Monday, May 20, 2024
Money TalksInflation and its impact on Ethiopia’s working class

Inflation and its impact on Ethiopia’s working class

In a country where more than half of the population spends their entire income on food and basic necessities, the slightest of increases in food prices are alarming. However, when they keep surging for years as they have done so in Ethiopia, the cumulative impacts could be earthshattering. Salary of public servants has not shown any significant rise over the past three years; yet the latest monthly inflation rate has reached 26.4 percent, while food inflation reached 30 percent.

Considering the real time prices of goods, the 26.4 percent feels like an understatement. Basic household and food items like cooking oil have seen price spikes from 420 to 680-700 birr within a span of three months. Other household items have almost doubled in prices.

As if adding fuel to the fire the buy now, rather than later mentality has taken the situation from bad to worse. The way things are going, the public is convinced that cash will only lose value; so it is better to get ones shopping out of the way and stock up on things that probably won’t lose value. The panic of being able to find things unaffordable through time forces one to buy while they still can even though the current prices are higher than the usual. For consumers, that means filling up gas tanks, stuffing the fridges, buying shoes in the next size up for the kids, and so on. For businesses, it means making capital investments that, under different circumstances, might be put off until later.

These mass purchases in turn cause more inflation, since the country’s private merchants have an almost monopolized power over goods. According to Alemayehu Geda (Prof.), one of the leading economists in the country, merchants abuse their power to a point where they spontaneously decide the prices of goods. They are not willing to share the downside of the market, as in, they’re not willing to negotiate their profit so they’ll increase prices to not compromise their own gains.

Speaking about the possible causes of the food inflation, Alemayehu (Prof.) said: “According to a research I conducted in 2009/2010 and again in 2020, I tried to see what the quarterly data of the past 20 years signify about inflation. I made an inflation model which showed which factors affected inflation and to what extent. According to that research, the major cause and reason for inflation in the Ethiopian market is food supply shortage, the productivity around agriculture is very low, and in some products like barley, sorghum and wheat, it shows a negative productivity value. The productivity is not well aligned with the population growth rate. Normally, Ethiopia has a 2.6 percent growth on a yearly basis, but the productivity does not grow on a yearly basis, in fact it decreases, creating a fundamental problem. If the food supply were to show a 10 percent increase, the inflation would show a 20-30 percent decrease.”

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Another factor that is responsible for the inflation according to Alemayehu’s (Prof.) research is devaluation. He recalls that a 10 percent increase in devaluation causes a 20 percent increase in inflation. The Ethiopian currency has faced major devaluations over the past couple of months so one can only imagine the effects those have had on the current market. The third cause he mentioned was money supply. The government is printing more money than the country’s annual economic growth would allow. Alemayehu (Prof.) added “When funds ran low, the government prints more money, which leads to more inflation. For example, back in 2000, all the money in the country accounted for was 67 billion, while the same data done 13 years later showed that the money accounted for in the country increased to 970 billion. All this increase within 13 years was due to excess printing of money by the government, which further led to inflation.”

The prices of goods increase on a regular basis but the income of people, who live pay check to pay check, has barely shown any relative increase. Especially essential workers and government employees are left to navigate this with paychecks that have not grown in any significant manner. On top of being the ones who are highly affected by inflation, the Prof argues, the working class gets salary deductions for donations to the national army, which is morally corrupt in its own way but apart from the moral stand point, the action leads to more strain on these groups.

“For the past 10 or so years, the working class’s income has been more or less fixed, especially incomes of city folks. According to a CFA study from 10 years ago, 70 percent of workers, government and private workers included, had a salary of 2500 birr per month, while a recent study by the CSA showed that the average income of workers is 4000, which goes to show that the working class hasn’t shown any growth within the past 10 years, but living costs have doubled, if not tripled. All these workers are below the poverty line. This increase on living costs just further pushes them in the unforgiving pit of poverty. There are two kinds of poverty, there is the general poverty and then there is food insecure poverty, which is chronic poverty. It would reach a point where the majority of the working class in the city might not be able to afford food and other necessities,” Alemayehu (Prof.) said.

If left unchecked, the problem is not one that will resolve itself. Government mediation is needed whether through regulating the market itself or by providing items at lower prices to the general public. Setting tariffs on the market would be a nearly impossible task for the government, especially in Addis Ababa where more than 250,000 merchants reside.

Speaking about the possible remedies by the government, Alemayehu (Prof.) said: “There was a time when the inflation reached 60 percent but that too was regulated. The thing the government can do is work on the factors we’ve mentioned before. Priority must be given for food productivity. The current government is trying by locally producing wheat on a mass scale. Secondly, the government can work on minimizing the devaluation and work on the money supply. The government can’t completely stop the money supply, so they need to find a middle ground. The current government has decreased the annual money supply increase from 30 percent to 17 percent within the last 3 years. Even though 17 is still a high number, it is a step in the right direction.”

If it stays unmediated, the market isn’t one to regulate itself, even though humans can adopt and acclimatize to most situations including this, the quality of life for most citizens is sure to be compromised.

Contributed by Yosthena Aynalem

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