Inflation has been a persistent issue in Ethiopia for at least 3 years
– Citizens say prices for basic goods ‘are changing day by day’
– Inflation crisis in Ethiopia is a mix of economic, political and global problems, according to analysts
ADDIS ABABA, Ethiopia
This March marks a holy month of fasting for two major religious groups in Ethiopia – Ramadan for Muslims and Hudade for Ethiopian Orthodox Christians.
But this time, the spirit of the month has been seriously dampened by the country’s struggle to rein in runaway inflation, a persistent issue over at least the past three years.
According to latest World Bank estimates, the inflation rate in Ethiopia has surged to nearly 34%, a figure that many citizens contend is inaccurate and almost half of the real rate, pointing to what they are actually paying for basic goods and services.
“Prices for every single thing have skyrocketed, and they are changing day by day,” Aisha Mohammed, a resident of the capital Addis Ababa, told Anadolu at Merkato, Ethiopia’s largest open marketplace that is the go-to place for most people looking to stock for Ramadan and Hudade.
“We are buying the same things we bought last month, not last year, and we’re almost paying double.”
Yordanos Alemu, another shopper, said she had been shocked and surprised by the price of each and every good.
“The problem is these are not things that we can omit from our lists. These are the essentials that we have to get,” she told Anadolu.
What is driving inflation in Ethiopia?
Across the country, there is particular resentment over the role of brokers and intermediaries in the Ethiopian market, which people feel has a significant role in the commodity price spikes.
However, economists like Tewodros Makonnen Gebrewolde argue that inflation in Ethiopia is “demand-driven,” and not majorly influenced by brokers.
“Credible studies indicate that it’s demand-pull inflation, which has massive money supply, that has created this massive inflation in Ethiopia,” Tewodros, senior country economist at the International Growth Center based at the London School of Economics, told Anadolu.
“Though it needs better scrutiny, the supply side also has some influences; the manufacturing structure, the channels of supply, and so on can be seen as major areas to be examined when talking about the surge, particularly in the food sector.”
With population and market size expanding, manufacturing inefficiencies have widened gaps in meeting the needs of consumers, he said.
Making matters worse is political instability, which has complicated the transportation of goods from some regions, particularly the conflict-ridden north, he added.
On top of that is the global economic scenario and surge in commodity prices, according to Tewodros.
“Since COVID-19, the unfolding political and economic crisis has played its part. The Red Sea escalation, The Russia-Ukraine war, and the Israel-Palestine issue, all contributed to the increase in global commodity prices, thus adding to Ethiopian inflation,” he said.
‘Sea outlet can be a great relief’
A key part of the Ethiopian government’s strategies to address economic problems have been efforts to secure maritime access for the landlocked country of over 120 million people.
A deal for this came on the first day of 2024, when Prime Minister Abiy Ahmed hosted Muse Bihi Abdi, president of the breakaway Somali region of Somaliland, in Addis Ababa.
The two leaders signed a memorandum of understanding for Ethiopia to lease a 20-kilometer (12-mile) stretch of coastal land in Somaliland, giving the landlocked nation crucial access to the Red Sea through the port of Berbera.
The agreement has not come without its share of controversy, escalating tensions between Ethiopia and Somalia, and placing the wider region on edge.
Mukerrem Miftah, assistant professor of policy studies at the Ethiopian Civil Service University, believes maritime access could prove pivotal in resolving Ethiopia’s economic problems, and even make the country a frontline actor in the Red Sea.
“For countries like Ethiopia that mostly depend on imports, a sea outlet can be a great relief,” he told Anadolu.
However, he acknowledged that the deal with Somaliland comes with political and security baggage.
“The reactions can tell us that this MoU has triggered many concerns and diplomatic queries. But, in my opinion, these were not outright rejections but precautionary statements,” he said.
According to Mukerrem, the deal has been tacitly endorsed by many countries, including the US, but they are not open about it because of the “territorial integrity” issue with Somalia.
On the security front, the agreement comes with the threat of regional terror groups like Al-Shabaab, as well as the issue of piracy in the Red Sea and the interests of the Yemen’s Houthis.
If the deal goes through, Ethiopia and Somaliland will be on the frontline of the Red Sea crisis, said Mukerrem.
Some analysts in Ethiopia view the agreement as a ploy by the Abiy government to divert attention from internal problems like inflation.
“Unless this really is this kind of diversion, if Ethiopia remains committed and Somaliland works toward it, there is nothing that can block this deal,” he asserted.
Foreign exchange unification
Another pressing issue in the Ethiopian economic arena is the forex problem, which has a significant impact on imports.
The forex rate determined by the government has been a major factor in the extreme shortage of foreign currency in the country, leading to a stagnation of imports that has contributed to the massive inflation.
In recent talks with the International Monetary Fund (IMF), Ethiopia has discussed ways to unify the currency with the parallel market that is operating at more than double the official exchange rate.
Ethiopia is believed to be close to a deal with the IMF and World Bank to ensure debt restructuring and more funds, but will be required to implement massive devaluation of the currency.
Tewodros, the economist, warned against using the term devaluation, pointing out that discussions between Ethiopia and the IMF and World Bank have centered on unification of the foreign exchange instead of mere devaluation of the Ethiopian birr.
“Devaluation is one way, but only a part of it. Shrinking the measures to the single one of devaluation might not change the situation, and rather might trigger a massive increase in the parallel forex and lead to a great shortage,” he explained.
