In a country where more than half of the population spends their entire income on food and basic necessities, the slightest of increases in food prices are alarming. In line with this, when the surging of price is exacerbated, the cumulative impacts could be extremely high. The salary of public servants, on the contrary, has not shown any significant rise over the past three years. Yet, the latest monthly inflation rate has reached 26.4 percent, while food inflation reached 30 percent, Professor Alemayehu Gedaa, an economist and instructor at Addis Ababa University said.
As to him, to keep inflation at lower level, some policy measures have to be taken and among others improving fiscal and monetary policies are essential.
He further said that devaluating the value of Birr against the Dollar by the National Bank of Ethiopia exacerbates inflation. Besides, importers incur additional price on the commodities when they import the commodities from abroad because they buy Dollar from banks with expensive price as a result of the devaluation of Birr against Dollar. In the end, consumers will pay the inflated price.
According to Alemayehu, the tax policy also must be adjusted because, the tax rate highly hurts lower income group particularly the civil servants than the higher income group.
By the same token, the tariff imposed on imported goods must be reduced because it has its own negative impact on the market in which consumers shoulder the end price.
The Ethiopian Economic Association recently made a study on the chronic inflation which critically hits the ordinary citizens’ day to day life. The study indicates that the problems can be categorized as structural that are impossible to resolve in short period.
According to Degiye Goshu (PhD), a researcher at Ethiopian Economic Association and instructor at Kotebe University of Education, the study identified the main problems and forwarded the possible solutions which can be implemented in short, medium and long terms.
In the short term, addressing the shortage of supply of commodities and supervising the value chain from producers up to consumers is recommended. In addition to implementing the plan, neutral board should be established.
He further said that the market should be governed by supply and demand rule and each actor should play fairly the game and for the short term, the board established to lead the market must act accordingly. The board also must identify which commodity shall get priority to be produced and supplied to the market. It should also identify and decide which commodity must get priority to be imported.
Currently, food items inflation has risen to 33 percent and to reduce the percentage in the coming years, strategy should be formulated and implemented.
As it is known, though the nation pursues market economy, the government still plays the dominant role in the economy. Land is monopolized by the government. It is a major component for the process of wealth creation when it is combined with capital and human labor. And the allocation of land both for manufacturing and agriculture manifests the government’s monopoly of ownership.
Institutional weakness and bureaucratic hurdles stagnates access to land which in turn makes development activities to go in snail-pace. On the other hand, to support the ordinary citizens, the government plays crucial role in closing market gaps through strategic subsidy on basic commodities such as imported edible oil, petroleum, fertilizer and others.
However, as to Degiye, the government should not equally treat the high income class and the low income ones those struggling to make a living. In this regard, it has to identify which segment of the society should be benefited from the government’s subsidy or else it lose huge amount of revenue which would have been allocated for development and ultimately harms the economic growth.
Therefore, it has to identify which sector needs subsidy and policy intervention. In addition, all sectors should evaluate the positive or negative impact of the introduction of homegrown economic reform which has been implemented for the last three years.
According to Degiye, in order to bring short term remedy for the pervasive inflation, taking the utilization of Franco Valuta as opportunity is essential.
The importation of basic commodities such as edible oil through Franco Valuta could alleviate inflation problems and in a similar way the government should allow importers to import spare parts and other inputs used in manufacturing in such a way.
In fact, some argue that the experiment of Franco Valuta aggravates illegal trade and black market but as to him, currently it is common that many Ethiopians when they come from Dubai and other country, they bring full of bags of closes which they purchased by their own hard currency without opening letter of credit from local banks. Therefore, it can be said that the importation of commodities through Franco valuta is already existed even before the government gave green light to the practice. And it should be recognized that the system brings some solution for the shortage of hard currency in this country.
In addition to these, selected commodities such as agricultural inputs and medicines should be allowed to be imported through Franco valuta. The other thing that should be taken as an option to stabilize the economy is adjusting the interest rate of deposited money in the banks.
Currently, depositors in Ethiopia obtain less interest from banks as compared to other countries. As a result, customers have become reluctant to deposit their money in the banks. Therefore, the amount of money circulated in the market and existed out of banks is increasing from time to time which in turn aggravates the inflation.
On the contrary, banks obtain more profit from borrowers because their interest rate when lending the money to borrowers is very high. Thus, banks should encourage their customers to deposit more money through increasing the interest rate.
On the other hand, the tariff which imposed on imported goods which is very high should be reduced. The reason for this is traders compensate what they lost resulted from the tariff by incurring additional price on the commodities which ultimately the burden is loaded on the consumers.
The African free trade tariff must be reduced to the lower level. It is impossible to experiment free market with imposing tariff on commodities up to 400 percent. In such a situation, liberalizing the financial sector which is the government’s aspiration is unthinkable.
As mentioned above, the bureaucratic hurdles witnessed in the provision of land plot procedure further aggravates inflation because when investors spend more money to obtain the land and to construct the production firms, they compensate what they spent in their initial phase by adding new price on what they produced.
According to the study of Ethiopian Economic Association, five years ago, the accomplishment of the utilization of land in the city was 96 percent but currently, it is plummeted to 21 percent. Of late, the provision of land to investors for agriculture, manufacturing and service sectors is not properly managed. It should be supplied on time and with fair price. The construction and the real estate development works do not go in a speedy manner as it is expected therefore, it must be improved.
The other thing which is responsible for the rampant inflation is the pervasive and chronic corruption witnessed here and there. Particularly, since 2018, it has been growing. Hence, fighting corruption should be taken as a means to reduce inflation. Because corrupted officials of the government spend the money excessively in the market which in turn poses shortage of commodity supply which again aggravates the inflation.
As to Degiye, to curb corruption, introducing electronic market can be taken as a way out and to that extent expanding the Information Communication Technology infrastructure and increasing the number of well qualified persons is essential. This method, on top of mitigating corruption, enables creating job opportunities to the youth and produces technological out puts and supply to the world market.
Degiye further noted that since 2015, the government has introduced the exportation of new products to the world market which is appreciable. But the volume of the products is negligible and its impact in increasing the nation’s foreign currency earning capacity is very tiny. Therefore, scaling up the volume of the products must be underlined.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD WEDNESDAY 25 MAY 2022
