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A Commendable Financial Performance One Digit Inflation

By Tariku Aweke
Tigrai Onlne - May 29, 2014

Recently National Bank of Ethiopia’s (NBE) governor Ato Teklewolde Atnafu has presented the bank’s performance report to the house of peoples’ representatives. In his report, he has said that, as a consequence of the government’s measures, it has been able to lower the rate of inflation to one digit – to 7.5%.

What we can understand from this is that how much the government is attentive to the public’s outcry, seeing as how it took the necessary steps to lower the previously two – digit Inflation rate to the stated number within a very short period of time.

Of course we all remember the price instability that reigned on the market, and the consequent government’s steps to amend this. It can be said that the issue was a like a sudden shock for the public. Especially the consumers were hard hit by it, and the government had this same thinking and feeling of the general public (And the government did not have different position to the public with regards to the issue).

In addition to being sensitive to the issue, the government took a quick response in order to stabilize the market. Here, when I say the feeling and wishes of the government and the public is the same with regards to rising prices on commodities, I am not saying that there were no sides, albeit few, who were happy to see the situation (that was unfolding). We have come to see the identity of those who were happy at that time, after the situation unfolded.

In order to understand better about the rising living conditions, and the measures taken to rectify it; it’s necessary to look first into the causes of the problem.

As it known, it has been more than two decades since our country started to follow a free market system where the government intervenes in some selected sectors. This has helped edify a business order in our country which is competitive, dynamic, sustainable and quickly receptive.

In addition to giving the consumers full freedom to do their business exchange, this order has been and still is playing a major role in creating developmental investors both in quality and quantity. And the government is playing the lion share in creating and rooting this brand of free market system.

Here, its important to raise the question ‘what kind of illness came up lately that would trouble the health of the market?’ There were various issues that caused the market instability in our country. Especially, it can be said that the effects that came with the international economic crisis is the main cause for the problem.

It’s a known fact that today we live in times where quick and huge market integration is edified in international level. This integration not only involves the (mighty) and developed nation but also those developing countries as well – either through selling or buying a single commodity. Ethiopia is no exception to this, as the country is currently on a trade with no less than 120 countries.

In this market, our country gains huge foreign currency reserve by exporting international standard commodities like coffee, oil seeds and others, while it imports very necessary raw materials, like oil, needed for its developmental works.

And this global market; which has a huge important for our country’s economic development just like every other country out there for various reasons was hit with some crisis in recent years. And this caused an unexpected and fast increase in prices of various commodities like oil and other items our country imports – this is why there was a rise in the price of oil.

Although the main reason for the rises in prices (inflation) in our country has to do with the international global market (economic) crisis, but there were also other reasons. Out of these reasons, the rise in demand of some products (commodities), in relation to the growing developmental works taking place in parts of the country, is one.

Of course, rise in price (inflation) that come as a result of the development works taking place is unpredictable and considered as a huge problem. As long as there’s development, it’s inevitable for the demand of some commodities to rise.

And the producers of these commodities might take a reasonable rise on their prices, as it does not contradicts (negates) the laws of free market. The rise in prices of commodities like cement, iron, metals and some other grains can be an evidence of this.

The other thing that can be seen as a dangerous cause for the market instability has to do with the rent-seekers that are hoarded within other businessmen.

The sides that were happy about the situation, the one I mentioned in the introduction part of the article, relates to these rent–seekers. As it can be recalled, at the time when the problem was starting to be seen, there wasn’t a rise in price in every type of commodities; and it would not have happened.

The rise was only seen on imported commodities including oil. As this have a reasonable explanation behind it; the public did not have any problem in accepting the explanation, and the government didn’t sit idly thinking that these temporary problems caused by the crisis in the global market and the developmental works that’s being carried out in the country, will not harm the general public. It took a swift action that would assist the free market system.

At the time, in addition to subsidizing in order to stabilize the market instability caused on oil and construction materials, the government gave a tax-free for some commodities. And it’s obvious that these measures have a huge burden and repercussion on the government’s budget and revenue.

Nevertheless, the government did not back down from taking those measures even knowing their repercussions. This shows the government’s long–sightedness. The government was able to create ease in the market by taking measures to remedy these short term problems.

However, during the time when the government was busy trying to solve the problem, there were those who tried to worsen the problem. Of course it can be said that these forces are few.

But, if weighed the damage they can cause, they are not to be underestimated. Not only do they have strong financial capabilities, they

have also rooted ties within the market. And we have seen them trying to inflict heavy devastation by pooling these capabilities of theirs.

