Why Ethiopia needs to take on Inflation?

The steady increase in inflation rates experienced in the past months should be seen as preludes to the potentially damaging economic trends that could occur leading up to the Ethiopian millennium set in September of 2007.
The stellar reviews given towards the economic performance recently with the Africa Development Indicator 2006 revealing that Ethiopia along with Tanzania, Uganda and Ghana joining the sustained growth countries with an average 5.5 percent GDP growth in addition to the economy’s projected growth of 10.1 percent this year are indicative of the progress made towards rebuilding the economy following the devastations of droughts and a costly border war with Eritrea.

On that same note, one should heed the warning signs emanating from the rise in prices of goods, increase in inflation rates, the trade deficit and reduced international reserves. These areas if not confronted decisively, the adverse effects will continue to haunt us during the period leading up to the millennium as well as the post- millennium period.

Inflation in Ethiopia is already pegged at around 18 percent and will take a few more months to stabilize with the Easter holiday. This year, no doubt, inflation will not be driven only by demand and cost factors but by expectations as well. The millennium celebrations in regards to commodity prices, transport as well as housing are expected to peak and preemptive steps should be taken months in advance. The government has maintained that the rise in prices was caused by shortages in produce from rural areas due to the late harvests and that prices would stabilize once produce start entering the market.

The government is right: there are shortages in supply but one has to ask whether it is a case of late harvests or there is more to this trend. As we all know well, prices rise during the period leading up to holidays with business expecting to make up for the lost or reduced revenues during the slow season.

Most often the case as seen previously in regards to the shortages in cement and sugar hoarding produce to raise prices has been witnessed. Though speculation is not a crime, unnecessary burdens on consumers should not be allowed. The urban poor are often those that are the most affected with price rises as they forgo badly needed money only on bare necessities. Inflation is a threat to the Ethiopian economy as it is a country without abundant liquidity and relies on exports of primary products that are susceptible to erratic price fluctuations. Despite stating admiration in showing resilience towards the IMF’s continued warnings one should not wholly rely on a ‘wait and see attitude’ expecting market influences to stabilize the situation.

There are other ways of remedying the problem without change of course. One would be by imposing price ceilings on consumer items whereby consumers could cushion the blow from price hikes. Another area would be to push more on low cost condominium projects as well as encourage low and middle income households to engage in constructing houses. This will help in depressing rentals which are the prime source of inflation among urban dwellers. These are not measures that are contradictory to the government’s policies, the problem lies in focus as well as drive to see these polices through.

Inflation not only affects savings but also reduces the buying power of individuals, taxing all of us in the end. The fears of the impact of the increasing inflation rates might be temporary as the government maintains but there is nothing wrong with being prepared and having contingency plans in the event that we miscalculated.•


March 16, 2007