Ethiopia ends fuel subsidy and moves to stabilise food prices

Forced to choose between food and fuel, Ethiopia has opted to spend scarce resources on feeding its population.

Ethiopia removed an $800m annual subsidy on petroleum products and will use the money to combat rising grain prices.

Forced to choose between food and fuel, Ethiopia removed an US$800 million (Dh2.94 billion) annual subsidy on petroleum products yesterday and said the money would be used to stabilise rising grain prices. "The $800 million which the government was spending on fuel subsidies will be channelled to ease the spiralling cost of food grain during the current harvest season," the East African country's Ministry of Trade and Industry said.

"The government has decided to subsidise food items instead of oil." A combination of drought and high global food prices had forced prices upwards, the government said. Ethiopia has already imported and distributed 150,000 tonnes of cereal to ease the shortage. The ministry said a litre of petrol would rise 5.6 per cent to 10.15 Ethiopian birr (Dh4.47) from 9.61 birr. Kerosene, used for cooking and heating, is retailing at 8.59 birr, up from 5.72 birr.

This is the second time in less than two years that Ethiopia has increased the domestic price of fuel oil. Analysts say that removing the subsidy may exacerbate inflation, which was at 19 per cent in March. Ethiopia was facing "extreme food insecurity" following a summer drought and more than a year of steady increases in the price of staple foods, USAID, a US government agency providing overseas economic and humanitarian assistance, warned in August. "

Given current and projected conditions, month-to-month expenditure-consumption deficits are cause for immediate attention," it said. In July, the food component of Ethiopia's consumer price index had jumped 91.7 per cent from a year earlier, according to the country's statistical agency. Local factors, including hoarding and high government spending on public infrastructure, have intensified the food crisis by increasing strain on Ethiopian government finances.

The UN ranks Ethiopia among the 10 least developed countries in the world. Inflation and drought-induced crop failure have recently left one in eight of its population of 80 million people dependent on food aid, the World Food Programme (WFP) said in July. The WFP has stopped buying cereals within Ethiopia to distribute to urban poor - a programme that was contributing to spiralling domestic food prices.

It has reduced the size of the rations it distributes, due to high inflation sapping its purchasing power. Last month, the agency said it would need an extra $420m to meet its food bill across the Horn of Africa for the rest of the year. Ethiopia imports almost all of its energy, although it does have promising oil and gas exploration prospects, mostly in its contested southern Somali province, also known as Ogaden.

Its government has been encouraging foreign participation in the country's energy sector and is seeking energy agreements with neighbouring Sudan. Companies exploring for oil and gas in Ethiopia include the Swedish company, Lundin Petroleum, the Malaysian state oil company, Petronas, and White Nile Petroleum, a joint venture between Petronas and Sudan's state-owned Sudapet. TransGlobal Petroleum, a US company, last week signed a 25-year agreement to explore and develop oil prospects in Ethiopia's Afar, Tigray and Amhara regions.

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