Ethiopia Should Curb Spending to Cut Inflation, World Bank Says

By William Davison

April 4 (Bloomberg) -- Ethiopia’s government may have to curb spending to avoid borrowing that will further stoke inflation, a World Bank official said. The Horn of Africa nation plans off-budget investment of about $33 billion by mid-2015 on projects including dams, railways and sugar plantations, as part of a five-year industrialization plan. More than half of the financing needs to be in foreign currency. The government is “keenly aware” there is a funding gap for the plan, Guang Zhe Chen, the bank’s country director, told reporters in Ethiopia’s capital, Addis Ababa, yesterday. “The government is certainly concerned about inflation, wanting to limit the budget deficit and monetary growth,” Chen said. “There is a limited scale of how much the government can really invest on all these state enterprises unless you continue to borrow from the banking sector, which is going to again be fuelling inflation.”
   

Ethiopia had the second-highest inflation rate in the world last year, when it peaked at 40.6 percent, according to Addis Ababa-based research group Access Capital SC, which pointed to a surge in external debt and central bank lending to the government. Inflation was 36.3 percent in February. The government’s target of bringing inflation below 10 percent during the plan’s lifetime is unlikely to be achieved, said Chen. “They probably expect they can sustain a level of inflation of 15 to 18 percent,” he said. Ethiopia’s economy grew 7 percent to 8 percent annually in the five years to July 2010, according to the International Monetary Fund. Growth may slow to 5.5 percent this year, from 7.5 percent last year, according to the IMF’s website.

The availability of low-cost financing has been limited by the euro zone debt crisis, leading Ethiopia to borrow at higher interest rates from emerging nations such as China, India and
Turkey, Chen said.The government should try to attract more direct investment from foreign companies to achieve growth without increasing inflationary pressures, Chen said.

To contact the reporter on this story:
William Davison in Addis Ababa via Johannesburg at
pmrichardson@bloomberg.net.

To contact the editor responsible for this story:
Antony Sguazzin at +27-11-286-1934 or
asguazzin@bloomberg.net

William Davison
Bloomberg News
Addis Ababa, Ethiopia
Mobile: 00251 913 415 322

Skype: william.davison2