July data: Despite Meles’s absence double-digit inflation foreseen beyond 2012

10 Aug

by Keffyalew Gebremedhin

If the monthly report by the Ethiopian Central Statistics (CSA) is something to go by, Ethiopia’s moving average rate of inflation for the month of July bears no good news at all to policy-makers and the country as a whole.

Ethiopia’s double-digit inflation dropped last month by an ineffectual margin from its high of 20.5 percent in June to 20.0 percent in July. The underlying upward push for inflation in the main in Ethiopia have been internal, as National Bank Governor Atnafu Teklewold told parliament on 22 March, not the often politically motivated reporting and misinterpretation by Reuters from Addis Abeba.

The Governor said, “Ultimately the lasting solution to the problems of inflation in Ethiopia is increasing agricultural production and introducing changes in the produces the country exports to foreign markets.”

In other words, he was pointing out that at no time would it be possible for Ethiopia to get inflation to single digit, as the former prime minister constantly expressed the desire, without the will and at the same time disinterested in the wherewithal that could have enabled him to realize the much-professed outcome.

In that respect, one could say that the July data is cautionary. It signals that, with this present tortoise pace of 0.5 percent drop, policy-makers should not anticipate to achieve their set goal of reducing inflation to single-digit by year’s end. If they choose to wait and see, without appropriate actions, they would only be greeted with a moving target, as before, instead of the conditions that would enable citizens to reap the gains of economic growth.

Ethiopia already has moved its target date for reducing its long running double-digit inflation to single digit three times. The first time was when the former prime minister announced the month of June as his target. Shortly afterwards, he pushed it to August /September.

When he inferred from the data that the low and inconsistent monthly rate of decline would not allow achievement of that targeted objective by the set date, in April the last time he was in parliament he finally pointed out Ethiopians should witness the end of double-digit inflation at the end of 2012 and the case was closed.

Clearly, the July monthly data makes it unmistakably clear that achieving the target of single-digit is literally impossible with inflation decelerating by less than one percent and with no improvements on the production side; not even 2.0 percent a month from this point forward would do the job.

There are three reasons why achieving single-digit inflation rate would become extremely difficult this time around.
 

                                                                  I
 

Climatic factor and food production

While food price inflation has gone down from 21.5 percent in June to 20.7 percent in July, its drop is also not very significant, given the fact that it still is at its persistently second tier double-digit rate. Unfortunately, it is expected to show increases in the coming months.

This is mainly because of factors threatening the country’s food production and the looming political instability that going forward may attack the national psyche, especially the sense of national stability and continuity that often are taken for granted.

To start with, the information one gleans from the joint Famine Early Warning Systems Network (FEWSNET), WFP and USAID’s latest Food Security Update is very concerning. Due to the shortfall in the 2012 secondary “belg” season rains, cereal crops to be harvested from August are showing its adverse consequences.

Already sizes of farmed lands were reduced to the absence of the rains. This then has had impact in Meher production, which otherwise provides 40 percent of the country’s cereal production.

Consequently, the June to December report states, “the level of needs for humanitarian food assistance will remain high as a result of the effects of repeated droughts since 2010.”

The report adds further that the already very high staple prices are expected to increase through September 2012.

This adverse condition, i.e., poor February to May rains, set as the first predictor of trouble down the road has already come with the number of people who require emergency assistance through the end of the calendar year. They have already topped the figure of 3.6 million people the government released in February 2012.

As at this moment, there is no announcement by government of new data of citizens requiring assistance, nor is there any additional requests for assistance.

The early warning international report indicates that the regions with the highest increases in the number of affected populations are SNNPR, Amhara, Somali, and Oromia, listed here in order of severity. It is also reported that southern and southwestern Ethiopia have become focus of humanitarian concerns. The major root crop dependent zones of Wolayita, Kembata Tembaro, Gamo Gofa, and Hadiya, Sidama, and the major Belg‐cropping special woredas in Segen are identified has been seriously affected. Government usually is slow in reporting or commenting on such situations, as if the problem would disappear.

