DISCONSOLATE!

Finally, the administration of Prime Minister Meles Zenawi comes around to surrender that inflation is unlikely to come down to single digit anytime soon. It ought to be a disconsolate moment for Meles, reports ABDI TSEGAYE, FORTUNE STAFF WRITER

At the ruling party’s convention held in Hawassa (Awassa) back in September 2008, a macroeconomist, Eyob Tesfaye (PhD), had argued that the administration of Prime Minister Meles Zenawi should rather consider a macroeconomic environment where there would be a double digit growth blended with double digit inflation.

Then head of state financial institutions supervisory agency, Eyob stood opposite to many who had argued that it would be possible to ensure double digit growth in gross domestic products (GDP), while taming inflation below 10pc. The Prime Minister was among this incredulous group. For far too long, he tried to sway the nation that it was a matter of time before his administration arrests what Bulcha Demekissa, an opposition figure, describes as “galloping inflation.” Not anymore though.

Inflation has been out in the woods for the past seven years, with the consumer price index (CPI), measured by the federal statistics agency, showing occasional but rare drops to single digits in between. It is proven to be an elusive and a moving target, eroding whatever gains the administration claims to have gained in the fight against poverty.  

Last week was a rather disconsolate moment for the Prime Minister, who appeared before Parliament for question time. Avoiding the media for a little over a year now, it was his third appearance since March 2011 - the last time he had held a press conference - where he has accepted, for the first time, inflation is very unlikely to be contained within single digit horizon. 

“Our plan of bringing inflation down to a single digit in June 2012 has come improbable and may be carried to the months of either August or September while the inflation stays on a constant downward trend,” Meles said last week. It was a rare admission from a person whose hopes hinged on low inflation for over five years. “A stock of reality has downed on him,” said a macroeconomist working for the administration.

Although the Prime Minister said his administration’s bid to bring inflation down to single digit has moved on to September, the macroeconomist foresees that it is unrealistic to expect this to happen anytime in the next three years. It was a moment of surrender to what Meles has declared on Tuesday, April 2012, “enemy number one”; his second pronouncement since 2008. “The high cost of living is among the scorching issues of the time [in Ethiopia] and probably the main one,” Meles said.

What many economists within and outside the administration see as a “runaway” inflation has been on the upward trend since 2005, hovering at year-on-year moving average of 35pc. Hardly is there any debate about the phenomenon of inflation in an economy which Syed Nuru (PhD), a researcher with the Ethiopian Economic Association (EEA), described as moving from low base and stagnation of the pre-2000 years to a growth trajectory that has unleashed consumers’ demand. Indeed, the economy has enjoyed its best spell in the country’s modern economic history, with medium and long term prospects for growth remaining positive.

Nevertheless, what is seen as the most daring policy decision the administration has taken in spending tens of billions of dollars in building the nation’s physical infrastructure has its own downside. The very policy drawn to help stimulate the economy and lift the nation out of poverty is inflationary in its nature, according to a macroeconomist who works in a private consultancy. Not surprisingly, the source of Ethiopia’s inflation remains an issue of debate, for the administration continues to argue that the fiscal expansionary macroeconomic environment is hardly the source. 

Persuaded by his macroeconomic advisors - comprising of Newayab Gebrekirstos, Hashim Ahmed and Michael Merid - Meles has been on the record arguing that the source of inflation could be several, but mainly imported due to price escalation in the international market. He also blames the inefficiency of the market, which he sees is dominated by oligopolies who he blames for creating an artificial shortage of basic goods such as edible oil and sugar.It took the administration’s macroeconomic advisors more time to concede Ethiopia’s inflation is also monetary phenomenon. Meles zoomed last week the sources down to imported inflation, the uncompetitive market structure, and excessive broad money supply spiraling inflation, while he also mentioned inflationary expectations by market agents as another.

But the Prime Minister and his macroeconomic team remain adamant in rejecting that the administration’s primary focus in supporting growth and the central bank’s inability to use monetary policies independent of the policy priorities of the political establishment is perhaps the main source. “Predominantly, the problem is an unwise monetary policy that is made subservient of the fiscal policy,” a macroeconomist, who requests anonymity, told Fortune.The administration has ballooned its spending for public infrastructure from 30 billion Br in 2005/06 to 35.4 billion Br in 2006/07, and 57.8 billion Br in 2008/09, allowing a record spending on public infrastructure, according to the International Monetary Fund (IMF).

It is this policy of pursing massive public investment as a way of developing the nation’s physical infrastructure in roads, energy, and telecom that puts the administration in collusion course with the IMF; the latter believes such policy would undermine Ethiopia’s balance of payments position. Indeed, its current account deficit of 4.3pc to GDP in 2007 surged back to 7.7pc in 2009, and 10.4pc in the subsequent year, one of the largest in the world.Seen as very inflationary, this is likely to continue.

Ethiopia’s overall balance of payments position is likely to remain deep in the red in the medium term as rising exports returns continue to be outpaced by higher import receipts, according to a study an international firm released in February 2012. 

 

And much of these imports, including oil, are made by state enterprises such as the utility companies, which are massively borrowing from the state owned commercial bank, thus neutralizing the administration’s pledge that it would not borrow from the central bank. “The government should have said it wouldn’t borrow from all domestic banks,” said the macroeconomist who is in private consultancy. The administration does not have the apatite to scale down both its borrowing from domestic sources and its fiscally expansive growth policy. So is inflation projected to remain in double digit for many months to come. 

Nonetheless, what shocked many studying Ethiopia’s economy was that prices were thought to subside between December and March, as they normally do, for it is the season when produces come out to the market. Although the administration hastily took solace from a marginal drop in inflation by 4.2pc, when comparing the 36.3pc in March 2011 to the March of this year, the picture was different when it is compared to February 2012; it galloped by a staggering 17.5pc.

Last week, Meles attributed this surprising increase less to drop in agricultural production and more on inflationary expectations held by market players who panicked by the late arrival of the Belg rain.“The price of grains has gone up in the month of February mainly due to the fact that until recently the Belg rain has been late, leading all agents - including farmers - to hold the expectations that price for grains will rise, thereby kept grains from the market in anticipation of better future price,” he told Parliament that is almost fully dominated by MPs from his party.

There is an exception. Girma Seyfu, a lone opposition voice in Parliament representing MEDREK, says Ethiopia’s inflation is deeply structural, and where no amount effort in controlling prices of edible oil and sugar can fend off. “The source is in supply constraint,” Girma told the Amharic weekly NegadRas. “We’ve memorized the list of sources the government has been hammering. Domestic productivity remains low; this is a country with vast arable land but imports wheat from abroad.” 

The Prime Minister was not up for such back and forth. There was hardly any challenge to his assumptions and arguments, but only responded to stock of questions on assortment of issues MPs raised from emerging tensions with Eritrea and Ethiopian soldiers involvement in Somalia to dissatisfaction of teachers over pay as well as a narrowing political space. He left the floor after responding to several of them, but none of them made him appear in despair as the runaway inflation does. 

Source: Addis Fortune