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Deteriorating Business Environment to Slow Economic Growth in Ethiopia

By Staff Reporters

IMF cuts Ethiopian growth forecastJune 2, 2011 (Ezega.com) - The Washington-based International Monetary Fund has predicted plummeted economic growth in the next fiscal for Ethiopia due to a difficult business environment and rising inflation.

Its forecast of 7.5 percent economic growth for Addis Ababa for the 2011-2012 fiscal is much below the official estimate of the government. Earlier, the Ethiopian government had predicted an 11.4 percent economic growth.

According to the IMF, growth rate of Ethiopia may slope from 7.5 percent to 6 percent in the remaining fiscal until July 7, 2012. The IMF’s estimate for 2010-11 growth is below the government’s projection of 11.4 percent for the period.

According to the IMF report released on 31 May, restrictions on private lending and unfriendly business environment were responsible for the slow economic growth in Ethiopia. Besides, high inflation estimated at 29.5 percent in April 2011 impacted economic growth adversely.

The report predicts that high inflation will slow down Ethiopia's economic growth to about 6 percent in the next fiscal. According to the Ethiopian Central Statistics Agency, in March 2011, inflation rate had soared up 25.9 percent from 16.5 percent.

In April, the government introduced a new banking rule asking private banks to apportion 27 percent of the loans to buy the government bonds launched to encourage financial efforts toward the construction of the proposed Nile Dam, which is expected to cost about $4.6 billion.

The report also indicates that price hike had impacted construction and food industry. Since May, inflation has soared, with fuel prices exceeding one U.S. dollar per liter for the first time and sugar and edible oil prices, too, rising sharply.

In January, in order to control rising inflation, the Ethiopian Government undertook several measures to fix prices of 18 basic commodities. It introduced price caps on these commodities, including sugar, bread, meat, beer, etc. However, importers argued that the government decision could lead to commodity shortage and higher inflation, which could further aggravate the situation. The government is likely to remove the ceilings on all commodities this week, except on sugar, bread, palm oil, and flour.

Even the Washington-based lender has welcomed the Ethiopian Government’s decision to remove ceilings, urging the Addis Ababa Administration to consider measures to reduce the trade cost and improve business climate. The IMF suggests that Ethiopia should reconsider its directive asking private lenders to buy government bonds to reduce its “disruptive impact on the banking system.”

An Addis Ababa-based research group Access Capital SC has also highlighted the implications of the government measure, saying that it will crimp profits of private lenders by 15 percent.


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