This report covers developments in the Ethiopian macro economy during the third and fourth quarters of fiscal year 2004/05 (i.e. from January to June 2005). The main focus is on changes in the selected macroeconomic aggregates during the period in review, but the report tried to highlight the changes relative to previous quarters and over all trends. The main macroeconomic aggregates covered include, in the order they appear in the report, prices, public finance, monetary aggregates, international trade, and investment.

The second section of the report deals with developments in price indices during the third and fourth quarter of the year under review. In the third quarter of 2004/05 country level inflation rate was 1.8% which increased to 5.2% in the fourth quarter. The relatively higher inflation rate in the fourth quarter is mainly attributed to the significant rise in food prices, which went up to 7.9% from a mere 0.2% inflation in the third quarter. After exhibiting an unusually high rate of 3.9% in the third quarter, non-food inflation has subsided to 0.1% in the fourth quarter of 2004/05. In Addis Ababa, general inflation rate was 0.1% in the third quarter. But the figure increased to 2.5% in the fourth quarter mainly due to higher food prices, which went up by 5.1% in the same quarter. Non-food inflation, however, went down from 1.2% in the third quarter to 0.5% in the fourth quarter, minimizing the impact of higher food prices on the general inflation rate observed in the capital city.

All the nine regional states and two administrative regions have experienced a rise in the general inflation rate in the fourth quarter of 2004/05 compared to the third quarter. This was categorically due to higher prices in food items. In the third quarter of 2004/05, the Harari regional state was the one with the highest inflation rate (5.2%), mainly as a result of higher prices in food items. In the fourth quarter, however, the highest inflation quarterly inflation rate was registered in Amhara regional state (7.3%) , primarily as a result of the 10.4% inflation in food items in the region, which was the second highest food inflation rate next to that of the Somali regional state.

Section three outlines movements in government revenue and expenditures during the six months between January and June 2005. The report indicates a sum of Birr 2.3 billion was collected from taxes during the third quarter, which is significantly higher than the trend average over the last thirteen years. As is usually the case, the share of indirect taxes in the total domestic revenue was much higher than direct taxes. On the whole, government revenue from tax, non-tax sources, and grants during the third quarter amounted to Birr 3.1 billion while spending was about 4.9 billion Birr. Consequently, the deficit during the quarter in review was about Birr 1.8 billion. The fourth quarter witnessed a slight decrease in the fiscal deficit compared with the third quarter. As such the total revenue (including grants) was 3.8 billion Birr while expenditure amounted to 5.5 billion Birr. Consequently, the budget deficit of the quarter was about 1.7 billion Birr.

Section four 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, and developments in microfinance institutions are examined. The section first focuses on developments during the third quarter and then discusses changes during the fourth quarter before making some general comments at the end. At the outset, we observe that broad money supply continued to expand during the third and fourth quarters. In 2004/05, broad money supply rose by 16 percent while nominal GDP increased by 12 percent. Real deposit rates remained negative during the last two quarters of the fiscal year while real lending rates were positive. The liquidity position of the market still shows that Commercial banks continue to keep excess reserves and this has put pressure on the T-Bills market and has led to further decline in the yield of all types of bills. As such, the yield on all types of bills has continued to decline during the last two months of the 2004/05 fiscal year. At the end of the third quarter of 2004/05, the loan portfolio microfinance institutions depicted five percent rise against the previous quarter to reach at Birr 1 billion. The loan portfolio continued to expand and reached 1.5 billion Birr at the end of June 2005. The interest rate structure of microfinance institutions showed no changes during the last nine quarters. The simple average deposit rate stayed at the never changing rate of 5.5 percent per annum. The range of deposit rates of microfinance intuitions ranged from three to the maximum of eight percent.

