Ethiopia policymakers take aim at soaring inflation

ADDIS ABABA, Sept 2 (Reuters) - Ethiopian policymakers are focused on lowering inflation and eliminating distortions in the foreign exchange market, the state minister of finance said on Thursday, and they will stay the course even if the policy curbs economic growth.

The Horn of Africa nation, whose troops are engaged in a conflict against Tigrayan forces in the north, raised cash reserve requirements for banks on Tuesday and increased short-term borrowing rates for commercial banks.

State Finance Minister Eyob Tekalign Tolina told a news conference that the government is throwing everything it has at the problem. “We are giving it all now,” he said. “This is the most critical challenge so even at the cost of economic growth ... it is worth it.”

Annual inflation stood at 26.4% in July. The rate has been above or close to 20% all of this year, defying the government’s efforts to curb it.

The government is also streamlining the foreign exchange market, where the difference between the official exchange rate and the parallel market has widened this year for various reasons including the war in the north.

“When there is a distortion in the forex market, the major victim is the poor, not the banker, not the trader,” Eyob said.

The local currency, the birr, is now trading at about 60 per dollar on the parallel market, compared with 45 on the official market, currency traders said.

The rate had widened to close to 70 on the black market, before narrowing this week after authorities signalled they were willing to take strict measures to correct.

The government is aware of the biting hard currency shortages, which were constraining the economy, but it wants to address their root causes over time.

“Shock therapy and quick measures to improve the exchange rate issue have not been useful in the past. We are taking a measured approach,” Eyob said.

Some of the measures include easing the supply of foreign exchange, rebuilding of reserves held by the government and unwinding of an expansionary fiscal and monetary policy stance, he added.

Reporting by Duncan Miriri in Addis Ababa Editing by Matthew Lewis