In one side there was a situation in which they were able on to cause shortage in the market by hiding commodities, while on the other hand they waged a huge campaign to pressure the developmental businessmen to not sell on a price that befits them.

This ruinous network set up by these rent seekers is not only fenced only to Addis Ababa and other regional capitals. They have worked to enter as far as the farmers. They spew a bogus propaganda targeted for the farmers not to bring their products to the market, to think that it’s free of its tax duties and to hide its product.

And this is what made an ample contribution for the rise in prices, both to those commodities that deserved it and to those who didn’t. It safe to say that the real reason behind the rise in price on commodities, that have adequate supplies, just like resources like oil and the likes, has to do with the psychological warfare waged by these forces.

The market instability that is caused by the ruinous network of these greedy forces, and for other reasons, will at the end of the day do harm on the public. And the government has to work hard to fulfill its duty of protecting the public from entering into problem. And this was what the government exactly did.

It went to taking measures to solve the public’s problem in a way that doesn’t harm the free market by weighing its options, before the temporary market instability spiraled out of control.

Its increase of public servant’s salary, temporary price adjustment on basic commodities and marginalizing and taking measures against unlawful business are some of the steps taken by the government.

These measures and steps taken by the government to weather against the rise in price may have given huge help in the public not to sustain heavy harm; but it’s obvious that they are not solutions for the long term. The fact that it should prioritize and take measure on issues that can have huge role in stopping the rise of price in a continuous and sustainable manner, cannot be put to debate.

As any reader of this article can understand, the main and long lasting solution to rise in price and rising demand that comes as a result of fast growing economy is to hasten the development.

And the government deeply understanding this fact is now hastening the developmental works that can give long-term solution to the temporary market problems (instabilities). For instance the construction of all the ten sugar factories that is being carried out in the country will inevitably solves problems related to sugar shortages once they become fully operational.

In other hand, the effort of the government to stabilize and integrate (more) the market, by increasing products and productivity, is bearing success. As it can be recalled, 9.7% GDP growth has been recorded in the 2005 budget year; in which the agriculture has had a 7.1% share, while the industry and service sector both had a 18.5% and 9.9% shares respectively.

Although the recorded growth is slightly less than the planned goal, but compared to Sub-Saharan Africa countries of 5% growth, it’s so much better. Especially considering the fact that it is recorded at a moment of challenging times at the global level, it can be safely said that it’s very impressive.

Understanding the role the agricultural sector has on the country’s economic growth and on remedying the rise in price (inflation), the government has been taking steps in accordance.

With this in mind, the government has been giving various supports for the small holder framers to harvest much better products in the 2005 production year. For instance the government has done huge work for the farmers to get seed plants, fertilizer etc … on time and get on with their work.

In addition to this, it had carried out successful works in giving various technical supports to the farmers. As a consequence of all this, it has been able to gain huge success with regards to the agricultural sector in this production year. It will play its own role in Growth and transformation plan.

In an effort to take structural change on the country’s economy; despite the fact that the agriculture share on the country’s GDP has lowered from 46.5% in 2002 to 42.9% in 2005, the industry and service sectors have both risen in the same given time to 12.4% (from 10.3%) and 45.2% (from 44.1%) respectively.

It’s repeatedly said that the agriculture sector is the driving force and the main motor behind the 5–year development plan, and has a goal to increase its productivity by double. Here, it’s clear that the goal is too broad.

Nevertheless, we should take, the fact that the sector is the motor and leader of the five–year growth plan, in to account. Out of the arable land in our country, the small holder farmers takes up the main and majority role in working more than 95% of the labor that’s invested on the sector.

The main inputs needed for agriculture are land and labor; and they are more or less being utilized on the farmer’s lands. If we look at capital, we can see that it also occupies considerable share.

And in a situation where the public is heavily involved and is the direct beneficiary of it, change will surely come. In light with this, it’s necessary to ask why this sector, with huge expectations for it to hit its targeted goal behind it, hasn’t been able to garner the expected goals.

As it’s known, any successful results garnered in a certain country has to account for the global market, rise in prices (inflation) and the general atmosphere. With regards to this, we can see that the goal is successful.

If we especially can see the fact that the agriculture development and especially the five–year plan are part of long-term works, we can understand that there’s nothing that would stop for the five–year plan to hit its targeted goals.

With regards to curbing poverty, the government was able to lower the people living under the poverty line from 29.6% in 2003 to 26% in 2005, while confirming that it can hit the targeted 22.2% in 2007.

In relation to this, there is a goal to strengthen the government’s capability of collecting revenues and allow it to have a supportive role for other goals. There is a plan to rise the government’s tax revenue by 17% in which the federal government share will be (reach to) 15%.

