Hoarding Commodities

Hoarding Commodities Spurs Inflation, Places Stress on the Poor

Hoarding refers to the deliberate withholding of goods from the market, usually to create false demand and raise prices for certain commodities. According to the Addis Ababa Chamber of Commerce, the practice is prevalent throughout the country. While fairly common in developed nations, hoarding can be problematic for fragile economies like Ethiopia, where the Consumer Price Index is heavily impacted by food inflation. In order to exert more control over hoarders, the government is enacting a number of plans to quell the practice and its negative effects. EBR’s Bantayehu Demlie spoke with stakeholders and researchers to learn more about the problem, its implications and what’s being done to prevent it in the local economy.

One morning in mid-February, Beruktawit Kassa, 18, went to one of the consumer association shops in woreda 8, located in the Kolfe Keranyo Sub-City in Addis Ababa, to purchase a litre of palm oil, which she was unable to find for weeks. This time was no exception.
“They told me there is no more edible oil after I waited in a queue for more than 6 hours, although I saw them giving jerry cans full of oil to individuals who showed up even long after I arrived,” she told EBR. ‘‘These individuals did not even line up. Those in charge of the shop also gave some to those whose faces were familiar to them.”
Beruktawit returned home empty-handed because she didn’t know anyone at the shop. This was bad news for her mother, Mekdes Tadesse, who heads a family of three with a monthly average income of less than ETB1,000. She sent her daughter to collect their ration of edible oil distributed by the government following the recent acute shortage of the item in the market.
Their story is illustrative of the plights of low-income households throughout the country, particularly in recent years, with traders holding basic consumption goods and creating an artificial scarcity.
This practice is known as hoarding – the intentional creation of a shortage of goods in the market. It often has corrupt undertones and, in the case of basic commodities, can inflict suffering on individuals and families.
According to Dereje Yohannes, a lecturer in Addis Ababa University’s Department of Economics, hoarding has self-serving motives, as those who provide goods look to increase market share or drive up prices: “[It is the] practice of obtaining, holding, storing, and accumulating scarce resources for resale later when prices go up – the purpose is not for consumption, but for profit.”
In Ethiopia, hoarding is not a recent phenomenon. In fact, for many years the local market has been hit by a serious shortage of essential consumer goods, such as palm oil, sugar and different grains, with several retailers going for days without the commodities because of these unlawful practices. Many stores in Addis Ababa and other major towns have been forced to operate without these necessary products on their shelves. As a result, customers often spend days in search of a particular commodity.
A 2009 study conducted by the Addis Ababa Chamber of Commerce and Sectoral Associations (AACCSA), entitled “Legal and Institutional Frameworks for Market Competition in Ethiopia,” reveals that hoarding is the most prevalent anticompetitive market practice in the country.
The study – which was based on information gathered from law enforcement officials and the business community in Hawassa, Dire Dawa, Bahir Dar and Mekelle – also states that hoarding is a leading practice in those regions.
Another Baseline Survey commissioned by the AACCSA also indicates that accusations of hoarding are widespread in Ethiopia, especially in the case of agricultural products such as cereals and basic commodities like flour and sugar.
The hoarding of basic commodities has become so prevalent these days that on Friday, February 25, 2016, the day EBR visited the Ethiopian Trade Competition and Consumers’ Protection Authority (ETCCPA), the government body in charge of the issue, the staff of the Investigation and Prosecution Directorate were constantly receiving calls and in-person petitions about allegations of hoarding and other unfair trade practices.
In fact, EBR’s interview with Biruh Gemeda, Acting Director of the Authority’s Investigation and Prosecution Directorate, was interrupted at times because he received calls telling him investigators caught a lorry full of hoarded sugar. In the last two years, the Authority has been handling numerous cases involving hoarding of consumer goods, according to Biruh.
Dereje says hoarding, while normal in more sophisticated economies, has an adverse effect on the country’s fragile economy. “In economies like Ethiopia, where the market does not adjust itself through the forces of demand and supply, hoarding generally has negative effects,” he argues. “But the practice is a normal act in competitive markets. In these markets, there is nothing bad about hoarding given the agents are rational.”
He adds that it has macroeconomic implications that exacerbate the living conditions of locals. “[Hoarding] has both economic and moral costs, both of which are interrelated,” he argues. “As a result of the current artificial shortage of supply, high prices will decrease the purchasing power of money, which in turn results in the decline of living standards.”