Section five deals with the performance of the external sector during the last six months of the 2004/05 fiscal year. After witnessing a surplus of Birr 267.7 million in the third quarter of 2004/05, a deficit of Birr 387.6 million was recorded in the last quarter of the same fiscal year. The deficit in the balance of payments in the fourth quarter of 2004/05 is mainly ascribed to the deterioration in the trade deficit and a decline in private transfers from the rest of the world coupled with a significant decline in receipts of unidentified items (i.e. net errors and omissions). Even though the current account deficit had also deteriorated in the third quarter of 2004/05, compared to the previous quarter, considerable rise in the receipts of unidentified items and an increase in private transfers had contributed to the surplus in the BOP in the quarter. The deterioration of the current account deficit both in the third and fourth quarter is primarily the result of the rise in the value of imports despite a relatively better performance in exports.

The was a modest improvement in the non-monetary capital account balance in the third quarter of 2004/05 after a sharp fall in the preceding quarter. However, a significant progress was observed in the balance in the fourth quarter, mainly due to the rise in long term loan disbursements.

While there was reserve build up of Birr 519 million Birr in the third quarter of 2004/05, which is in fact higher than the figure in the preceding quarter (i.e.Birr 508 million) it was followed by a reduction in the reserve almost by Birr 212.5 million in the fourth quarter. The decline in reserves particularly in last quarter of 2004/05 is mainly attributed to the deterioration of the overall balance of payments.

There is a continuous depreciation in the Birr against the US dollar in the third and fourth quarters of 2004/05 both in the official exchange market. There was an appreciation in the parallel exchange rate in the third quarter, though that was subsequently followed by a higher rate of Birr again the US dollar in the fourth quarter

Quarterly developments in investment are dealt within the final section of this quarterly report. According to data obtained from the Ethiopian Investment Commission, a total of 890 projects with an investment capital of around 11.2 billion birr were given investment licenses during the third quarter of 2004/05. The number of licensed investment projects went down to 569 in the fourth quarter of the same fiscal year causing the investment capital also to decline to 8.7 billion. Compared to the 672 investment projects that got approval during the second quarter of 2004/05, significantly higher numbers of projects were approved in the third quarter. Nevertheless, the number of approved investment projects plummeted to only 569 (19.4 % less) in the last quarter of fiscal year 2004/05. The decline in the total number of approved projects in the fourth quarter is mainly attributed to the lower number of approved local projects i.e.569 compared to the same figure in the preceding quarter which was 707. In addition to that, the number of licensed foreign projects also went down to 181 from 144 in the preceding quarter. The total approved projects in the third quarter of 2004/05 are expected to create permanent employment opportunities for 43,421 individuals in addition to 175,062 short-term jobs. The number of expected permanent and temporary job opportunities by the investment projects approved in the fourth quarter is 31,486 and 353,701, respectively.

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The Macroeconomic Division,

EEA / EEPRI.

Text Box: 2 Prices

General inflation rate registered a steady increase during the last three preceding quarters. During the fourth quarter of FY 2004/05 quarterly general inflation rate increased to 5.2% relative to 1.5 and 1.1 per cent during the second and the third quarters, respectively. The relatively higher inflation rate during the fourth quarter is mainly due to the significant rise in food prices, which went up to 7.9% from a mere 0.2% inflation in the third quarter and 0.8 per cent in the second quarter. This, however, does not come as a surprise since prices of food items usually pick up in the fourth quarter. In fact, inflation in food items during the same period last year and the year before were 8.0% and 6.9%, respectively. Nevertheless, the food inflation rate recorded in the third quarter of 2004/05(0.2%), albeit lower than the preceding two quarters, is higher compared to the same period in the previous fiscal year which saw falling food prices (-5.2%).

On the other hand, non-food inflation has subsided to 0.1% in the fourth quarter of 2004/05, after exhibiting an unusually higher rate in the preceding second quarter (i.e.3.9%). In the fourth quarter of the previous fiscal year, there was a general decline in the prices of non-food items (-0.3%), again after registering a relatively higher inflation rate in the third quarter of the same fiscal year (i.e. 2.6%).[Table 2.1].