With the poor availability of pasture and water in isolated pockets in the lowland areas of East and West Hararghe, Arsi, West Arsi, and North Shewa in Oromiya and North Gondar and North Wello in Amhara, the crisis is building quietly.

In short, over the July-December period the picture of Ethiopia’s Food Security Outlook is increasingly becoming concerning, with both poor rains from February to May and now the June to September kiremt. This comes against the backdrop of the country’s already inadequate food security situation. The fear is that these would have adverse implications to the performance of Meher crops, particularly in the eastern Meher crop areas, according to the report.

 

                                                                  II

Signals from cereal market prices

In terms of cereal prices and market conditions in the country, it has already been recognized that since February 2012 prices have been high in most markets in Ethiopia. At this very moment, according to the early warning report, these high food prices have leveled up at higher price levels.

Quoting FAO’S GIEWS (Global Information and Early Warning System), IRIN reports that in Ethiopia, which is described as one of the 30 ‘grain price shock hotspots’, “Wholesale wheat prices in most of Ethiopia’s markets have also increased by an average 18 – 20 percent since the beginning of the year, mainly following increases in international prices.”

As far as the situation in the world grains market is concerned, the FAO Food Price Index climbed 6 percent in July 2012, after three months of consecutive declines. This sharp rebound, it is stated, is related to and driven by a surge in grain and sugar prices in markets around the world. It is true that the impact of these latest increases in cereal market prices may not have immediacy for Ethiopia, although their indirect and secondary effects may not be avoided.

There are added factors this time also that stand on the way of significant drop in the rate of inflation in Ethiopia. As mentioned above, besides the weather condition and the latest disturbances in global cereal market prices, the sudden incapacitation of the prime minister is likely to have major implications to the country’s stability and direction until the succession problem is overcome and a sense of continuity in some form is achieved.

Even if we ignore these developments, the fact that the distance to be traversed to single digit inflation seems to be moving further away, when one looks at the monthly percentage rates that need to drop. In other words, between August and December, Ethiopia would have to experience a minimum of 11 percent decline in the rate of inflation to reach the upper threshold of single-digit inflation, i.e., 9.0 percent, even though that by itself is higher for normal economic growth and confidence of citizens.

Since the current rate decline began in February to the latest reporting period in August, inflation has gone down by a whopping 16.3 percent from the latest high of 36.3 percent in February to 20.0 percent in July. This means a monthly average decline of a minimum of 3.3 percentage point was achieved, although the decline had been erratic ranging from as high a drop as 5 percent in one month, 4.3 percent at another to 3.8 percent still another – the lowest being 0.5 percent in July.

This suggests that for the next five months, inflation needs to decelerate at a minimum rate of 2.2 – 2.5 percent, although that still leaves consumers at a huge disadvantage and ordinary people without any relief and producers with enormous difficulties.
 

                                                                  III

Meles’s incapacitation: the man to be both missed and loathed

With the advantage readers now have in the CSA data for the month of July, without even thinking of the new political developments in the country surrounding the prime minister’s exit, it is unlikely for Ethiopia to achieve 11 – 12 percentage point drops in its rate of inflation in the remaining five months to bring inflation down to single-digit by the end of the year.

However, the unanticipated departure of the prime minister is likely to prolong the uncertainties that would pervade national activities, be it political or economic. Normally periods of uncertainty, especially of a political nature, have bearings on national stability and people’s sense of the future and their security.

Above all, this does not mean that in all the four corners of our country guns have been silent all this years, although our country has been relatively stable. Moreover, in a country that has been exemplary in the peaceful cohabitation of Christians and Moslems the state has been accused of creating tensions to further its interets. The standoff with the Moslem community has also been badly handled, where there is no clue how it would turn out from this point.

Just recently, Moyale was in conflict and 50-80 lives were lost with 33,000 citizens becoming refugees in in Kenya. Ogaden and Gambella have been Ethiopia’s two officially militarized zones, with the military in charge; Afar is also almost trailing in that direction. In short, these and other flash points, for which the handling by the state of some of the problems has been responsible, could turn out to be Ethiopia’s nightmares, on account of the state’s unwillingness to find political solutions to political problems.

