Table of Contents

Preface ..............................................................................2

1. Introduction ...................................................................5

2. Price Level ......................................................................7

3. Public Finance ..............................................................14

4. Foreign Trade.................................................................19

5. Monetary Aggregates and Indicators.................................25

6. Investment......................................................................28

7. Special Issues..................................................................32

8. Statistical Annexes..........................................................35

The Ethiopian Economic Association has been publishing its “Annual Report on the Ethiopian Economy” since 2000. The annual report, a flagship publication of the Association, provides an independent analysis of the performance of the economy in addition to detailed discussions on particular sectors chosen to be the focus area for the year. While that report has served this purpose very well, it has two fundamental drawbacks. The first is the fact that owing to lack of timely data, the analysis usually has a two year lag period. This delay is bound to reduce the usefulness of the analysis for immediate policy interventions. The second and related drawback is that even if data is available on a timely basis, there is a lot of information that annual data hides that can be available from shorter frequency data sets such as monthly or quarterly data. While monthly data is almost non existent in Ethiopia, there is quarterly data, albeit incomplete, that can be used for a meaningful short term analysis. The aim of preparing this quarterly report is to use this available quarterly data set in order to fill the analytical gap that is felt in the annual report.

The availability of up-to-date data on a regular basis along with a thorough analysis of this data is crucial to make an informed and timely adjustment on major macroeconomic policies. Paucity of data has rendered timely macroeconomic analysis in Ethiopia rather difficult. This, in turn, hinders making rapid and informed policy interventions in periods of macroeconomic shocks. This has significantly reduced the flexibility and effectiveness of macro policy at the national level, especially in periods of economic stress. The timely availability of macroeconomic data and analysis in the public domain, therefore, is valuable not only in enhancing our understanding of macroeconomic phenomena but also in enabling policy makers to make informed policy decisions and enhancing stakeholders’ participation in the policy making process.

Moreover, the importance of quarterly performance can be judged by the fact that the annual economic performance is a cumulative result of quarterly performances. A systematic concentration of economic activities on some specific quarters provides useful information about the nature of an economy, resource utilization and distribution.

Understanding such a pattern helps in making informed policy interventions. Thus, it is very useful to systematically compile, and analyze quarterly data on major macroeconomic indicators in the country.

Towards this end, the Ethiopian Economic Association/Ethiopian Economic Policy Research Institute is launching a quarterly report on major macroeconomic indicators for Ethiopia. We firmly believe that this report will encourage a more informed and relatively timely debate on macroeconomic issues in the country among academics, policy makers, donors and the general public. Accordingly, we encourage users of this report to provide constructive comments and criticisms both on the form and content of this report in order to help us improve future reports.

This report is part of the work of the recently established Macroeconomic Division of the Institute. The establishment of the Division is financially supported by a consortium of donors including Irish Aid, the African Capacity Building Foundation (ACBF), the Department for International Development of the United Kingdom (DFID), the Norwegian Agency for International Development (NORAD), the Swedish International Development Agency (SIDA), the Netherlands Embassy in Ethiopia, and Friedrich Ebert Stiftung of Germany (FES). The Association and the Institute are very grateful for their continuous support. We would particularly like to mention Irish Aid and particularly Patrick Empi and the other Irish Aid staff in Addis Ababa not only for the financial support and commitment to the Macroeconomic Division but also for significantly contributing to the enrichment of the project idea and its implementation.

We also would like to thank various data generating government institutions including the National Bank of Ethiopia, the Central Statistical Authority, the Ministry of Finance and Economic Development, the Ethiopian Investment Authority, and the National Meteorological Agency for allowing us to use their libraries and making some of their data available for analysis. We hope, in the interest of knowledge and a better understanding of our economy, this cooperation will broaden to include other government and non governmental institutions in the future.

Berhanu Nega (Ph. D)

Director, Ethiopian Economic Policy Research Institute

Introduction

It is generally believed that in a well developed capitalist economy, the economic performance of a country for two consecutive quarters in a given fiscal year suffices to tell whether the economy is in a recession or not. A timely determination of the health of the economy allows policy makers to use the various policy instruments they have to try and chart a more desirable course for the economy. Quarterly data also provides important details about the performance of individual economic sectors with seasonal variations. For example, in rain dependant agriculture such as Ethiopia, what happens to the agricultural sector in the first quarter more or less determines the total value-added in the sector for the whole fiscal year. Closely related to this, in Ethiopia, price levels are higher in the first and fourth quarters than in the second and third quarters witnessing the strong association between price levels and food availability above all other determinants of inflation. About 48% (sometimes as high as 59%) of the capital budget of the Ethiopian government is utilized during the fourth quarter and this has serious implications on resource allocation and efficiency. Hydroelectric power that is generated in the first and second quarters is not sustained in the third and fourth quarters. All these variations provide us with a richer understanding of the operation of the economy.

Some of the indicators considered in this issue are brief. Future issues of this report will update the already available information and will cover macroeconomic indicators in more detail. This maiden report incorporates data and analysis on selected variables on quarterly time series basis. In order to highlight some of the salient issues that emerge in a quarterly data analysis and identify systematic trends, this report will provide long term time series analysis on quarterly data. Moreover, it will take some sectors for a more in depth discussion when particularly noteworthy events occur in that sector during the quarter under analysis. Furthermore, future reports will incorporate other indicators that are not covered in this issue as the availability of data permits.

