Constructive Speculation

There are too many drawbacks to being an Ethiopian consumer. If it is not cheap consumer goods and services that are not even worth the paper that the money has been printed on, it is an inflationary pressure eating away at already low disposable incomes.

If there is one concept in economics that is the hardest to grasp in practical terms, it is inflation. In those instances where demand and supply are mismatched, it is driven merely by human emotion – the hardest thing to govern.

When the Birr was devalued by 15pc against a basket of major currencies in October last year, there was little doubt that inflation would pick up. In fact, in the days and weeks leading up to that fateful month, when the National Bank of Ethiopia (NBE) made public its decision, inflation had already punctured the hopes of achieving an annual average single-digit inflation rate. By February this year, it has reached a five-year high of 15.6pc.

The reasons mainly had to do with people’s perceptions. Retailers had no fundamental basis to begin increasing their prices right away. But they believed costs would pick up in the next month – not to mention that they saw an opportunity for windfall gains – thus they began to set higher prices for their goods and services.

In the meantime, the central bank had tried to arrest such an escalation by swelling deposit interest rates by a couple of percentage points to seven percent. The regulators were not one to take the bull by the horns. Thus they planned to trip it. By inflating interest rates, consumers would choose to save their money instead of spending it. And those retailers who jack up their prices would see that no one is buying them and, thus, start selling cheaply.

Alas, tripping a four-legged animal is not easy. It is hard not to think of the current inflationary pressure as consumers being pragmatic. They have a long memory, especially when it comes to what hurts their wallets and purses, and what does not. They fail to believe that inflation will not pick up, no matter the measures the central bank takes, especially considering that imported goods will be more costly anyway.

Fearing further inflation, they turn their cash into non-liquid assets, a move that, by itself, fuels the growth of the price of goods and the fall of the purchasing power of money.

On and on this cycle will go until supply and demand converge. This will need significant structural reforms, for increasing supply is no easy task. For Ethiopia, where the trade deficit stands at around 13 billion dollars, it would perhaps take a generation.

But before Ethiopia’s economy reaches that stage, it is unavoidable that the government would try to come up with temporary solutions to at least hold average annual headline inflation below 10pc. One such solution that this government has employed is to punish price gauging. The other was to put credit caps on commercial banks.

However, both tactics have been detrimental to the private sector. The former is likely to discourage the private sector, which uses price increments as a coping mechanism in times such as these, when the business environment is unhealthy.

Why should they pay for the government’s inability to relax supply constraint?

The credit cap’s effect is fairly obvious, especially when it comes to the fate of private players. In the past fiscal year, 99pc of all the private banks’ loans went to the private sector, with a 44.5pc credit growth rate, in stark contrast to this year’s 16.5pc limit.

For a government that tries to boost supply and that acknowledges that the private sector would be a great ally in this ambitious plan, their contradictions stink of unimaginative policymaking and desperation. Instead, they should be inward looking. Policies and ideologies have been the bane of the country’s economy, and that is where the fixing needs to begin.

What ails the economy is not too much credit but not enough of it. What has added to the inflationary pressure is the fact that people have limited possibilities of investing their money. It would be naïve to assert that inflation could sustainably be brought to heel in the short-term, but such inclinations toward investment and lending could be helpful to relaxing supply constrains.

Although there is talk of creating a stock market, and there is a movement to bring about a secondary capital market, it is not close to realisation. But at a time when the government is most worried due to an inflationary pressure that is causing consumer speculation, it could help to channel some of that energy into something constructive, such as investment.

Consumers can be persuaded into investing their money as an alternative to seeing it depreciate, given the high inflation rate, or spending it. The private sector, for its part, would have access to more capital. Of course, this would not help inflation, as businesses are bound to spend the money. But the impetus to turn cash into assets should be enough of a nudge for the authorities to create more efficient means of capital mobilisation.

By Christian Tesfaye
Christian Tesfaye ( is Fortune's Op-Ed Editor whose interests run amok in the directions of both print and audiovisual storytelling.

Published on Mar 10,2018 [ Vol 18 ,No 932]



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