Different literatures written on the issue suggest that the greatest moral and societal implication of hoarding is concentrated resource accumulation, which is unfair. Keith Sharfman, an expert in commercial law and corporate finance, who published a study entitled “The Law and Economics of Hoarding,” says in almost every society, hoarding has negative connotations: It suggests self-interested, acquisitive behaviour that has detrimental effects on others in the form of higher prices and material deprivation.
Dereje concurs: “Hoarding will disproportionately affect the poor section of society. There will be a decrease in overall social welfare as a result of what is known as dead weight loss, which implies allocative distributional inefficiency,” he argues. “It also leads to government intervention, which is not always good.”
This moral cost analysis supports aspects of Beruktawit’s story. Brokers who received higher quantities of edible oil from the consumer association shops reportedly hoard the commodities and sell it for higher prices only to those who can afford to pay, which is often financially burdensome for low-income and poverty-stricken residents.
This means the ‘haves’ benefit at the expense of the ‘have-nots’. Experts say this dynamic has the danger of paving the way for more corrupt behaviours, such as bribing government officials to access necessities.
Simply put, people find hoarding immoral because of its perceived economic consequences. In his study, Sharfman elucidates the economic consequences of hoarding. The major effect is price inflation – and when it is done on basic commodities the impacts will be immense. Such a phenomenon is especially critical in Ethiopia, where 60Pct of the Consumer Price Index is determined by the food inflation rate. Whenever the food inflation rate increases, it will lead to the massive rise in the overall inflation rate.
Higher inflation rates, in turn, lead to a fall in real incomes. Another risk resulting from higher inflation is that it has a regressive effect on lower-income families and older people in society. This can discourage saving by creating negative real interest rates, which renders one of the monetary policy instruments ineffective.
The government says it understands the scale of the problems and is taking measures to curb it. Those include preparing a legal framework, strengthening law enforcement, price fixing, and promoting competition by acting as supplier of scarce essential food items.
According to the Ministry of Trade (MoT), the government is working closely with Addis Ababa and regional trade bureaus on policy-level consultations to promote healthy market competition. Enforcement measures are decentralised to the bureaus and the ETCCPA, according to Shimelis Arega, Senior Public Relations Expert at the MoT.
The ETCCPA was established in 2014 after its predecessors: the Trade Practice and Investigation Commission, which was established in 2003; and the Trade Practice and Consumers’ Protection Authority, which was established in 2010. ETCCPA’s immediate predecessor’s name includes the term “trade practice.” This is replaced by “trade competition” in the present Authority, giving it much more specialised mandates, according to Biruh.
The Authority is granted jurisdiction over hoarding cases involving consumer goods and non-consumer goods. In the case of the former, the MoT may declare certain goods scarce due to manmade and natural reasons, such as drought. The Ministry may also set a price ceiling for such goods. “In this case, hoarding may mean, broadly speaking, storing, hiding, diverting any amount of such goods, distributing them using prohibited market channels, and so on, or selling them above the fixed price,” says Biruh.
According to the proclamation that established the ETCCPA, such acts entail a criminal liability. In addition to fines that range from 5Pct to 10Pct of annual sales turnover, any businessperson who has been found hoarding will be punished with one- to five-year prison sentences.
On the other hand, hoarding non-consumer goods, such as coffee or cotton, which is referred to as competition-side hoarding, involves only administrative measures such as fines. It does not carry criminal penalty unless the hoarder fails to comply with the administrative measures.
Biruh says the reason for such a difference in penalties between consumer goods and non-consumer goods is largely economic. “The purpose of regulating hoarding related to competition is not to penalise businesses and take them out of the market for a single fault. That will negatively affect the economy,” he says. “The purpose is rather to take measures that will allow businesses to learn [from their mistakes] and rectify their misbehaviour. Secondly, our competition regulatory regime is [in its infancy] compared to other countries such as the USA, Europe and South Africa.”
In addition to this overall regulatory regime, the government is pursuing additional measures to exert price control. Recently, it established the Ethiopian Trading Enterprise, also known as ALLE Bejimla with one billion birr start up capital, to sell food and fast-moving consumer goods to licensed retailers. The government targeted to cover up to 30Pct of the country’s household-goods market by 2018 to curb the rising consumer prices.
Gaps in the Existing Regulatory and Policy Framework