All major food items saw a rise in their prices during the fourth quarter relative to the second and third the quarters, which was the major factor behind the higher general inflation rate in the fourth quarter. In particular, the increases in the prices of cereals (12.7%), meat (7.8%), spices (6.1%), coffee and tea leaves (5.4%), and potatoes and other tubers (5.3%) have significantly contributed to the increase in food prices in particular and overall price increases in general during the fourth quarter. This is in contrast to the price movements in both the second and the third quarters. The fall in the prices of cereals (-3.3%), pulses (-1.2%), and potatoes and other tubers (-7.6%) in the third quarter, contributed to the modest inflation registered during the period. The food items that exhibited a significant jump during the third quarter relative to the fourth quarter are vegetables and fruits (14.4%), coffee and teal leaves (14.1%) and milk, cheese & eggs (5%) while all others were less than that of the fourth quarter. Hence the overall food inflation was higher (5.2%) during the fourth quarter than both the third (1.5%) and the second quarters (1.1%). (Fig 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.	2.4	3.1	0.6	4.5	6.5	0.4	8.0	12.5	0.9	-2.1	-4.4	1.3
Qtr II	1.1	0.8	1.7	-3.3	-5.2	0.7	4.5	7.0	0.4	0.1	-0.1	0.6
Qtr III	1.5	0.2	3.9	-2.6	-5.2	2.6	4.5	6.5	1.0	-2.0	-3.1	-0.4
Qtr. IV	5.2	7.9	0.1	4.9	8.0	-0.3	4.5	6.9	0.0	0.8	2.5	-1.4

Source: CSA and EEPRI/EEA staff computations

Despite the increase in the prices of all major food items in the fourth quarter, the prices of all major non-food items fell during the fourth quarter both relative to the second and the third quarters. Most notably, the prices of house rent, construction materials, water& fuel and power (6.7%), cigarettes and tobacco (7.7%), and personal care and effects (6.5%) recorded were higher during the third quarter than the fourth quarter. In addition, transport and communication (2.7%), recreation, entertainment and education (2.5%), and furniture, furnishing, household equipment and operation (2%) also saw modest increases in their prices during the same third quarter.

In the fourth quarter of 2004/05, however, the rise in non-food prices has been a little bit abated. In particular, recreation, entertainment and education (-0.9%), house rent, construction materials, water& fuel and power (-0.2%), clothing and footwear (-1.2%), beverages (-0.2), and cigarettes and tobacco (-0.4%), witnessed drops in their prices. Among the non-food items that recorded an increase in prices during the fourth quarter are medical care and health (3.1%), personal care and effects (1.5%), furniture, furnishing & household equipment & operations (2%) and beverages (1.2%0. (Fig 2.3)

Source: CSA and EEPRI/EEA staff computations.

The annualized general inflation rate by the end fiscal year 2004/05 was 6.8%, which is relatively lower than the corresponding quarterly figures for the previous two fiscal years (i.e. 8.6% in 2003/04 and 15.1% in 2002/03). By the end of the same fiscal year , the figures for food and non-food items were 7.7% and 8.6%, respectively. The respective general and food and non food inflation rates by the end of march 2005 (that is, by the end of the third quarter of 2004/05), were 5%, 5.4% and 4.5%. .

During the review quarterly general inflation in Addis Ababa was 1.6 %, almost similar to the country level inflation rate, which is down from the 3.3 % inflation rate recorded in the preceding quarter. In addition to the decline in the food price index by 0.5%, the non-food inflation in the capital (3.0%) was also lower than its national counterpart i.e. 3.2 %. In the previous quarter food and non-food inflation rates were 3.4 % and 3.2%, respectively.

Source: CSA and EEPRI/EEA staff computations.

Compared with the figures for the same period last year the general and food inflation rates in the capital city were higher (-0.3 % and 2.1 %), while a higher rate was registered for food items. These figures, except non-food inflation rate, are lower than the corresponding figures registered during the same period in the last two fiscal years.

	2004/05			2003/04			2002/03			2001/02
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
January	3.9	3.8	4.0	16.4	25.1	2.1	3.8	6.2	0.0	-8.8	-15.5	0.3
February	4.4	4.6	4.2	15.0	22.5	2.3	6.1	10.1	0.1	-9.3	-16.2	0.3
March	5.0	5.4	4.5	13.5	19.8	2.5	8.4	14.0	0.0	-9.2	-16.1	0.7
April	5.4	5.9	4.6	11.9	17.2	2.6	10.7	17.8