June 29, 2008
Yohaness Anberbir and Michael Chebud
As global prices hit the roof, Ethiopia has not been left unscathed. It has been adversely affected by the economic shock waves that have slammed against the national budget and the general economy of the country. Yohaness Anberbir and Michael Chebud, Fortune staff writers, assess the impact of this collision.
Lemlem Assefa, a mother of one, is one of the many poverty-stricken residents of Addis Abeba. With the 150 Br monthly income she earns from where she works as a maid, she supports her mother and four-year-old son. She toils during every bit of her free time to make extra income, and occasionally earns 80 to 120 Br a month from washing clothes for single men. Fortunately, the trio live in a state-owned single room house, at the reasonably cheap cost of 7.50 Br per month in Kebele 03/04 of the Yeka District.
At first glance, Lemlem does not appear to be in her early thirties. Her cheeks have turned pale from her daily exposures to the heat in the small kitchen where she works. Trying to prepare a meal for her mother and baby son is distressful for her. For close to six months now, she has been using fire to cook every meal, tolerating the scorching heat of the flames and the blinding smoke, albeit with a feeling of distaste.
Following the adjustment of the retail price of kerosene in January this year, Lemlem has had no choice but to resort to low cost energy sources, such as wood and charcoal. Six months ago, the Ministry of Trade and Industry (MoTI) slapped an additional 1.84 Br on benzene and 2.6 Br for diesel, revising the prevailing prices. Subsequently, the cost of a litre of kerosene shot up to 5.75 Br, a price that Lemlem obviously cannot afford.
“I have stopped cooking with Kerosene,” she mourns. “It is on a few occasions that I use it.”
Lemlem has not only been unable to afford kerosene because of her meager income, she has also not paid her house rent for months, and hopes that she will be able to settle her debt before the kebele drives her out. Her family survives on the generosity of her bosses who gives her food to take home almost daily.
To the dread of most city residents of her class, speculation on price revisions is rife. Often, people queue at fuel stations for a long time to fill up their tanks, fearing a possible price adjustment by the government at any time.
Their fears are not baseless. Escalating oil prices – except for a few slumps – have ricocheted across the globe, sending economic shock waves that have affected even the top industrialized economies of our time. The cost of crude oil struck a record high of 140 dollars a barrel last week, a six- fold increase compared to the price in 2002.
Ethiopia has not been spared from the scorching effects of the price surge, which has had a devastating effect not only on the national budget, but also on the general economy as the price of fuel is factored into the cost of almost everything. For instance, in 2006/2007 the country spent 8.7 billion Br on the procurement of 1.6 million metric tonnes of oil. The oil import bill for the first nine months of the current budget year exceeded that of the previous year’s total expenditure by close to two billion Birr. In the first three quarters of the 2007/2008 fiscal year, Ethiopia paid 10.1 billion Br for the procurement of the black liquid gold. This is close to a 3.7 billion Br rise compared to what the country paid at the same time last year for 1.2 million metric tonnes of the commodity.
What is worse, this year, the demand for oil has increased to 1.3 million metric tonnes in the first nine months of the budget year, amidst the skyrocketing prices. One of the major reasons for the rise in demand for diesel oil, especially in the past two months of the budget year, is the current power outage that lasts for 10 days of the month. As a result, more generators are roaring, as they are used by all businesses – from small kiosks to large manufacturing firms – in a bid to remain afloat.
The power blackouts have also resulted in an increase in the import of diesel oil by the government.
“This has created a serious damage to our enterprise because we sell it at subsidized prices,” said Damenu Kibret, Public Relations officer at the Ethiopian Petroleum Enterprise (EPE).
Ethiopia imports five types of oil: white diesel for heavy duty and cross country trucks, which accounts for 58pc of the total imports; kerosene for household consumption, amounts to 15pc of the total import volume; benzene accounts for nine per cent; jet fuel for planes is 10pc of the total import; and light and heavy diesel (eight per cent) for industrial use.
All these oil types are distributed to retailers at prices far below the soaring international price of the commodity, putting a greater strain on the federal government, which foots 65 to 67pc of the price difference
Damenu believes the government should no longer carry the total burden on its own.
“From the point of view of an Enterprise, we would want to see the prices revised again, even if it might exacerbate the cost of living for the poor,” Damenu told Fortune.
India, Malaysia, Indonesia and Taiwan have increased fuel prices and reduced subsidies, a move Ethiopian authorities often shun. The Asian governments, like Damenu, believe that is the only way to lift the burden off government shoulders. The Ethiopian government, however, argues that lifting the subsidy would fuel the spike in prices of other commodities.
“Revising oil prices at this point would not be an appropriate measure considering the pain the urban poor is going through due to the costs of basic commodities,” Girma Birru, minister of Trade and Industry, told Fortune.
Often, his government is criticized for being overly paternal in the face of the prevailing economic shocks. It was only when the global price of the commodity peaked to 80 dollars per barrel that the government made a cost adjustment six months ago. The current cost has almost doubled, yet the government has not made any adjustments so far, despite speculation.
What is more alarming is analysts’ views of the future scenario. There are predictions of oil prices hitting 200 dollars a barrel this year, as consumption continues to rise rapidly while supplies lag. Economic leaps forward by China and India, they argue, represent a step-change in energy demand.
“This government cannot continue subsidizing oil for more than three more months,” says Haile Kibret, head of the Macro Economic Research Division at the Ethiopian Economic Association.
Ethiopia has squeezed its foreign exchange reserves due to the increase in its import bills.
After assessing the economy, the International Monetary Fund (IMF) a month ago reported that the east African country is left with foreign exchange reserves below two months of imports.
The pressure seems to have mounted on the government to adjust prices for three major reasons: economic forecasts predict that the global price of oil will not decline; local demand has increased compared to last year; and most other countries are trickling the price increase directly to the consumers, which is almost unanimously supported by pundits.
The strain on the Federal Government coffers is apparent. The more the government spends to alleviate the burden from the urban poor, the more the budget slides into deficit. Economists believe that this only works to fuel inflation in the long run.
The Meles Zenawi-led government has been blistered by a run away inflation, despite reporting five years of double-digit economic growth. Both global and local forces have pushed the prices up, although the government associates inflation with the former.
Excess money supply has also been driving domestic prices to the roof. In April 2008, the overall inflation rate was 19.9pc. A headline inflation (on food commodities) was even worse at 26.6pc, significantly rising from 16.9pc at the same time last year.
In addition to subsidizing the poor, the government has hesitantly begun to look for alternative energy sources. The Council of Ministers approved, in September 2007, a Bio-Fuel Development and Utilization Strategy crafted by the Ministry of Mines and Energy. This plan aims at utilizing the country’s bio-fuel, bio-diesel and ethanol production potentials in a bid to decrease the dependency on fossil oil.
However, judging from developments so far, it does not seem that the government would reap the benefits of the strategy any time soon.
Although speculation of an oil price increase has been a source of anxiety for most, Lemlem does not appear worried.
“It doesn’t bother me anymore if kerosene prices increase because it already has become a luxury for me,” she explains, highlighting the level of her deprivation. “But I do worry that it may affect the household I work for and force them to stop their daily support in kind to me.”