If we look into the government’s collected revenue of the year 2005, we would see that its only 12.5% of the country’s total GDP, which seeks additional effort considering how low it is compared to many African countries, and how short it falls to the targeted goal. All in all, it’s in no way easy to increase the revenue of the government by double every year.

Nevertheless, it’s possible to realize the targeted goal in the next two years by rooting out the rent–seeking attitude that’s seen in the tax collecting mechanism, in which some investors stack up wealth by not paying their taxes. In addition to this, by using structured procedures within the revenue collection mechanism, every citizen’s possession and their income should be made to be transparent.

Here, it should be noted that when we look into the government’s revenue in parallel, we should also be looking at its spending. With regards to this, in the year 2005, 70% of the gross government spending was allocated on five sectors that has a huge role in curbing poverty; sectors like education, health, agriculture, water and sanitation and rural road construction, cementing its huge role in expanding fair distribution of the benefits.

Out of the goals targeted to be realized within the five year growth and transformation plan, one is enhancing the public’s saving culture. By improving our saving culture (capabilities), there is a plan to reach to 15% within five years, and to continue on the some momentum before the five year period ends.

In the mean time the country’s gross saving has been able to grow from 5.2% in 2002 to 17.7% in 2005. Understanding it has over performed from the targeted 15% increment, it has been decided that there should be an effort made to make it 20% in 2007. This shows the growing saving culture of the public and that it has been able to record more than what’s on the plan.

The successful results seen on the agricultural sector have a strong say with regards to stabilizing the rising prices seen on the market, especially on agricultural products. Thus, it’s expected that within a short period of time price inflation will be stabilized.

Here, it’s helpful to look into an issue that’s raised in some corners. That is considering this year’s high productivity seen in the agricultural sector, the income of the farmers will be hit. Of course considering past experience with regards to similar situations, it can’t be said this thinking is unwarranted or even surprising.

Nevertheless, there will be no opening in the current realities of the country where the farmers would be harmed when productivity is high, or look for aid when productivity is low - as the government has set up a suitable market for the farmers to sell their products. As this huge market opportunity will enable the farmer to get its sweat (toil) worth, there will be no fear of the marketing disfranchising the farmers.

Some of the people that are concerned with the increase of the farmer’s productivity do not have the understanding that the loss of productivity will make the farmers profitable. This is because there hasn’t been any instant where the farmers tried to slap unreasonable price on their products by citing ‘there’s no supply’.

Instead very few illegal businessmen that brokers between the farmers and consumers, were seen creating such kind of problem on the market. Thus, this talk of ‘rise in productivity will hurt the income of the farmers’ should be stopped now, as it has no basis.

Out of the measures (actions) the government took this year, in order to subdue the inflation, controlling the loan system is one. As its known, circulation of large number of money in the market (economy) can cause inflation.

With regards to this, in order to tame the problem that aroused within the market, the government had made various subsidies last year. Also the government had brought huge amount of dollar, in order to take its effort of importing important materials needed for the developmental works of the country to an assured level. There were times in which it gave large amounts of loan to investors involved in various investment sectors.

With this and other related issues, there were periods where the government borrowed large sums of money from the national bank in various times. This has made it possible for a circulation of large sums of money to get their way into the market.

Thus, this year the government has planned and moved to execute to control the loan (borrowing) system (mechanism) that’s in line to counter inflationary pressure; and this effort is fetching positive results.

As a result, there might not be an opening where the government borrows from the national bank. And the loan given to investors involved in various investment sectors is being controlled in a way that wouldn’t worsen the circulation of money; which is believed to further lower the inflation rate to a one digit number.

The other measure taken by the government to control the rate of inflation is selling dollar. As I have tried to mention it earlier, the government has created huge reserve of dollar in past times in order to facilitate and hasten the developmental works of the country.

This has extended the government to not have problems with regards to dollar reserve. This year the government is undertaking dollar sale as part of its measure to control the inflation.

With regards to this, the dollar exchange that used to be fenced only to major investors and very few commodities, is now been able to be extended to small and micro scale importers. In addition to this, any citizen who asks to buy dollar is also getting the service.

Generally, the government has been doing pro-people action by taking important measures to control inflation. And it can’t be put to debate the fact that these measures played a role in subduing the inflation from laying a huge burden on the public.

The aforementioned measure implies that the current one digit inflation problem is only a short term problem. And this is a commendable feat for the government and good news for the public – as it would have a breather from the inflation.

A Commendable Financial Performance  One Digit Inflation

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