Ethiopian Business Review

Towering Food Inflation Featured

What goes up doesn't always come down

Since August 2017, the general year-on-year inflation has ballooned, exacerbated by a devaluation that came into the picture last October. In similar manner, food inflation has been severe and reached 19.9 Pct last month. The rapid rise of food price, on the other hand, highly affects urban wage earners living on limited and fixed incomes. EBR’s Samson Berhane investigates the issues behind it. 

Bogalech Zegeye, in her mid 30s, lives with her mother in a one bedroom house located in Nifas Silk Lafto District. She earns a living working at a factory that produces personal care items, making   an ETB 800 monthly net salary, which hardly covers her basic expenses. 

“I am cutting back on many basic commodities due the recent price increases,  especially in food items,” Bogalech told EBR. “Even if I pay no rent, my limited income cannot be stretched anymore. In fact, my mother and I hardly make it each month.”

Inflationary pressure is not only eroding consumer confidence, but is also eating away at the purchasing power of households. Consequently, consumers like Bogalech are forced to adapt to an unfortunate reality, as inflationary pressure grinds down their income and causes a fall in living standards. “I cannot take any more price increases in my current circumstance,” explains Bogalech. “If it happens, my living condition will plummet to  new lows.” 

The general year-on-year inflation as reported through the Consumer Price Index released monthly by the Central Statistical Agency (CSA) reached 10.8Pct in August 2017. Since then, it has ballooned, exacerbated by the devaluation that came into the picture seven months ago. 

Food inflation has been especially severe since May 2016, when it began to climb from 14.6Pc, and reached 19.9 Pct in March 2018. Year-on-year inflation stood at 15.6Pct. 

In particular, the two-fold increase in the price of red pepper, or berbere, was the major contributor to inflationary pressure in February 2018. “It pushed inflation upward in February 2018,” Biratu Yigezu, director of CSA, told EBR. “It rose at a stronger rate this year.”

Indeed, the price of berbere shot up from under ETB50 to ETB120 in recent months. A major staple, berbere has a strong attachment to Ethiopian cuisine, to the point where it is almost impossible to find a household without it. It is this popularity that caused it to have such a tangible effect on the general inflation rate. 

Although the cause of the price upsurge was a mystery to many, Kedir Buser, who has been a wholesaler of berbere for more than 20 years in Merkato, believes the price increase was caused by a cut in the supply. “I was shocked when I first heard the price skyrocketed in just one day,” said Kedir, who owns a 16 square-meter outlet in Merkato, and receives his product from small holder farms in Markeo, Chagni and Bure, areas well known for berbere cultivation. 

According to Kedir, the last time the price increased so dramatically was nine years ago, when it doubled to ETB60. “At the time, we even sold peppers imported from China,” Kedir commented. “There is nothing to stop history repeating itself unless productivity increases drastically.” 

Despite primitive farming methods in many areas, the production and coverage of the red peppers has considerably risen over the last five years. Just during the last Meher season, red pepper production reached 3.2 million quintals, 25.5Pct higher than the previous season production, according to CSA’s Agricultural Survey.  Three million smallholder farmers are engaged in the production of red peppers in Ethiopia, and 181 hectare of land is covered by the crop. 

However, Kedir doesn’t believe this reflects the reality. “From my experience, production is not increasing proportionally with the population,” he argues. “To produce enough to satisfy the bulging demand as well as control inflation, modern technologies should be adopted by the smallholder farmers.”

Berbere is not the only item that dealt a blow to customers’ wallets in recent months. Other agricultural products, including cereals, pulses, fruits and vegetables also showed a price increase since the beginning of 2018. The retail price of teff, another crop widely used by Ethiopians, showed a 15Pct rise in recent months to ETB30 a kilo. This is 50Pct higher than the same period last year, according to retailers EBR spoke to. For many households living in urban areas, one thing that characterises the price of teff is its tendency to shoot up without warning- and its tendency not to decrease. With a 24Pct share of total crop production, teff accounted for over half of the cereals cultivated in Ethiopia, reaching 50.2 million quintals during the last meher season; 12.3Pct higher than previous season. 

