This quarterly report focuses on the performance of selected macroeconomic aggregates of the Ethiopian economy during the second quarter of fiscal year 2004/05. The major aggregates examined include the changes in prices, the structure of public finance, the performance of the monetary sector, the movements in the external sector, and the flow of both domestic and foreign investment during the quarter in review. These aggregates will be evaluated in terms of the changes observed relative to the preceding quarter and relative to a similar quarter of the previous fiscal year. After highlighting the major components of the report in this introductory section, a detailed discussion on each of the aggregates is presented in the remaining sections.

The Second Section examines price movements both at national and regional levels. A notable development in this regard is the decline in the general price level owing to declines in food prices while non-food inflation increased during the quarter in review, both relative to the preceding quarter and a similar quarter last year. At a regional level, the highest inflation rate was recorded in Gambela regional state while the Hareri regional state had the lowest inflation rate among all the regional states during the quarter in review.

The Third Section outlines the financial flows of the Federal Government of Ethiopia during the second quarter of 2004/05. Accordingly, the federal government raised revenue from both tax and non-tax sources worth 3.75 billion Birr while spending about 4.35 billion Birr during the quarter in review. The result was an overall deficit (excluding grants) of about 600 million Birr. During the quarter under review, the government was able to secure grants worth about 1.6 billion Birr. As a result, the overall fiscal balance was about a positive of 1 billion Birr.

The Fourth Section of the report focuses on the activities of the monetary sector. This includes the flow of monetary aggregates, the structure of interest rates, and the activities of Microfinance institutions. To highlight some of the important points discussed in this section, the stock of money supply increased during the second quarter of 2004/05 both relative to trend average and relative to recent quarters. Deposit interest rates were below the non-food inflation rate while real lending rates were positive. The yield on Treasury bills has continued to decline vis-à-vis rising excess reserves. Most of the bills were still owned by commercial banks. The banking sector disbursed higher amount of fresh loans during the quarter in review. The Commercial Bank of Ethiopia maintained its dominant role in terms of fresh loan disbursement, and loan collection.

The Fifth Section evaluates the performance of the external sector. It highlights the flow and the composition of exports and imports and the resulting overall trade balance during the quarter in review. It also, among other things, analyses the movements of the local exchange rate against the US dollar. The report indicates that the overall balance of the external sector recorded a healthy surplus relative to the deficit in the preceding quarter. Owing to increased public and private transfers and improvements in net service balance, the current account deficit had also significantly improved during the quarter in review. On the other hand, the trade deficit has continued to deteriorate due to escalations in the value of imports and unmatched performance in exports.

The Six Section of the report examines the flow of investment during the second quarter of 2004/05. It analyses the number of new investment projects approved, the size of their capital, their employment creation potential and their distribution among the various regional states. Accordingly, the report notes that a total of 672 projects with an investment capital of around 11.2 billion birr were given investment licenses during the second quarter of 2004/05. The total approved projects are expected to create permanent employment opportunities for 25,614 individuals in addition to 35,287 short-term jobs.

Enjoy the rest of the report and please do not hesitate to forward any comments and suggestions you may have.

The Macroeconomic Division, EEA / EEPRI.

Text Box: 2

Prices

During the second quarter of fiscal year 2004/05, quarterly general inflation went down to 1.5% from the 2.8% inflation registered during the preceding quarter. The respective food and non-food inflation rates in the same quarter were 0.8 % and 3.3 %. As might be expected, the general and food inflation rates during the review quarter were relatively lower than the figures observed in the preceding quarter. Compared to last quarter, however, non-food inflation increased from 2.7% to 3.3% in the review quarter. The observed non-food inflation was also higher than what was observed in the same period last year (which was 1%). The lower inflation rate in the review quarter owes mainly to the fall in the food inflation rates despite the increase in the non-food inflation rate during the quarter in the review. [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	1.5	0.8	3.3	-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

As noted earlier declining food prices were the major causes for lower general inflation during the quarter in the review. The price of potatoes, other tubers and stems significantly increased (by 18.6%), while the increments in the prices of all food items was below 5%. Particularly, the prices of vegetables and fruits, spices, and pulses have gone down by 5%, 5.9%, and 1.2%. During the last quarter, the prices of spices had peaked up by 10.5%. In addition, the price of cereals only slightly increased (by 0.3%), which is far lower than the growth rate observed during the preceding quarter i.e. 7%. (Fig 2.1)

Source: CSA and EEPRI/EEA staff computations

A different picture is observed when we look at the prices of non-food items. Among the major food item categories, only the price of medical care and health services declined by a slight margin of 0.2%. Apart from that all the price indices of the remaining non-food item categories recorded positive growth rates during the quarter. Particularly transport and communication, recreation, entertainment and education and personal care and effects recorded notable prices increases of 4.6%), 4.1%, and 3.2%, respectively.

Source: CSA and EEPRI/EEA staff computations

The prices of the category of house rent, construction materials, water& fuel and power also increased by 2.7% during the quarter in review. The highest increase in the non-food price index came from miscellaneous goods (13.7%), where the prices of the remaining non-food items exhibited an increase of 11.8%. (Fig 2.3)

The annualized general inflation rate by the end of the first quarter of fiscal year 2004/05 was 4.5%. The corresponding figures for food and non-food items were 3.0% and 9.6%, 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.

Source: CSA and EEPRI/EEA staff computations

During the quarter in review general inflation in Addis Ababa was 1.6 %. This figure is almost identical to the 1.5% recorded at the national level. In addition to the decline in the food price index by 0.5%, the non-food inflation in the capital was also 3.0% which is lower than its national counterpart of 3.2 %. During the preceding quarter food and non-food inflation rates in the capital were 3.4 % and 3.2%, respectively.

	2004/05			2003/04			2002/03			2001/02
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
October	4.3	3.5	7.8	18.6	29.7	1.3	-1.1	-2.4	0.6	-8.1	-14.2	0.3
November	4.2	2.9	8.8	18.5	29.1	1.6	0.2	0.0	0.1	-8.2	-14.5	0.5
December	4.5	3.0	9.6	17.8	27.7	1.8	1.7	2.4	0.1	-8.2	-14.4	0.3

Table 2.2 Annualized Inflation during the Second Quarter; 2001/02-2004/05

Similar to the national level, the prices of vegetables & fruits and spices considerably went down by 12.7% and 4.9%, respectively. In addition, even though the prices of potatoes, other tubers and stems increased both at a national level and in Addis Ababa, the increase in the former was far larger (18.6%) than what was recorded in the latter (3.1%). As a result, the food inflation in Addis Ababa was lower than what was observed at a national level. (Fig 2.5)

With regard to the prices of non-food items, on the other hand, almost every major item in this category saw a rise in their prices, while the most significant increases came from recreation, entertainment & education (8.6 %), medical care and health (5.9%), house rent, construction materials, and fuel & power (4.0%).

The price index of transport and communication also grew up by 2.9% during the quarter in review. The remaining categories in non-food items, however, only saw a modest increase in their prices. Nevertheless, the non-food inflation rate in Addis Ababa was still slightly lower than the national level figure. (Fig 2.6)

Table 2.3 Quarterly Addis Ababa 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
Q. I.	3.3	3.4	3.2	2.1	3.4	0.9	3.0	7.0	0.2	-1.7	-2.9	-0.7
Q. II	1.6