This report examines the performance of the major macroeconomic aggregates over the first three months (July-September) of fiscal year 2005/06. Among the major macroeconomic aggregates, movements in prices, 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 evaluated. As a prelude to the detailed analyses outlined in the report, this brief introductory section highlights a summary of the aggregates discussed in the ensuing subsections of the report.

Following this introductory section, the Second Section focuses on changes in prices both at national and regional levels. Similar to the inflation rate registered in the preceding quarter, quarterly inflation during the first quarter of fiscal year 2005/06 was 5.2 %. On the other hand, food inflation during the review quarter was 6.1%, which was relatively lower than the same figure as the preceding quarter. In contrast, non food inflation significantly picked up to 3.2% in the review quarter from only 0.6 % during the last quarter. During the quarter in review, general inflation in Addis Ababa was 3.2 % up from the 2.5 % inflation rate recorded in the previous quarter. In addition, food inflation in the capital city slightly went up by 5.2% in the review quarter from 5.1% in the fourth quarter of 2004/05. Similarly, non-food inflation also rose to 1.5% from 0.5% in the previous quarter. Similar to last quarter of 2004/05, all the nine regional states and two administrative regions have experienced a rise in the general inflation rate during the quarter in review. This was once again primarily due to higher food prices, which normally pick up in the fourth and first quarters due to supply factors.

The third section of this report discusses developments in public finance. It mainly focuses on federal government revenue and expenditures. Between July and September 2005, the federal government spent about 5.2 billion Birr on various activities. Measured against the overall planned expenditure of the year, the quarterly outlay is close to 20 percent of the annual budget. The revenue performance during the first three months of the year shows that the total revenue and grants that were available to the federal government amounted to 2.8 billion Birr. This is about 17 percent of the annual budget. Thus the fiscal performance of the quarter has resulted in an overall deficit (excluding grants) of 2.4 billion Birr. During the quarter under review, the government was able to secure about 131.8 million Birr from external grants. As a result, the overall deficit (including grants) was about 2.2 billion Birr. The shortfall in resources was mainly financed by domestic borrowing. As such, net domestic borrowing contributed about 1.2 billion Birr. External sources and others covered the remaining balance.

The Fourth Section covers developments in the financial (monetary) sector. The first quarter of 2005/06 is characterized by significant monetary expansion. Broad money supply has grown by about 21 percent while that of narrow money showed an 18 percent growth compared with the same period of last fiscal year. The first quarter has also witnessed increased fresh loan disbursements to the overall economy. But there was no noticeable development regarding interest rates and the Treasury bills market continues to be dominated by commercial banks and the yield on all three types of bills continues to decline.

The fifth section of the report highlights the overall performance of the external sector during the first quarter of fiscal year 2005/06. In particular, it examines the balance of payment position of the economy and discusses the performance of the visible and invisible trade during the quarter under review. Among the notable points in this regard are the following. First, the current account balance (including public transfers) declined vis-à-vis a similar quarter of the last fiscal year and the preceding forth quarter. Second, the capital account balance also deteriorated during the quarter under review vis-à-vis the previous quarter and the same quarter of last fiscal year. Accordantly, the worsening of the current account balance and the decrease in capital account surplus are among the major reasons in the deterioration of the balance of payments. However, this balance showed an improvement compared to the first quarter of the previous fiscal year. This is due to the improvement in the balance of unrecorded portion of the BOP or errors and omissions

And finally, the Sixth section examines the size, regional share and employment creation potential of approved investment activities during the quarter. A total of 1134 projects with an investment capital of around 48.5 billion birr were given investment licenses during the first quarter of 2005/06. Compared to the 751 investment projects that got approval during the first quarter of 2004/05, far higher number of projects got approval during the quarter in review. The volume of capital in the review quarter is also more than eight fold when compared to the same quarter of last fiscal year. In the fourth quarter of 2005/06, only 717 investment projects worth Birr 8.6 billion got approved. A bulk of the increment in the total number and volume of approved projects during the quarter in review was mainly due to larger number of investments licenses given to local investors, which accounted for 82.1% and 72.4 % of the total number and capital of approved projects, respectively. The number of foreign investment projects was only 202 with a capital of Birr 2.8 billion. The total approved projects in the review quarter are expected to create permanent employment opportunities for 49,562 individuals in addition to 27,075 short-term jobs. Regarding the sectoral distribution of investment capital, the capital city still took the largest share, which accounted for 67.5% of the total approved investment capital in the review 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

During the first quarter of fiscal year 2005/06, quarterly inflation was 5.2 percent, which was similar to the inflation rate registered in the preceding quarter. The general inflation in the review quarter is, however, the highest compared to a similar quarter since the 8 percent inflation that was recorded in 2002/03 owing to the acute food shortage following the countrywide drought that occurred during that year. On the other hand, food inflation in the review quarter, the major reason for the higher general inflation rate, was 6.1 percent, which was relatively lower than the same figure in the preceding quarter. Non food inflation, nevertheless, significantly picked up to 3.2 percent from only 0.6 percent in the previous quarter. The observed non-food inflation in the review quarter was relatively higher than for any other quarters since 1997/98. [Table 2.1].

