Life Matters | Feb 11,2023
Mar 6 , 2021
By Zelalem Bezabih ( Zelalem Bezabih (firstname.lastname@example.org), a business development and social researcher. )
We do not need to go far to see the exasperation felt by the public over the current rise in the cost of living. Recently, I stood at the grocery store next to a lady that was haggling with the owner over the price of half a kilo of tomatoes. After much back and forth, they compromised that she would buy half of what she came for, in addition to an eight Birr credit she promised to pay the next time she comes. The experience of the lady has become the order of the day in Ethiopia.
Basic food items in Ethiopia, including wheat, maize, teffand barley, have increased significantly, crippling consumers. Inflation has reached over 20pc for months, the sort that has been unseen since 2012. These numbers are staggering, particularly on the poor. They place a disproportionate burden on this latter group as they often depend on cereals and breads.
What inflation can manifest in is social chaos. It creates a rise in unemployment due to an increase in the cost of doing business, a rise in crime, and an increase in people living under the poverty line. Coupled with an increase in income inequality, which has been on the march for the past two decades, inflation can become the "social monster" it is dubbed to be by social researchers.
The rise in the cost of living has a debilitating impact on poor households. Perhaps nothing is more concerning here than its effects on the ability to afford food, especially nutritious food necessary for avoiding many types of diseases. This unavoidably leads to social tensions that can lead to political unrest. The vicious circle needs urgent attention before it gets out of control.
Unfortunately, the concern seems to have been responded to with few meaningful remedies by policymakers. The government is busy justifying its decisions and policy changes instead of addressing the real reasons behind the price hikes. Often, it blames skyrocketing prices in consumer goods on international prices, greedy traders or growing demand. This may not be entirely false, but it is far from an adequate response.
The current inflationary pressure is a result of a combination of factors. There is of course the structural impediment, supply that could not catch up with the rise in aggregate demand. Despite rapid economic expansion in the past decade and a half, incomes have not caught up with the escalation in the cost of goods and services. This has made cities unaffordable in many cases for residents.
But there is an even more direct reason for the current rise in prices, and this has to do with the government’s economic policies. It is undertaking a structural adjustment programme that will see a more austere fiscal and monetary policy. This includes reducing borrowing and spending. The latter also involves cutting subsidies on goods such as fuel, electricity and sugar. This has translated into a rise in prices.
The biggest direct contributor is the depreciation of the Birr by about a third of its value over the past year. This has meant an increase in imports, including raw materials for the construction and manufacturing sectors. Businesses pass on the rise in prices to consumers, which could see their bank accounts and wallets shrink if they only have fixed incomes.
These developments are combined with the traditional source of inflation in Ethiopia, the supply-demand mismatch. The best indicator of this is cement. Every time it is hit by some challenge that leads to a shortage, its price skyrockets as construction companies clamour to get what little supply there is. Among the terrible consequences of this is that a shortage in cement and reinforcement steel can mean long delays in construction projects, leading to firms letting labourers go, which exasperates unemployment in Ethiopia.
The urgency of addressing inflation cannot be overstated. The country does not need more political pressures. Thus, the government should knuckle down and deliver its promises to stabilise the lives of low-income people. It can still do this while running a monetary and fiscal policy by marshalling government resources toward economic policies that help low-income households.
The government continues to spend a fortune on projects that do not seem to have immediate economic value, including tourist destinations. These projects are not unimportant, but the government should not lose sight of the fact that a safety net programme covering the most destitute can go a long way in helping people survive the current economic storm.
PUBLISHED ON Mar 06,2021 [ VOL 21 , NO 1088]
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