Why Ethiopian Inflation Could Hurt the Rest of the World

Ethiopia’s month over month inflation rose from 32% in January to 36.3% in February, according to their latest economic report. As the global economy sits in a state of disarray, with the potential collapse of the Greek economy and the domino effect it could cause throughout the world, the latest news out of Ethiopia spells trouble for the developing world.

While Ethiopia may not be the ideal measuring stick for the developing world, Ethiopia’s inflation presents a very real issue that could affect many other countries. While not all news out of Ethiopia is bad, this high of an inflation rate spells real trouble for the country. Ethiopia has had many variances in its inflation rate, a number as high as this spells trouble for Ethiopia as well as the rest of the developing world.  If drastic action is not taken, a domino effect throughout the rest of Africa and the world could take shape. 

In 2011, Ethiopia’s estimated real growth rate was 7.5%, putting them 13th in the world, and gave them a positive outlook on the future. More promising news out of the country announced late last week was that 29.6% of its population lives beneath the poverty line, down from 38.7% from just six years ago. The only issue is, these numbers not only bear a lack of credibility, but don’t add up with the rest of the data presented.

One issue that affects the entire globe is the cost of food, and Ethiopia has been hit harder by that harsh reality than many other countries. In the report filed just last week, food inflation increased by 47.4% compared to February of last year. Compared to the FAO Food Price Index, which examines the average of five commodity group prices indices weighted with the average export shares of each of the groups, which has actually gone down by nearly 7% in that same time span. This shows that Ethiopia has a serious food issue.

While 36.3% is certainly a high number for inflation, it does not touch the 231 million percent inflation that Zimbabwe had at its peak, some of the underlying features are in place for hyperinflation to occur. While Meles Zenawi is certainly no Robert Mugabe, he has also been the spotlight of more than his fair share of scandals. All of these factors draw distinct parallels to the hyperinflation that occurred in Zimbabwe less than five years ago.

With yesterday’s reports of increased tension between Ethiopia and neighboring Eritrea, the conglomeration of factors could spell trouble for the fragile state of the Ethiopian economy. When Zimbabwe’s economy plunged into deep hyperinflation, while economically, they were so isolated that the effects of their inflation was largely a refugee problem, Ethiopia’s standing as an international trading partner make this web a bit more difficult to untangle. As of 2010, Sudan was the recipient of 4.6% of the country's exports. For a country as economically unstable as Sudan, inflation in this country could set off economic shockwaves that could reverberate throughout the continent.

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