Even though many causes could be mentioned, the main culprits of the Ethiopian inflation rates are supply shortages, excess money supply and devaluation. To make matters worse, the government imposed price caps, which in turn have made a substantial portion of consumer products to disappear from the market.
As I indicated before, inflation in Ethiopia would remain a perennial problem unless the government in power both acknowledges and takes measures to alleviate the supply shortages, tightens its expansionary monetary and fiscal policy, and refrains from manipulating the domestic currency (and, instead focuses on solving the real economic fundamentals and structural problems), while at the same time minimizing its heavy intervention in the “free” market.
Even though it is easy to identify both the causes and potential solutions of the rampant inflation, I am somewhat pessimistic about the government’s ability to resolve the crisis. The supply shortages are structural problems which have existed in the economy for too long and would require major policy changes which should include returning the land back to the tiller. As long as the government continues to play an increasing role in the economy, as the so-called Growth and Transformation Plan (GSP) is set out to do, it will continue to soak the economy with an excessive government expenditure and money supply. Several anecdotal evidences and several of the government’s current polices strongly indicate that excessive government spending will continue unabated. Some of these increased expenditures include, in addition to what the ominous GSP would demand (which is expected to dangerously soak the economy with excess money supply/expenditures), the government has now faced with additional expenditures on security and imported goods (in which case the devaluation and the price cap measures have made it worse than would be otherwise.)
