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[July 14, 2014]
Could the Market Defy Expectations?
(AllAfrica Via Acquire Media NewsEdge) January 2011 was by far the most decisive month in Ethiopian economic history.
The month saw the capping of prices of some 17 basic commodities, the first since the declaration of a free market system in Ethiopia, with an effect as high as a 45 percent reduction in price of the commodities. The move was announced at an equally landmark meeting where high-ranking government officials came face-to-face with some 600 influential members of the business community. The draft price schedule for the 17 commodities was met with opposition from the very start and was subjected to revision before entering into effect. The cap was not successful during its stay, to say the least. Experts argued at the time that the cap contributed to the further heightening of the inflationary pressure, which culminated in an all time high of 40 percent towards the end of 2012.
The entire ordeal started after the government of Ethiopia announced its intentions to give its employees a pay bump in an order of 39 percent. The adjustment was long overdue, according to commentators, and a much needed one too. But, what happened following the salary adjustment was not to the liking of the government. The market soon rattled and the headline inflation climbed to 17.7 percent, robbing the extra disposable income that the government paid for. Since that was the first time the government openly fell out with the trading community on the issue of unreasonable price hikes after adjustment of government employee's remuneration package, the story seemed to have started and ended there. Apparently not.
Turns out, it was not an isolated incident. Three and half years later, the government of Ethiopia announced another round of pay adjustments, which is speculated to be three times more in magnitude. And, it looks like history is going to repeat itself in many respects. Or will it? The latest adjustment is expected to be effective as of the beginning of the next fiscal year. But, it looks like both the government and consumers want to make sure that events of the past will not be catching up to them this time around. They do not want to risk igniting unprecedented price hikes. For that, the public relation work seems to have started way before the effective date of the adjustment. They sound like they are expecting the worse. The Shola Open Market, located in Yeka sub city, is the third largest open market in Addis Ababa following Saris market (2nd) and the famous Mercato (the biggest open market in Ethiopia), look to be nothing out of the ordinary. Shola serves hundreds of thousands of residents of the capital. It is a hub for food stuff including cereals, grains, fruits and vegetables, clothing, household furniture and several more consumer goods.
On Thursday afternoon, business is as usual at the Shola market, except for the fact that it is muddy in the narrow pathways, a testament to the beginning of the rainy season in Ethiopia. The perception of the market situation, however, is largely mixed. The likes of Alemayehu Bosena, grocery shop owner at Shola, is highly dismissive of any sort of price hike in connection to the recent announcement of the salary adjustment. "The price change during the past few weeks is next to nothing," Alemayehu says, "Generally our price menu has shown no change in the past three months." Alemayehu looks to be highly conscious about the issue. His walls are crowded with price menus of an assortment of commodities all clearly written and posted for everyone to see. One can see that the prices posted on the walls were there for while and recent adjustments or revisions are nowhere to be seen. In fact, for a vegetable vendor around the locality called Dejach Webe, Barkote Ada, the story is the same. The woman says that she is well aware of the salary adjustment planned by the government, however, she did not expect prices to change considerably. "I am also a buyer," she says, "I had to buy the items I retail from 'Atikilt Tera' (a famous vegetable market in the capital) and I have not noticed significant price variations in the wholesale markets either," she told The Reporter.
From the side of the consumers as well, things are not that different. Consumers like Aster Geresu, whom The Reporter found shopping at Shola, have their doubts. She says the headline price hike happened not now but a few weeks ago when the whiff of salary increments first hit the streets.
To corroborate this she mentions weird jumps in the price of a liter of palm oil from 45 birr two weeks ago to 54 birr this week. In addition to that, items like wheat, spaghetti, macaroni, bread flour and red pepper have also exhibited price hikes according to Aster. For her, the slightest of changes happening in the past few weeks is in connection to the salary adjustment. Other consumers do not share her pessimism. Most fail see any noticeable changes in the price of commodities, courtesy of the salary adjustment. Thus far, price hikes and ignition of an inflationary pressure after a year-and-half of containment within a single digit is a phenomenon mostly feared by the consumer society and the policymaker. But, the question of far reaching importance here is how such expectation comes to be formed in the minds of economic agents? According to Costantinos Berhe (Ph.D.), a lecturer at Addis Ababa University, such expectations came to be formed due to the experience of a group of consumers who just had their disposable income bumped up, going to the market at once to clamor over a few consumables. He says this has been the trend in Ethiopia, and the government employees are no exception to that. As soon as they were able to get extra disposable income, demand for the few commodities that the society consumes in common will start to trend upwards, he explains, and this information is recorded in the minds of the economic agents like consumers, governments and producers, giving them the basis to expect an upwards push in price every time income of a certain group of the society changes. "The expectation is largely driven by the shortage in supply of goods and services," Costantinos told The Reporter, and that would be the ultimate remedy according to him.
