ETHIOPIA: Lifting of grain tax may ease food burden for urban poor

Sunday, March 23, 2008

The Ethiopian government’s decision to remove some taxes on grains is unlikely to have an immediate impact on rising food prices in rural areas, where most of the consumers are actually producers, an economist said.

It may, however, ease the burden on the urban poor in several months’ time, if the government follows through on implementation.

"The fact that 85 percent of Ethiopians are living in rural areas means a reduction of value added tax and turnover tax will not have an impact on their lives," the Ethiopian economist, who declined to be named, said.

"The reduction will probably help the urban poor; [but] the change will not be that significant," he told IRIN in the capital, Addis Ababa. "It will take at least six months to see some changes in the grain market - with serious regulation and follow-up. However, the government does not have the capacity to do that."

Speaking in parliament on 18 March, Prime Minister Meles Zenawi said: "While our current economic development is encouraging, worsening inflation has created a difficult situation for the low-income urban dwellers."

The government, he added, had devised temporary measures, including provision of direct and indirect subsidies, and had spent 372 million birr [US$38 million] in the past few years to subsidise wheat and 3.52bn birr [$366 million] to subsidise fuel.

"Direct subsidies have included government expenditure to stabilise fuel prices and provide wheat for low-income populations," Meles said.

A subsidised wheat supply of 25kg every month for low-income urban dwellers was introduced in March 2007. "The current distribution of wheat will be maintained and edible oil will also be offered in a similar manner until the price of goods has been satisfactorily stabilised. We will also attempt to distribute products such as soap if deemed appropriate, depending on the circumstances."

Apart from rising commodity prices in the international market, a significant increase in money circulation and deficiencies in the marketing system were two domestic reasons that had exacerbated inflation.

In December 2007, the Famine Early Warning Systems (Fews Net) warned that high cereal and commodity prices in Addis Ababa, and several other monitored markets, including Bahir Dar, Mekelle and Dire Dawa, would affect food security for many urban dwellers.
Market-related factors, along with chronic problems and decreased production, were expected to render an estimated eight million Ethiopians food-insecure this year, while 2.4 million acutely food-insecure people would require food and cash assistance.

"Despite some increases in income, high prices are affecting the food security of the rural and urban poor, who rely heavily on the market to purchase food," the update noted.

Giving the example of white maize, Fews Net said the nominal retail price in Addis Ababa was 36 percent higher in 2007 compared with the 2002-2006 average.

According to the UN, 16 percent of Ethiopia's more than 70 million people live in urban areas and the rest in rural areas. Eighty-five percent of the population are employed in agriculture.

"Overall, the increase in prices of cereals is expected to have a serious negative impact on the food security of the poor, both in urban and rural areas, who depend on the market to purchase food, though increases in wage labour are expected to enable them to cope, to some extent, with increasing prices."