Table 2.1 Quarterly Inflation During 2002/03-2005/06

	2005/06			2004/05			2003/04			2002/03
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
Qtr I.	5.2	6.1	3.2	2.4	3.1	0.6	4.5	6.5	0.4	8.0	12.5	0.9
Qtr II				1.1	0.8	1.7	-3.3	-5.2	0.7	4.5	7.0	0.4
Qtr III				1.5	0.2	3.9	-2.6	-5.2	2.6	4.5	6.5	1.0
Qtr. IV				5.2	7.9	0.1	4.9	8.0	-0.3	4.5	6.9	0.0

Source: CSA and EEPRI/EEA staff computations

It is to be recalled that most major food items recorded a significant rise in the fourth quarter of 2004/05. In particular, the prices of cereals increased by 12.7%, meat (7.8%), spices (6.1%), coffee and tea leaves (5.4%), and potatoes and other tubers (5.3%) during the fourth quarter of 2004/05. This trend continued during the first quarter of 2005/06 in which the prices of cereals and meat have considerably increased (by 10.6% and 9.9%, respectively). Nevertheless, the prices of vegetables and fruits which significantly went up in the preceding quarter (14.4%), plummeted during the quarter in review by around 7.7%. Oil and fats also saw a fall in their prices by around 3.2 percent in the review quarter. (Fig 2.1)

Source: CSA and EEPRI/EEA staff computations

Similar to the trend in the prices of major food items, all major non-food items also saw a rise in their prices in the first quarter of 2005/06, compared to the preceding quarter. Most notably, the prices of house rent (5.5%), cigarettes and tobacco (3.8%), and beverages (3.4%) picked up in the review quarter. In addition, a modest increase in the prices of clothing and footwear (2.2%), transport and communication (1.6%), personal care and effects (1.5%), and recreation, entertainment and education (0.5%) was observed in the same quarter. The only major non-food item category that experienced a slight fall in prices is medical care and health, the price index of which declined by 1.2% compared to the previous quarter. (Fig 2.3)

Source: CSA and EEPRI/EEA staff computations

The countrywide annualized general inflation rate by the end the first quarter of 2005/06 was 10%, which is far higher than the same figure in the same period last fiscal year. (i..e 4.2%). This is mainly due to both relatively higher food prices coupled with relatively higher non-food inflation as well during the quarter in review. By the end of the quarter in review, the annualized inflation figures for food and non-food items were 11.7% and 6.5 %, respectively. The respective food and non food inflation rates in the same period last fiscal year were 4.8% and 3.2%. .

During the quarter in review, general inflation in Addis Ababa was 3.2 % up from the 2.5 % inflation rate recorded in the preceding quarter. In addition, food inflation in the capital city slightly went up by 5.2% in the first quarter of 2005/06 from 5.1% in the fourth quarter of the previous fiscal year. Non-food inflation also rose to 1.5% from 0.5% in the previous quarter. Similar to the situation at a national level, the food inflation rate in the capital city during the quarter in review is higher than the corresponding figures registered during similar quarters of the last two fiscal years. Nevertheless, non-food inflation in Addis Ababa in the review quarter is lower than the figure registered in the preceding quarter (i.e.1.5 compared to 3.2%). (Table 2.3)

Source: CSA and EEPRI/EEA staff computations

	2005/06			2004/05			2003/04			2002/03
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
July	7.9	9.0	5.7	6.9	9.2	2.8	16.6	27.1	0.8	-5.8	-10.5	0.9
August	9.0	10.3	6.2	5.4	6.7	3.0	17.6	28.7	0.8	-4.0	-7.8	1.2
September	10.0	11.7	6.5	4.2	4.8	3.2	18.2	29.4	1.1	-2.6	-5.0	0.8

Table 2.2 Annualized Inflation During the First Quarter of 2002/03-2005/06

Source: CSA and EEPRI/EEA staff computations.

The food items that recorded the most notable rises in the prices of major food items in Addis Ababa during the first quarter were cereals (8.0%), meat (7.4%), pulses (7%), milk and cheese (5.9), and vegetables and fruits (5.7%). Of these items, the prices of cereals and meat were also on the rise in the preceding quarter, which went up by 7.6% and 10%, respectively. The prices of potatoes and other tubers, which increased by 9.5 percent in the previous quarter, went down by 14.9% during the quarter in review along with the prices of pulses and oils & fats which declined by 3%, and 2.1%, respectively. (See Figure 2.4)

Table 2.3 Quarterly Addis Ababa Inflation During 2000/01-2003/04

2005/06

2004/05

2003/04

2002/03

General

Food

Non-Food

General

Food

Non-Food

General

Food

Non-Food

General

Food

Non-Food

Qtr I.

3.2