BY ABEBE WOLDEGIORGIS
Remarkable number of people agree that Ethiopia has been achieved economic progress for the last two decades. The expanding service and manufacturing sectors attributed to the registered economic growth. However, in the last five years the basic commodities such as food and agricultural products’ prices have been rising in skyrocketed manner excluding the house rent which is consuming more than half income of the renters.
The inflation is critically affecting the fixed income group of the society particularly the civil servants. The pervasive price hike in cement products also negatively affected the construction industry.
Atnafu Gebremeskel is an economist and made several studies on inflation. While making an interview with the local media recently, he said that Ethiopia has registered one of the fastest economic growth in Africa for the last two decades, but this has been accompanied by double digit inflation for most of the times.
He further said that the inflationary growth process has also occupied a central position in the Ethiopian political economy of growth. The growth process was not inflationary earlier to 2005.
Among the many factors which aggravate the inflation rates are the marginalization of farmers from the formal market; the extended value chain from farming and harvesting up to supplying of products to the market. The dominant role played by illegal brokers who do not pay tax formally in the business in line with market sabotage created by some greedy traders that hoard basic products has also aggravated the price hike. As a result, the farmers do not obtain proper income from their product which receive high price when it reaches to the final consumer, the economist said.
Others argue that the high money circulation in the market due to government’s budget expenditure and excess loan given to the new small scale business enterprises further aggravate the situation. The imbalance between the available service and goods and the excess money in circulation caused shortage of commodities in the market which in turn induced inflation.
In contrary to this, due to the non availability of modern storage facilities and functioning markets; vegetable products such as tomato, cabbage and onions are perished before reaching to the market that resulted in shortage of supply on top of causing adverse effects on farmers’ livelihood.
Other studies indicate that, Ethiopia imports more goods which highly exceed its export bills and this make the country to be vulnerable to take the price burden. The price of Industrial products in the international market rises from time to time and when the goods reached to the domestic market they will be sold in higher price.
The devaluation of the value of Birr which impacts the exchange rate against foreign currencies also aggravates the situation.
With regard to the inflation pressure due to shortage of cement in the market, some business men said that the gap between supply and demand is responsible to the pervasive price hick. Though there are about 12 cement factories in the country, they do not produce in their full capacity due to lack of sufficient inputs and power breakdown. In addition to this, some officials from cement companies told the media that industries shut parts of their production departments currently because of the ongoing rainy season and for maintenance purpose which in turn affects the supply.
According to Atnafu, the balance between domestic demand and output, fiscal revenues and expenditure, and savings and investment; external balances mainly refer to Balance of Payments are responsible for the hiking of the price of commodities and services.
The recent document published by the Ethiopian Economic Association stated that the fiscal and current account deficits or surpluses are perfectly compatible with economic instability. Hence, regulating them in a sustainable manner is essential. There is no unique parameter for every macroeconomic variable between stability and instability. It may be relatively easy to identify a country in a state of macroeconomic instability, for example where there are large current account deficits financed by short-term borrowing, high rising levels of public debt, double-digit inflation rates, and stagnant or declining Gross Domestic Production (GDP).
This helps to understand the evolution of inflation in Ethiopia and allows proposing a macroeconomic policy to ensure the economy could achieve non-inflationary and stable economic growth.
According to the Ministry of Finance, Ethiopia in general registered mild economic progress, and formulated monetary policy in particular to attain relative stability of prices to help and protect the poor from the ills of inflation and encourage savings and long-term investment. In the past, the government’s monetary policy would be geared towards containing price and exchange rate stability, with the objective of containing inflation within a single digit.
The Government’s 10 year perspective development plan also stated that Ethiopia’s monetary policy will continue to focus on maintaining price and exchange rate stability so as to create macroeconomic stability that is conducive for rapid and sustained growth.
Measures should also be undertaken so the growth of money supply would not be in excess of nominal GDP growth. A stable foreign exchange rate is envisaged for the coming years through encouraging export growth and import substitution.
This in turn is expected to facilitate stable economic growth and significantly minimize foreign exchange constraints by strengthening hard currency reserves.
As to Atnafu, the last three years’ performance showed that money supply and nominal GDP expanded at a closely similar growth rate, consistent with the target. The government set the minimum interest rate for deposits at 5 percent over the period of the plan. However, the government admitted inflation was a challenge in the past and the government had taken tight monetary and fiscal policy measures to counter adverse effects and maintain inflation to a single digit, though the real interest rate dropped into negative territory and expand the export sector.
Similarly, focusing on maintaining price and exchange rate stability to create a conducive macroeconomic environment for rapid and sustained economic growth is vital.
In addition, maintaining stable foreign exchange rate that encouraged export growth, while promoting efficient import substitution, would be pursued. In general, the inflation rate was expected to be confined to single figures, though it was unable to materialize.
According to the Central Statistics Authority, prices continued to climb, especially for cereals including teff, barley, sorghum and maize and some vegetables used daily, including onions, tomatoes and garlic. The International Monetary Fund indicated that Ethiopia was among the biggest inflationary economies of the global average.
The Ethiopian Herald August 10/2021
