Ethiopia: Inflation Galore Plus!

The current overall economic situation

At present in Addis Ababa you do not have to be an economist or a student of economics to be able to feel a sense of unease about the state of the national economy. A few days ago I invited a friend to lunch at a pretty ordinary eatery at Aratkilo. I suggested a fish dish knowing that my friend would not have any particular objection to the suggestion.

The attending waiter brought us the menu the most decisive part of which these days is the price list beside the column of dishes. So I looked at the price of my favorite fried whole fish recipe. It was forbiddingly high at 400 birr or about a seventh of my monthly pension.

I had lunched on it for 80 birr only a few years ago. I told my friend what I saw and handed him the menu to see it for himself. He rose from his seat to depart. I followed suit.

In recent weeks the price of fuel has gone up from about 22 birr per liter to about 26 birr per liter. As an exaggerated result, transport fares between regional administrations skyrocketed disproportionately. For instance, the transport tariff from Rayakobo in Amhara region to Addis Ababa soared from about 300 birr to around 600 birr.

Even more ominously, the price of a loaf of bread increased by 50 percent from 2 birr to 3 birr! A quintal of teff, which has registered a steady price rise since the Derg days, soared to nearly 6000 birr. A single sort- of pancake injera made from it now fetches a price of about 10 birr, higher than the price of two loaves of bread, its approximate equivalent at eateries and restaurants. Hence, rampant inflation is one of the salient characteristics of Ethiopia's current economy. But that is not the only bad economic news.

A stream of bad economic news

Seven factories in Addis Ababa with an average workforce of over 100 employees have folded and another 20 are on the verge of shutting down for lack of inputs, power, foreign exchange, etc. Only 30 percent of those who have been licensed for starting businesses or expansions have actually gone into operation.

The Federal Housing Corporation managed to construct only about 171,000 condominiums in eighteen years for a waiting list containing over one million registered names; Fitch has downgraded Ethiopia from B to CCC on account of its impending vulnerability to external debt default susceptibility.

It is forecast that Ethiopia will have to fork out 5bn USD on its outstanding external debt of nearly 30 bn USD by 2022 as against an estimated 3 bn USD in foreign reserves in the banking system, mainly the NBE.

On top of all this, the usual systematic corruption has been going on unabated in practically every government institution.

The macroeconomic picture

It would be naïve to expect a sanguine macroeconomic picture from a stream of bad microeconomic news. One government institution entrusted with employment creation tried to do so but with no mean credibility deficit. It claims that it has helped create 1.6 million jobs in the first six months of the 20/21 budget year.

Good for it, but is the reporting on a gross or a net basis. Tens of thousands of jobs are at the same time being lost due to Covid -19, factory closures owing, as mentioned above, to input and foreign exchange constraints.

IMF forecasts for GDP growth have been far gloomier than those of the government by a wide margin (1.9-0 percent as against 6-7 percent by the government). The birr appears to be in free fall on the black market where it has nosedived to as low as 55 birr/ USD in recent weeks.

The average annualized inflation rate is getting close to 25-30 percent. Domestic and foreign direct investment is pointing downwards; foreign reserves are destined to dwindle in the weeks and months ahead.

Likewise, fiscal financial straits are bound to tighten further with a risky rise in deficit- financing banking (mainly NBE) operations. Contrary to the government's rather too optimistic stance, unemployment is on the rise due to an increase in the number of prospective labour -market entrants on the one hand and the more than sluggish job creation rates.

The beast of inflation

The most pressing problem today from the perspective of the public at large is the beast of inflation, which has reared its ugly head rather too high and has forced the public to make it the most important talking point, perhaps second only to the dire political situation in the country.

At present there is no essential good or service whose price has not risen far beyond the normal and expected rate of inflation. Nothing proves this more dramatically than the 50 percent hike in the price of bread. House rents have gone through the roof, a shabby one-room shack renting for as much as 2000 birr! Food prices at ordinary eateries have become unaffordable even for middle-income-earning government employees.

Cooking at home, once an important cost cutter, is now no longer a viable option as domestic servants (maids) often demands a monthly payment of no less than 2500 birr. So, if you want to save money on food you have to do the cooking yourself. Let us look at a random sample of the prices of a few essential goods and services as follows:

Well, to slay the beast of inflation we must know its immediate and underlying causes.

The causative factors for inflation

Price is a monetary expression of the market value of a good or a service. The price of a good or a service is the amount of money which is equal to the market value of that physical good or non -physical service.

The market prices of goods and services are determined by the demand for and supply of those goods and services on the market. If the demand for products is higher than their supply prices tend upwards whereas in the opposite case they tend downwards.

It stands to reason to state that there is a definite relationship between the volume of money and the volume of goods and services. The supply of goods and services is determined by the productive capacity of the country whereas the supply of money is determined by the monetary policy of that country. In Ethiopia the volume of money originates from the following sources:

NBE's currency printing

Commercial banks' money creation through fractional reserve lending operations and

Conversion of net foreign exchange earnings and receipts into local currency.

Theoretically, if the volume of money increases pari passu with the volume of real goods and services, there should be no inflation. Inflation is caused when the volume of money increases faster than the volume of real goods and services.

If bank credit is used to create new productive capacity, which produces additional goods and services, which can be sold on the market at a profit, then the volume of money which entered the economy via the bank credit will be repaid back to the lending bank from the profit while the produced additional goods and services will be part of the GDP with their monetary counterparts in the form of wages and salaries, thereby leaving no theoretical room for inflation.

The basic problem in Ethiopia is that bank credit (the major source of monetary emission) is not productively used in the manner outlined above, causing the volume of money to grow much faster than the

volume of goods and services (or GDP), thereby triggering and entrenching the inflationary process in the economy. More specifically the major interrelated causes of inflation in Ethiopia are:

Demand -pull factors

Population growth which raises demand for essentials like food;

Rise in monetary incomes from land sales (monetization of land);

Monetary incomes from inward remittances which are spent on domestically produced goods such as teff and housing:

Government and private -sector borrowing spent on wages and salaries unproductively.

Cost -push factors

A rise in the cost of raw materials and inputs;

Rising labor costs

High land and housing costs

High capital costs

High taxes

A depreciating birr

High international prices, etc.

Concluding Remarks

I once wrote a well- liked article in "Birritu" entitled "Inflation Galore!" Well, it is perhaps now time to write a sequel headed "Inflation Galore Plus?!"

There is practically nothing we can do to reduce inflation significantly in the short -term because it is largely a long -and deeply by entrenched economic, largely monetary phenomenon, which resulted mainly from irresponsible lending to the central government and its development agencies by the NBE and CBE. I may, however, recommend the following measures almost out of desperation:

1) Subsidize essential goods and services from foreign grants;

2) Restitute money and property obtained from corruption;

3) Use cooperative and government-owned outlets to distribute essentials at low and subsidized prices. By the way, sorry the sequel is worse than the original!

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