The cycle of violence that has been gripping Ethiopia for close to a decade now shows no sign of abating. From the conflict in northern Ethiopia, albeit at a lower intensity, to horrendous attacks intended to fuel inter-communal and inter-faith strife, the country and its people have paid and continue to pay a heavy humanitarian toll. Tens of thousands have been killed and maimed with millions more forced to flee their homes and left psychologically traumatized due to deadly incidents that have erupted all over the nation. Understandably, the general sense of insecurity the seemingly endless violence has engendered is the biggest threat facing each and every Ethiopian. At the same time, though, the inexorable rise in the cost of living represents as much if not a more pressing challenge for the nation and its people. Unless a holistic and participatory solution is sought for the problem before it gets even worse, the socio-economic havoc it wreaks is bound to have grave political ramifications exacerbating Ethiopia’s already fragile security situation.
No single factor that explains the incessant surge in the inflation rate. The phenomenon is actually attributable the confluence of a number of mutually reinforcing reasons. Chief among these are the monopolization of the market by a handful of players and the government’s failure to take decisive measures aimed at deterring the predatory behavior of these actors; the inability to fix supply-side constraints preventing the adequate provisioning of basic commodities; and the substantial proportion of the meager government revenue spent on servicing the considerable public debt stemming from the high level of government borrowing from both domestic and external lenders. The high cost of doing business owing to the absence of an efficient logistics infrastructure and the allocation of funds which could have been utilized for development or welfare purposes to rehabilitate the victims of humanitarian disasters have also played a part in escalating the hike in the cost of living.
There is another important factor though that has been given short shrift by policy makers and other stakeholders. Empirical evidence shows that the skyrocketing rise in the cost of imported goods due to the fast-paced depreciation of the Ethiopian birr against a basket of major foreign currencies is a major driver in stoking the inflationary pressure. It took only two years (between 2019 and 2022) for the fiat currency to depreciate against the U.S. Dollar from Birr 32 to 1 USD to Birr 50 to 1 USD, compared to the four years it took (between 2015 and 2019) to devalue by 11 birr. The downward trajectory of the birr’s value started in 2010 with its unprecedented devaluation by 20 percent when the exchange rate was at 10 birr to the USD. The depreciation proceeded at a moderate pace until another round of devaluation in 2017 saw it fall by 15 percent, pegging it at 26.91 to the dollar, up from 23.40 on the official market. Since then, although no similar one-off devaluation was implemented, the birr has been allowed to depreciate steadily, almost halving against the U.S. Dollar during this period.
The official reason cited to behind the decision to let the birr depreciate fast was to control inflationary pressure, to boost export earnings, which had hitherto stagnated, and discourage imports. In fact the World Bank and International Monetary Fund (IMF) have repeatedly urged Ethiopia to devalue its currency, arguing it was overvalued and needed to be at a level reflecting its real value. Unfortunately, the depreciation of the birr has not brought about its intended outcome. Though export receipts rose for a couple of years they are projected to come down in the current fiscal year. Meanwhile, the import bill has been soaring owing to the fact that the import of such basic necessities as food, medicine and fuel as well as industrial inputs cannot be discouraged through currency devaluation alone. As a result the rise in the prices of these items on the international market is fueling inflation.
Although the depreciation of the birr has been cited as one of the factors escalating inflation, no concrete policy proposals or actions have come forth from decision makers, think tanks and trade associations on how to manage it in a manner that does not compound the problem further. While there are no clear answers as to what lies behind this reticence, many believe the “inducements” the likes of the World Bank and IMF have offered them explain why they are espousing the same course of action the Bretton Woods institutions have “recommended”. The intentional depreciation of the birr, a monetary policy instrument the government has adopted, may have advantages like more competitive exports, lower trade deficit and wage increases. However, it also has such downsides as making imports more expensive, driving inflation and rendering local industries less competitive. That is why it’s of the essence to pursue a balanced approach that is mindful of and offsets the disadvantages of depreciating the birr.