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Submitted by Anonymous on
Thank you for your question, Yohannes. Incidentally, our web manager, another Ethiopian, is also named Yohannes. The fact is that Ethiopia is running a large trade deficit (30 percent of GDP) and also a sizable current account deficit. These deficits are being financed by foreign inflows. If there is a cutback in these inflows, then either domestic investment has to go down or domestic savings (private plus public) have to go up (this is a definition, not a political statement). One way to increase public savings is to cut back public spending. The point is not to make this adjustment too drastic, so it may also be helpful to improve the competitiveness of the economy (by depreciating the real exchange rate), so that the amount of expenditure reduction will not have to be as great. Shanta