This is a quarterly report of the Ethiopian macro-economy for the second quarter (October to December) of fiscal year 2005/06. It evaluates the performance of the major macroeconomic aggregates vis-à-vis the preceding quarter of the same year and relative to a similar quarter of the precious fiscal year of 2004/05. These selected macroeconomic aggregates include movements in prices, the public finance in terms of revenue and expenditure, the performance of the financial or monetary sector, and the foreign sector and its major components. In this section of the report, the highlights of these major sectors of the economy in terms of their performance registered during the quarter in review is presented as prelude to the main body of the text. And detail analysis of the macroeconomic aggregates sector by sector will be discussed in the appropriate sections of the report.

Section 2 examines price movements both at national and regional levels during the quarter in review. In this regard, it is observed that at national level the average general consumer price index dropped by 0.1 % relative to the preceding quarter while that of food items declined by 0.4%. Non food inflation was merely 0.2% in the quarter under review. Both food and non food inflation rate figures are lower compared to the same figures in the preceding quarter and the second quarter of fiscal year 2004/05. During the quarter in review, the highest inflation rate of 5.2% was registered in Dire Dawa followed by Afar regional state where the quarterly inflation rate was 2.9%.

The third section analyses the structure of public finance in the quarter under review. It examines the flow of the Federal government’s revenue and its expenditure. The revenue performance during the second quarter of the year shows that the total revenue and grants collected by the federal government amounted to about 4.6 billion Birr. This is the second highest amount of revenue ever collected, in a single quarter, since the reform that began in 1992. During the quarter, the federal government disbursed close to Birr 5.3 billion or about 21 percent of the annual budget. This sum is 21 percent higher than that of the same quarter last fiscal year and only 4 percent more over the first quarter of 2005/06.

The Fourth section discusses developments in the financial or monetary sector. Among the highlights in this regard is the increase in the money supply via the sale of government T-bills relative to previous quarter average. A second point worth highlighting is that both deposit and lending interest rates were below the national inflation rate indicating a negative real interest rate. The yield on Treasury bills has continued to decline despite declines in the number of participants and decline in excess reserves. Most of the bills are still owned by commercial banks. The banking sector has disbursed higher amount of fresh loans during the quarter in review. Public banks still dominate the resource mobilization of the sector.

Section 5 focuses on the foreign sector of the economy. It is noted that the overall performance of the balance of payment has further deteriorated relative to the preceding quarter. The balance of payments deficit was Birr 324 million in the second quarter, which worsened by 33% compared to the first quarter of the same year. The situation is much worse when this quarter’s performance is compared with a similar quarter of the previous fiscal year. The current account balance (including public transfers), registered an improvement of 18.3% during the second quarter of 2005/06 relative to the preceding (or first) quarter. However, it exhibited a deterioration of more than 840% during the quarter in review when compared with a similar quarter of fiscal year 2004/05. As was the case for the overall balance of payments position, the trade balance registered an improvement during the quarter in review compared to the preceding quarter while it significantly worsened compared relative to the send quarter of 2004/05. On the other hand the capital account stood at Birr 1.2 billion and exhibited a 46.2% increase in the second quarter of 2005/06 relative to the preceding quarter of the same year. The change is by far larger at 246% when this quarter’s capital account balance is compared with the second quarter of fiscal year 2004/05.

The last section of this report examines the flow of investment in the period under consideration. A total of 1076 projects with an investment capital of around 23.3 billion birr were given investment licenses during the second quarter of 2005/06. Of the total 1076 projects, 849 (78.9%), which worth around Birr 6.8 billion (29 % of the total), came from local private investors. The number of foreign investment projects was 224(20.8%) with Birr 9.2 billion capital (39.4% of the total).

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

In the second quarter of 2005/06, the average general consumer price index decreased by 0.1 % relative to the preceding quarter while that of food items declined by 0.4% during the same period. Non food inflation was merely 0.2% in the review quarter. Both food and non food inflation rate figures are lower as compared to the same figures in the preceding quarter and the same period during fiscal year 2004/05. (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	-0.1	-0.4	0.2	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

Among food items, there were notable increases in the prices of vegetables and fruits (7%), potatoes and other tuber and stems (6.7%), bread other prepared food (4.5%) and meat (3.4%) during the first quarter of 2005/06. However, the prices of cereals, which has the highest share in constituting the food price index, declined by 3.2% in the review quarter, which more than outweighed the rise in the prices of other food items and primarily contributed to the 0.4% decline in the quarterly food price index.

In the preceding quarter, the prices of cereals and meat had considerably increased by 10.6% and 9.9%, respectively. Nevertheless, the prices of vegetables and fruits had plummeted by around 7.7%. The prices of oil and fats had also fallen by around 3.2 percent in the previous quarter. (Fig 2.1)

Source: CSA and EEPRI/EEA staff computations

Unlike the previous quarter where virtually all major non-food items saw a rise in their prices, the prices of non food items did not change significantly in the review quarter. However, a modest increase in the prices of beverages (1.5%), cigarettes and tobacco (2.6%) and furniture, household equipment and operation (1.6%), and recreation, entertainment, and education (1.2%) was recorded in the review quarter. In the preceding quarter, significant increases in the prices of major non food items particularly house rent (5.5%), cigarettes and tobacco (3.8%), and beverages (3.4%) were registered.(Fig 2.3)

By the end of the second quarter of fiscal year 2005/06, annualized national inflation rate reached 11.7 %. Food and non-food inflation rates in this period were 13.7% and 7.2%, respectively. It is to be recalled that by the end of the preceding quarter general inflation rate was 10% while the corresponding food and non-food inflation rates were 11.7% and 6.5%. In addition, inflation in both food and non-food items usually observed during this quarter are comparatively much higher than the same figures recorded by the end of the second quarter in the previous fiscal year.

Source: CSA and EEPRI/EEA staff computations

. Source: CSA and EEPRI/EEA staff computations

During the quarter in review, general inflation in Addis Ababa was only 0.6 %, down from the 3.2 % inflation rate recorded in the preceding quarter. In addition, food inflation in the capital city went down to 1.5% from 5.2% in the first quarter of 2005/06. Quarterly non-food inflation in the same period is in the negative territory as the non-food price index declined by 0.2% relative to the preceding quarter. (Table 2.3)

The most significant rises in the prices of major food items in Addis Ababa in the first quarter came from potatoes and other tuber items (29.4%), breaded , other prepared food (6.6%), and meat (4%). On the other hand , the prices of vegetables and milling charges during the review quarter declined by 1.9% and 5.4%, respectively as compared to the preceding quarter. (See Figure 2.4)

	2005/06			2004/05			2003/04			2002/03
	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food	General	Food	Non-Food
October	10.7	12.5	6.9	3.4	3.5	3.4	18.6	29.7	1.3	-1.1	-2.4	0.6
November	11.3	13.3	7.1	3.1	2.9	3.7	18.5	29.1	1.6	0.2	0.0	0.1
December	11.7	13.7	7.2	3.2	3.0	3.9	17.8	27.7	1.8	1.7	2.4	0.1

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

Source: CSA and EEPRI/EEA staff computations

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

2004/05

2003/04

2002/03

General

Food

Non-Food

General