This report examines the performance of the major macroeconomic aggregates over the third quarter of 2005/06 fiscal year. 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 are evaluated in comparison to their past movements. As an introduction to the detailed analyses outlined in the report, this brief first section highlights a summary of the aggregates discussed in the ensuing subsections of the report.

Following this brief introduction, the Report presents developments in the price level both at a regional and a country levels during the quarter under review (3^rd quarter of Fiscal year 2005/06). In the third quarter of 2005/06, quarterly inflation was one percent relative to the preceding quarter and the average quarterly price of food items increased by 0.4% during the same period. But the prices of non-food items significantly increased to 2.3% during the quarter in review relative to the preceding quarter. In the capital city, general inflation was 2.1%, up from the 0.6% inflation rate recorded in the preceding quarter. But food inflation in the capital city went up to 2.9% from 1.5% in the second quarter of 2005/06. Quarterly non-food inflation, on the other hand, was 1.6% in Addis Ababa, relatively lower than its national counterpart. Looking at the regional inflation rates, all the regions except Tigray and Amhara regional states have experienced a rise in the general inflation rate. The highest inflation during the review quarter, 3.0%, was registered in Somali regional state followed by Gambella and Southern National and Nationalities regional states where the quarterly inflation rate was 2.3%. An upward movement in the price of food price is the primary cause for the observed higher inflation rate in these regions

The third section focuses on discussing developments in public finance. Between January and March 2006, the federal government raised revenue from both tax and non-tax sources worth Birr 3.4 billion while spending Birr 5.3 billion. The result was an overall deficit of Birr 1.9 million. One important feature of the quarter is that there was no inflow of grants from external sources. Thus, the over all deficit before and after grants is the same. The 1.9 billion Birr deficit was financed mainly by borrowing from the domestic sources. As such about 45 percent of the deficit i.e. 860.5 million Birr was from the domestic banking sector. Net external borrowing was positive at Birr 307 million while unspecified sources covered the difference.

The fourth part of the report discusses the monetary sector of the Ethiopian economy. Both banking and microfinance institutions are included in this section. The stock of money supply reached 44.3 billion Birr at the end of the third quarter of 2005/06. This is a 5.3 percent growth compared to the preceding quarter and about 20 percent growth against the same quarter of last fiscal year. On the asset side of the story, we note that all the components of broad money supply have increased relative to the preceding quarter. Net external asset position of the economy declined by about 11 percent compared with the same quarter of last fiscal year while domestic credit supplied to the economy showed a 32 percent rise. What are commonly called “other items” increased by 19 percent during the third quarter of 2004/05. On the liability side, we note that by the end of March 2006, narrow money reached 22.9 billion Birr. The third quarter witnessed a significant quarterly rise in the supply of treasury bills by the National Bank of Ethiopia. As such, about 13.8 billion Birr was on offer and was actually sold. At the end of the third quarter of 2005/06, the outstanding loan of microfinance institutions stood at Birr 1.7 billion which showed a growth of about 61 percent relative to the same quarter of last fiscal year.

The fifth section of the report highlights the overall performance of the external sector during the third quarter of fiscal year 2005/06. In particular, it examines the balance of payment position of the economy and discusses the performance of the aggregates which include both 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) has declined vis-à-vis a similar quarter of the last fiscal year and the preceding quarter. Second, the capital account balance has improved during the quarter under review vis-à-vis the previous quarter and the same quarter of last fiscal year. During the quarter under review, though the current account deteriorated, the relatively high increase in non-monetary capital account and the growth in the receipts from unidentified items (errors and omissions) are among the major reasons for the improvement of the balance of payment deficit relative to the previous quarter. However, this balance showed a fall as compared to the overall surplus of Birr 267.7 Million Birr registered in the third quarter of 2004/05. This is mainly due to the decrease in current account balance.

The final part of the report analyses developments regarding investment in the economy during the quarter under review. 1,357 projects worth Birr 11.7 billion were approved by the Ethiopian Investment commission and regional investment offices during the quarter in review. The number of projects approved in the quarter is comparatively higher than the 816 and 1,076 projects approved in the preceding quarter and a similar quarter of 2004/05. However, there is a decline in the planned capital of the approved investment projects in the review quarter as compared to the preceding quarter which was around Birr 23.3 billion where there is a modest increase relative the corresponding figure in the same period last fiscal year i.e. Birr 11 billion. These projects are expected to create job opportunities for 98, 581 individuals. The leading sectors in terms of attracting investment are manufacturing (42.8%) and real estate, renting and business activities (18%). In terms of regional distribution, the three regions namely Addis Ababa, Oromia and SNNPR have got the largest share of both the number of projects and investment capital outlays registered during the quarter under review.

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 third quarter of 2005/06, the average general consumer price index increased by one percent relative to the preceding quarter and that of food items increased by 0.4% during the same period. But non-food inflation significantly increased to 2.3% during the quarter in review relative to the preceding quarter. Both food and non-food inflation rate figures were in the negative territory in the preceding quarter. (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	1.0	0.4	2.3	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 (8.7%), bread other prepared food (3.3%) and pulses (2%) during the third quarter of 2005/06. However, the prices of cereals, which has the highest share in constituting the food price index, declined by 1.5% in the review quarter, which contributed to the mere 0.4% growth rate in the quarterly food price index.

In the preceding quarter, there were significant rises 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%). Nevertheless similar to the quarter in review, the prices of cereals had 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 period. (Fig 2.1)

Source: CSA and EEPRI/EEA staff computations

In the third quarter of 2005/06, virtually all major non-food items saw a rise in their prices. In particular, a large increase in the prices of clothing and footwear (4.9%), personal care and effect (2.5%), furniture and household equipment (2.4%) were observed. In the preceding 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.(Fig 2.3)

By the end of the third quarter of fiscal year 2005/06, annualized national inflation rate reached 12 %. Food and non-food inflation rates in this period were 14.2% and 7.2%, respectively. It is to be recalled that by the end of the preceding quarter general inflation rate was 11.7% while the corresponding food and non-food inflation rates were 13.7% and 7.2. It is to be noted that inflation in both food and non-food items observed during the third quarter are comparatively much higher than the same figures in the same period 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 2.1%, up from the 0.6 % inflation rate recorded in the preceding quarter. But food inflation in the capital city went up to 2.9% from 1.5% in the second quarter of 2005/06. Quarterly non-food inflation, which was in the negative territory as the non-food price index declined by 0.2% relative to the preceding quarter, increased to 1.6% in the review quarter. (Table 2.3)

The most significant rises in the prices of major food items in Addis Ababa in the first quarter came from the other food items category (18.2%), followed by coffee and other tubers, fruits and vegetables (4.0), meat (4.0%) and cereals (3%). On the other hand , the prices of spices and milling charges during the review quarter declined by 2% and 0.1%, 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
January	11.7	13.8	7.2	3.9	3.8	4.0	16.4	25.1	2.1	1.7	6.2	0.0
February	11.9	14.1	7.1	4.4	4.6	4.2	15.0	22.5	2.3	3.8	10.1	0.1
March	12.0	14.2	7.2	5.0	5.4	4.5	13.5	19.8	2.5	6.1	14.0	0.0

Table 2.2. Annualized Inflation in the Third 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