20 January 2013

Ethiopia: Inflation Down, Fears Remain

Official figures show Ethiopian inflation dropped in December 2012 to 12.9pc percent year-on-year, its lowest rate of 2012

The Ethiopian government may breathe a huge sigh of relief once again, thanks to the release in pressure brought on by a continuous decline in inflation, over the past six months. Although experts warn of future price increases, if necessary measures are not taken.

Though the government has been taking measures, in a bid to control the ever increasing price of items, observers close to the issue anticipate that the methods used could, too, impact the progress of major government projects.

As the result of the government decision to cease borrowing from the central bank, in 2011/12 - in order to limit the money circulation in the market - government spending has decreased, along with the investing capacity of the private sector, according to an economics professor at Addis Abeba University.

Prices for commodities continued to increase, but at a slower rate than they did in 2011/12, according to the December 2012 consumer price index, released by the Central Statistics Agency (CSA). The year-on-year inflation decreased to 12.9pc, in December 2012; the lowest inflation rate since February 2012.

Food inflation declined from 41pc, in January 2012, to a mere 11.8pc in December, but its contribution to the general inflation was 60pc.

The experts say, however, that the measures taken by the government to bring inflation down to a single digit figure, have also slowed down businesses growth. The government, they say, is still driving in the wrong direction, in their bid to bring down inflation.

The agricultural produce, expected for the 2012/13 mehar harvest season, stands at 236.4 million quintals, 4.8 pc higher than the previous year. This rate, however, is lower than the 7.4pc increase, observed from 2010/11 to 2011/12.

The government imported 613,000tn of palm oil, 800,000tn of wheat flour and 250,000tn of sugar, as of August 2011, which was the major reason for the decrease in inflation, according to Haji Ibsa, director of Public Relations and Information Directorate, at the Ministry of Finance & Economic Development (MoFED), who spoke to journalists during a press conference held at the headquarters of the Ministry, on January 18, 2013.

The government also plans to import 350,000tn of palm oil, 400,000tn of wheat and 247,000tn of sugar, which it hope will help to reduce the inflation rate further, according to Haji.

Macroeconomists disagree with the government's claim, however, which states that the increased production of agricultural products, coupled with the bulk supply of certain commodities, such as; palm oil, flour and sugar - under government control - brought inflation down to the current 12.9pc.

"Inflation dropped not because of supply increase in the country, but rather because more money was out of circulation, which has caused prices to increase at a slower rate for the time being," said a macroeconomist who has been following the issue closely.

Back in July 2011, the government had admitted that the inflation was as a result of increased money supply.

Speaking to the parliament, in defence of his administration's budget for the 2011/12 fiscal year, the late Prime Minister Meles Zenawi had accepted that domestic factors had a role in inflating prices.

Broad money (cash and cash equivalent) supply had increased 35pc, at the end of March 2011, in comparison to the previous year's figure.

This move, by the government, to increase the supply in the economy to around 134 billion Br from 96 billion Br, in March 2010, had been called a 'very inflationary move', by experts at the time.

However, aware of the negative consequences of its action, the government retreated back, by limiting the broad money supply and ceasing government borrowing from the Central Bank.

The afore mentioned macroeconomist, and other stakeholders, also believe that inflation might build up once more, if the government does not know where and when to act.

The government should stick to limiting the money in circulation, and leave the private sector to participate in those areas, which are currently being controlled by the government, the experts advised.

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