The year-on-year inflation in Ethiopia is three times higher than the average rate in the developing countries, according to a new report by the World Bank.
Average inflation in developing countries doubled from 5.4 percent in 2019 to 10.8 percent in 2022. The figure is staggeringly high in case of Ethiopia, where inflation surged from 15.8 percent to 34.5 percent.
The World Bank, in the report dubbed "World Economic Situation and Prospects 2023," said "central banks in Ethiopia, along with Ghana, Sierra Leone,Sudan and Zimbabwe, would face the most pressing needs for monetary policy tightening."
"A careful balance will need to be achieved to preserve economic confidence and prevent disturbances to short- and medium-term economic growth prospects," the report reads.
Inflation has been a headache for policymakers in Ethiopia for the last four years. It is caused by supply side gaps caused by political unrest and the global trade dynamic. The fast losing of the country's local currency against dollar and other FX is blamed for the inflation haunting the country since 2019.
Higher prices can widen fiscal deficits as the cost to provide public goods and services rises but government revenues decline.
"high inflation can prompt a decline in the volume of tax collection and a deterioration of real tax proceeds, known as the “Tanzi effect”. This occurs due to the time lag between when a tax is charged and when the tax is actually paid," the World Bank said.