According to a recent study, Ethiopia’s macro policymakers will face three major challenges and choices in 2022.

These are: Whether to tighten or loosen fiscal and monetary policies; Whether to pursue primarily domestic or primarily external financing sources for reconstruction spending; and Whether to allocate priority resources (particularly credit and forex) to the public or private sectors.

Here, we extract the study’s three key challenges and choices predicted to confront macro policymakers in 2022.

  • First, there is likely to be significant tension between tightening and loosening macroeconomic policies, particularly in the fiscal and monetary arenas. Addressing inflation and other imbalances necessitates at least some policy tightening, whereas reconstruction needs will necessitate increased spending and policy relaxation in some areas.
  • Second, given the obvious need for significantly increased government funding for recovery and reconstruction, an important question is whether this will be sought primarily from domestic or external sources. In other words, will a more independent (domestically driven) recovery be pursued, or will an international-supported recovery be pursued?
  • Third, policymakers will need to strike the right balance between the public and private sectors in allocating key economic resources, particularly credit and foreign exchange. The allocation of loanable funds and forex supplies shifted heavily towards the public sector last year (which is understandable in a wartime economy), but how much of this shift back to increased private sector allocations will have a significant impact on 2022 developments and the business operating environment this year.

The Cepheus macroeconomic handbook indicates that ‘So far, and understandably given the circumstances, policy has favored loosening rather than tightening, domestic rather than external financing, and directing resources (forex/credit) to the public rather than private sectors.’

Source: Ethiopia Macroeconomic Handbook 2022, Cepheus Growth Capital Partners

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