Is there any possible economic reason for a price surge coming as a result of the current salary adjustment to government employees? Or is the price increment just a conspiracy by traders who wish to gain unnecessary profit from the salary adjustment?
Any price hike will be the result of 'rent seeking' amongst traders, if one is to go by the portrayal of the EPRDF officials and shared by many, knowingly or unknowingly. The ruling party politicians are usually seen repeating the line of argument that goes - "there is no single economic reason for possible inflation related to salary adjustment".
But, is it true?
In my view, there are a number of economic reasons for a possible price hike that will push the aggregate price index up. As we all know, a large proportion of the household expenditure in poor countries, such as Ethiopia, is explained by consumption expenditure, which mostly entails food and related consumables.
As it stands, most of the expenditure pattern of civil servants falls into this category - they spend a considerable part of their income on food and related items. Therefore, any increment in income will be directed to the same category of expenditure.
At this time, sugar, wheat and edible oil are notably highly sought, but are in short supply in the market. Any additional demand related to these consumable items will thus produce a price increase, which, for sure, is an economic reason.
The gap between supply and demand would be corrected by price, as it goes with the 'ABC' of economics. Rationing is an alternative, but in the end this creates a 'black market', which again increase prices in the informal market.
For the current fiscal year, the government has approved a budget of 178.6 billion Br, of which around 7.5 billion Br is for the salary increment of about 1.3 million government employees. By any standard, this budget is not big for a country like Ethiopia with a population estimated to exceed 90 million.
Even then, if the government decides not to increase the salary and divert the same amount of budget to other sectors- for example, the construction of health facilities - what would be the scenario regarding the government expenditure in relation to inflation? Will government officials argue the same way?
No. They will not say it has no economic justification for inflation. Surely, they will argue it would increase employment in the construction sector.
These additional employees for sure will increase demand for consumables, which, in turn, increases the price of commodities that are in short supply compared to the demand. Unlike the salary adjustment of the already employed government personnel, the alternative budget spending in the construction sector (expansion of health facilities) would also create additional demand in other areas, like construction materials.
Hence, the full impact of the salary adjustment in basic consumables may not be visible in this alternative budget spending. But, if the case had been the latter, we rightly know the answer from our politicians: "any inflation is the result of economic growth.".
Why this double standard from the politicians, then?
I think the source of this double standard is merely a result of a poor communications strategy from the ruling party, which often confuses communication with propaganda. The government wants to make too much propaganda on the salary adjustment, as a card to win the heart of millions of civil servants, either to support the party or to be indifferent in the political field.
However, this propaganda coupled with the supply shortage of basic consumables will push the price up for two economic reasons: expectation and shortage.
Therefore, in the very short run, inflation as the result of supply shortage will be inevitable, mainly for economic reasons. Of course, however, high inflation can be minimised or mitigated by avoiding the propaganda that creates unhealthy expectation and fear of shortage.
My piece of advice to the government is to refrain from the propaganda that affects the lives of the civil servants. The civil servants should also be cautious not to rush into purchasing commodities that are in short supply in the market. Otherwise, the salary adjustment will end up with zero net effect due to a price increase created by government propaganda. By Girma Seifu Maru Girma Seifu Maru - email@example.com - a Member of Parliament (MP) from MEDREK