practice, by definition, not all countries can pursue a policy of real undervaluation at the same time. Beyond the empirical answer, a policy of “forced savings” can only be conducted in a certain political economy context.

# 5. Transitional macro‐financial programming scenario

Implementing the new vision while maintaining macroeconomic economic stability would require solid control over the macro‐financial flows and good anticipation on the immediate financial effects. The current NBE financial programming framework would need to evolve and incorporate the main elements of reforms discussed above in new medium‐term financial programming. This revised financial program would have significant implications on the financing of the government, the SOEs and the private sector.

## 5.1. Current NBE financial programming framework

The current NBE monetary policy framework aims at directly controlling monetary aggregates and credit allocations.<sup>111</sup> This involves several steps. First, given the real GDP growth projection and inflation rate target, the NBE determines the growth of reserve money supply in line with the nominal GDP growth rate. Since the NBE does not directly control broad money, it determines the increase in reserve money consistent with the targeted growth of broad money supply assuming a gradual increase in the money multiplier. Second, based on the balance of payment financing requirements and sources projections,<sup>112</sup> the NBE forecasts the net foreign assets (NFA) that would be available in the monetary survey, and by difference with broad money, the net domestic assets (NDA) that could be made available to the economy. Third, the NBE allocates the NDA by prioritizing the credit to the government (direct advances and bonds) and credit to the CBE and DBE based on their respective cash flow needs. The CBE cash flow needs are projected based on the financing requirements of major SOEs.<sup>113</sup> The DBE cash flow assumes that the DBE outflow does not exceed its inflows, which comprises the NBE bills proceeds (27‐percent rule), the repayment of its loans, the sale of foreign exchange, and the sale of GERD dam bonds. The remaining NDA represents then the assets available for the CBE and private commercial banks to finance the private sector. Fourth, and in the same vein, the NBE allocates the NFA by prioritizing the foreign exchange needs of the government, the DBE and CBE (including the large fuel import bill) and SOEs, with the remaining balance made available to private banks for the private sector.

The uncertainties surrounding the formulation of the 2018/19 (see Box 10) illustrates the difficulties inherent to any financial programs based on monetary aggregates. As the financial system deepens and becomes more sophisticated, reserve money necessarily loses its effectiveness as a monetary instrument to control broad money growth and inflation. Indeed, in recent years, the growth rate of reserve money

> 111 NBE (2009). NBE’s Monetary Policy Framework.

> <u>https://www.nbe.gov.et/pdf/Monetary_Policy_Framework_of_Ethiopia_main_edited.pdf</u>

> 112 Financing requirements include the current account deficit and the debt amortization (multilateral, bilateral and commercial). Financing sources include net FDI, net disbursements from official external creditors, and net external private sector disbursement.

> 113 Ethiopian Electric Power Corporation, Addis Ababa Housing, Railway corporation, Sugar Corporation, Ethiopia Construction Works Corporation, and Ministry of Public Enterprises (Fertilizer complex).

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