💪 Gov't Wrestles With Central Bank

Welcome to the 55th edition of ፍራንክ Digest!

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

Here’s what’s coming your way:

• 🥊 The Tussle Between Central Banks and Governments

• 💯 Keeping It Real: The Truth About Cars as Investments

• 🗝️ The Key Takeaways

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Fiscal Dominance: When Government Steals the Central Bank's Thunder

Economy

The IMF just wrapped up its big Spring get-together—a kind of global finance family reunion, but with fewer hugs and more sideline talks (where the actual deals happen). As usual, Ethiopia sent its top economic brass: folks from the Ministry of Finance and the National Bank of Ethiopia (NBE), all suited up and ready to charm lenders. 

Governor Mamo Mihretu took the mic and gave a solid recap of how Ethiopia’s trying to rebalance its economy—like changing tires while driving.

But as much as we love a good monetary policy update (we’re fun at parties, we promise), let’s talk about the bigger issue lurking behind all the jargon: fiscal dominance. Never heard of it? Don’t worry—most people haven’t.

Put simply: fiscal dominance is what happens when government spending gets so out of hand that it starts bossing around the central bank. Instead of the NBE calling the shots on inflation and money supply, it ends up playing sidekick—printing money just to keep the government running. And that, as you might guess, rarely ends well.

Wait—Monetary and Fiscal Policy? A Quick Refresher:

No shame in needing a recap. Here's the አጠሬራ:

• Monetary Policy

👨‍⚖️ Who? Central banks (NBE).

⚙️ How? Tinkering with interest rates, money supply and doing fancy stuff like open market operations.

🎯 Why? To keep inflation in check, promote jobs and avoid economic meltdowns.

• Fiscal Policy

🏛️ Who? Governments.

💰 How? Taxes, spending and borrowing.

🎯 Why? To boost or cool down the economy, depending on whether things are booming or busting.

In Ethiopia, the government runs a budget deficit, meaning it spends more than it earns! When it needs to plug the difference, it typically turns to:

External creditors (hello IMF, China and Sovereign Eurobonds), Commercial Bank of Ethiopia (state-owned and the largest financial institution in Ethiopia) and NBE itself, which—spoiler alert—is where things get tricky. So people ask:

“Is this sustainable?”

“How are we going to pay it all back?”

Excellent questions. But here’s the real issue: Ongoing deficit spending can eventually override the central bank’s Monetary Policy. That’s where Fiscal Dominance comes in.

Fiscal Dominance: Not Just a Fancy Term

Imagine if the central bank is a parent trying to enforce a budget, and the government is the kid throwing everything into the shopping cart because “we’ll figure it out later.” Fiscal dominance is when the kid wins, and the government’s cash requirements start calling the shots. Basically, the central bank becomes the sidekick instead of the superhero– especially when it comes to interest rate and inflation.

Government keeps spending like there’s a sale on budget deficits. Debt balloons, and suddenly, the central bank can’t raise interest rates—even if inflation’s running wild—because that would make the government’s own borrowing more expensive.