This report is divided in to seven sections. The next section deals with price developments which is followed by public finance in section three. Sections four to six deal with foreign trade, monetary aggregates, and investment, respectively. The last section of the report deals with energy issues in the “Special Issues” section of the report. The statistical annex of the report provides detailed quarterly data on a variety of indicators.

Price Level

General Quarterly Trend

It is usually maintained that inflation in Ethiopia has never been a serious problem. Except in times of war and drought, the official record of inflation in the country has shown a relatively stable trend, remaining within single digits in normal years and even showing a negative value (deflation) in some years.

It is clear from the data that price levels in the country are heavily dictated by food production. This is evidenced by the systematic association between the price level and seasonal variation in crop production. The first quarter (July- September), which is the rainy season in the country, is the planting period for most food crops. During this period, there is a relative shortage of food as peasants themselves are facing a depletion of their stock. As food comprises 60% of the share in the basket of commodities in calculating the consumer price index (CPI), the relative shortfall in food supply during this quarter results in a relative rise in price levels compared to previous quarters.

The second quarter (October - December) is a good period for food availability as crops reach their edible stage and as it is harvest time in some areas. This quarter is also a period when farmers or traders having accumulated stocks from the previous year start selling especially if they expect that current harvest to be good. The third quarter (January to March) is generally the period for farmers to complete harvesting. Thus, price level in these two quarters is relatively low because of the availability of crops. During this period, the terms of trade is in fact biased against producers particularly because small holders, who dominate the agricultural sector in the country, have to sell a significant portion of their crop to settle their debts, which they incur in order to buy fertilizers and other inputs.

The fourth quarter (April – June) is the dry season. It is a period of intense tilling and crop stocks are depleted. Thus, price starts to rise. In years of good belg harvest, price levels become lower than the normal average.

As can be seen from Figures 2.1a and 2.1b, quarterly price behavior is more of a supply-side phenomenon. The graph (2.1a) shows the average national price level of each quarter for the period 1997/98 to 2002/03. It depicts that price levels, on average, are 2% higher in the first and fourth quarters than in the second and third quarters. The respective comparison rate for food index is 4%. A similar trend prevails for Addis Ababa (See Figure 2.1b).

The pattern that is observed above for the six year average is consistent with the quarterly trend of prices during the period 1997/98:Q1 to 2002/03:Q4 save for a few exceptional years. One such exception is 2002/03 where prices showed an unusually upward trend due to the catastrophic drought that occurred in the previous year. With this typical pattern maintained in other years, price levels moved above the trend for the years 1998/99 and 1999/00 partly due to the Ethio-Eritrean boarder conflict.

Figure 2.2: Quarterly Trends of Price Levels: 1997/98:Q1-2002/03:Q4

The six year average monthly price levels show that prices start to sharply rise in July through August, begins to decline in September, and reach their lowest level in December, which is exactly the end of the harvest period. The price level starts to rise again after December until it reaches the maximum at the end of the fourth quarter in June.

Figure 2-3: Monthly Trends of Prices (1997/98-2002/03)

INFLATION RATES

The national general price level has been rising at an average (inflation) rate of 0.75% per quarter during the period 1997/98-2002/03, that is, for the last twenty four quarters. Price levels for food and non-food items have been increasing at a quarterly rate of 1.1% and 0.1%, respectively. Food items, with a 60% share in the CPI, accounted for 95% of the quarterly, and 87% of annual inflation.

Table 2.1a: Average Quarterly Inflation at a National Level

	CPI		Food		Non-food
	1997/98:I-2002/03:IV	2002/03:I-IV	1997/98:I-2002/03:IV	2002/03: I-IV	1997/98:I-2002/03:IV	2002/03:I-IV
Share (weight)	100	100	60.005	60.005	39.95	39.95
Inflation Rate	0.75	5.4	1.1	8.2	0.1	0.6
Weighted inflation Rate	0.74	5.2	0.7	5.0	0.04	0.23
Share in inflation	100	100	95	95.6	5	4.4

Source: Central Statistics Authority and EEA/EEPRI staff computations.

As it is evidenced by Figure 2-4 below, the price index for non-food items is relatively stable over the last 24 quarters. Any inflationary or deflationary pressure, if any, is more or less associated with fluctuations in the food price index. This situation clearly supports the view that price trends in Ethiopia are highly dictated by availability of food supply.

Figure 2-4: Trends in Quarterly Price Levels

In terms of price stability over the years, the first quarter is found to be the most stable with a percentage change of 0.8% while the fourth quarter is found to be the most unstable with a percentage change of 4.5%[1]. This indicates that inflationary trends are higher in the fourth quarter than in other quarters. While inflation is heavily determined by availability of food in general and crop production in particular, the high inflationary pressure in the fourth quarter for successive years implies that the relative shortage of food is dynamically deteriorating in the forth quarter. Some of the fluctuation could be minimized with a comprehensive agricultural marketing strategy that allows for smoothening out prices over the cycle.

Table 2.1b: Average Quarterly Inflation for Addis Ababa

	CPI		Food		Non-food
	1997/98:I-2002/03:IV	2002/03:I-IV	1997/98:I-2002/03:IV	2002/03:I-IV	1997/98:I-2002/03:IV	2002/03:I-IV
Share (weight)	100	100