Is Ethiopia to face danger of double-digit inflation, again?

13 Jul

by Keffyalew Gebremedhin – The Ethiopia Observatory

Although it still is in single digit, Ethiopia’s 12-month moving average inflation rate is signaling change to a higher direction, with the Central Statistical Agency (CSA) recording 7.4 percent in June 2013 in its Consumer Price Index.

This latest change, whose June increase on a monthly basis features a rise of 1.1 percent in the overall inflation rate reflects higher numbers for the second time since May 2013, which jumped from 6.1 in April to 6.3 percent.

Of their own, however, these numbers do not necessarily constitute sufficient and conclusive evidence that Ethiopia is on its way to double-digit inflation.

At the same time, these numbers do hardly provide assurances that would enable government to think and believe ‘we still have more time to borrow and spend’. It is already foreseen in the just approved 2013/2014 budget that the state would borrow from domestic sources ETB 17 billion, roughly one billion USD. If the past is any guide, this would not be sufficient and more would be required and taken.

It means that, in an environment not supported by robust economic activities in both the domestic and foreign sectors, government could incur more expenditures. This would fuel inflationary growth with no concern for accountability – including its depressing consequences on human conditions – a profound national problem in our country.

If indeed the rumors are true about the state already domestically borrowing ,and the June data may mark the end of what the state has prided itself as its significant achievements – the four-month old single digit inflation becoming the shortest in the country’s economic history for nearly a decade.

In terms of the CSA indices, measured on the basis of the 12-month moving average inflation rate, food inflation – the main grit for inflation in Ethiopia – has gone up in June only by 0.3 percent. Its increase from a year ago has reached 12.6 percent. The prices of bread and cereals are the main culprits.

Non-food inflation is reported to have reached 11.9 percent in June, reflecting a 2.1 percent change from May. In comparison from a year ago, however, the overall increase is 14.8 percent. These changes have mainly resulted in higher prices for clothing and footwear, firewood, household goods and furnishings, according to the CSA data.

In the face of this, warnings abound from the World Bank to the IMF so that the current single digit inflation, according to the former’s Ethiopia Economic Update II, would not become “a short-lived experience.” It is in the same spirit that in a recent statement, the unusually full of praises for Ethiopia’s economic growths of recent years, the IMF implicitly and politely warned the government of the danger of double-digit inflation coming back. It is in that context, among other measures, the Fund urged the government to “strike a balance between promoting growth and ensuring macroeconomic stability.”

Vintage mercantilism of Ethiopia’s developmental state

In the circumstances, concern about the resurgence of inflation going forward is a timely question for Ethiopians. Nonetheless, a negative answer to this question dependes on two factors:

    •   Willingness and preparedness of the state to recognize its macroeconomic challenges and galvanize society and prioritize its policies to serve the interests of citizens; and

    •   The state should be ready to set citizens and the economy free from the various shackles of the sort of mercantilist policies and practices of Ethiopia’s developmental state.

To date, the political, economic and financial polices pursued by the state have been heavy-handed, because of which they often have proved encumbrance to broad-based growth; to citizens, the resultant costs have been excessive. These have tied society and the state in tense relations, with households and businesses on one side.

Keep in mind that the growing number of individuals and communities that have been deprived of their farms, homes and businesses – for any number of reasons – not a good number of them lawful. Recall also the high number of complaints about absence of good governance and justice, or a sense of security.

Any reader would be surprised by the tone and vehemence of Laying bare the unvarnished truth, appearing onThe Reporter’sJune 13, 2013 edition. It berated the state for its routine hypocritical engagements in self-evaluation exercises only to highlight its success and suppress its failures or misdeeds. In that respect, signaling the sense of enough is enough on behalf of the citizenry, the paper called on the government not only to apologize, but also:

    “[T]o institute a mechanism that addresses public grievances promptly as well as ensures that corrupt officials/employees are brought to justice. The first step that helps to attain this goal is to facilitate regular forums which allow candidness to characterize reports and evaluations so that the truth is laid bare.”

