This report examines the performance of the major macroeconomic aggregates over the first three months of fiscal year 2004/05. Among the major macroeconomic aggregates, the movement in the price level, the governments fiscal stance in terms of revenue and expenditure, the performance of the financial or monetary sector, and the external sector and its components will be evaluates relative to their historical levels and in terms of possible changes observed during the quarter in review. Before presenting a detailed analyses, a brief summary of the aggregates discussed in the ensuing subsections of the report are highlighted in this introductory section.

Following this introductory section, the Second Section focuses on changes in prices both at a national and regional level. Among the notable changes with regard to price movements during the quarter in review are the following. Relative to the preceding quarter and a similar quarter of the previous year (a) in almost all regions and at a national level, the price of non-food items increased during the quarter in review; but (b) both food and general inflation rates declined. During the first quarter of 2004, quarterly general inflation was 2.8%, down from the 5.4 % inflation rate registered in the preceding quarter. In the same quarter, food inflation and non-food inflation rates were 3.1% and 2.7%, respectively.

On the other hand, compared to its national counterpart, the general price level in Addis Ababa increased relative to a similar quarter a year ago while it decreased relative to the preceding quarter. Food prices also decreased relative the preceding quarter but there was no change relative to a similar quarter of last year. But the prices of non-food items increased during the quarter in review both relative to the preceding quarter and relative to a similar quarter a year ago as was the case at the national level. Accordingly, general inflation in Addis Ababa was 3.3%, slightly lower than the 3.5% inflation rate recorded in the preceding quarter, though 1.2 percentage points higher than a similar quarter of the previous year. Food inflation was 3.4% while non-food inflation was 3.2%. In general, all regions except Amhara, Oromia, and Benshangul Gumuz, experienced higher inflation rates during the quarter in review compared to the preceding quarter. The highest quarterly inflation rate was registered in the Tigray regional state (6.1%), spurred mainly by the 6.6% increase in prices of food items in the region. In contrast, the lowest quarterly inflation was registered in Gambella regional state which experienced no change in prices in the review period from that of the preceding quarter.

The third section of this report discusses developments in public finance. It mainly focuses on federal government revenue and expenditures. The total revenue and grants collected amounted to 2.5 billion Birr. This is about 18 percent of the annual budget. Compared with the previous quarter, the figure was 11 percent less. This decline is due to the relatively slow performances in non-tax revenue, external grants, and personal income tax. During the three months in review, the total federal government expenditure was close to 4.5 billion Birr. This sum is 32 percent higher than that of the same quarter last fiscal year and only 6 percent less over the fourth quarter of 2003/04. The result was an overall deficit (excluding grants) of 2 billion Birr. Much of the overall deficit was financed largely by domestic borrowing. As such, net domestic borrowing covered about 887 million Birr (or about 44% of the total deficit).

The Fourth Section covers developments in the financial sector. The first quarter of 2004/05 is characterized by a slow broad money growth. In effect, the stock of money supply did not change much between the months of July and September 2004. As such, broad money supply more or less remained at the same level as that of the previous quarter, depicting only a marginal decline of 0.3 percent. Of the components of money supply, domestic credit has significantly increased relative to the previous quarter as claims on government leaped by about 8 percent. Claims on other sectors also increased by 5.7 percent. This growth in domestic credit was counter balanced by slower performances in net foreign assets and “other” items. And despite fluctuations in prices over the quarters, the interest rate structure has remained more or less constant, resulting in negative real interest rates. The Commercial bank of Ethiopia still continues to hold the lion’s share of outstanding deposits. Hence, between July 2004 and September 2004, the CBE claimed close to 73 percent of the total outstanding deposits. All the other private banks only managed to take about 23 per cent of the total deposits.

The Fifth section of the report discusses developments in the external sector over the first three months of the year. The value of exports in the review quarter went down by 25.5% to Birr 1.2 billion. The value of imports, on the other hand, climbed to Birr 7.2 billion (an increase of 56.4% relative to the same quarter of the previous year and 27% relative to the preceding quarter). The result was a current account (including public transfer) deficit of more than Birr 3.4 billion, which is more than six fold of the deficit in the same quarter of last year and more than three fold of the deficit in the previous quarter. The overall balance of payments deteriorated to a deficit of Birr 1.3 billion. Consequently, probably due to the deterioration in the Balance of payments, the Ethiopian Birr depreciated vis-à-vis the USD in the first quarter of 2004/05 both in the official and parallel markets. Relative to a similar quarter a year ago, the official exchange rate of the Ethiopian Birr declined in value by 0.4% and the parallel market rate by 0.8% against the US dollar.

And finally, the Sixth section examines the size, regional share and employment creation potential of approved investment activities during the quarter. The section highlights that both in terms of the size of approved capital, number of projects approved and job creation potential, planned investment activities indicate a marginal increased during the quarter in review relative to the preceding quarter.

Enjoy the rest of the report and please do not hesitate to forward your comments and suggestions.

The Macroeconomic Division;

EEA/EEPRI

Text Box: 2

Prices

Owing to the relatively better rain last year, both food and general inflation were lower during the first quarter of 2004/05 relative to the preceding quarter and a similar quarter of the previous year, while non-food inflation was higher. General inflation was 2.8%, down from the 5.4 % inflation registered in the preceding quarter. During 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 relatively lower than the figures for the same quarter of the preceding year (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 was observed both in the preceding quarter and the same quarter last year, which was 0.4 percent [See 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%, and 14.3%, respectively. Nevertheless, while the prices of vegetables and fruits significantly plummeted in the review quarter (by 12.5 %), but the prices of cereals and spices has continued to rise even during the quarter in review even though by a relatively lower rate compared to the last quarter. In addition to that, the decline in the prices of oil and fats (by 2.6%), milk, cheese and egg (by 3.2%), potatoes, other tubers and stems (by 6.1%) in the first quarter of 2004/05, among others, partly explains why food and general inflation rates declined (see Fig 2.1 for details).

Source: CSA and EEPRI/EEA staff computations.

As can be seen in the following graph, general and food price indices, which more often than not mimic each other, 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 continued rising until 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 quarters, while a small agricultural production from the Belg season is available in the fourth and first quarters (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, as witnessed by the significant increase in the prices of construction materials, fuel and health care.

Source: CSA and EEPRI/EEA staff computations.

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

Source: CSA and EEPRI/EEA staff computations.

Looking at the general price movements over the last five years (that is, between 1998/99-2003/04), it is only in.2001/02 that general and food inflation rates were higher in the second quarter compared to the first quarter. Based on this, albeit short, historical trend, we expect inflation to go down in the second quarter. With regard to non-food inflation, it has fluctuated within a 5% band during the above period, and, therefore, it is highly likely that it will remain within that range in the second quarter.

Source: CSA and EEPRI/EEA staff computations.

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 a similar quarter last year. Annualized inflation for non-food items by the end of the review quarter was, however, higher than for the same quarter last year.

During the quarter in review, general inflation in Addis Ababa was 3.3%, slightly lower than the 3.5 % inflation rate recorded in the preceding quarter. Food inflation was 3.4% while non-food inflation was 3.2%.

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