Gov`t Aims at Wrong Targets in What Ails the Economy

For the Revolutionary Democrats, focused, consistent, predictable and thoughtful policymaking is not their forte. Evidently, they do have a lot of kneejerk responses to the many issues that ail the national economy. Equally, monitoring the economy has not been much of enforcing contracts and protecting consumers from anti-competitive practices; the latter of which would have been hypocritical given that state enterprises enjoy a captive market over most of the critical sectors of the economy.

Close supervision has instead meant the prerogative to allocate hard currency and land, exclusively. And when the going gets tough, or the asymmetry between supply and demand worsens, they find convenience in blaming businesses for hoarding before they rush to throw themselves in price controls.

Such that it is a time of uncertainty for the Ethiopian economy, from the pile-up of external debt to a forex crunch, complimented by sizeable public expenditure and the recent devaluation of the Birr by 15pc against a basket of major currencies, instability has only deepened. The ever-present features of an economy – supply constraint and steady growth in demand – have become more acute problems, and like in the past, continue to cause inflationary pressure.

Despite the kind words from the IMF, the symptoms are all over the places to read. An economy with rising debts of domestic and external as well as ballooning inflation should deprive macroeconomic policymakers their sleep. Alas, they would rather spend much of their time running after the small boys in town instead of fixing what is broken at a macro level.

Just recently, the Trade Practices & Consumers’ Protection Authority filed a lawsuit against three steel manufacturers for alleged price gauging, within the range of 12pc to 34pc. Its officials believe that the manufacturers are engaged in a “concerted practice”, which is understood by many to reduce competition.

Indeed, concerted practices, price fixing, in this case, is anathema to competition. It severally discourages new private players from entering the market. It also leads to a decline in the innovative capacity of the current market players and the quality provision of their services and goods.

But their action against those that jack-up prices is not isolated to the rebar manufacturers. They temporarily shut down 21 rebar retailers back in October for allegedly making unreasonable price adjustments a few days after the announcement of the devaluation of the Birr. Aside from the rebar market, milk powder and steel sheet importers were also under investigation on similar charges. Hoteliers were cautioned, just to cap it off, against jacking room prices in anticipation of the 30th summit in Addis Abeba of the African Union (AU) that sees delegates of member countries arriving at the capital.

Authorities` fear is understandable, given the year-on-year increase in consumer prices index that has lately been haunting the economy. Inflation stood at 13.6pc, for last December, mostly as a result of food inflation, which was 17.4pc. The former is at a similar rate compared to the previous month, while the latter has dropped by around a percentage point.

Instead, goods such as clothing and footwear and services from restaurants and hotels have shown some of the highest spikes, the latter two by over three percentage points to 13.7pc. The trend is indeed worrying. Inflationary pressure in the economy is building up; slowly, but surely.

But the measures being taken by policymakers to reverse this are short-sighted. It is almost as if the authorities at Consumer Protection have taken a page or two from the National Bank of Ethiopia’s (NBE) book.

Authorities at the central bank have spent most of their energy since the devaluation of the Birr to arrest the inflationary pressure through several monetary policy tools that paid little consideration to investment, such as the 16pc credit growth cap on banks – since having been lifted for exporters and manufacturers. Banks are told to transfer 30pc of their foreign exchange earnings to the central bank and abruptly ordered last week to finance the letters of credit request by a private brewery. No doubt presidents of private banks are looking ahead towards bleak 2017/2018 annual reports.

But none of these measures has evidently helped, and if the second edition of the Growth & Transformation Plan’s (GTP) target is to keep annual average inflationary rate within single-digits, then the economy is up to a bad start. True to form, the government is still trying to find economic miracles through the indirect engineering of market prices. The recurrent attempt to force businesses to bring their prices to a level that is deemed acceptable, in effect instituting price ceilings, is a glaring illustration of this.

These are symptoms of a government that is trying to have the best of both worlds. On the one hand, authorities are trying to loosen the inflationary pressure, through various central bank directives that are expected to limit the money circulation in the market. On the other, though, the same government has chosen to continue to spend, as witnessed in the 14 billion Br supplementary federal budget the Council of Ministers recently voted to approve.

The administration of Prime Minister Hailemariam Desalegn is likewise trying to streamline the doing business environment of the country and see a shift towards a free-market oriented economy in its GTP policy prescriptions. But none of this squares off with the fact that the central bank has chosen to starve the private sector of off credit, or its attempt to control prices, despite their negative consequence in the long term.

If the government wants to create a conducive environment for the private sector, then punishing that very same part of the economy for how it naturally reacts to measures by the government and the state of the economy is illogical. Following a currency devaluation and an increasing shortfall in supply that is in many cases attributed to the lack of hard currency, businesses have seen it fit to adjust their prices to the point where they have deemed consumers will accept. And punishing them for this discourages those currently operating in the market – against all the odds – and disincentivises others from joining in.

There are immediate disadvantages to such measures by the government also. For one, it transfers hoarding from sellers to buyers. Those at the front of the line will choose to buy more than they need in fear of future shortage – given that there is no adjustment to prices in a time of scarcity to discourage that consumer otherwise – which is legitimate given recurrent supply constraint. But by doing as such, little else will be left for the rest of the consumers.

The remedy here is inaction. If, however, the administration cannot resist the temptation to do something, it should instead be working to fix the supply side through focused, long-term and consistent policy responses.

There are, of course, occasions where laws against price gauging should be contemplated. During times of natural or human-made disasters where a consumers` access to critical goods and services could spell the difference between life and death is but one example. The government should also actively enforce anti-competitive measures, and hold responsible those the authorities have evidence they have engaged in concerted practices such as price fixing or sharing of markets. Otherwise, the market should be left to sort itself out as the government instead walks the talk on its promises to transform the economy into one that is dictated by the natural machinations of supply and demand.

Such policies will inevitably bring about inflation in the short-term, but the policymakers need to look beyond and aspire to create long-term economic stability. As most of the developmental obstacles the country is facing are born out of the inability of supply to fulfil demand, those with the capacity to address this should be allowed to persist without too much interference from the state. Price should not be an issue as long as there are wallets, purses and bank accounts thick enough to support it.

Published on Jan 27,2018 [ Vol 18 ,No 925]



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