Tuesday 30 August 2011

Deposit vs Inflation

DEFYING THE PRINCIPLES OF                      ECONOMICS


Despite the bitingly rising inflation that results in negative interest rate, deposits has been marking a significant growth to the surprise of many an economists. And the fact that the conclude budget year has exhibited a record growth in deposit has raise many eyebrows, where some professionals and bankers are optimistic that the trend will last longer, while others cast their doubts that it will never be sustainable, writes Hayal Alemayehu.



Only during the concluded budget year the Commercial Bank of Ethiopia had mobilized a record 30 billion birr-plus while the 30 micro financial institutions operating in the country were able to make over 1.5 billion birr in deposit during the same period of time, an amount that they failed to raise over the previous ten years.

Some professionals explain the growth in deposit as lack of alternative market instruments in the country, while others attribute it to efforts undertaken by the government to promote saving nationwide by opening scores of bank branches nationwide, including the rural parts of the country.

While more economists question whether or not the trend in deposit growth against the negative interest rate will keep up on sustainable basis, others, including bankers, are taking it for granted it will last.

More and more professionals are suggesting that the government should keep the inflation at bay if the trend in deposit growth should continue, and hence the investment in infrastructure while most of them are advising the government to stop or minimizing printing money, which they take us the culprit-in-chief for the rising inflation. 

What explains the growth in deposit

Despite the prevailing negative interest rate, deposit at both banks and micro financial institutions has increased, according to Dr. Wolday Amaha, Ethiopian Micro Financial Institutions Executive Director. Deposit at micro finance institutions has increased from 1.6 billion to a staggering 3.1 billion birr during the concluded budget year, he says. Yet, although the volume of deposit has increased, the number of creditors has not increased, according to the economist. “What is being observed is that it is rather the volume of loan request that has increased instead. For instance, farmers who used to request a 1,000 birr to buy an ox are now asking for 3,000 birr for the same purpose. This shows that it is the average loan request that has increased, and not the number of creditors.”

All the same, there are some stark reasons why deposit is still increasing when it was supposed to contract because of the negative interest rate, a phenomenon that works against the principle of economics, says Dr. Wolday. “Individuals who do not have enough money to invest in some investment ventures or to buy cars or houses opt to deposit their money at banks or micro financial institutions, which they consider as a safe box,” he says. “And because of the fact that much work has been done by banks and micro financial institutions to encourage saving, the saving culture has been boosted nationwide.” A number of new branches have been opened across the country to provide nationwide saving facilities. The Commercial Bank of Ethiopia alone has opened 160 branches nationwide, including the rural parts of the country during the concluded budget year alone. Banks have even been [unethically] competing neck to neck with micro financial institutions by opening branches in the rural parts of the country especially in Amhara and Tigray regional states where there are stronger micro financial institutions which have earlier on established their presence there, according to him. And this has significantly contributed to boost saving and deposit nationwide, he asserts.

Indicating the growth in deposit is the same story at the bank he serves, Anteneh Asefa, vice president of Bank of Abyssinia, says that his bank has been able to mobilize over 950 million birr in deposit during the concluded budget year, the amount significantly higher than the previous year.

Michael Melaku, an economist, says on his part that for mysteriong reasons private credit demand has decreased, and it is not the rate of the deposit that has actually increased. The ecnomist says that the other factor attributable to the growth is growing saving awareness and outreaching of bank branch facilities entering rural parts of the country. He says, the growth in deposit circulates around this.

“Deposit has its own growth trend,” a prominent macro economist says. “As the economy expands and the government invests, micro and small enterprises as well as big companies will participate in that. And one’s expenditure will serve as another’s income. And it is that income that one will be saving and as such the saving grows,” he says. “As the government’s spending increases, so does the income of the private sector, which will save some of that income.” According to the macroeconomist, high income makers may not only save in banks but in a bid to hedge inflation, they diversify their asset by buying houses or investing in other ventures. And people with less income which makes the majority will simply dump their money in banks. On surprise that deposit is growing, he asserts.

