Ethiopia: Devalutation and speedy growth breed economic chaos?

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Ethiopian Government and entrepreneurs seem to have found a common ground to find a solution to a recalcitrant double digit inflation after the former was forced to revise a price cap it recently imposed on basic consumer items following commodity shortages in Addis Ababa, the capital, as a result. Some argue that a speedy growth coupled with a 16.7 percent devaluation of the local currency last September are to blame.

One of the government’s main reasons to set price ceilings on January 6, 2011, was to help curb a double-digit inflation that has hit the Horn of Africa country since the announcement of a 16.7% devaluation of the birr (the local currency) in September 2010.

Despite the sharp and historic devaluation of the birr, its inflationary impact was not regarded by the government who, on the contrary, blamed the country’s businesses for abusing the market and setting prices regardless of market principles.

Prime Minister Meles Zenawi, who recently conferred with some of the main actors of the Ethiopian economy, admitted to his government’s weak market regulation alongside an illegal market exploitation by businesses.

And after setting ceiling prices on 18 basic commodities, Zenawi cautioned traders to comply with set regulations whilst insisting that failure to do so would force his administration to import and dump some of the listed items.
Meles Zenawi had also threatened to open the local market to foreign businesses.

Notwithstanding harsh measures taken by the government to curtail the negative outcomes of the price ceiling — including the shutting down of several businesses and arrest of entrepreneurs allegedly accused of hoarding — many traders reportedly continue hoarding the listed commodities.

As a result, the price ceiling which was introduced about past two weeks ago failed to produce the desired effect. This, according to Ethiopian traders, was because “the government didn’t make the required and accurate assessment of the commodities’ import costs before imposing the fixed price.”

“We have to accommodate the losses if we have to comply with the price cap, but bankruptcy will not be tolerable,” a trader who spoke on condition of anonymity explained.

Positively, the unanticipated outcome of the ceiling and the futile measure taken to curb the shortage has prompted the government to reconsider the business people’s argument.

The Ministry of Trade and Industry announced a revised price cap which was to be implemented as of Monday. The new ceiling raises the earliest prices on most of the commodities.

Meat, sugar, soap and palm oil are some of the commodities on which the fixed price is imposed. For instance, the earliest price cap set on a liter of palm oil was 16.5 birr, now revised to 24.5 birr.

However, some analysts still do not agree to the price ceiling and have been forwarding their criticisms to the government. They say that the root cause of the current price hike is not man-made, but rather due to a commodities shortage created in association with the country’s speedy growth and the sharp devaluation of birr.

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