increased remittances, and higher capital inflows following exchange rate reforms in July 2024. These developments contributed to a current account surplus and boosted foreign exchange reserves.