This may help to a point. The main problem, however, lies in how Ethiopia’s developmental state behaves and its policies are implemented. We are repeatedly told that the goal of the Ethiopian developmental state has been to transform bankrupt, weak and poverty-ridden Ethiopia the TPLF has found in 1991 into a strong state.

Surely, over the years huge network of roads have been built and are being built and the same with schools and health services. All of them lose the best and experienced staff either to braindrain or in the case of schools because of poor quality.

The expansion of power generation capacity is important, although the state’s goal has been its export to earn foreign exchange. This means that the time for citizens to enjoy the benefits of all those dams and power generators may not come for a long time. Therefore, citizens would be compelled to remain in the dark; and factories continue to suffer shortages and breakdowns.

The process of establishing the developmental state took nearly two decades, until Meles emerged as the sole leader of the country. For Meles and the TPLF, development became the only redeemer, capable of justifying their seizure of power, especially to run the country in unrepresentative fashion and undemocratic.

The unmistakable purpose of this is development becoming the only route to legitimacy, where since 2005 power has been disputed and society divided ever since. No efforts, including the latest diaspora policy – accompanied by financial and other enticements … seem to help ameliorate the situation of the ruling party.

To give credit where it is due, Meles was frank in acknowledging the long recognized fact, as he indicated in his State and Markets: Neoliberal Limitations, attributing his information to his journey through “historical experiences” to realize that developmental state and national consensus have always contradicted each other. This is also the dilemma of the Ethiopian ruling party, which has always been compelled to operate in such an environment.

The reason for this is the fact of the developmental state being authoritarian. It calls for a strong leader, whose will is the law. Only this makes it possible for developmental state to rely on use of and/or threat of use of force to ensure its primacy. Obviously, such a state could only be built at the expense of the freedom and independence of citizens, not excluding sacrificing the nation’s future prospects, i.e., national development and citizen’s wellbeing.

This has been at the heart of Ethiopia’s political, economic, social and security ailments.

Over the years, Meles’s developmental state has managed to achieve its objective of ensuring, what he called “the autonomy of the state” by adopting laws, or utilizing any other means to enable it project itself at home and in neighboring countries with as little challenge as possible.

In this connection, recall that Meles borrowed the phrase the ‘hustle for democracy’ to inject his own deepest sentiment early on in his African Development: Dead Ends And New Beginnings.

Therefore, not only that we have witnessed this continually becoming the causes for the tension between the state and Ethiopians. But also it has become major factor for the country’s derailment from major possibilities for broad-based and accelerated economic growth, development and improved governance with minimal costs in terms of human sufferings and lost opportunities for the nation.

While Ethiopia’s economic growth has attracted the admiration of many around the world, the policies pursued to achieve those growths have entailed significant violations of the human rights of individuals and groups, not even excluding respect for property rights. In the eyes of citizens, not only have these behaviors of the state damaged government credibility and trust, but also has hurt the country’s image with the outside world, especially at popular levels and international civic institutions.

Inflation is by-product of bad policies

For all we know, inflation is a by-product of poorly designed policies. It occurs when a nation fails to use its potentials to produce the goods and services society needs. It also occurs, when the state engages in unrestrained expenditures, domestic or foreign, unrequited by improved economic performance.

Often, there is trouble when there is excess of domestic and foreign borrowings, unsupported by the economy and especially in an environment devoid of accountability. One result of these situations is misallocation of resources, i.e., inefficient use of resources, which has bee killing Ethiopian productivity.

Such policies have also engendered widespread corruption, mostly of the privileged; at the same time, many households experience impoverishment to the extent that they lack even daily meals. In this kind of situation that has prevailed since 2005, official Ethiopia has claimed significant poverty reduction, while most of these years have been a period of highest double-digit inflation the country has ever known.