In the case of Ato Meles Zenawi, who for all intents and purposes was also the country’s actual minister of finance, governor of its central bank and the treasurer and, thus, his absence would sorely be felt, because of the difficulty of filling the big shoes he has left behind.

In the coming days and months, the difficult transition would be felt in the areas of economic policies, finance, foreign aid and foreign credits. This is mainly owing to staying longer and his abilities to force through his plans and his ways with the country’s partners.

On top of that, the passion he had for economics and how through the years he had positioned himself to make use of it initially as a willing learner was noticeable. Because of that, as a practitioner he had remarkably developed over the years, although more often that not both his pragmatism and experimentations have proved costly for the country in many respects.

In a commanding position of authority, Meles Zenawi’s human weaknesses were allowed to play out to his detriment, often associated with extremes and intolerances that have made it easier to remember him more as a polarizing figure than peacemaker and a statesman. This is a bi-product of him being hardly and sufficiently challenged by those around him, who worshipped him with the divination they attributed to him in their minds. In the process, these appealed to his human frailties rather than the strengths of the person.

Over time, Meles allowed these adulation by the malleable around him and the fearful to feed his ego, thereby bolstering his personal convictions to the extent of owning Ethiopia and its future. Of this he had on many occasions, claimed the probity of his policies, even when the country was in difficulty. He had shown tendencies to rowdily arrogate credit for himself, vigorously and vindictively defending his policies in measures and ardency in evidence only amongst defenders of faith or religion.

Meles had been consistent with his visceral hostility toward disent and differences of opinion. It is common knowledge how badly he mistreated the opposition, the harshness of his actions and languages he had used on occasions, including exhibiting in parliament his rage and impatience, televised and distributed worldwide, among others, in February and April 2012. In future, these become gold mine to historians who may decide to write about the person and how much his unstatesmanlike actions and behavior hurt him as a leader and Ethiopia as a country.

The yes-men he has collected around him worked hard to please him, not to discuss with him options and alternatives and their implications, with the public’s interests and disagreements with his policies in view.

Ethiopians would not forget, for instance, how those in the Addis Abeba City Administration and the Ministry of Urban Development and Construction spearheaded realization of Meles’s wishes. They literally annulled the compact citizens have with the state as co-owners of urban and rural lands. In spite of public anger and uproar, they went to the extent of cheating the public to please the boss regarding urban land ownership one is entitled to where home stands. They literally went in the dark to get urban land proclamation 721/2004 overnight to make his will and wishes come true, despite public protests and resistance.

As is often the case with him, Meles later admitted in parliament that was a big mistake, although he never reversed the proclamation.

As a citizen, although not a landowner, I was incensed by what happened and how much citizens have been taken for granted. I expressed that anger in an article Urban land lease legislation: the prime minister’s new front against urban dwellers . At the time, I had the opportunity to state my fury and disappointment with the following words:

    This time, it is so naked, but not because of the usual TPLF/EPRDF recklessness. The controversies arising from the new urban land proclamation, be it for their substances, intentions and the manner they have been railroaded into parliament have pitted the regime’s powerful figures and their agents against the millions!

    This might have not been a fight the Meles regime would have wanted to pick now. It only burst on its face willy-nilly, as it tried to get the draft legislation stealthily approved through the backdoor on the second day when parliament members returned from holiday around mid-October, i.e., without reference to a relevant main committee. Of course, the MPs were back physically then, but not mentally.

    Get me right. In stating this I do not mean to give the impression that discussions in parliament have been helpful to date in advancing the interests of the people against any unwanted legislations that habitually are shoved down their throats. No way, it cannot happen, since 99.6 percent of MPs are beholden to the ruling party for their survival.

 

                                                                  IV

 

 

Sufferings ofEthiopians by persistent and prolonged double-digit inflation

Over time, more particularly after the 2010 election, Meles exuded confidence especially during which time he weighed in with his vision of building the Ethiopian developmental state. It became his single hallmark, whose advocacy of “autonomy of the state” became one of his ideological pillars, the inspiration of which had been his need to ensure his unchallenged control over the Ethiopian state and its future.

