Food insecurity in Ethiopia leads to inflation rise – report

Ethiopia will experience a resurgence in inflation over 2017 as food insecurity increases on the back of erratic rainfall, says new report by BMI. Strong money supply growth will also drive inflationary pressures upwards over the year ahead.

Inflation in Ethiopia will begin to rise over the next several months as drought conditions negatively affect domestic food supply. We forecast inflation to pick up from 6.1% y-o-y in January and to average 7.5% over the year.

While our 2017 average inflation forecast is only marginally higher than the 2016 average of 7.3%, price pressures will begin to rise from current levels. Continued strong growth in money supply will also act as an additional driver of inflationary pressures over the year ahead.

Poor Rainfall Will Drive Food Costs Upwards Ethiopia remains susceptible to adverse weather conditions and this will drive the food component of inflation upwards over 2017. Headline inflation ramped up into double digits in mid 2015 as El-Niño induced droughts hampered agricultural production.

While inflation subsequently cooled through much of 2016, the poor rainfall in southern and southeastern Ethiopia between October and December 2016 and the Famine Early Warning Systems Network’s expectation for below-average rain between March and May will see inflationary pressures rise.

We however do not expect price growth to rise to the extent seen over late 2015 – inflation peaked at 11.9% y-o-y in September 2015 – as the severity of the drought over that period was the worst experienced in 50 years. As a result, we still see inflation remaining in single digits over the next several months.

Money Supply Growth To Remain Elevated Core inflation in Ethiopia will likely begin to rise as money supply exceeds nominal GDP growth. While reserve money growth remains the National Bank of Ethiopia’s (NBE) operational target for monetary policy, broad money supply (M2) continues to outpace growth in the economy – M2 includes currency held by the public, traveller’s checks, demand deposits and other checkable deposits plus assets that can be quickly converted to cash.

Broad money supply rose by 21.8% in the first quarter of 2016/17 (Ethiopia’s fiscal year runs from July to June) and we expect this trend of elevated money supply growth to continue over the through to the end of the government’s second phase of its Growth and Transformation Plan in 2020.

Indeed, between 2012 and 2015, M2 grew on average by 25.1% per year compared to nominal GDP growth of 17.5% over the same period. As a result, we expect this will exert upward pressure on core inflation in the economy over the upcoming months – core inflation removes the effects of volatile food and energy prices.