Ethiopia: Whose Actions Caused the Ongoing Inflation?

opinion

There have recently been steep hikes in the price of commodities. The cost of living has skyrocketed once again over the past weeks, weighing further down on people's hopes. The cost of grocery items has shown considerable rise yet again as people are increasingly left with fewer goods in their plastic bags for a certain amount of money. Accordingly, a kilo of lentils cost up 85 birr from 65-70 birr just a few weeks ago; flour prices have doubled to 40 birr from 20 birr during the same time; 5 liter edible oil has risen to 470 birr from 360 birr; egg prices have shot up from 4 birr to 7 birr; while the price of Teff has gone over the 5,000 birr mark from 4,300 birr a few weeks ago. Transport prices have exhibited an increase by as high as 20 percent, serving as the common denominator for the sharp increment in the prices of other commodities.

With the incomes of a large portion of society left at their previous levels and those in the informal economy only affording fluctuating incomes, some have been forced to cut down on the consumables they normally bought. Some avoided buying some items they could live without while others cut down on the volume of their purchase.

Speaking about the economic shockwaves created, Deputy Mayor of the Addis Ababa City Administration, Adanech Abiebie pointed her finger at groups attempting to offset their political loss using economic gains. The deputy mayor identified political sabotage as the cause of the latest inflation. She accused the group of using its economic hegemony to political ends.

"Using their dominance over supply chains, some groups are trying to prevent items from reaching the market just to satisfy their political needs," said Adanech. She further noted that the inflationary pressure is partly an attempt made by groups who want the coming elections suspended.

Without contesting the Deputy Mayor's claims that political sabotage by groups trying to offset their political loss through economic gain is to blame, The Reporter asks if the actions of these groups have more bearing on the current inflation than governmental decisions.

In line with the research, an Economist, Wossenseged Assefa points out three major reasons for the inflation currently rocking the country. The first has to do with the disruption of international supply chains as a result of the Coronavirus pandemic. Wossenseged explains that the disruption in the global supply chain has pushed prices up following its recent strides towards normalcy. He argues that surges in price are global phenomena and that Ethiopia's current inflation is partly caused by these global trends.

The second reason Wossenseged identifies as the cause for the current inflation is the increase in the price of fuel. After plummeting during the height of the Coronavirus pandemic that saw the world at a standstill, international crude oil prices are picking up with current figures pinned at USD 64 per barrel. After announcing its decision to cut down fuel subsidy to 75 percent at the end of January, 2021, the Ministry of Trade and Industry approved over 10 percent surge in fuel prices in mid February. The surge in prices has especially shot up following the fuel price increase by the government. Wossenseged notes that the foreign exchange problem has pushed the governmental decision to have consumers bear the brunt of fuel price increases.

Wossenseged raises devaluation as the third major reason for the current inflation. He pointed out that the current administration agreed with the World Bank a couple of years ago to float the foreign exchange regime. That means the government will leave its current duty of fixing the foreign exchange rate to the market.

The rate of devaluation/depreciation of birr has picked up speed following the ascendance to power of Abiy Ahmed (PhD). In the three years before his assumption of power on April 2, 2018 (i.e between April 2, 2015 - April 2, 2018), the birr was devaluated at a rate of 33.94 percent. This figure includes the 2017 National Bank sanctioned 15 percent devaluation of the birr in 2017. However, in the two years and 11 months between April 3, 2018 and March 3, 2021 (this Wednesday), the birr was devalued at a rate of 47.17 percent.

The exchange rate stood at 27.7850 (selling rate) on April 2, 2018 - the day the current PM came into power. After two years and 11 months, the exchange rate stood at 40.8921 (selling rate) on March 3, 2021. That is a devaluation of over 13 birr within less than three years.

Wossenseged argues that the consistent devaluation of the birr since the agreement with the World Bank, although labeled by the government as 'managed floating', is silent devaluation as it is intentional and not driven by market forces.

Wossenseged further notes that governmental decisions to undertake huge projects such as the Addis Ababa riverside project and the La Gare project that are allotted 28 billion and 30 billion birr, respectively, perpetuate the problem of inflation as they don't complement production and supply activities. He suggests that the money could have been used to address the problem of inflation, had it been invested in agricultural production.

He then concludes that the fuel price increase that followed the decision to cut down on subsidies and the consistent devaluation over the past years leave the government as the primary entity to blame for the current inflation. He said: "I would rate political sabotage by groups one or two percent as a contributing factor to the ongoing inflation."

Another economist, Wasihun Belay, raises a large number of factors as contributing to the ongoing inflation. He considers fuel as one of the causes for the inflation. However, he acknowledges fuel not just as a transportation input but as a source of energy as well. He pointed out that less than 40 percent of the energy needs of businesses are met by electricity supply from the government. Considering the rest of the energy is mainly covered by fuel as a source of energy, he explained, earmarking the 25 percent cut down on fuel subsidies to develop other energy sources could make sense.

Wasihun identifies various interest rate adjustments made recently by the Commercial Bank of Ethiopia as having sizeable impact in raising inflation. He explained that the interest rate adjustments have a far reaching effect on various investors. For instance, the interest on the debt of condominium houses in Addis led to the recent surge in rent. Another reason he raised was the reinstatement of tax on the import of consumables such wheat, pharmaceuticals and edible oil after the advent of the Coronavirus pandemic. The expense of the 'law enforcement operation' in Tigray and the subsequent humanitarian aid in the region, 70 percent of which is provided by the Ethiopian government, also make up some of the causes of the recent inflation in the country.

Wasihun also raised foreign exchange shortage exacerbated by prospects of a possible military engagement with neighboring countries as contributing factors to the inflation. He further pointed out that there is a sense of uncertainty during elections and that the upcoming elections have their own bearing on inflation. He remarked that investment and bringing products to the market are related with confidence.

The contributing factors Wasihun identified involve governmental decisions. A research by Ashenafi Etefa entitled "The Inflation Dynamics of Ethiopia: Main Causes and Possible Solutions" identifies global oil prices, exchange rates, broad money supply, inflation expectations explained by inflation inertia, agricultural output (as Ethiopia is predominantly an agrarian economy), government borrowing and economic growth as factors that explain the inflation dynamics of the country.

Considering these are mainly related with governmental decision making, claiming that the ongoing inflation is a result of sabotage by political groups would be stretching the relatively smaller contribution such acts bear.

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