Price Freeze as a Policy to Control Inflation in Ethiopia

Price Freeze as a Policy to Control Inflation in Ethiopia

Ethiopia being referred as free market economy, since 1995 when the current government took power from the socialist party, has been following different scenarios to stabilize the economy which is assumed led by the interaction of demand and supply. It has been difficult to economists to evaluate the impact of the socialist economic system (1974-1995) in the country due to the political instability and continuous wars. But since 1995 the political stability create suitable conditions for the no intervention economy and The government is working to bring economic development and political stability in the country by forwarding  and implementing different strategic frameworks at different times ,SDPRP (2002-2004), PASDEP (2005-2010) and now Growth and Transformation Plan (2011-2015).

Privatization and private sector development have been the main bold new directions in the country to facilitate free market system. But the market faces higher inflation rate than ever due to ; Increase in the money supply, Souring oil prices,  Rising world food Prices ,greedy merchants, farmers who happen to demand higher prices for their products  and increase in demand. According to IMF the inflation rate fluctuate from 2.4% in 2005 to 44.4% in 2009 and to 8.5% in 2010.

In the past, the Ethiopian government has successfully curbed chronic inflation by adopting a contraction monetary policy. It has also subsidized the price of wheat, edible oil, and removed taxes on flour and grains. The policy measures had in fact created a breathing space for vulnerable low income groups and retirees alike.

The impact of the subsidy program was only effective for a short period of time. It was obvious that when short-term policy actions leave the scene, inflation once again comes to bite. Apparently, the price of many food and non food items has gone through the roof recently. Concerned by the consumer way, Ethiopian government on January 6, 2010 adopted another short-term measure: Price freeze on selected domestic and imported items.

The government blames “greedy businesses and speculators” for the introduction of the latest policy measure. While it is difficult to kill inflation with only in short-term measures, such as price freeze, are important if inflation becomes a scourge on the economy. A temporary price freezes could keep suppress inflation and serve as an instrument to break a possible wage-price spiral. Price freeze is usually used when monetary policy has proved to be ineffective.

Many countries around the world impose a temporary freeze to fight inflation, and discourage speculative attacks. The US in the 1970s had imposed price freeze on an array of commodities to curb inflation. Brazil has incessantly adopted price freezing measures to fight rampant hyperinflation and inflation. China last year has frozen prices on many food and non food items. Argentina, Bolivia, Mexico, Israel, and Mexico in the past two years have adopted similar measures to hold the raise in prices down. Mexico, for instance, had imposed a price freeze on 150 commodities two years ago.

Price freeze, as a short-term strategy to curb inflation, is not without risks. If governments resort to freezing prices, doing so with the belief that the price shocks are transitory, it will evaporate soon. Such measures could encourage people to consume more and call for additional measures whenever there is a price hike. Once in place, it is difficult to withdraw price freeze measures for fear of losing support.

Measures of price freeze could worsen shortages, and help the black market flourish. If these measures are kept for too long, they will serve as a means to interfere with the dynamics of demand and supply. Such short term measures are ineffective in Ethiopia due to the structural weakness of the economy, inefficient marketing and distribution system, prevalent oligopoly and corruption. To effectively bring both inflation and inflationary expectations under control in the long run, the government has to adopt long-term policy measures such as; close the gap between aggregate demand and supply. This requires the need to address structural problems in the economy.

While monetary policy is essential to serve as anchor to control inflationary pressure, it is ineffective if the growth in money supply is not in harmony with the growth in demand. If the fiscal policy is not influenced by monetary policy, it would be hard to stop runaway inflation. On the other hand, if the growth in reserve money (money in circulation and reserve requirement) is not brought down to a single digit level, then the fight against inflation in Ethiopia could be out of control.

Successful implementation of long-term inflation controlling policy measures also requires a vibrant central bank. The government has to give top priority to bolster the capacity of the central bank. It also needs to cut out some of the “fat” from its budget, boost agricultural productivity, introduce efficient market infrastructures, support and encourage private commercial farms, encourage bio-fuel farms, and industries.

The upshot is that while short-term policy measures are helpful to prevent inflation, long-term policy strategy is essential to hold down inflation and achieve a sustainable growth in GDP as outlined in the Growth and Transformation Plan (GTP).

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