Fueling Wild Inflation

In the past, prices of commodities revert to reasonable levels after the end of the harvesting season. However, agricultural products are priced at new heights this year. In fact, the current inflation spike is the second highest after the record year of 2008. A major factor is the widespread instability affecting the mobility of commodities. Foreign currency scarcity and an increased money supply have also contributed. But the lifting of fuel subsidies by the government has brought the acceleration of prices to new levels. EBR’s Ashenafi Endale explores.

September to December is the main harvesting season in Ethiopia. Close to 17 million small-scale farmers who have been cultivating their crops during the previous rainy season collect what they have sown. January and February is when these agricultural commodities start flooding into markets throughout the nation, historically equating to when produce prices start their descent.

This has been the custom in Ethiopia, until this year. In drastic contrast to past trends and periods, agricultural commodities and products are priced at new peaks. Towards the end of February 2021, the prices of major commodities especially food items, which constitute more than half of households’ expenditure, has doubled from last year.

In February alone, the price of bread increased by 35Pct in Addis Ababa and beans by ETB5 per kilo. Teff and processed foods like macaroni also increased by ETB8 and 10 per kilo, respectively.

Such spikes have not been seen since 2008. Although the government claims the annual average inflation rate has been 15Pct for the past decade, independent experts assert otherwise. “My intensive research indicates the average annual inflation for the last 15 years to be 39Pct,” argues Atnafu Gebremeskel (PhD), Assistant Professor of economics at Addis Ababa University. Atnafu, also an executive member of the Ethiopian Economics Association, published the pertinent study, “Inflation Dynamics and Macroeconomic Stability in Ethiopia,” in December 2020.

Experts stress that one reason for the furthering of price hikes is the instability and conflict observed in different parts of the country, hindering the mobility of agricultural commodities from rural Ethiopia to markets.

Basic items like edible oil, wheat, and sugar—subsidized by the government—are sold at inflated prices as they are unavailable at governmental outlets. In the past, the administration has been supplying wheat to bakeries at the subsidized price of ETB780 per quintal. But now, the commodity can only be found in few private shops costing twice as much.

“Currently, the government is not supplying us with wheat,” says Murad Ahmed, who runs a bakery shop in Kazanchis, in the Kirkos district. So, we are buying a quintal of wheat for ETB3,400 in Mercato.”

It is not only small and medium bakeries and bread outlets that are facing wheat shortages. Even Sheger Bread, the largest bakery and flour factory with a daily baking capacity of two million loaves, recently announced it is facing similar scarcities. Although the factory, built with strong support from the Addis Ababa City Administration, was expected to alleviate shortages and stabilize the price of bread, it is currently trying to stay afloat.

What further exasperated price hikes was the government’s decision to increase the price of fuel by 25Pct in mid-February 2021. This move raised the prices of major petroleum products by up to ETB3 per liter, swelling the cost of transportation across the country. Even companies that provide taxi hailing services increased their fares by ETB10.

Since agricultural commodities have to be transported from rural parts to central markets, the fuel price increase spreads from the transport sector to other areas, galvanizing the already galloping inflation rate. But government officials stress that the fuel price revision is justifiable.

“If the government revised the fuel price based on international rates, the increment would have been ETB8 per liter,” argues Ahmed Tusa, the first Director of the Petroleum and Petroleum Products Supply and Distribution Regulatory Authority, which was established last year at the Ministry of Trade and Industry (MoTI). “But the government added only ETB3, which is very small.”

Ahmed says the price revision will continue. The government is heavily subsidizing fuel. Further adjustments are needed to bridge the difference between domestic and international fuel prices.”

Alemayehu Geda (PhD), Professor of economics at Addis Ababa University, stresses that “it is the wrong time to increase fuel prices as it has implications on the price of goods and services. The major reason behind government’s decision to lift part of the subsidy is pressure from western allies. Western financial institutions have been demanding Ethiopia open up economic sectors to foreigners and lift subsidies. Now government is responding accordingly.”

Apart from domestic items, the price of imported goods has also skyrocketed. Rebars, construction materials, and capital goods have surged substantially. “The price of imported items increased because importers are accessing foreign currency from the black market at expensive rates,” explains a businessman who imports electronics. “Accessing foreign currency even for prioritized items has become very difficult. So, the parallel market has become the last resort.”

Despite conflicts that have affected the mobility of commodities and the lifting of fuel subsidies, the government says the main cause of inflation is market sabotage perpetuated by some political forces and businesses. “Although the reasons for inflation have to be studied, the major reason is hoarding by traders and middlemen who want to reap undue profits,” said Adanech Abebie, Mayor of Addis Ababa while briefing journalists on February 26, 2021.

