The inflation rate in Ethiopia hit an all-time high in May 2022 with 37.7% before slowing down to 34% in June 2022. This high level of inflation may be accounted for the ongoing war in the northern part of the country and sanctions related to it, the effect of Covid 19 pandemic on the global economy, and the ongoing Russia- Ukraine war.
Inflation affects everyone, but it tends to worsen poverty because it hits income and savings harder for poorer or middle-income households than for wealthy households. This is especially true when there is a rise in the price of necessity goods that are inelastic to price change. Households that have recently escaped poverty could be pushed back into it by rising inflation.
Higher inflation may cause price increase in necessity goods such as food and if not protected by the government, this will hit hard poor households. According to the World Bank Global consumption database people on very low incomes, food prices can amount to over 70% of their total consumption, so even small changes in food prices has a big impact on their quality of life.
Controlling inflation is a global macroeconomic issue that is too broad to cover in this article. However, below are some suggestions policymakers might consider to mitigate the impact of inflation on the poor.
1. Raise threshold for allowances
Currently, the maximum threshold for transport allowance 1/4th of an employee’s salary. With the current inflation levels and the rising price of fuel, transportation cost is expected to rise. Government can protect workers by raising the maximum threshold for transport allowance providing for better protection of incomes from the effects of the gradual lifting of fuel subsidies.
2. Providing subsidies for Businesses
The current inflation mixed with lack of foreign currency might force different manufacturing industries in the country to shut down and lay off employees. Providing subsidies for sectors that are essential, generate foreign currency, and provide high inflation rate will not only help employees secure their job, but also helps with the effects of the current foreign exchange crisis.
3. Providing Loans, and Preferential Treatment to Businesses
Government can provide loans to Small and Medium Enterprises (SMEs) that are hit hard by the inflation. This could help the businesses to survive through the inflation and help their workers secure their jobs. This can also be supplemented by preferential treatment to small businesses in the form of government procurement below a certain contract threshold and a supplier’s credit scheme.
4. Removing or reducing income tax
Income tax in Ethiopia currently ranges from 10% for income ranging from 601 ETB- 1650 ETB to 35% for those with income above 10,900 ETB. Reducing income tax will raise the disposable income of an employee giving consumers more power over their spending and allowing them to resist the inflation better. Government can raise the minimum taxable income for employees from ETB 601 to a median amount of ETB 3000 and also reduce income tax rate for individuals.
5. Job protection schemes
Job protection plans aim to keep jobs at enterprises that are suffering a temporary decrease in business activity by lowering labour expenses and supporting the salaries of workers whose hours are cut. They can take the shape of short-term work (STW) programmes that directly subsidise unworked hours. They can also take the shape of wage subsidy (WS) programmes, which subsidises the number of hours worked but can also be used to supplement the earnings of people who work fewer hours. Employees preserve their contracts with the company even if their job is interrupted, which is a critical component of all job protection schemes.