Food Inflation Strikes Five-Year High Post Devaluation

→ Food inflation hit 18.1pc last month

In the wake of exchange rate adjustment, Ethiopia witnesses the highest food inflation in almost five years despite the measures taken by the central government to control the money supply.

Food inflation hit 18.1pc last month, two percentage points higher than that of the month before, according to the Central Statistical Agency (CSA). The data, disclosed yesterday, indicates that prices of sugar, coffee, banana and red pepper powder have seen the fastest rises in the past months.

The swell in prices of food items pushed the headline inflation to 13.6pc from 12.2pc in October, against the target set to be achieved throughout the years of the second edition of the Growth & Transformation Plan (GTP).

It is a major impediment for the government that had managed to maintain the inflation rate in a single digit for over two and half years.

This year, the double-digit headline inflation was first recorded in August, which then was the highest since October 2015, when the El Nino-induced drought hit the nation and reduced crop productivity.

It had been feared that inflation would actually continue to grow after the devaluation of the Birr by 15pc against a basket of major currencies in October, driving the Birr to be exchanged at 26 for a dollar.

Atlaw Alemu (PhD), an economist who has done research on price development in the country, believes that the recent devaluation can be considered as the core reason for the soar in the price of goods.

“It is obvious that the exchange rate adjustment propelled the current rise,” asserts Atlaw. “It would be challenging for households- whose incomes will not be able to keep up with the rocketing retail prices.”

First announced by President Mulatu Teshome two days before being effective, the devaluation was targeted to reduce the foreign currency shortage in the country, which put businesses under a problematic situation.

“The devaluation promises to draw capital into the country and end the forex crunch that has plagued the economy for years,” said Yohannes Ayalew (PhD), vice governor and chief economist at the central bank, while announcing the devaluation to state media outlets in October 2017.

Since then, the government has been taking various measures to control the adverse effects of the exchange rate adjustment.The same day while disclosing the devaluation, raising the deposit interest rate by two percentage points to seven percent was an immediate step taken by the government.

Also, it instructed the banks to stop loan provisions to their customers except for exporters and manufacturers.

Moreover, commercial banks put their windfall gains as well as 30pc of forex earnings from various sources into the accounts of the central bank.