Inflation, often portrayed as the invisible thief, can have profound effects on a country’s economic health and the well-being of its citizens. In the case of Ethiopia, this is no different. With an annual inflation rate sitting at 33.5% as of April 2023, the country is grappling with the adverse impacts of this economic phenomenon on its populace.
A Glimpse into Ethiopia’s Inflation
The major factors contributing to Ethiopia’s high inflation rate include internal conflicts, the worst and most protracted drought on record in the country’s southern region, and the rapid depreciation of the birr against major baskets of foreign currencies. This is further exacerbated by the war in Ukraine disrupting supply chains and food supplies across the region, leading to rapidly rising prices for essential goods.
In Ethiopia, the three primary components of the consumer price index are Food and Non-Alcoholic Beverages (54 percent of the total weight), Housing, Water, Electricity, Gas and Other Fuels (17 percent), and Clothing and Footwear (7 percent). Given these weightages, it’s clear that the high inflation rate directly affects the cost of basic necessities for the average Ethiopian citizen.
The Impact on the Average Citizen
Understanding the abstract concept of inflation becomes easier when we consider its real-world implications. Let’s delve into the various ways the current inflationary environment in Ethiopia affects the average citizen.
Food Inflation
Food inflation, which dipped slightly to 29.6 percent in February 2023, remains a critical concern. This issue is especially pertinent because food and non-alcoholic beverages make up over half of the consumer price index in Ethiopia, meaning a rise in food prices disproportionately impacts Ethiopians, especially those with lower incomes.
For example, the price of teff, a staple food in Ethiopia, rose sharply to a record level in March 2023, selling at 67 percent higher than prices one year ago and 123 percent above the five-year average for the month. This significant price increase directly affects the average Ethiopian’s ability to afford this essential food item, leading to potential food insecurity.
Currency Depreciation and Exchange Rates
The depreciation of the Ethiopian birr also fuels inflation. The official exchange rate of the birr has lost its value by 6.5 percent against the USD over the past 12 months, while the parallel market jumped by 48.4 percent. This depreciation makes imports more expensive, which feeds into inflation and further increases the cost of goods and services for the average Ethiopian.
Fuel and Energy Costs
Fuel and energy costs are another essential component of the inflation picture. In Addis Ababa, the prices of diesel and benzene increased by 12 percent and 7 percent, respectively, in January 2023. As fuel and electricity account for 10 percent of the national Consumer Price Index (CPI), a rise in fuel prices can easily lead to a direct rise in inflation, affecting everything from transportation costs to the price of goods and services.
Impact on Conflict-Affected Areas and Livelihoods
In regions affected by conflict, such as Tigray, the purchasing power of daily labourers in February 2023 remains far below where it was one year ago, despite a decrease in prices of certain cereals following the peace agreement between the GoE and TPLF.
In the Somali region, failed rainy seasons have led to poor livestock body conditions, decreasing their demand and price. Simultaneously, the prices of imported foods have sustained an
aggressive increase due to continued inflationary pressures and depreciation of the Birr against the US dollar. This has a drastic impact on the terms of trade and hence, the purchasing power of people in the region, especially those who depend on livestock rearing for their livelihoods.
The Outlook
Given the complex factors driving Ethiopia’s inflation, it’s clear that the situation is unlikely to improve soon. The country is still dealing with persistent inflationary pressure on food prices, with no signs of immediate respite. This scenario paints a grim picture for the average Ethiopian, who must navigate these economic challenges while also dealing with political unrest and other social issues.
Inflation, in essence, reduces the buying power of the average citizen, making it harder for them to afford the goods and services they need or want. It can lead to reduced living standards, increased poverty rates, and social unrest, as people struggle to afford basic necessities like food and fuel. For Ethiopia, addressing these inflationary pressures will be key to ensuring the well-being of its citizens and the health of its economy.
However, it’s important to remember that tackling inflation is no simple task. It requires a careful balancing act from policy makers, who must consider a range of factors from monetary policy to fiscal policy, from managing internal conflicts to dealing with global market forces. As we continue to watch Ethiopia’s economic situation unfold, it will be essential to keep in mind the real human impact of these economic figures and the vital importance of striving towards solutions that can bring about economic stability and improve the quality of life for the average citizen.