Saturday, June 15, 2024

Gov’t, society’s reckless spending heaps inflation, EEA study reveals


New study recommends the government to control its squandering spending as part of mitigating the inflationary behavior whilst reviewing the levy on import commodities is hinted as an additional input to price stabilization.
The study conducted by the Ethiopian Economics Association (EEA) under the title: ‘The Ethiopian Economy: Structural Constraints, Inflation, and Policy Options’ highlighted the current challenge in the market with possible way forwards to ease the circumstance.
The study that uses resources from government offices and international organizations said that the slowdown and drop down in some pillar economic sectors have been observed for the past close to a decade from the growth trajectory in the first ten years of the millennia.
The EEA, through its study flashback, showed that the agricultural sector has fizzled by half from 60 percent contribution to the GDP in 1990, while the industry sector has shown ups of two folds to about 30 percent as that of the service sector, which stands at the top, takes 40 percent of the GDP contribution, up from 30 percent in the past.
“The growing trend on the services sector for the share on the GDP is an indication that the economy in general is in structural challenges,” the statement that EEA issued by referring to the study outcome said.
Production volatility and sharp reduction in some agricultural products’ productivity was also revealed on the document. This is also similar to industrial production increments up until 2010, which then started reducing from 2016.
The reduction on the supply side whether locally produced or imported items has contributed to the inflation.
It said that different researches indicated that the growth of industry and service sectors in Ethiopia is contributing to the price hikes, while the growth of agricultural sector productivity with additional factors played a key role to stabilize the market.
The drop of birr’s purchasing power against international currencies and devaluation was also stated as one of the factors to ballooning the inflation.
The study revealed that Ethiopia was one of the top ten African countries which amass significant revenue from import-export taxes and it seats at the fourth level by imposing huge customs duties.
As per the study, imposing a massive levy on import items and expanding tax revenue yield higher chances in contributing to inflation.
EEA’s research also identified that the growth of export trade might fuel the price hike, “due to that it explained that proper policy thinking and direction is crucial to balance it.”
Of the top ten countries in Africa that have poor export performance, Ethiopia stands at the third level.
Regulating the money supply and monetary policy based on the market was recommended as a basic principle for the issue.
However, in its recommendations, the study said that reckless spending from the government and society, in general, should be corrected as an alternative to keep the galloping inflation. While it gives priority to agricultural productivity by emplacing proper support for smallholder farmers, which are the major source of agricultural products in Ethiopia. Improving power usage was also among the suggestions put forth.
Even though the government is a crucial body in introducing and applying different policy instruments to tackle the challenge, external support has also been stated as essential.
It study suggested that even though the government remains the major player on the issue, the formation of supporting an independent body is vital to curb the challenge.
It recommended for the formation of a board, supply and price stabilization board, as an independent body to support the government.
EEA study added that the role of the board will be providing support for trade balance administration, providing policy recommendations as per a detailed evaluation of the circumstance, and coordinating different relevant bodies.
Playing a role to stabilize the market or at least setting maximum inflationary points if curbing the inflation is not fruitful was also stated as an area where the board can contribute.

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