Table of Contents

1. Introduction.................................................................. 1

2. Price Level....................................................................4

3. Public Finance..............................................................11

4. Foreign Trade.................................................................23

5. Financial Sector Developments.....................................32

6. Investment......................................................................40

7. Statistical Annexes..........................................................45

Introduction

This report covers developments in the Ethiopian macro economy during the first quarter of fiscal year 2003/04 (or July-September 2003). Even though the focus is on changes in the selected macroeconomic aggregates during the period in review, the analysis also attempted to highlight the changes relative to previous quarters and over all trends. The rationale for doing so is to gauge the relative performance of the economy during the quarter relative to long-term trend. Needless to say, the benefits of such current information on the sate of the economy when made available in time goes beyond the simple fact of establishing where the economy is relative to its past performance. It also helps identify the major bottlenecks, their causes, and the required policy intervention(s) to address them. It further helps in designing short-term policy adjustment(s) not only to correct current fluctuations but also steer direction that is consistent with envisioned long-term economic growth.

On the basis of data availability on a quarterly basis and the relevance of the indicators in serving as vital signs of the economy, this report examined selected macroeconomic aggregates. These aggregates include the following: prices, public finance, foreign trade, financial sector developments, and investment.

In general, no major trend-breaking developments were registered during the period in review. The overall performance of the aggregates examined could be characterized as ranging between a significant slowdown (or worsening) to marginal improvements relative to either trend averages or relative to a similar quarter of the previous year. As a prelude to the details presented in the report and to indicate the sequence in which the report is organized, the movements of the aggregates during the quarter in question are briefly highlighted below in the order they are presented.

Section two of the report, examines price movements during the quarter both at a national level and in the Capital. Official figures from Central Statistical Authority show that, owing to last year’s severe drought, the national price index shot-up to 18.2 per cent by the end of the first quarter compared to -2.6 per cent the same period last year. Not surprisingly, the food price component which reached 29.4 % during the same period, accounted for this increase since the price of non-food items remained almost the same. The only exception, and surprising phenomenon worth highlighting, is that both the general and food prices indices in Addis Ababa fell relative to the same quarter last fiscal year despite the increase of both indices at a national level.

Section three outlines the size and structure of government revenue and expenditures during the first quarter of 2003/04. The report indicates that the government’s ability to collect taxes seems to have increased recently. A sum of Birr 1.8 billion tax revenue was collected during the quarter, which is the highest that the federal government managed to collect in the first quarters since 1990/91. As is usually the case, the share of indirect taxes in the total tax revenue was much higher than indirect taxes. On the whole, government revenue from tax and non tax sources during the quarter amounted to Birr 2.3 billion while spending was about 3.1 billion. Consequently, the deficit during the quarter in review was about Birr 0.8 billion.

Section four presents developments in the foreign sector. Figures show that the value of total exports of goods amounted to Birr 1.1 billion while imports amounted to Birr 4.6 billion in the first quarter of the fiscal year 2003/04. In terms of growth, the value of total exports increased by 43.7% while that of imports increased by 33.3% during the quarter in review relative to the same quarter the previous year. Despite the growth in exports the deficit in merchandize trade amounted to Birr 3.5 billion due to the size of the import bill. Further, in the quarter under consideration, the spread between the official and parallel market exchange rate narrowed to birr 8.6057 and 8.6452 per US$, respectively.

Section five focuses on financial sector developments in which growth in monetary aggregates, the size of credit and its structure, and trends in the T-bill auction market are examined. The report indicates that the growth in monetary aggregates (whether measured in narrow or broad money) was moderate during the review period. On the other hand, at Birr 35.8 billion, gross domestic credit to the economy declined by 5.3% compared to the fourth quarter of 2002/03 fiscal year. Of this total figure, the share of claims on government was about 71 percent while the rest went as credit to the private or semi-private sectors. Regarding the market for T-bills, the report shows that the market has grown in the number of participants and bidders over the last seven or more years. The number of participants has grown from just 16 in the second quarter of 1995/96 to as high as 120 participants in the first quarter of 2000/01. Since then, however, the number of participants in the bi-weekly auction has, on average, been declining. In the first quarter of 2003/04, there were only 66 participants even though total demand for treasury bills has risen from the quarterly trend average by about 193% during the period in review.