Writing of this and about his strategy in States and Markets: Neoliberal Limitations, which appeared as a book as a chapter in Good Growth and Governance in Africa, (Edited by Joseph Stiglitiz et.al, Oxford Univ. Press, Jan, 1992), Meles stated:

    If the state is not autonomous from the private sector, it cannot provide guidance to the economy. Moreover, day-to-day economic decisions in a market economy are made essentially by the private sector. The developmental state tries to guide the private sector to make its decisions in a manner that accelerates growth by using a set of incentives and disincentives. If the state is not autonomous from the private sector, it will not be able to discipline, encourage and cajole it to act in a manner designed by the state.

In his position, Meles clearly showed he had the brain and the skills, but only a premonition when it comes to where he wanted to take the country. However, his problem has been that, beyond bandaid (import grains and sugar, oil, etic.), he could not become responsive to the consequences of his seven-year long inflationary polices that have resulted with both growth and untold sufferings of ordinary people. In this situation, a few became rich, others richer and the corrupt within his own party ended up robbing the country, as the majority of the population in both rural and urban areas experienced difficulties in managing daily life.

In these years, Ethiopia has been placed on the map for its fast economic growth and the opportunities it afforded foreign investors. Nonetheless, a serious and adverse outcome of those years is that the country has lost many golden opportunities in engaging the private sector. This became anathema to Meles Zenawi, especially because of his opportunistic hostilities toward the private sector and its exclusion from major developmental undertakings of the country.

Because of that, Meles denied Ethiopia the possibility of tapping the skills and resources of the private sector. They could otherwise have tipped a better balance in areas especially in improving the horrendous unemployment situation in the country and the huge inequalities the prime minister’s vision and policies have entailed.

He often spoke about Korea’s development model. Unfortunately, it seems, he never cared to pay attention to two of the major foundations of Korea’s advancements. They are predicated on emphasis on quality education at all levels at home and abroad; equality of opportunities for qualified citizens. For those disadvantaged by age and other conditions, social safety net and other possibilities were instituted early on to ensure that the train that carried the benefits of growth never left anyone at the station, despite the inflation this caused at some point in the late 1960s and 1970s.

For Koreans, education became the only access to opportunities. Politics, family connections, nepotism and etc., could not penetrate the firewall the laws and institutions have put in place since the late 1960s with national tests being the key for admission to schools or employment. There is no doubt that the Korean model has a lot to offer for national development.

Unlike Meles’s version of developmental state, the Korean state embraced the private sector and enticed it with incentives and disincentives to get what the government wanted done to propel the country forward. Unfortunately, Ato Meles Zenawi cherry picked what he needed to promote his interests from the Korean experience, rejecting those that he felt interfered with his love for power.

It is because of this that the Ethiopian state could not develop the essential symbiotic relations with the private sector. Therefore, the state and the private sector to this day continued to exist in a state of relations that is antagonistic, with the state behaving like a cat that always wanted to eat the rat.

Unfortunately, in a country where the state sector could not and would not achieve capacity to satisfy the huge demand for goods and services, this policy direction has has only denied the private sector of any role in the nation’s development. With this in turn, the nation has been denied great deal of inputs and contributions that could have expanded the supply side of its economy, the building of diverse enterprises that could produce goods and more goods and specialize in services. This area literally rendered difficult for the private sector, the country is has been both clogged and starved.

Thus, the pent up demand (not suppressed by choice of consumers) the state could not satisfy eventually exposed the weaknesses of the state sector. In realizing that, when the state came knocking at the door of the private sector to solve the shortages inflation created, the state was found insisting that solution to the problem must be addressed on its own terms, if one recalls the conversation Meles had with the business community in May 2009, when he threatened to cut hands.

As the inflationary situation worsened, as seen in 2011 and 2012, Ethiopia was stuck to exporting coffee, spices and gold to import wheat and sugar and oil, in short supply in the country that the state could not produce, distribute to meet the needs of the nation.