In the last few weeks alone, the Addis Ababa Trade and Industry Bureau closed or took corrective action on 30,000 warehouses, distribution outlets, and shops found to be hoarding commodities and aiding price hikes.

Atnafu, however, says that no country has managed to control inflation by closing and arresting businesses. “The government is ignoring the real causes.”
Eyob Tekalign (PhD), State Minister of Finance attributed inflation to past mistakes when he briefed the media in March 2021. “We have a backlog of accumulated inflation from the past because Ethiopia previously implemented the wrong fiscal and monetary policies,” said Eyob. “There was massive public investment with little productivity for the past 15 years. This has led to the price hikes currently observed.”

According to Eyob, one of the previous government’s mistakes was injecting huge amounts of money by borrowing from domestic sources and by printing money. “But this changed as of last year after government replaced its source of finance to the treasury bill market.”

However, Fekadu Degafe, Chief Economist and Vice Governor of the National Bank of Ethiopia (NBE), argues inflation is the result of supply and demand side factors as well as exogenous shocks or a combination of these factors in most cases. “There is empirical evidence that inflation in Ethiopia is the result of the combination of demand and supply factors as well as occasionally occurring shocks. As a mandate, NBE is responsible to maintain macroeconomic stability proxied by stable inflation, i.e., single digit inflation. However, due to the fact that inflation is caused by both supply side factors and demand management, NBE’s role is limited to controlling the demand side, such as money in circulation.”

Experts like Atnafu agree with the fact that the huge money supply of the last 15 years has significantly contributed to inflation. “The contribution of money supply towards inflation is around 80Pct in Ethiopia,” he states. “Factors like conflict, market disruption, production shortage, devaluation, and forex crunch contribute only 20Pct to the total inflation rate.”

Broad money supply has been growing at an annual rate of around 20Pct for the last decade, while GDP has been increasing at 10.2Pct. “Large money supply, not accompanied by production and productivity, has created phony money in the economy,” explains Atnafu. “Even the recent measures including cash withdrawal caps and tax rate increments, could not mop out the huge money from circulation.”

“We have planned a very tight monetary policy stance measured by base money growth in 2020/21 relative to more than 22Pct expansion in 2019/20,” claims Fekadu, signaling a move away from previous inflation-causing moves by the government. “Base money expansion is affected by direct advances to finance budget deficits, among others. In this regard, the government has already started financing its budget deficit through market-based treasury bills as of December 2019. Therefore, there will be the lowest direct advance to the government from NBE in 2020/21. Still, however, supply side constraints and exogenous shocks have considerable roles in fueling inflation in Ethiopia.” added Fekadu.

For Eyob, employing the same old approaches can be the antidote in the short term. “The government will import basic commodities and ensure there is no supply shortage in the domestic market. We will revive public outlets such as consumer associations and other selling points to cut out middlemen and ensure the supply of basic commodities at reasonable prices.”

For the long term, Eyob stresses the current inflation will be solved only by improving production and productivity, straightening the market chain, and readjusting the macroeconomic imbalance. “Government subsidy cannot continue like this.”

Yet, Alemayehu advises that the government must retain its policy of independence from western institutions’ pressure. “Subsidy is not a sin. Even western countries subsidize their farmers.”

While reflecting on the recent six-month performance report from his ministers, Prime Minister Abiy Ahmed (PhD) claimed the government is subsidizing beyond its capacity. “We are subsidizing the rich. Most car owners in Ethiopia are the rich. So, subsidizing fuel doesn’t make sense.” The lost realization is that fuel affects transport rates, which in turn affect all services and products. Especially in Ethiopia, production mobility is high during harvest seasons, from agricultural corners to central markets and nonproductive regions. Hence, transport costs have a significant influence on food prices.

Atnafu, on the other hand, argues that the cause for the recent inflation outbreak is weak political integrity and poor macroeconomic management. “So, the immediate action should be ensuring political stability. Political stability brings government credibility and the power of enforcement.”

After ensuring political stability, the government can guarantee free mobility of commodities, money, and people, according to Atnafu. “The government has to leverage the purchasing capacity of the fixed income population and pensioners. It must set a minimum wage in a bid to save the low-income population from the inflation flame, which is pulling even the middle class into poverty.” EBR

9th Year • Mar 16 – Apr 15 2021 • No. 96