Inflation Hits Lower Income Families Hard

The urban poor in Ethiopia are being hit by the invisible hammer that’s getting larger in size day by day. It is hard to recall a time where inflation was so prevalent and unrelenting. Even salaried workers—most employed by the government—are falling below internationally accepted thresholds of poverty. Former middle-class residents are now slipping into the low-income bracket and are utilizing consumer association shops to access basic commodities at cheaper prices that were previously destined for the poor. Further down, those with low incomes are falling into the ‘poor of the poor’ level, which can only be handled through direct support including the SafetyNet program. The administration is exerting efforts to help with the pain, but the underlying causes are yet to be tackled. Subsidies and direct payments to urbanites can only go so far as the regime’s pockets are getting shallower. EBR takes a close look at the toll inflation is inflicting upon urban residents and possible coping mechanisms both structurally and temporarily.

Selamawit Tigabu, a 35-year-old mother of two, leaves her house early in the morning to buy bread from a Sheger Bakery outlet near her house. If she is lucky, the resident of Kotebe in Yeka District buys eight pieces of bread for ETB10. Prices fluctuate based on the price of bread at other bakeries.

Many low-income residents like Selamawit who cannot afford bread from other outlets lineup at Sheger Bakery spots as early as six in the morning. The store only opens at 8am. Heavy queues are a daily occurrence at outlets. “If I buy eight pieces, it is sufficient for my family for the day,” Selamawit tells EBR. However, she usually returns home empty-handed as there is no bread at the outlet.

Established last year with the intent of availing affordable bread for the humble, Sheger Bakery has the capacity to produce 80,000 pieces of bread per hour. Although the bakery, which cost ETB900 million, was expected to relieve the poor from the pressures of continuous and high price increments, it has been functioning way below installed capacity.

Even if Selamawit manages to secure the cheaper bread, inflation still remains a serious concern for her as she has other food requirements of which prices are skyrocketing. “Basic items like edible oil, wheat, and sugar—subsidized by the government—are sold at inflated prices as they are not available at government outlets,” she explains. “The price rises of recent times is really making my family’s life unbearable.”

The price of commodities, especially food items, is climbing to incessant new heights this year. In fact, the current inflation spike is the second-highest after the record year of 2008. Since February 2021, prices of major food commodities, which constitute more than half of a household’s expenditure, have doubled. General inflation has grown by 20.2Pct this year. More specifically, food inflation has increased by 22.6Pct while non-food inflation grew by 18.9Pct.

Although the government claims the yearly average inflation rate to be at 16Pct for the last decade, independent experts say otherwise. “My intensive research indicates the average annual inflation rate of the last fifteen years was 39Pct,” reveals Atnafu Gebremeskel (PhD) Assistant Professor of economics at Addis Ababa University.

The nature of inflation in Ethiopia, which largely arises from food inflation, has a devastating effect on the low- and middle-income population. “Most of the population is unable to afford inflation,” argues Dejene Bekele, Director of Employment and Labor Market at Ministry of Labor and Social Affairs (MoLSA).

The impact of inflation differs from one segment of the population to the other. While the middle- and upper-class segments of the population can afford price increases in goods and services, it becomes much harder or impossible for the poor with limited and inelastic incomes to afford the same. In simple terms, inflation hits poorer families with fixed wages much harder than the rich.
Selamawit, who earns a fixed monthly salary of ETB500 by working as a cleaner at a government institution, is among 1.8 million civil servants working in Ethiopia. The majority of people working at government institutions and state-owned enterprises live in urban areas where 20Pct of the nation resides. On the other hand, 1.49 million people in urban areas are employed by private organizations. There are also 74,388 NGO and international organization employees and 374,602 domestic workers.

From the total of 3.7 million paid employees, 546,595 have a gross monthly wage ranging between ETB500 and ETB999, while 177,381 people earn less than ETB500 per month, according to data from MoLSA. Additionally, 1.5 million people are paid between ETB999 and 2,000 per month and 1.58 million people earn salaries from ETB2,000 to 5,000. There are 3.8 million urban people who are self-employed with elastic earnings.

Based on the minimum daily income of USD1.5 set as the internationally-accepted line of poverty, people in Ethiopia need to earn at least ETB2,000 per month to be above the threshold. However, given the piling-up year upon year inflation in Ethiopia, experts argue that ETB5,000 is the minimum monthly income a person needs to earn just to get by. For lower income families living in urban areas, inflation is a very serious and growing concern.

Those with salaries between ETB5,000 and 7,000 are 473,810 in number whilst only 305,035 urbanites earn more than ETB7,000 per month.

South and Oromia regions have been the most hit by price hikes with inflation rates at 30.5Pct since last year. The next hardest hit region is Tigray, seeing a 23.3Pct price rise. Inflation rates in Dire Dawa, Harari, Addis Ababa, and Afar were around 20Pct. The least inflation affected region is Amhara at 12.1Pct.

Due to galloping inflation in urban areas, more and more people are plummeting into the poverty trap. Although there are many other factors that may cause poverty, the price upsurge of commodities in general, and food in particular, is considered as the major factor. Inflation increases poverty by lowering the real value of fixed wages, thus reducing the purchasing power of lower-income families.

Dejene says the government is devising policy tools to help the low-income segment of the population cope better with high inflation. “The ministry has established an independent board of 40 members to study inflation and set a minimum wage for public and private workers,” he says. “The government also included unemployment benefits into the new social security policy.”

Government is currently providing ETB200 to 300 monthly per head under the SafetyNet program, while others receive support upon offering their labor for manual and social works. Currently there are 93,120 people receiving SafetyNet support in urban areas, while there are close to nine million under the rural SafetyNet. “Currently, the government is working to initiate urban SafetyNet schemes in 70 regional cities and towns, up from the current 11,” Dejene explains.

Kiflu Gedefe (PhD), Lead Researcher and Coordinator of the Trade Policy Research Center at the Policy Studies Institute (PSI) advises that providing decent jobs and income are critical to lastingly pull the populace out of poverty. “Subsidies and support for low-income earners might work in the short run. But to solve the problem permanently, creating decent jobs by attracting investment is highly critical.”

“In a bid to attract sufficient investment that can create enough decent jobs, ensuring peace and stability is indispensable,” Kiflu argues. “Inflation cannot be averted only through restructuring income, but also by improving productivity.”

Atnafu recommends introducing new support packages for the poor to cope up with the exploding inflation. “But for the long term, the government needs to reduce money supply, restrict budget deficit, and boost productivity.” EBR

9th Year • Jun 16 – July 15 2021 • No. 99