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The Ethiopian Economic Association (EEA) calls for the adjustment of salaries of the elderly and retirees taking into account inflationary pressure.
The Association, in a policy working paper by Atnafu Gebremichael and published on December 31, 2020, recommended that the fixed income of the elderly and retirees be indexed to inflation.
“In addition, civil servants and people with low fixed incomes suffered from inflationary pressure that has reduced the purchasing power of the birr. Therefore, the government is expected to adjust the salaries of civil servants based on the rising rate of inflation, ”Atnafu told The Reporter.
The policy paper, which has examined the drivers of inflation dynamics and their effects on macroeconomic stability, found that the welfare cost of inflation has shown a sharp rise since 2010, negatively affecting the economic life of the vast majority. of the population.
This has had serious implications for the well-being of inflation-prone wage earners and, in particular, those earning minimum wages and pensioners with fixed incomes not subject to wage or income indexation, according to the document.
“Although the call to index wages to inflation seems attractive, it is very difficult to implement it in the current situation in Ethiopia, where the government is likely to face a fall in tax revenue and the private sector is experiencing a business slowdown because of instability, currency shortages and other economic shocks, ”said Tiruneh Assefa, research analyst and economist.
In some countries, especially developed ones, frequent wage adjustments are common when inflation accelerates. This includes France where minimum salary is automatically incremented whenever inflation exceeds two percent in a given year.
Economists warn Automatic indexing is sometimes risky and can lead to a perpetual loop or cycle of constant price increases in situations of very fast inflation.
“Although wage adjustment is necessary as inflation erodes the purchasing power of money, in the case of Ethiopia, where inflation is in the double digits, doing so is impossible. However, salaries must be adjusted reasonably, although they should not be frequent as in other countries, as they can generate more inflation, “said Atlaw Alemu (PhD), an economist with decades of experience.
Inflation has been in double digits for the last three and a half years in Ethiopia, reaching almost 19 percent in November 2020. Food inflation reached 22.1 percent during the same month, while the non-food component Food inflation stood at 15.1 percent.
The Association’s working paper found that there is strong evidence that a growth in the money supply contributed to inflationary pressure.
“Since there is strong evidence that the monetary component of inflation is due to money growth, prudent monetary policy is essential. This may require a new institutional arrangement of the monetary authority, to the extent that it allows the operational independence of the central ENE ”, the working document underlined.
The independence of the Central Bank could mitigate the problem of time inconsistency, giving it the benefit of keeping monetary policy away from political pressure, preventing the government from collecting irresponsible revenue, and keeping rent-seeking economic actors at a distance, thus fostering competition. and improving the economy. progress, according to the newspaper.
The working document also suggested zero tolerance for corruption, the application of the rule of law and the strengthening of regularity agreements as a necessary and sufficient condition to combat inflation. He also recommended cRestrictions on the exit of small businesses should be removed and entry conditions should be made more flexible to the point of allowing and facilitating entrepreneurs to start businesses with minimal requirements while they proceed with the granting of formal licenses.
This would allow the economy to fight inflation from the supply side, the newspaper said.
By Samson Berhane