Personally, I found the presentation to parliament last March by the Governor of the National Bank pertinent. He told them upfront, when reporting about the seven-months performance of the bank, that Ethiopia had earned from exports of agricultural products $1.6 billion. The country had spent $6 billion on imports, to bring in basic foods, raw materials, machinery, etc., without corresponding increases in exports and all the more only bringing with them related inflation.

As a show of wisdom, some parliamentarians asked him why he did not raise interest rates. Patiently the Governor said, the appropriate measure for the central bank is to mop up excess foreign currency during that period, dollars pumped into the market early on, with a view to reducing money in circulation. Any increase in the rate of interest, he said, would be counterproductive since correspondingly banks would also raise interests on loans, thereby making the price of loans for investments prohibitively expensive.

He further rightly explained, the food imports were necessary at that point in order to stabilize the market and that these should continue. Nevertheless, he put to the parliamentarians that he was gravely concerned by the policies pursued since it was these imports that are exacerbating the already bad inflationary situation in the country and the deficits.

In the circumstances, it was only Meles Zenawi who did not listen to his Governor of the National Bank of Ethiopia (NBE), when he was telling him that his polices were the main reason why inflation could not give Ethiopians respite from the huge unofficial taxation it has subjected their meager resources throughout these seven years.

At the same time, due to the weakness of his ego, which became his misfortune, Meles’s inner circle was bedecked only by yes-men, instead of people that could have critiqued (privately to him) his policies, politics and ideology to help him become a better and balanced leader he could have become.

That not being the case, Ethiopians could not be spared of the robbery by inappropriate policy that unleashed double-digit inflation and its unofficial taxation of citizens. To illustrate that point, note that at its height inflation in Ethiopia between 2006 and 2012 looked like this:

    36.3 percent in February 2012;

    40.6 percent in August 2011;

    14.5 percent in December 2010;

    37.8 percent in January 2009;

    44.4 percent in December 2008;

    15.0 percent in June 2007; and

    19.0 percent in December 2006.

 

                                                                  V

Conclusion

The conclusion that Meles never took seriously the human costs of inflation, as he focussed on his developmental state is not without foundation. He must have inappropriately drawn his conclusions from the fact that China built the Great Walls to end incessant invasions by barbarians. He often recalled that Korea overcame poverty and backwardness through creative policies, determined efforts, mobilizing their national energies and resources.

Meles must have picked what he thought relevant under his leadership to enable Ethiopia pay huge sacrifices to overcome endemic poverty. This is a jaundiced view of history based on arbitrary selectivity, lacking balance and proportion. Notwithstanding that, with some reservations, I could have cheered him up, at least, if all citizens equally shared the benefits and the burdens, instead of the disproportionate sufferings by the common persons.

Citizens know for a fact, as he also did, his political base and supporters have enjoyed most of the benefits, while the majority immensely suffered, without even the courtesy of consultations.

Of course, this does not change the fact that Ethiopians would feel Meles Zenawi’s absence going forward. This is more because as a nation, they would be jolted by his sudden absence out of their sense of comfort and of habit of presumed national stability, despite all his rhetorics about ethnicity coming first to develop a person’s sense of belongingness to his or her country.

In spite of the many incongruities, still uncertainties would be there for a while in conditions where political preparations are inadequate, with no succession plan in place.

Students of economic history keep reminding nations that uncertainties are a good staple of inflation.

Political conditions and economic policies that cannot ward uncertainties off can hardly ensure stable macroeconomic environment. In such a situation, national development is unable to benefit from the confidence of entrepreneurs, investors and distributors of goods and services. The uncertainties would render them all shorthanded, as we have seen how much the country’s coffee trade has suffered in the past two years, with the reverberations still continuing.

Therefore, without a doubt Ethiopia would witness some reversals in the behavior of inflation in the months to come, the early signs of which we have already witnessed from the July data.

In short, inflation thrives as much on political uncertainties and social turmoil, as the lack of good policy initiatives as bad policies.

 
*updated version.

Transforming Ethiopia TE

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