Ethiopian government price ceiling to be readjusted?

Source: Afrik News, Monday 14 February 2011

Ethiopia has been hit by an acute shortage of basic commodities following a recently imposed price ceiling. To study the cause of this shortage, the government, last week, met with local entrepreneurs.

In a move to halt runaway prices of basic commodities and also curb a double digit inflation in Ethiopia, the Horn of Africa country’s government moved to set a price ceiling for 18 types of basic commodities in the first week of January, 2011.

The government had accused some of the country’s major businesses for exploiting the market illegally by raising commodity prices at over 100 per cent without any respect for market principles.

But a few weeks after the introduction of the government controlled prices the desired market stabilization has been questioned as many of the targeted commodities, including flour, palm oil, sugar, beer, powder milk, soap, continue to disappear from the market, thus, creating a more difficult situation for consumers.

According to local entrepreneurs who met with officials of the Trade Ministry for extensive discussions last week, the government had failed to make a detailed assessment regarding production and importation costs before imposing price limits.

The local Reporter Newspaper argues that the 600 birr maximum price per 100 kg of flour, for example, is not compatible with the real market price, given that 100 kg of wheat, the raw material, is sold at about 545 birr. Continuing production with the extra production cost, therefore, means that both producers and traders would be running at a loss. The same arguments have been forwarded by palm oil importers, among others.

In what concerns the shortage of beer on the Ethiopian market, traders explain that while the 7.10 birr maximum retailing price for a single bottle of beer would only assure marginal profits for the Addis Ababa market, supplying the product at the same price outside the capital is not acceptable as it would incur other costs, including transportation, which would in turn make them run at a loss.

Following the arguments forwarded by local entrepreneurs at the meeting, the Trade Ministry ordered the various traders to submit their production and importation costs by the end of last week, promising that, if accurate, the government would use the information as a yardstick to readjust prices.

Macroeconomic analysts have questioned the government’s decision to adjust prices to counter a so-called illegal exploitation of the market by traders and argued that the root cause of the price hikes is linked with the shortage of commodities. A situation they say was due to the country’s speedy growth and last year’s sharp devaluation of the local currency