Saturday, September 23, 2023
BusinessRunaway inflation continues under 'stabilize market' Franco plan

Runaway inflation continues under ‘stabilize market’ Franco plan

The government’s Franco Valuta scheme has failed to stabilize prices and reduce inflation, economists and citizens say.

The scheme allows traders to import essentials like edible oil, sugar, and baby formula using foreign currency while exempt from duty taxes.

Though over a third of Ethiopia’s imports now enter duty-free under the scheme, steep price rises for goods show its inability to curb inflation and stabilize the economy, experts say.

The price of sugar imported under the scheme has doubled in a year to 65 birr per kilogram while oil prices have surged by over 30 percent to 1,000 birr. Baby formula prices have increased by about 50 percent to almost 900 birr.

“Prices for items imported duty-free under the scheme have risen the most, as it is causing the gap between the parallel and official market to widen at a rate never seen before,” said economist Abraham Terecha. “This highlights that the scheme itself is exacerbating inflation instead of reducing it as intended.”

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Inflation has remained at around 30 percent for over a year, finally showing some slowdown last month when the rate eased slightly to 28.5 percent for food and 34.4 percent for non-food items, according to official figures.

Traders taking advantage of exchange rate discrepancies and currency flows to the parallel market are seen as fueling these inflationary pressures. The dollar in the parallel market now costs as high as 100 birr, compared to around 54 birr in the official rate.

Despite the duty tax exemptions under the scheme, which were expected to lower prices, Alem Tafese, a mother who lives in Addis, said she has had to cut back on necessities due to higher prices.

“The price of every item, including basic ones like edible oil, became out of reach,” Alem said.

Shop owner Shemsu Ali has witnessed customers’ dissatisfaction with steadily climbing costs.

“When the scheme was introduced, it was meant to stabilize the market but the reverse is happening,” said Shemsu, who owns a retail store at Bole Bulubula neighborhood.

Experts recommend stricter regulations on foreign exchange used by traders using Franco Valuta scheme, higher foreign reserves and incentivizing local production for import substitution to stabilize prices and rein in inflation fueled by the scheme’s duty exemptions.

“Long-term solutions are needed to curb runaway inflation, stabilize the economy and halt citizens’ impoverishment,” Abraham warned, saying temporary relief measures under the scheme will not succeed on their own.

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