Ethiopia food prices spike after govt intervention – By LUC VAN KEMENADE, Associated Press

June 22nd, 2011 Print Print Email Email

ethio_economyADDIS ABABA, Ethiopia (AP) — When Ethiopia’s government imposed price controls in January to combat the spiraling cost of staples like meat, cooking oil and bread, butcher Wabe Habse had a long line of customers, but could barely make a profit.

Now, after price controls were dropped earlier this month, Wabe is still not making money.

“The meat market has collapsed,” said Wabe, who raised his prices nearly two-fold and saw his customers abandon him. “I am not sure how we are going to survive.”

Ethiopia, like many African nations, has seen spiraling food prices this year. Nearby Uganda has seen violent protests over rising costs.

Buyers and sellers in Ethiopia’s capital say the government’s attempt to bring down prices by imposing price caps on basics like oil and sugar for five months this year has caused even more turmoil. When they were in place, the price caps bankrupted businesses that could not afford to sell at cheaper prices.

The government claims the country is a victim of rising international food prices, but the International Monetary Fund says the government is causing inflation by borrowing and printing money to pay for infrastructure projects. One economist called the government’s attempt at price caps “a fool’s errand.”

After most of the caps were lifted in early June, prices again soared to levels unaffordable for many here. Already, 3.2 million Ethiopians depend on food aid. Recent government figures put inflation at nearly 35 percent in the last year.

In a rare show of rebellion in a country historically used to authoritarianism, Ethiopian consumers earlier this month started a text-message campaign to boycott meat in an attempt to force prices down. Wabe says the campaign has affected his customer base but that he can’t afford to reduce prices.

“There is no profit if I do that,” he said.

Taxi driver Abraham Habtamu, who earns about $60 a month in Addis Ababa, said that since the price controls were dropped he can only afford to gaze longingly at the beef that is now selling for about $5 a kilogram ($2.30 a pound), up from the capped price of about $3 a kilogram ($1.40 a pound).

“For me it is untouchable,” said Abraham, who is his family’s main provider.

Prices of cheaper goods such as chickpea flour have also risen. The flour, which formerly cost about 65 cents a kilo (30 cents a pound), is used to make a stew that is generally considered a poor man’s meal. Now it costs $1.60 a kilo (70 cents a pound).

Economist Seid Hassan, who was born in Ethiopia but is now a professor in Kentucky, said imposing price caps to fight inflation has been “a fool’s errand.”

“The measure was taken without any careful study about the causes of rampant inflation, and the ruling party took the measures to distract public anger and potential unrest,” said the economics professor, who teaches at Murray State University.

If it wants to create a healthy economy, Ethiopia should “minimize its heavy interventions in the ‘free’ market,” he said.

This East African nation’s communist government was overthrown in 1991 by the current administration, which despite promises of adopting free market principles established an economy in which state enterprises dominate key industries. Other sectors are strictly regulated.

Ethiopia expects to collect almost $1.3 billion from foreign donors in the next fiscal year on a total budget of less than $7 billion.

The International Monetary Fund last week welcomed the decision to lift most of the price controls and urged the government to further improve the business climate and avoid “overheating” its economy, which has one of the highest growth rates on the continent.

Ethiopia pumps huge amounts of money borrowed from foreign donors and provided by its central bank into its economy to support massive infrastructure projects.

The IMF said Ethiopia’s inflation was mainly caused by this excessive growth of money supply and the country is not, as the government claims, a victim of rising international food prices. In fact, global food prices have a minimal impact on agricultural economies like Ethiopia’s, economists say.

The government accused private wholesalers of monopolizing the market and creating artificial shortages to increase prices even more. Ethiopia’s last resort, according to its government, was a price ceiling: an emergency measure usually reserved for countries at war or struck by a disaster.

The price ceilings felt like “payback time” against business owners, said Betelhem Rehobot, who works at a clothing store.

She said the adjusted food prices were a big relief to her at first. But instead of stabilizing the market, the price controls soon created shortages of goods and forced businesses to choose between bankruptcy and the black market because of nonexistent or narrow profit margins.

The government has monopolized the sale of sugar, oil and flour, products which still have price ceilings. Betelhem says she doesn’t have time to wait in line for these items at government distribution points. But consumers have fewer choices than ever: many retailers say they now can’t afford to sell oil and sugar because of narrow profit margins.

Because of the rising inflation, even the country’s most important crop, coffee, has become too expensive for many. Abraham, the driver, said his family can no longer honor a basic Ethiopian courtesy by serving it to guests.

“I made my mother cry last night when I gave her my salary, which she says it is worthless these days,” he said.

Copyright © 2011 The Associated Press. All rights reserved.

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