I think two things explain most the growing deposit against the negative interest rate, says a senior macro economist who ought not to be named. “According to a research I conducted recently, most of depositors do not seem to know that they will get much less than they deposit. About 90 percent of my respondents do not seem to know about the negative interest rate. And those who are conscious about it have no other alternative than saving at banks,” asserts the macro economist. Those who can afford, even though relatively much fewer in number, may spend their money buying cars, houses or other assets  or invest in some ventures,” he says. “But more people may go to other options like buying shares if more of them are being floated. And much of the growing deposit has got to do with government spending.” Yet the volume of the deposit is not significant when compared with the economy, the economist confirms. “According to the research I did recently, the volume of deposit is only five percent of the GDP, whereas that figure stood 18 to 19 percent for sub-Saharan Africa and 30 percent for China,” he says. “At best, that figure has been rising to five percent of the economy here and at worst standing negative two percent. But as deposit has now exhibited a significant growth during the concluded fiscal year, the figure may rise to 10 or 12 percent of the GDP.”

For Ermias Amelga, board chairman of Access Capital and founder of Zemen Bank, says the fact that there are few meaningful options or alternatives for the people is the major element for the deposit growth. And this makes deposit to keep growing despite rising inflation, he concludes. And money in circulation is also growing to further exacerbate the inflation, he says.


Impact on the economy

But when it comes to the potential adverse impact of the negative interest rate, the bankers and economists look to sing from the same sheet in agreement.It goes without saying that the negative interest rate scenario will discourage saving, says Dr. Wolday. Unfortunately that is not what is actually happening here, at least for now. “Negative interest rate would automatically discourage saving because people would rather opt to spend their money on whatever goods they are interested in to buy than losing their money to inflation. But that is not what is happening here,” he says. “Despite the prevailing negative interest rate, deposit at both banks and micro financial institutions have increased. Deposit at micro finance institutions has increased from 1.6 billion to a staggering 3.1 billion birr during the concluded budget year. Yet, although the volume of deposit has increased, the number of creditors has not increased. What is being observed is that it is rather the volume of loan request that has increased instead. For instance, farmers who used to request a 1,000 birr to buy an ox are now asking for 3,000 birr for same purpose. This shows that it is the average loan request that has increased, and not the number of creditors.”

“There is no doubt it will affect the economy as it will affect the purchasing power of the birr which in turn will affect the economy, says Anteneh. “And that is why the government is taking various monetary policies.”

According to the anonymous prominent macro economist, inflation is an eroding factor, which erodes the value of money and the value of saving, thereby discouraging deposit.  In the shorter term, it might not affect the economy as the government expenditure is expanding and those without an option are still dumping their money in the bank, he asserts. According to the macro economist, in the medium term, the trend will only discourage saving and in turn the economy will suffer from losing saving or capital to invest in with and grow.

What should be done?


The government should take concerted efforts to keep the inflation at bay. But I don’t see that comes to pass, says Dr. Wolday. It is not merely the monetary measures or policies that the National Bank of Ethiopia takes that will do away the inflation just by themselves. It should rather be the concerted efforts of all government agencies that could curb the inflation. If the central bank takes some measures to mitigate the inflation while the Ethiopian Revenue and Customs Authority (ERCA) comes up with some new tax system or that the Ministry of Trade (MoT) introduces new regulation that may give way to rising inflation, the right job is not done at all. As such a task undertaken to curb the inflation may entail political risk, an institute led by the prime minister or a higher authority, which will put in place prudent and concerted efforts all focused on curbing the inflation, should be established to do away with the prevailing inflation.

Prudent monetary policy is the only answer, the prominent macro economist asserts. “Money supply should go along or in balance with the DGP that the government should not print money or should print less to bring about the inflation at an acceptable level,” he says. “There is no prudent monetary policy currently that may put the inflation at bay or at an acceptable rate of five percent as the government says. As the result, inflation is still on somewhere at 40 percent for four years or so.”