While the state’s goals, as envisioned in the growth and transformation plan (GTP), are seductive, due to their desire to end the country’s poverty, one of its inadequacies have to do with the fact of its launching when inflation was very high.

In March this year, Addis Fortune rightly observed that in its initial two years the GTP had been under the spell of inflation at double-digits, its average annual growth rate running 33.7pc in 2011/12. Ironically, the plan presumes single digit rate of inflation fore realization of GTP’s targets.

Realistically thinking, it is not clear how this anomaly was overcome to declare implementation of GTP at its mid-term review early this year a success.

In brief, the polices are not only poorly designed but also their implementation deficient, primarily lacking transparency and national consensus. These count amongst its major causes for the known failures, which attest to the state’s inability, incompetence and lack of flexibility to take advantage of opportunities to achieve real progress.

Consequently, in spite of this situation the state has thus been compelled to reassure the nation with empty official promises. They still vow that from the heights of 2015, when GTP completes its cycle, citizens would simply look back on today’s problems and smile.

Unfortunately, these problems i.e., food insecurity, hunger, shortages and unaffordability of goods and services, water and power, abundance of bad governance and denial of justice, etc., are proving defiant, for which not all of these problems necessarily having their origin in the state and its policies.

After all, there is growing justification in the puzzle why this present exercise cannot be real. That is the case especially in present circumstances when the state is hamstrung by the lack of the means to realize those attractive goals, i.e., food security, increased capacity to produce the goods and services citizens need, or export earning capacities and drawing adequate reserves to import what the country needs.

A business owner in a freight forwarding business complained to the prime minister on June 27, 2013 “We have submitted our application for foreign currency to the banks, but it has been months and we are still with no reply. Our shipments are stuck in Djibouti for that reason”, according to Capital. This is not hearsay, it is based on experience and there is very little the state could do, except glossing over real issues.

Consequently, after listening to Prime Minister Hailemariam Dessalegn during his first ever encounter with the business community, many seemed resolved about the need to brace up for harder days ahead, due to:

    •   The state’s continuing lack of the means by which it could attain its GTP objectives;

    •   Inevitability of the state turning to heavy-handed measures to ensure that somebody else paid the financial and other requirements to enable it attain those goals, for which the primary targets are businesses and households.

The irony is that immense in-country capacities exist – within individuals, households and the private sector – an abundance of resourcefulness to improve the situation. It is only the mercantilist developmental state policies that have either totally rejected them or has become impediment to their utilization in a beneficial, consensual and transparent manner, with sustained policies supporting and guiding the way forward.

Without this being possible, what would persist is scarce national reserves, shortages of goods and services and intensification of corruption.

Without resort to working solutions, instead Ethiopia’s developmental state keeps on cranking without giving attention to the sufferings of the people. As harsh as the polices of distant era mercantilist states were, at least, unlike the developmental state’s of our time, they were able to project strength, based on real economic power, trade, profitability, positive internal balance. The important point here is recognizing that all of the mercantilist state’s strengths have come at the expense of many citizens and a society’s future.

If it were up to them, they could have continued with such policies were it not for society’s rescue provided by classical thinkers and later neoclassical economists, removing 250 years of mercantilism’s blinders.

It is also time the TPLF/EPRDF recognized that fiddling with what is unworkable on a continual basis, especially in the face of deeply felt popular resentment is not a smart move. It may be late in coming; but it would have adverse consequences for everyone.

*Updated.

One Response to “Is Ethiopia to face danger of double-digit inflation, again?”

  1. Salaam July 14, 2013 at 07:03 #

    I’m afraid excessive leveraging (or simply put, printing money) is a very addictive drug for any government, let alone the Ethiopian government. So long as the government receives billions in aid which it can leverage, it will continue to do so. It would require a rare and very far sighted politician to put an end to it. Or an economic shock, such as a major drought, which happens to be quite overdue.

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