Thursday, April 30, 2009

Ethiopia’s inflation falls to 23.7%. So what?

Many people would think that Ethiopia and economy are not exactly two words that complement each other. There are many people who still think that we are a nation of beggars with dusty bowls. What was started by Jonathan Dimbleby in 1973, and sealed with ‘We are the world’ concert in the 80’s, forever burnt the images of the poor drought-hit people as the description of Ethiopia and Ethiopians. While it is undeniable millions of lives were saved, and that Ethiopia and Ethiopians will always be thankful, these images made Ethiopia the definition of drought, hunger and famine. More than two decades later people still think that we are dying of hunger.

As of 2009 the Ethiopian economy has been growing at a rate that would make any nation proud. For the past five years the economy has grown by an amazing 10+%. Although the world economic crisis has hit the world, it will continue to grow better than most of many of the world’s countries. This doesn’t mean there weren’t and still aren’t any problems along the way. The inflation rate alone was a staggering 64% in mid-2008 and is reported to have fallen to 23.7% in April of 2009.

So what exactly does it mean to us Ethiopians? Let’s start by defining inflation itself. Inflation is “the rise of price of goods and services in an economy measured over a period of time (usually annually).” In Ethiopia it would mean it was, mainly, the measurement of the amount we pay to buy a quintal of teff today, compared to the amount on the same day last year. While economists cannot agree on what exactly causes inflation, the two main types of inflations by cause are:

· Demand-Pull Inflation: this is caused when the supply can meet the demand. It can be put as “too much money chasing too few goods.”

· Cost-Push Inflation: this is caused when the manufacturer has to increase the price of the goods or services produced because the costs have gone up.

It can be safely assumed that the first one was the type of inflation that hit Ethiopia. The increase of the price of petroleum, the economic crisis that followed - which weakened Ethiopia’s export business, and in turn starving the government of badly needed foreign currencies added up to create a shortage in goods and services. This happened because the Ethiopian economy is mainly agrarian and the majority of goods are imported.

Although inflation is not always a bad thing, since a little inflation is expected when an economy grows, it needs to be reined in before going out of control. This can be done by either limiting the amount of money circulating in the country or giving breaks (e.g. reduced tax) to the producers to reduce their costs.

Now that we have cleared all that up, let’s go to the 23.7% that is being talked about here in Ethiopia. What does it really mean to us? People are asking where the inflation has been curbed, let alone beaten back, since the prices of common commodities like teff are still at the highest they were last year. (In the case of teff – 1,000 birr/quintal.)

Let us consider the following facts:

· First off Ethiopians are forgetting that their some of their compatriots, especially the ones in the trading business, are notorious for hiking prices … and staying there no matter how low their cost goes. In a word they are greedy! A few months ago rumours that there was a shortage in salt launched the prices to around 300% in one day! It was said at the time that the rumours were spread by traders who dealt in salt. Now, these same traders will have to be assuaged, either willingly or by force, to reasonably reduce their prices. People can help out by refusing to buy stuff at the inflated prices.

· Next we should remember that the price standing still is another indicator of a controlled inflation. If the price is neither rising nor falling it implies that inflation is in control. While this may be good for a relatively brief moment of time, it is a dangerous indicator of the stagnation of the economy which will obviously lead to an economic collapse. (Think of the economy during the Dergue era.)

· Next (although had no hand in this, and was rather lucky) the fact that the price of petroleum has hit rock-bottom has impacted the prices of other imported goods, despite the fact that the government has a shortage of foreign currency and has suspended the issuing of Letters of Credit (LC) for almost all importers. What gets through is at a lower price than should be had the petroleum prices remained at those dizzying heights.

· Finally we should remember that the results cannot be seen immediately; at least not within one month – the news was told in April. We will need a minimum of two months for the difference to be felt and the impact to spread. This it because the confidence in the money one is holding actually raises its value. For example, if Mr. “A” were told that the commodity “B”, having a current price of 10 birr, would be sold for 20 birr in two days time he would feel that the 10 birr he has in his pocket were devalued by half. The opposite holds true too. Confidence will grow once it is known that it is no longer necessary to buy the commodities at the inflated prices.


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