Prime Minister Abiy Ahmed’s (PhD) administration eagerness to pride itself on its much touted doubling of Ethiopia’s GDP in the past five-and-half years belies the miserable conditions the vast majority of Ethiopians have been living in since he came to office in April 2018. During this period the country has been mired in the throes of a political turmoil the likes of which it has rarely witnessed before. The humanitarian and economic toll of the scores of ethnic-based strife across the nation as well as the two-year civil war in the northern Tigray region and the ongoing insurgencies in the Oromia Amhara regions have been devastating, to say the least.Hundreds of thousands have been killed and maimed and millions more were uprooted from their homes and left traumatized by the seemingly endless cycle of violence.Even as Ethiopians yearn for an end to the sense of insecurity and foreboding that has been prevailing in Ethiopia, their livelihood has been hit hard by another phenomenon that has proven to be intractable. The inexorable hike in the cost of living that Ethiopia has experienced for successive years has dealt them a debilitating blow, threatening to set in motion a socio-economic upheaval that precipitates a steep political cost. This prospect must be averted at all costs before things get out of hand.
The astronomical rise in the rate of inflation in Ethiopia isattributable to a host of both interrelated and disparate factors. The principal factors at play that have fueled the spiraling inflation are structural in nature. Among these are the inability to fix supply-side constraints preventing the adequate supply of basic commodities; the substantial amount of government revenue spent on servicing the considerable public debt; and the high cost of doing business owing to the absence of an efficient logistics infrastructure. The rapid money supply growthinitiated by the central bank coupled with the relatively fast pace at which it has allowed the domestic currency to depreciate, that caused the price of imported goods to skyrocket, have beenthe other main drivers of inflation.In addition, such other transient factors as the diversion of funds which could have been utilized for development or welfare purposes to quash the rebellion in several areas of the country and the rehabilitation of the victims of humanitarian disasters have further stoked inflationary pressures.
Aside from the above-stated reasons, distortionary acts precipitating market disequilibrium have also contributed to escalating inflation. The most notable of such practices is the monopolization of the market by a handful of players. It is impossible to talk about a free market while prices and the distribution of goods are fixed by cartels. The market has for long been dominated by a handful of rent-seekers in the value chain who act with impunity. Despite the government’s repeated pledge to bring these actors to heel, it has failed to take meaningful measures that deter their predatory behavior.To make matters worse, some of the interventions the government made took to bring them to heel have had unintended consequences that made things worse for consumers.
There is a raft of measures that canbe takento rein in the galloping inflation.The central bank can use measures such as increasing interest rates or tightening lending requirements to reduce money supply growth and control inflation. This has the advantage of stabilize prices and restore confidence in the currency. Equally important is to reduce budget deficits by improving revenue collection, cutting unnecessary expenditures, and prioritizing essential investments with a view to reduce pressure on borrowing and inflationary tendencies. On the other hand, strengthening the nation’s foreign exchange reserves and managing the exchange rate effectively can go some way towards mitigating the depreciation of the domestic currency. This, in turn, can help control price increases of imported goods. On the structural front, implementing reforms to promote investment, productivity, and economic diversification can address the underlying causes of inflation. This may involve improving infrastructure, enhancing the business environment, and encouraging private sector development. Finally, encouraging agricultural productivity, minimizing supply chain bottlenecks, and investing in critical sectors such as energy, transportation, and logistics can boost production and reduce inflationary pressures.
Addressing Ethiopia’s backbreaking inflation requires a comprehensive approach involving coordination between monetary, fiscal, and structural policies. Additionally, effective communication and public awareness campaigns can help manage inflation expectations and support policy measures. No one should labor under the impression that inflation can be brought down to low levels in the short-term given the factors that account for it are bound to remain around for some time and require long-term solutions. Nevertheless, the job of tackling inflation must commence urgently.