For some economists, it is hard to call such behavior formidable expectation of economic agents. " It is more like speculation," says an economist approached by The Reporter opting to stay anonymous. It is something bordering speculative behavior, he argued since it cannot be supported by any economic rationale. As far as Costantinos is concerned, the expectation might be formed on the basis of speculation.
He strongly argues that supply shortages that taunted local markets for years in addition to the consumer tenancies to compete over a few basic commodities (consumable) provides reasonable grounds to expect upward pressure in prices. And an economic agent could not be far off to expect inflationary pressure when a certain group of consumers come into an increased disposable income. The anonymous economist does not accept the argument that 1.2 million government employees, making up 1 percent of the general population, could have an impact on the aggregate effective demand of commodities.
For him, this is where the economic reason goes out the window. In fact, policymakers' view of the matter is the same. In his recent appearance to the parliament defending the budget proposed for the new fiscal year, PM Hailemariam Desalegn also weighed in on this issue. According to the PM, the whole point of waiting this long to make the adjustment is because of fear of igniting inflationary pressure.
"We have delayed our plans for over a year-and-half to make sure that inflation is well within single digits," Hailemariam said. We could not fuel the issue by making salary adjustments when the figures were still in the danger zone, he argued. Besides, he also noted that the planned expenditure, the salary adjustment is included in the budget plan and the overall budget is in the clear when it comes to the level of deficit and it is financing. "Now there is absolutely no economic reason for it, except ill-intentioned desires to benefit from the situation," Hailemariam warned.
The very notion of 'economic rationale' is in fact debated among economic professionals. According to another macroeconomist who also does not want to be named, it is not appropriate to say expectations are not economic reasons. In his view, it is part of the day-to-day life to have economic agents make decisions based on the basket of information at their disposal. "It is pure economic decision in all its sense," he argues, it is not all treachery. In fact, agents cannot be told what to expect and what not to expect, he explains. Rather, what should be considered is how they were able to arrive at that decision.
For the macroeconomist, the experience of inflation of the macroeconomic environment during the past couple of years, which was as high as 40 percent at some points, warranties economic agents to hold a gloomy view of future prices. He suspects expectation of inflation is becoming entranced in Ethiopia and says that the past challenges with inflation are the ones to blame for that. In fact, he does not seem to be worried about the impact of salary adjustments on actual effective demand of commodities in the market. "In that respect, I am in agreement with the assessment of the policymaker," the macroeconomist says.
However, inflation expectation itself should be something to worry about. "Why expectation is so worrying is that it can have double implication," he argues. One is from the side of the consumer who tries to buy as much as it can today if there is expectation of high inflation tomorrow. This, according to him, is not restricted to the government employees who say their salary is raised but other consumers who are convinced that the salary adjustment could ignite inflation in the economy.
Meanwhile, from the side of the suppliers and sellers there is strong incentive to push prices up since they expect consumers to pay. One thing all three experts agree on is that expanding supply of commodities is a remedy that could break whatever expectation the consumers and sellers might have. Costantinos is for change of strategy when it comes to food production. "Though is was primarily bound to the international market, the large commercial farm strategy that was expected to alleviate such acute supply shortages is not working," he says, "and it is time to revisit." Nevertheless, all agree that short-term supply of basic commodities, the one the government is trying to do in selected products, could also be a short-term remedy to dissipate inflation expectations. Nevertheless, market conditions weeks after the announcement of the salary adjustment are not supportive of the skepticism and doubt reflected by consumers, government and experts.
For now, the likes of Alemayehu, Barkote and numerous others remain adamant about carrying business as usual. Perhaps, Sabir Argaw, renowned wholesaler in the country, thinks that past experiences were due to shortage of supply of basic commodities. He says that there is no reason for prices to rise this time around. "Both the government and private enterprises have enough stock of consumables now," he believes, and hopes prices would remain stable. However, the market and its major players are far from gaining the trust of the consumer yet. And all expectations look to be bidding against them; to cause unprecedented price hiking. Who knows, this time the markets might just defy expectations.
Copyright The Reporter. Distributed by AllAfrica Global Media (allAfrica.com).
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