This second quarterly report (covering October to December 2003) is an update of the first quarterly report released recently. Accordingly, the macroeconomic aggregates covered in this report parallel those that were covered in the first quarterly report. In the order that they are presented in the report, the macroeconomic aggregates examined include: the price level, public finance, the monetary sector, the foreign sector and investment.

Owing to last year’s relatively adequate rainfall, agricultural output significantly improved. Consequently, the general price index at a national level which is mainly influenced by food prices showed a modest decline relative to the last quarter. The inflation rate is still high by historical standards, but it is the first quarter in which prices fell since the upward movement that had started in June 2002. A similar an over all decline in inflation was also observed at a regional level. But the inflation rate in some regions was still high. The three highest general inflation figures at the end of the second quarter were registered in Benshangul gumuz, Oromia and Amhara while the lowest was registered in Somali regional state.

The Third section of the report deals with public finance in which it examined the amount of public domestic revenue collected, expenditures incurred, and the amount of external grants obtained. The major points worth highlighting in this regard are that tax revenue collected and external grants increased while non-tax revenue decreased during the period. These all flows resulted in a net deficit of Birr 488 million (or about 16% of total revenue) during the quarter in review which is lower than the preceding and a similar quarter last year.

The Fourth section highlights developments in the monetary sector. These include the components of the stock of money, the structure of interest rates, and Treasury bills. There is no significant development in the sector that is worth highlighting except for the modest growth in money supply and some increase in money circulation (or transaction demand for money) owing to the harvest season in which economic activity in the agricultural sector increase.

The Fifth section outlines the performance of the external sector. During the second quarter of fiscal year 2003/04 the value of merchandise exports declined both relative to the preceding quarter and a similar quarter of the previous fiscal year while the value of merchandise imports increased during the same period. As a result, the trade balance has deteriorated during the quarter in review relative to the first quarter of this fiscal year, and the same quarter of the previous fiscal year. The decrease in exports over the last quarter could be partly attributed to the production cycle of coffee which is usually at its lowest during the second quarter since it is the time when most of it is harvested.

The focus of the Sixth section is on investment flows. Investment activity as measured by the number of projects licensed and their capital outlays, particularly those of foreign origin, increased during the quarter. Compared to previous quarters, a rather significant increase was recorded in the number of approved foreign projects during the quarter in review showing a 389% increase relative to the preceding quarter. Most of the investment capital (about 60%) went to manufacturing and agriculture. In terms of regional distribution, once again, the largest share of investment capital went to the capital city – attracting about 62% followed by Oromia with 18%of the total investment capital.

Enjoy the res.

EEA/EEPRI Macroeconomic Division

Text Box: 2

Prices

During the first quarter of 2004 quarterly general inflation was 2.8%, up from the 5.4 % inflation registered in the preceding quarter. In the same quarter food inflation and non-food inflation rates were 3.1 % and 2.7%, respectively. The general and food inflation rates in the review quarter were also comparatively lower than the same figures last year in the same period (which were 4.5% and 6.5 %, respectively). The corresponding inflation figures in the previous quarter for food and non-food items were 8% and 1.8 percent. Non-food inflation, on the other, hand was higher than what is observed both in the preceding quarter and the same period last year, which was 0.4 percent. [Table 2.1]

Table 2.1 Quarterly Inflation During 2000/01-2003/04

	2004/05			2003/04			2002/03			2001/02
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
Qtr I.	2.8	3.1	2.7	4.5	6.5	0.4	8.0	12.5	0.9	-2.1	-4.4	1.3
Qtr II				-3.3	-5.2	1.0	4.5	7.0	0.4	0.1	-0.1	0.6
Qtr III				-2.2	-5.2	4.8	4.5	6.5	1.0	-2.0	-3.1	-0.4
Qtr. IV				5.4	8.0	1.8	4.5	6.9	0.0	0.8	2.5	-1.4

Source: CSA and EEPRI/EEA staff computations

It is to be recalled that increasing food prices was the reason behind the rise in inflation last quarter. Particularly, the prices of cereals, spices, and vegetables and fruits notably had gone up by 10.7% and 19.2%, 14.3 %, respectively. Nevertheless, the prices of vegetables and fruits significantly plummeted in the review quarter (by 12.5 %), and the rise in prices of cereals and spices was also, relatively speaking, lower than last quarter. In addition to that, the decline in the prices of oil and fats (2.6%), milk, cheese and egg (3.2%), potatoes, other tubers and stems (6.1%) in the in the first quarter of 2004/05 , among others, partly explains lower food and general inflation rates. (Fig 2.1)

As can be seen in the following graph, general and food price indices, which do exhibit close association, had been rising since the fourth quarter of 2001/02 until the first quarter of 2003/04. Both then began to decline in the consecutive two quarters only to rise in the fourth quarter of 2003/04 and the review quarter. This is mainly associated with the seasonality of agricultural production. Production from the Meher (Main) season is mainly available in the second and third quarter quarters, while a small of agricultural production from the Belg season is available in the fourth and first quarter (Fig 2.2). On the other hand, the non food price index, which does not show significant seasonal variations, has been on the increase since the third quarter of 2002/03.

Despite a modest increase in the prices of medical care & health (3.7%), transport & communication (1.9), house rent, construction material, water, & fuel 7 water (1.8), the highest increase in the non-food price index came from miscellaneous goods (20.1%), where as the sharpest decline was registered for cigarettes & tobacco (11.8%). (Fig 2.3)

When you look at the historical trend in general inflation rate during 1998/99-2003/04, it is only on one occasion (i.e.2001/02) where a higher general and food inflation rates were observed in the second quarter compared to the first quarter. Based on this historical trend, we expect inflation to go down in the second quarter. With regards to non-food inflation, it has not been beyond 5% on both ends in the period and it is highly likely that the same will happen in the second quarter.

The annualized general inflation rate by the end of the first quarter of fiscal year 2004/05 was 5%. The corresponding figures for food and non-food items were 4.8% and 6.9%, respectively. The general and food inflation rate figures are relatively lower than the same period last year. Annualized inflation in non-food items by the end of the review quarter was, however, higher than the same period last year.

Table 2.2 Annualized Inflation During the First Quarter 2001/02-2004/05

2004/05

2003/04

2002/03

2001/02

General

Food

Non-Food

General

Food

Non-Food

General

Food

Non-Food

General

Food

Non-Food

July

7.5

9.2