Inflation, Austerity, and the Cost of Missteps
By Kebour Ghenna

Ethiopia’s economy finds itself navigating a storm of its own making. Inflation stands at a bruising 17% (down from 20% in 2023), growth which is pegged at a respectable 7% by end of 2024, seems more like a mirage when contrasted with the reality on the ground – and a Birr devalued by 100% under the weight of IMF prescriptions. Add to that the backdrop of a relentless insurgency, and the nation resembles a tightrope walker teetering between cautious optimism and outright calamity.

The policymakers, for their part, seem to have turned to an old playbook: austerity measures coupled with restrictive banking policies. The result? A classic case of treating the symptoms while ignoring the disease. High taxes, costly public services, and shrinking government spending are touted as the cure for inflation. But like prescribing a starvation diet to a patient battling exhaustion, the prescription risks worsening the underlying ailment.

Devaluation, too, has been pitched as part of the solution. The logic goes something like this: make the birr cheaper, and Ethiopian goods become more competitive abroad. Exports rise, dollars flow in, and economic health is restored. Yet, in practice, devaluation has done little more than fuel the inflationary fire. With a heavily import-dependent economy, basic goods – food, fuel, and medicines – now come with eye-watering price tags, leaving families to tighten belts that are already pulled taut.
And then there’s the question of capacity. A cheaper currency is only an advantage if you can produce and sell what the world wants to buy. Ethiopia, wracked by insurgency and corruption and hobbled by supply chain bottlenecks, is far from ready to make good on this promise. Factories can’t run on wishes. Farmers can’t harvest hope. Without addressing these structural constraints, the devaluation risks becoming a hollow gesture – a sleight of hand that leaves the ordinary Ethiopian worse off.

Meanwhile, the nation’s banking policies seem to exist in an entirely different universe. Credit is scarce, loans are choked off, and small businesses – the very engines of economic resilience – are left gasping for air. It’s as though the government has resolved to fight inflation by strangling the economy, squeezing it tighter with every passing quarter. One imagines policymakers patting themselves on the back as growth ticks along at 7%, seemingly oblivious to the fact that this growth is bypassing the people who need it most.

For Ethiopia, the question is not whether inflation needs to be tamed – it does. But the methods matter. Austerity might cool demand in the short term, but at what cost? A nation that raises taxes and cuts services during a time of social and political unrest risks lighting a match in a room already full of kindling. Businesses that can’t borrow can’t invest, and without investment, jobs disappear. What follows is a cascade of hardship: rising unemployment, deepening inequality, and a sense of despair that fuels even more instability.

Many economists would argue that the real problem isn’t just inflation; it’s the inability of the economy to grow in a way that includes everyone. Tackling inflation by crushing demand is like trying to fix a broken engine by draining the fuel tank. It might stop the sputtering, but it won’t get you moving forward.

So, what’s the alternative? Ethiopia’s challenges are daunting, but the solutions don’t have to be. Instead of austerity, why not focus on investment? Instead of making credit harder to access, why not make it easier? Channel resources into agriculture, manufacturing, and infrastructure – sectors that can stabilize prices, create jobs, and generate the kind of growth that lifts people out of poverty.

And then there’s the insurgency. No amount of monetary tightening or fiscal discipline can paper over the cracks of a divided nation. Peace is not just a moral imperative; it’s an economic one. Addressing the root causes of conflict - authoritarianism, exclusion, and lack of opportunity – is as essential to inflation control as any central bank policy.

The devaluation of the Birr may have been inevitable, but it was not sufficient. Without a clear strategy to leverage the new exchange rate, it’s simply another burden for an already struggling population. The same goes for austerity. It might please the IMF and look good on paper, but for the people of Ethiopia, it’s a bitter pill to swallow - one that leaves a sour taste long after the supposed benefits have worn off.

Ethiopia doesn’t need quick fixes or half-measures. It needs bold, inclusive policies that address inflation without sacrificing growth, social cohesion, or the dignity of its people. Anything less is not just bad economics; it’s a betrayal of a nation’s potential.

#ጥቆማ

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