Thursday, February 29, 2024
BusinessInflation rates keep soaring

Inflation rates keep soaring

The year-on-year overall inflation rate for the past 12 months leading to May 2021 surged by 19.9 percent compared to what it has been a year ago, a report by Ethiopia’s Central Statistics Agency (CSA) indicated.

While the biggest contributor for the increment is food inflation that expanded by 22.6 percent, the non-food inflation increased by 16.5 percent as of May 2021.

The latest report by the CSA indicated that the 12 months moving average inflation rate shows the longer-term inflationary situation in the country and the comparison of inflation rate in May 2020 and May of this year saw an increase by 19.7 percent growth. Accordingly, compared to May 2020, food inflation has increased by 23.7 percent in May 2021.

“Cereal prices continued to increase in the current month which has great contribution for the rise in food inflation. In addition, the continued increase in the prices of edible oil, meat (showed fast price increase), butter, spices and coffee during the current month has contributed to an increase in the rate of inflation,” the report states.

The inflation for non-food items jumped by 14.8 percent compared to the same period last year.  The reason for this spike in inflation is said to be the result of price increase in Alcohol and Tobacco, Stimulants (Chat), Clothing and Footwear, Housing Repair and Maintenance (Cement and Corrugated Iron sheets), and Energy (Firewood and Charcoal), Medical care, Transport (fuel) and Jewelry (Gold).

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Also, the country level Consumer Price Index (CPI), which measures the average change in the price paid by consumers for a fixed market basket of goods and services, in May increased by 2.2 percent compared to April. A basket of goods refers to a fixed set of consumer products and services whose price is evaluated on a regular basis, often monthly or annually. This evaluation of prices is used to measure inflation.

According to the CSA, the CPI calculation in Ethiopia is “based on the results of the Household Income, Consumption and Expenditure Survey (HICES) conducted by the CSA in 2015/2016 from which expenditure weights are derived for major household goods and services of that period and adjusted using the December 2016 retail prices of the goods and services as a base period.”

The average annual inflation rate for low-middle income countries stands at 3.4 percent while Sub-Saharan Africa stands at 4.4 percent, according to the Ethiopian Economics Association (EEA) report on the state of the Ethiopian Economy 2020/21 released in February 2021.

The report stressed “In a country where a quarter of the population lives under the poverty line, double digit inflation puts significant strain on the livelihood of people, particularly on wage earners and the retired section of the population whose income can rarely cope with inflation rates,” adding that, “High inflation also raises the real exchange rate, reducing the competitiveness of exports. High inflation has remained a major source of concern in recent years.”

Since Abiy Ahmed (PhD) came to power in early April 2018, he has committed to various changes in the economy. In the Home-Grown Economic Reform (HGER) he spearheaded to abet the main hurdles of the economy, high inflation was identified as one of the headwinds facing the Ethiopian economy. The PowerPoint presentation slides disclosed by the Office of the Prime Minister highlight key areas of focus. It was assessed “Expansionary fiscal policy appears to have crowded out the private sector’s access to finance and might have contributed to the high inflation.”

The high level of inflation that averaged at 15.5 between the years 2005 and 2019 is said to have resulted in the “Dwindling purchasing power of consumers, in particular the poor and middle class, negative saving rates, thereby discouraging financial saving, and appreciating real exchange, thereby eroding external competitiveness.”

This assessment corroborates the National Bank of Ethiopia’s similar assessment in the fiscal year’s quarterly report which stated “Average savings deposit rate remained at 8.0 percent and lending rate at 14.25 percent, while weighted average time deposit rate witnessed a 0.27 percent annual decline.” The challenges in external competitiveness are also in line with the EEA’s finding.

Hence, one of the targets for the macroeconomic reforms was controlling inflation through containing the growth of reserve money, including by gradually reducing direct advances to the budget, introducing effective monetary policy and liquidity management instruments, strengthening NBE’s analytical capacity and improving the efficiency of the supply chain and domestic commodity markets.

However, the rate of inflation kept growing despite slight signs of steadiness during the early times of the administration.

Aiming to curb such challenges by placing a close follow-up of inflation, the government formed a task force in June 2019, to regularly monitor price growth and resolve it accordingly. But the works of this task force are yet to bear fruit.

On the same year the task force was formed, the House of Peoples’ Representatives Revenues, Budget and Finance Standing Committee rebuffed a nine month performance report by the Ministry of Finance (MoF) and ordered the Ministry to prioritize inflation. The Committee members stressed that the adverse effects of inflation are already being witnessed and this should be given due attention. Contributors to the high inflation in the country include the global coronavirus pandemic, political instability as well as locust infestations.

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Video from Enat Bank Youtube Channel.

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