According to official reports, the Ethiopian economy had been experiencing a high and unabated inflation over the past decade and a half. During the period 2004 -2018, the average inflation rate was noticed to be above 15 percent.
Not only that, inflation has been rising since 2015. This has critically affected the fixed income of urban dwellers.
In December, the inflations reached 19.8 percent with food and non-food inflations showing a 22.7 and 15.8 growth respectively.
Pertaining to this, recently, the Ethiopian Economic Association has prepared a platform for discussion. Think thanks had presented papers. Participants also reflected their views.
Atnafu Gebremeskel (PhD) works at Addis Ababa University in the Department of Monetary Policy and Financial Sector. As to him, regarding the macro economic growth, the increment of money in the market poses inflation.
In addition to that, the behavior of the participants in the market system and failing to adjust to the market pressurize the money value to inflate.
Furthermore, the quality and quantity of products, the services and the absurd value chains also have an adverse impact.
According to Atnafu, dealing with the multifaceted causes depends on the utilization of economic concepts, gathering data, adopting theories in relation to inflation, seeing to the legality and validity of the study and checking professional integrity of the researcher.
In gathering the economic performance data, it should be recognized that the National Bank of Ethiopia and the Ministry of Finance and Economic Development are the pertinent institutions.
In the past political order, before the coming to power of the government of Prime Minister Abiy Ahmed, officials had been claiming that the nation’s rapid economic growth was responsible for the frequent occurrence of inflation which is totally wrong.
As to Atnafu, there are several factors other than the above aforementioned ones. Honestly speaking, the government has lost control of monetary policy and for the last decade and half inflation had been aggravating poverty.
The increasing government budget allocation, the gap between the collected revenue and expenditure, the currency value fluctuation against Dollar, Euro and Pound exacerbated the situation. As a result, the living condition of citizens has become appalling. Because of the official reduction of the purchasing power of the Birr for the last decade, Ethiopians unnecessarily paid over one billion Birr due to the soaring prices of commodities and services.
Currently, the frustrated well-to-do classes in urban centers are forced to invest their money in rent seeking schemes for their short term gains. This indicates the psychological impact of money devaluation.
To stabilize the economy disturbed by inflation, the government usually takes measure. Introducing new taxes and adding tax rate could be mentioned here. As to Atnafu, 3 percent inflation is essential for normal economic growth.
During the last decade, government had claimed 11 percent growth but it should be understood that the corresponding annual inflation rate was 25 percent.
And this shows that though growth is conspicuous in other sectors, benefits are not seen accruing to citizens.
The major driving force for inflation are insufficient food supply to the market, monetary factors such as fiscal deficit, gap in balance of payment and expansion of development projects without considering the created wealth.
Hence, to reverse the situation, stabilizing net foreign asset, controlling money supply, reestablishing the National Bank in such a way it has independence from the executive branch of the government by proclamation, which has a mandate to employ viable solutions to stabilize the economy, are very crucial.
In addition, strengthening statistical capacity of the nation and making rigorous research can be taken as way out.
Engineer Tsedeke Woldu, on his part, noted that, inflation can be taken as an error in a given work.
The most affected group of the society is the middle income one.
To his understanding, the poor are not affected because they consume very little and has no disposable income. The rising of the price of consumer goods, house rent, medicines and services aggravate inflation.
The government borrows from banks to cover its budget deficit and the gap between the aggregate production input and output as well as between supply and demand also triggers inflation.
In another respect, due to the frequent external shake Ethiopia is forced to be price taker from abroad.
The devaluation of hard currency in the international market also affects the purchasing power of Birr domestically. On the other hand, when the government increases public sectors monthly salary due to workers uprisings and strikes inflation might surface.
After the unexpected outcome of the 2005 election, the then ruling party shifted its attention from politics to economic front and to regain the public trust abruptly opened new projects to create jobs by printing money only to aggravate inflation.
The other panelist Muluneh Ayalew, an expert from the National Bank of Ethiopia and who works in the department of the Macro Economic Division said that, the government is conducting studies to evaluate the rate of inflation.
In Ethiopia, the measurement of inflation bases on consumer price particularly in food and food-related commodities, while in other countries it is measured by wholesale price.
The National Bank targets to control inflation rate by 8 percent single digit margin. But according to the National Statistics Authority, the annual average rate is 16 percent. To stabilize the macro economy, the NB is working on increasing the amount of money available in the market. But injecting money to the market should be based on the demand because the arbitrarily injection of money has its own demerits. The money in circulation, in individuals pocket and deposited in banks should not surpass its maximum level.
The banks’ loan and saving rate also should be regulated based on the macroeconomic steady growth. The printing of money depends on the availability of hard currency deposited in the National Bank. If excess money is available, it should be understood that it might come from abroad in the form of loan.
The local banks’ loan provision must also be governed by the amount of printed money. Every action against this rule will pose own repercussions.
As to Muluneh, sometimes inflation could occur while the amount of money in circulation is at the reduced level. This indicates the complicated nature of the monetary system.
The National Plan Commission study reveals that, the market system is usually not governed by receipt system and merchants fail to provide crucial information with regard to their day-to-day transactions. This in turn, makes the struggle to control inflation hard.
As to him, to redress the above mentioned economic havocs, with respect to monetary and fiscal policies, supervising money supply is essential.
The provision of credits and asset accumulation is an indicator of economic growth. The availability of sufficient hard currency deposit also stabilizes the economy.
The reduction of the exchange rate of hard currency also can be taken as one option to curb inflation. But, it should go in line with other policy measures. On the other hand, when money supply is increased due to increasing of hard currency deposits, it must be adjusted with the money demanded.
Strengthening tax reform and taking cautionary measures in covering budget deficit is also essential.
Studying the root causes of illegal trade, taking strong action on the distorted market system, and establishing better relation between farming and productive industry sector are vital.
The Ethiopian Herald Sunday Edition 8 March 2020
BY ABEBE WOLDE GIORGIS