While the measures undertaken by the federal government are strategic in addressing systemic acts of hoarding, experts identify several setbacks.
Firstly, there are a number of gaps in the current regulatory institutional set up. Tesema Elias, a legal professional who authored a study entitled “Gaps and Challenges in the Enforcement Framework for Consumer Protection in Ethiopia,” identifies a number of gaps in this respect. He argues that the law establishing the ETCCPA fails to ensure the representation of relevant stakeholders, especially the private sector.
In this regard, the current institutional framework falls below the institution established in the 2003 law. He argues that private sector representation in the ETCCPA would encourage “voluntary compliance” by the business community, similar to international practices.
Andnet Shimelis, Adjunct Lecturer at Addis Ababa University School of Law and Debt Recovery Division Head at Dashen Bank, suggests the government needs to address this representation gap. “Currently, in other authorities of comparable mandate – such as the Food, Medicine and Health Care Administration and Control Authority – there is representation of relevant stakeholders.”
The other gap identified is that the current law “centralises” consumer protection to the federal government. Regional states do not have independent consumer protection regimes, though constitution ally permissible. It states that regional governments can enact their own laws on civil matters that are not purely commercial, such as consumer protection.
Yet regional trade bureaus do not have specific authorities like the ETCCPA. The bureaus themselves handle cases. In fact, experts stress that the decentralisation of the regulatory framework will be more effective, as many of the hoarding cases handled by the Authority involve the participation of actors based in regional states, not just the capital. “You may see only the impacts of hoarding in Addis Ababa, not the act itself. The actual hoarding activity may take place rather in regions,” argues Andnet.
The lack of independence of the ETCCPA is still another problem, according to critics. Its US and UK counterparts enjoy a significant level of autonomy. In Ethiopia, the Authority is not autonomous, at least financially. It is accountable to the MoT, which is an executive body. According to Andnet, this is problematic, since the Authority has expansive powers in penalising violations, including criminal prosecution.
Another major weakness in the current law is that it fails to clearly and progressively define the minimum quantity of goods held that constitutes hoarding. In other words, individuals hoarding a kilogram of oil and tonnes of the same item commit hoarding regardless of the size differentiation. This unclear demarcation creates a lot of work for the Authority, as it regularly receives petitions about the hoarding of an insignificant amount of goods. The penalties also lack proportionality with regard to the amount being hoarded.
The lack of a threshold for personal consumption also obscures the line between legal and illicit activity. Withholding for the purpose personal consumption is not prohibited under the current trade competition and consumers’ protection law.
On a policy level, some critics say government intervention seems to lack a comprehensive understanding of the long-term impacts of the measures being enacted. Tesema argues that although the regulation on oil was welcomed in its early phase, consumers themselves were eventually unhappy because it caused complications, like a shortage of items, poor quality service and an unnecessary waste of time due to long queues at distribution points.
Indeed, when the government introduced a price cap on some consumer goods in 2011, it wasn’t always cost effective. For example, the initial fixed price for a litre of oil was ETB16.5, but this failed to materialise because the cost of an imported litre of oil – not including transportation, loading and unloading costs – was over ETB20. Following negotiations and discussion between wholesalers, importers and the government, the price was re-adjusted to ETB21.50 and then to ETB24.50. A few days later, palm oil disappeared from the market, scarcity persisted. These trial and error measures according to Tesema, can be attributed to a lack of pre-intervention analysis or studies.
For others, the government producing and supplying goods itself does not seem to be a sustainable solution, so alternatives must be pursued. “The private sector is the number one solution. The government should resort to production only if the private sector finds doing so unprofitable and shies away from the market. A government actively involved in actual production and supply of goods and services is not cost effective,’’ cautions Dereje. ‘‘The private sector is considered more efficient. Thus, government involvement should be only a temporary solution.”
Biruh thinks otherwise, arguing the problem, like other issues plaguing the Ethiopian economy, is systemic and multi-faceted. “Government policy gaps are not the only things to blame. The problem largely lies in the ethics of the business,” says Biruh. “The market imbalance between demand and supply is just the immediate cause but the root cause is unethical profit-seeking motives.”
Experts stress that it is in the long-term interest of the private sector to behave ethically, since unethical business behaviours, like hoarding, attract stiff government regulation and even exclusion through active government involvement in business. EBR

4th Year • March 16 2016 – April 15 2016 • No. 37


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