Ethiopia’s comprehensive inflation Good news at last?

Ethiopia’s inflation has been  out of control for five consecutive years, at a great cost on the urban poor; now it looks as though it may come down to a somehow acceptable digit   

Bisrat Teshome, Special to Addis Standard

For the last five consecutive years it is a routine practice for ordinary Ethiopians to go to any given market and confront erratic prices, mostly higher, for same products purchased a few weeks, days or even hours before from the same market. Consecutive data from the country’s Central Statistics Authority (CSA) can hardly conceal this dreadful fact either. In the month of September 2008, the CSA published a data showing inflation that went through the roof (59.67%), which is the highest ever recorded in recent history of Ethiopia.

Rudimentary economics define inflation as general price hike in goods and services in an economy over a period of time, paralyzing the purchasing power of the cash, which in turn results in people unable to afford to pay for goods and services.

 Worse on urban dwellers  

In the case for Ethiopia urban dwellers in Addis Ababa, the capital, and other major regional cities are the most affected segments of the society. This directly corresponds to the nature of urban lifestyle where almost all of the consumable products are purchased by a majority of city dwellers living on fixed salary based incomes. However, this is not to say that the poor in rural parts of the country is not affected by high price hikes.

A 2008 study conducted on urban food insecurity inside Kirkos sub-city in Addis Ababa, ‘Urban Food Insecurity: Extent of Food Deprivation’, revealed that 70% of the respondents in the sample were food insecure as a result of the high food prices, which means they were not able to meet a daily calorie requirement (> 2100 kilo calories per day) that is essential for the normal functioning of the body. Common coping mechanisms with urban food insecurity adopted by the urban poor around Kirkos sub-city were limiting the number of meals per day to two times or once and consuming less preferred food types. Some households have also reported that they have sold household assets to buy food.

As was clear from various indications, the respondents have said that this trend in price hikes started after the disputed elections of 2005. This period also coincides with a period shortly before the elections and after, during which the government in Ethiopia launched massive public investments in the Ethiopian economy.

 Why persistent?

The serious impacts of inflation in the Ethiopian economy, which is believed to have been worsened by the state’s massive investment in infrastructure, have in turn pushed market players to go against major market principles: hoarding consumer products such as sugar and cooking oil, which, more than once, has exacerbated the problem into a full scale market disorder (currently sugar is an item available only in ration). Consumers’ and traders’ inflation-expectations have also played a major role in ever ballooning the vicious cycle of price hikes; it is common to see middle to upper class Ethiopian families in urban areas easily getting into the habit of purchasing larger quantities of consumable products expecting that in few more days or weeks prices will be more expensive than the “already old” prices. This in turn has created a fertile ground for wholesalers and retailers who used the demand as an opportunity to raise prices as it fits them best and not as dictated by the market.

Different multinational organizations such as the IMF and the WB have been proposing different mechanisms to curb inflation in Ethiopia. Their recommendations range from decreasing the already excess money supply in the economy (expansionary monetary policies) to diminishing the momentum of growth in the country’s economy. Experts from these institutions suggest that Ethiopia’s economy is fueled up way above its capacity to handle it. The counter recommendation by the government in Ethiopia has always been to continue increasing the country’s GDP growth which should help in countering high inflation rates by increasing opportunities and supply into the market.

Authorities have also repeatedly claimed various monetary and fiscal measures were taken to tame inflation. Although some of the measures showed a fair success in slowing down the general inflation since its peak year in 2008, it is yet to go lower than 20%, let alone to a single digit by June 2012, as was promised by the government in Ethiopia.   In economics this type of inflation is known as ‘comprehensive inflation’ or ‘economy wide inflation’.

One of the likely reasons for slow responses of inflation digits to the government’s anti-inflationary measures is the possibility of miscalculated strategy. The government often blames “superficial causes” mainly “imported inflation”; but a sober analysis of the root cause put the blame elsewhere. A working paper published in August 2012 by the African Development Bank Group, for example, says that the major reason for the excessive inflation in Ethiopia is the printing of money by the government to finance its deficits and stimulate aggregate demand.

 On the way down, thankfully 

Perhaps heeding to unrelenting pleas from many directions, as of recent the government has decided to ease its borrowing from the central bank, and somehow switched funding sources for some of its massive and ambitious projects from central bank to domestic borrowing. This is hugely welcome news as it means the government may actually have stopped printing money and started borrowing from various alternative sources.  The official Inflation data shows that food inflation has declined from 41% in January 2012 to 11.8% in December 2012.

This is a relief for the urban poor, but it has to be sustained. It goes without saying that inflation has a rolling snowball effect on the urban poor, where the prices that are seen today are higher than they were days before and the salary based incomes fail to rise higher than the price hikes. It is now crucial for the government not to indulge, among many other things, in ambitious economic stimulus packages that can pressure it to borrow excess money from the central bank, which, as was the case in the last five years, will easily lead the economy into another daunting inflationary era.