Yet the retail price of teff does not match the growth in production. “Supply shortage has always been an issue in the teff market,” explained Yonas Abebaw, a retailer in Ehil Berenda, Merkato. “The market is also not properly regulated. A case in point is the tendency of producers to hoard their output whenever they want to.” 

Stabilizing swelling inflation has not been short of challenges for the National Bank of Ethiopia (NBE). The Bank has failed to maintain a single digit inflation rate over the past eight months, contrary to the plan outlined in the second phase of Growth and Transformation Plan - which targets keeping the consumer price index below eight percent. 

This is despite the fact that 23.5Pct of the total population were found to be under the poverty line, according to  an Interim Report on Poverty Analysis Study in 2015/16 prepared by CSA. The severity of the problem is high in urban areas where 14.8Pct of the population, like Bogalech, who spends 53Pct of their income on food items, live below poverty line. 

Although the per capita income rose to USD660 in 2016 from USD130 in 2001, the income of many citizens, especially low income households, remained fixed. In particular, the average income in Ethiopia remained around USD145 per month, according to World Bank’s 2016 estimate, whereas in Kenya it stood at USD 679. 

Studies indicate that the accumulated and rapid inflation in Ethiopia have had highly adverse short run impacts on the disposable income of urban wage earners since the highest ever inflation, 64.2Pct, was recorded in 2008. Even after the implementation of the first phase of the Growth and Transformation Plan eight years ago, inflation remained hazardous especially during 2011 and 2012. 

Although inflation was arrested at a single digit after measures taken by the government through subsidization of basic imported commodities, including sugar, oil and wheat, the pressure resurfaced again, especially after the recent devaluation. 

According to a study entitled ‘Inflation Dynamics and Food Prices in Ethiopia’ published in 2010, inflation is deeply linked with the dominant role of agriculture and food in the economy. I n fact, Ethiopia‘s inflation was practically synonymous with food price inflation in the short run, while food prices seem to be determined in the external sector; exchange rate and international food prices explain the evolution of food prices in the long run. 

Atlaw Alemu, (PhD) an economist who lectures at Addis Ababa University with more than three decades of experience, believes that the experiences of the previous devaluations that took place since 1991 prove that devaluation has a direct impact on inflation. “An uptick in inflation in a country that is heavily dependent on imports is obvious,” he stressed, mentioning that a further price rise is inevitable.

While economists warn further increases in inflation will prompt producers and suppliers to hoard goods, Endalkachew Tsegaye, director of the Public Relations Directorate of the Trade Practice and Consumers Protection Authority, feels differently. “We know there were companies that deliberately increased prices for no reason after the devaluation, just to gain from the uncertainties,” he says, mentioning that the Authority has issued warning letters to more than 65 businesses accused of price gouging. This includes eight metal and 35 medicine products manufacturers. “Our recent measures clearly indicate the attention given by the government to regulating the market and ensuring fair competition.”

There were complementary actions taken by the Prime Minister’s Office as well.  Three months ago, a PM-led committee, chaired by Mekonnen Manyaziwal, International Trade Negotiation Affairs Advisor to the Prime Minister and former chief of the National Planning Commission, was formed to curb inflationary pressure. Yet, there seem to be no solutions in sight. With the scarcity of some food items in the past month owing to unrest in some parts of the country, another committee, composed of experts from trade and consumer protection bodies, was formed. 

A financial expert with over forty years of experience, who served as a senior official of the National Bank, indicates that on top of  eroding consumers purchasing power, devaluation induced price increases would also have an impact on the economy by raising government expenditure and widening the trade deficit, he explains. “Additionally, it will discourage saving as real income will plummet due to the inflation. This will eventually reduce borrowing by the private sector, thereby affecting the profit of financial institutions- whose expenses, such as rent and commission, are likely to skyrocket.” 

It might yet be too early to predict the impact that inflationary pressure can have on the economy. But certainly, its effect is already reflected in the purchasing power of fixed income earners such as Bogalech, who are slow to adjust when prices are rising. Thus, there is a need to adequately protect the urban poor against high food inflation.


6th Year . April 16  - May 15 2018 . No.60


 

 

Samson Berhane

Editor-in-Chief

samson.b@ethiopianbusinessreview.net

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