And finally, section six evaluates the performance of investment in terms of number of investment projects approved and their capital outlays. According to the National Income Accounts of MoFED, the highest share of gross capital formation to GDP (22.3%) was recorded during fiscal year 2002/03. And in the first quarter of fiscal year 2003/04 The Ethiopian Investment Authority and regional investment offices approved a total of 411 projects worth around Birr 3.5 billion. The number of approved projects in this period is the highest relative to any single quarter since 1997/98 and the volume of capital is around 41% higher than the average volume of capital approved over the various quarters during 1997/98-2003/04. In terms of regional distribution of investment projects, Addis Ababa took the lion’s share with 56.7%, followed by Oromia with 23% share during the quarter in review.

Prices

Many of the macroeconomic fundamentals that are expected to contribute to price stability seem to prevail in Ethiopia. Ethiopian monetary authorities pursued by in large prudent monetary and fiscal policies. Consequently, the exchange rate has also been relatively stable compared to many other African countries, safe-guarding any potential pass-through effects of foreign prices on domestic inflation.

But it is difficult to ascribe the relative price stability in Ethiopia to the above policy stances. As Fig. 2.1 clearly shows, inflation, more often than not, is not a “monetary phenomenon” in Ethiopia. Rather supply side factors such as food availability, which is usually at the mercy of the weather conditions, seem to play an important role in determining price movements. For instance, the very high 15.1% inflation registered last fiscal year i.e. 2002/03 owes much to the severe drought that hit almost all parts of the country than any other macroeconomic phenomenon.

The rise in the rate of inflation that began at the outset of 2002/03 continued in 2003/04 in which the national inflation rate reached 18.2% by the end of the first quarter, from -2.6 % the same period last year. While the prices of non-food items saw a modest growth of 1.1%, food inflation overshot to 29.4% in September 2003. It is usually the case that, owing to the production cycle, higher inflation rates are observed during the first and the fourth quarters (both quarters being short in food supply). But as Table 2.1 shows, the figures observed during the quarter under review are exceptionally high even compared to similar periods over the previous couple of years due to the drought which was high both in severity and scope by recent historical standards.

Figure 2.1: Monthly Change in the CPI and Growth in Broad Money Supply: 200/01:I-2003/04:I)

Table 2.1 Inflation During the First Quarter (2000/01- 2003/04) (Annualized Average)

	2003/04			2002/03			2001/02			2000/01
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
July	16.6	27.1	0.8	-5.8	-10.5	0.9	-6.3	-11.8	1.2	5.0	6.3	3.0
August	17.6	28.7	0.8	-4.0	-7.8	1.2	-7.3	-13.1	0.6	4.0	4.2	3.5
September	18.2	29.4	1.1	-2.6	-5.0	0.8	-7.8	-13.8	0.3	3.1	2.3	4.0

Source: CSA and EEPRI/EEA staff computations.

An attempt to empirically establish the relationship between food production and inflation is hampered by the lack of quarterly data on GDP. However, if we look at the dynamics of prices and see how it behaves in the different quarters, a picture which shows that inflation in Ethiopia is normally a supply-side phenomenon clearly emerges. Accordingly, on average, lower inflation rates are recorded during the second (October-December) and the third (January-March) quarters, and prices start tend to be high during the first (July-September) and the fourth (April-June) quarters (Fig. 2.2). The high prices correspond to periods of tilling and planting where as the low prices correspond to harvest periods.

Figure 2-2: Average Quarterly Inflation Rate: 1997/98-2003/04

The generally observed pattern in price movements was not observed, however, in 2002/03 and the first quarter of 2003/04. As Fig 2.3 indicates, inflation began to rise and is still on the increase since the first month of 2002/03. It is also interesting to note that non-food inflation has been low and stable throughout the period since 1998. Obviously, much of the change in the general price index came from the food price index. This is not, however, surprising since food items account for 60% of the general price index.

Figure 2-3: Trends in Country Level Inflation Rate: June 1999-September 2003

In terms of quarterly movements, inflation grew by the same rate of 4.5% between the second quarter of 2002/2003 and the first quarter of 2003/2004. Compared to the previous quarters this was unusually high. (See Fig 2.4).

The food-price index rose by 6.5% in the first quarter of 2003/04 relative to the previous quarter. The figure was a mere 0.4% for the non-food index. A similar comparison for the preceding year (2002/03) shows that the general price index grew by 8% in the first quarter relative to the previous quarter. The relative contributions of food and non-food items to the overall increase averaged 12.5% and 0.9%, respectively (Table 2.2).

Table 2.2 Quarterly National Inflation: 2000/01- 2003/04.

	2003/04			2002/03			2001/02			2000/01
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
Qtr I.	4.5	6.5	0.4	8.0	12.5	0.9	-2.1	-4.4	1.3	-1.2	-2.6	0.4
Qtr II	-	-	-	4.5	7.0	0.4	0.1	-0.1	0.6	-6.6	-10.5