BY ABEBE WOLDEGIORGIS
The frequent price increase in food and food-related items has become unbearable to ordinary citizens particularly for those with fixed income. Studies indicate that almost 75 percent of the residents in the capital, Addis Ababa, spend 1/3 of their income on house rental and the remaining on very basic items. Hence, they are unable to withstand the price hike.
Dr. Wasihun Belay is an economist working as a private consultant. In an interview with local media recently, he said that similar to the previous time, the food inflation rose to 20 percent and remained in two digits, critically affecting the poorest section of society. The fixed income earners particularly civil servants suffer a great deal of the pressure.
As to him, the real income of the wage earners is their salary minus the inflation rate. For example, if a person earns 4000 Birr per month and the rate of inflation is 20 percent, his real income will be 1600 Birr.
Since the 1990s, the inflation rate has been two digits and today it has reached to 20 percent. There are many factors which cause inflation. In addition to the macroeconomic imbalances, the growing population has its own impact. As it is known, Ethiopia has the highest population growth rate in the world which is three percent annually.
This means more than three million children join Ethiopia’s population every year. But food production does not go in line with the increasing demand. This in turn causes the price of food items to increase.
The rain-fed agriculture is subsistence, vulnerable to drought and natural calamities and in time of extreme situation, it is critically affected. The decline of the agricultural output again results in a shortage of supply in the market, and hence price hike.
The local food production in time of adversity fails to meet the local demand and as a result, the nation will be forced to import food and food-related goods by spending hard currency.
Unless it is subsidized by the government, the price of the imported food will be beyond the purchasing power of the average citizens. The reason is the value of Birr against the USD is declining from time to time. This also makes the price of imported food item unaffordable.
Hence, to curb the price hike of food items, increasing agricultural production and productivity must be a priority agenda. The government’s effort to expand irrigation farms both in the lowland and highland areas of the country can play a crucial role in stabilizing food price, as to him.
The weak value chain is also one of the aggravating factors for the prevalence of inflation. As to Wasihun, even though there is food in the market, brokers and illegal traders break the normal chain between producers and consumers and impose their own price on food commodities. In their greedy ambition to illegally maximize profit, they make the price of commodities unaffordable to the masses. On the other hand, the lack of commitment to reject unreasonable price of commodities from the side of the society gives way to traders to fix the price even at times when the supply of food surpasses the demand.
The absence of strong civil society organizations and consumer associations which advocate on behalf of the public interest left the ordinary people to be exploited by artificial inflation.
Eyob Tekalign (PhD), a State Minister of Finance, for his part said that unless the market functions in a formal way, inflation will be exacerbated.
If the price of commodities does not show reduction when there is a surplus in the production of food items, it indicates anomalies in the trading system. As to Eyob, in order to stabilize the price, the government has been implementing schemes to encourage trade and business to be governed by the principles of fair competition. In fact, currently, the distribution of commodities is carried out by few individuals and this makes the market to be governed arbitrarily by their affiliates.
One the other hand, the gap between the aggregate demand and supply of commodities nationwide also complicated the matter.
As it is known, growth and development necessitates the importation of both capital and consumer goods and such situation might pose a trade balance deficit unless the nation export more products to balance the import cost or substitute imported goods locally. But the prevailed trade practice shows that Ethiopia always faces trade deficit which means it imports more than it exports and this again directly or indirectly aggravates inflation.
Generally, to mitigate the problem side by side with increasing production and productivity, enhancing the income of the fixed income group should be taken as a way out.
Due to economic dynamism, normally the price of commodities might increase but it should be understood that overcoming the price hike can be possible by increasing the wage earners’ income.
As to Eyob, the generational long inflation problem will not be addressed within a short period of time. It needs time and concerted efforts by all stakeholders and to that end, the government planned to bring structural change in the economy as a long-lasting solution.
There are also different arguments with regard to price hike in food items. And according to the national bank’s recent study, rises in the relative price of food tends to benefit rural households, though the exact magnitude needs to be investigated further, he added.
Changes in the prices of teff, wheat and maize tend to affect more the people at the higher income quintile in rural areas, while in urban areas they tend to affect those at the lower-income quintiles. The recent hike in relative prices has increased the urban cost of living by 8-12 percent.
Inflation could worsen urban income inequality significantly. Demand for teff, maize and wheat tends to be elastic, with evidence of substitutability, especially between teff and wheat. In urban areas, all three types of cereals tended to be necessities, with inelastic price responses.
The Ethiopian Herald 10 February 2021