The inflation should first have to be done away with to make the saving sustainable, according to the senior economist interviewed. “And to curb the inflation,” asserts the economist “the government should have to stop or minimize printing money.” The government has lately admitted that the increase in the amount of money circulating in the economy has given rise to inflation, he says. When the government stops printing money the inflation will slow down, according to him. “The government should stop or minimize borrowing from the National Bank of Ethiopia,” he says. “And if the inflation goes down to some ten percent or lower, it would be easier to adjust the interest rate with the inflation rate which in the end will make the growth in saving sustainable. The IMF has been suggesting to somewhat balance the interest rate with the inflation rate while the latter stood at over 30 percent, which I don’t think is good for the economy.”

Loyal or dedicated customers like Workneh may keep saving their money at banks leaving the results for the uncharted eventualities. But curbing inflation or balancing its rate with interest rate might bring back Esayas and money more like him to their old habit. That will serve a double purpose as it will further boost the saving much need by the GTP.
for full reading of the report  you can access it in this site http://www.thereporterethiopia.com/Business-and-Economy/defying-the-principles-of-economics.html
 

Saturday 27 August 2011

Negadras Gebrehiwot Baykedagn (1886-1919)


 Negadras Gebrehiwot Baykedagn
      from "Pioneers of Change in Ethiopia"
              By Prof. Bahru Zewdehttp://www.damera-poems-web.net/bykeda.htm
 
Often times, contemporary Ethiopian politicians and mercenary historians attribute the backwardness of Ethiopia to the feudal systems of its government and leaders. Although there is truth to this, nothing had been said about Ethiopian intellectuals who, while serving in the Ethiopian governments of Emperors Tewodros, Yohannes, Menelik and Haile Selassie, struggled to bring about meaningful political and social changes in the country. The struggle and work of those intellectuals are glossed over and forgotten whereas the life of the kings and queens are glorified.

            As part of our quest to find and emulate exemplary leaders of change, it is fitting to learn about the lives and contributions of Ethiopia's men of letters and agents of change. Earlier in the year Prof. Aleme Eshete shared with us the life time contributions of the late Dr. Sergew HableSelassie. Thanks to Prof. Bahru Zewde's work we are now able to learn about the lives of "The Reformist Intellectuals of the early Twentieth Century." One among a series of such intellectuals was Neggadras Gabra-Hewat Baykadan. Neggadras Gabra-Hewat Baykadan was among beneficiaries of Western education who came to occupy important positions in both Emperors Menelik and Haile Selassie's governments. The following brief history of Neggadras Gabra-Hewat is adopted from Prof. Bahru Zewde's book, "Pioneers of Change in Ethiopia." His picture is in the attachment.

            The most celebrated of the early twentieth-century intellectuals, Gabra-Hewyat Baykadan led a life that has perhaps been the least documented. His lifespan was also one of the shortest, lasting barely 33 years. He was born on 30 July 1886 in the village of May Mesham in the district of Adwa. His father, Shaqa Baykadan, was in the service of Emperor Yohannes and died with the emperor at the Battle of Matamma on 9 March 1889. The early 1890s were a period of exceptional turbulence in Tegray, where the political disintegration and psychological void created by the death of the emperor, the ravage of one of the longest and most devastating famines the country had ever known, and the depredations that attended Menelik's campaign of 1890 to assert his new imperial authority, all combined to produce great instability.
 
It was in these circumstances that Gabra-Hewat fled with some other companions to Eritrea at the age of seven. According to Richard Caulk, Gabra-Hewat joined the
Swedish mission school at Menkullu, on the mainland off Massawa. A trip to the port of Massawa that he subsequently made with his friends was to change decisively the course of his life. Gabra-Hewat and his friends got permission from the captain of a German ship
docked there to go aboard and look around. When time came for the ship's departure, Gabra-Hewat stowed away. When the captain eventually discovered his 'guest', it was too late to do anything. On arrival at the destination, he entrusted the young boy to a rich Austrian family, which adopted him. Under the benevolent patronage of his Austrian sponsors, Gabra-Hewat learnt the German language, and is said to have gone on to study medicine at Berlin University. After completing his studies in Germany, he returned to his country. In the Ethiopian court, he had the good fortune of winning the friendship of Dejjach Yeggazu BeHabte, who assigned someone to teach Gabra-Hewat Amharic. After seven months of studious application, he was able to master the language to such a degree that he was to emerge as one of the finest writers of Amharic prose. It was also Dajjach Yeggazu, along with Naggadras Hayla-Giyorgis, who recommended Gabra-Hewat to Menilk.

            Gabra-Hewat was reportedly made private secretary and interpreter to the emperor. Apparently in his capacity as interpreter, he also accompanied an official mission to Germany led by Dajjach Mashasha Warqe in the summer of 1907. As in the case of Hakim Warenah and theBritish,theillnessofEmperorMenileklenthimsomediplomatic utility to the German government. He was attached to the German doctor Steinkuhler, and detailed to treat the ailing emperor and thereby promote the fortunes of German diplomacy. Again, like Warqenah, Gabra-Hewat failed to win the confidence of Taytu, who reportedly forbade him to touch the invalid. The acrimony that subsequently developed between the empress and the German doctor, who provoked the controversy about the poisoning of the ailing emperor, could only have reflected badly on his Ethiopian associate. In the potent article "Ate Menilek-naItyopya',there is an allusion to the German minister, Dr. Zintgraff, and his interpreter instigating the nobility against Taytu's ambitious designs on the throne. It was probably under these circumstances that he chose to exile himself to the neighboring British colony of the Sudan sometime in November 1909.

Gabra-Heywat fell critically ill on his return from the Sudan and was hospitalized in Massawa. As the brief preamble suggests, it was apparently while he was convalescing--and not, as Tegabe claims, while in the Sudan that he wrote 'Ate Menilek-na Ityopya'. In the preamble the author pays a glowing tribute to his lifelong friend, Pawlos Manamano, to whom, next to God, he says, he owed his life. Pawlos was to render Gabra-Hewat an equally worthy service a few years later when he published posthumously his major work, a treatise on political economy, Mangest-na Ya Hezb Astadadar.
 
There are two things are worthy of note here. The first is how his sojourn in the Sudan, and much earlier in Eritrea, impressed him deeply and forced him to contrast the backwardness of his country with the progress he believes to have been achieved in the two colonies. As he writes: (Translation from the Amharic version) "If we look around our neighboring countries, we see intelligent people developing them with diligence. In particular, if we look at the Sudan, which had been ravaged by the Dervishes, we realize how a desert can be transformed into a Garden of Eden when ruled by such intelligent people like the British. All around us colonies are marching ahead undeterred by any obstacles. For intelligence can only be checked by intelligence. Woe, then to a people that persists in its ignorance, for it is ultimately bound to perish."

            The second point to note is Gabra-Heywat's balanced appraisal of Empress Taytu, despite all that he had endured at her hands. The major fault that he finds in her otherwise illustrious career is her attempt to disrupt Iyyasu's succession to Meilek, not the hard time she gave him and fellow intellectuals like Afwarq and Gabru. As the last paragraph of the article makes clear, 'Ate Meilek-na Ityopya' was addressed to Iyyasu, the heir to the throne. Disappointed by Menilek as a modern izing monarch,Gabra-He wat apparently pinned his hopes on the young prince. He was soon to be disillusioned, as Iyyasu failed to demonstrate the resolution and consistency necessary for the social and economic change that Gabra-Hewat and his fellow intellectuals recommended. Like Takla-Hwaryat, Gabra-Hewat had no choice but to shift his hopes and his allegiance to another young prince, Tafari Makonnen, the future Haile Selassie. And after Tafari became heir to the throne in September 1916 Gabra-Hewat started to occupy major administrative posts, as inspector of the Addis Abab-Djibout railway in 1916 and Naggadras of Dire Dawa in 1917. He diedon1July1919.


 

Economists'


Economists


Friday 26 August 2011

welcome

am happy to see this blog published,right now those who are interested on Ethiopian economy  can forward his/her view or idea  for betterment of Ethiopian economy.