MONTHLY ECONOMIC REVIEW FOR DECEMBER 2007

UNCLAS SECTION 01 OF 02 ADDIS ABABA 000165 SIPDIS SIPDIS DEPARTMENT FOR EEB AND AF/E E.O. 12958: N/A TAGS: ECON ETRD EINV EAGR ET SUBJECT: MONTHLY ECONOMIC REVIEW FOR DECEMBER 2007 ¶1. SUMMARY -- Ethiopian Government's (GoE) 2006/07 macroeconomic performance report indicates economic growth was broad based and sustainable. -- GoE projects double digit economic growth in 2007/08, the fifth year in a row; -- The Central Statistical Agency (CSA) changed the base year of the monthly Consumer Price Index (CPI) as well as food and non-food price weights. Annualized general inflation, according to the new formula, reached 18 percent and food inflation 21.7 percent in November 2007. -- Monetary authorities allowed significant depreciation in the exchange rate of the Ethiopian Birr in December. -- World Bank approves a USD 215 million grant to continue the protecting basic services program. -- GoE and India signed a USD 640 million loan agreement to support two Ethiopian sugar factories. MACROECONOMIC DEVELOPMENTS DURING 2006/07 -------------- ¶2. According to the GoE's macroeconomic development report for 2006/07 released in November, overall economic performance was "broad based and sustainable." Real GDP growth was reported to be 11.4% during 2006/07 and the average growth rate for the last four years was 11.8%. According to the report, improved infrastructure, supply of agricultural inputs, rural development, poverty reduction efforts and good weather conditions have contributed to the growth. Despite such significant growth figures, annualized general inflation soared to 17.8% in contrast to 12.3% a year earlier. The overall fiscal deficit was 3.5% of GDP, largely financed from domestic borrowing. Domestic liquidity measured by broad money supply increased by 19.7% mainly owing to expansion in domestic credit while nominal GDP grew by 29.8%. In the external sector, trade deficits widened by 9.7% compared to the preceding year but the overall balance of payments position indicated a build up in reserves of USD 85.2 million. This came largely due to better inflows of transfers and net services. The report also indicated that a total of USD 343 million in external loans were disbursed during the year. 6,472 projects with investment capital of over USD 10 billion were approved during the year. ECONOMIC GROWTH -------------- ¶3. The Ministry of Finance and Economic Development (MoFED) has revised the national accounts statistics frequently in recent years. According to the recent revision released in November 2007, real GDP registered double digit growth rates of 11.7%, 12.6%, 11.6%, and 11.4% in fiscal years 2003/04 through 2006/07 respectively. It also projected that real GDP will grow by 10.8% in 2007/08. The share of agriculture is steadily declining from 47.4% in 2004/05 to 44.9% in 2007/08 while the service sector increased from 39.7% to 42.3% in the same period. ¶4. The Economist Intelligence Unit (EIU) in its annual publication, "The World in 2008," puts GDP growth for Ethiopia for 2008 at 8%, still an impressive number. EIU reports "the government claims that the economy has been growing at an impressive 10% a year since 2003/04, but the real figure is probably more like 5-6%, which is little more than the average for sub-Saharan Africa." The International Monetary Fund (IMF) estimated GDP growth of 9.4% for 2006/07 and projected 8.5% for 2007/08. PRICE DEVELOPMENTS--INFLATION STILL ON THE RISE -------------- -- ¶5. Based on a recently published Household Income, Consumption, and Expenditure Survey conducted in 2004/05, the CSA changed the base year for computing monthly CPI from December 2000 through December ¶2006. The weights of food and non-food items were also adjusted, with the food price weight dropping from 60.08% to 57.01% while that of non-food increased from 39.92% to 42.99%. Though the new base year and adjustments in weights show a slower inflation rate, inflation continues to rise. According to official statistics published by CSA, the annualized moving average country level headline inflation reached 18.0% in November 2007 in contrast to 17.9% in October 2007 and 13.0% a year earlier. Food inflation reached 21.7% in November 2007 compared to 21.0% and 13.9% in the preceding month and November last year. Nevertheless, given that the main harvest begins in October, inflation is expected to decline as of November. ¶6. Despite a series of measures taken by the government, prices remain extremely high and above the long-term average across the country, the UN's Office for the Coordination of Humanitarian Affairs (OCHA) said recently. Price increases follow general inflation in the country, which was 18.4% in August 2007, according ADDIS ABAB 00000165 002 OF 002 to the National Bank of Ethiopia. An OCHA report stated that "The wholesale prices of mixed teff (steeple cereal),white wheat, and white maize were 66%, 80% and 97% greater than the five-year average (2002-2006) in September, respectively." EXCHANGE RATE DEVELOPMENTS -------------- ¶7. The Ethiopian Birr is pegged to the U.S. Dollar and currently the official exchange rate is determined by the daily inter-bank foreign exchange market in which the National Bank of Ethiopia (NBE), Ethiopia's central bank, intervenes to regulate the market. The inter-bank rate typically follows a crawling pattern of daily depreciation by Birr 0.0001. IN the face of a growing spread between the official and parallel rates, the authorities allowed a significant depreciation in December 2007. The inter-bank rate at the end of December reached Birr 9.2008 per USD in contrast to Birr 9.0444 at the end of November and Birr 8.7759 a year earlier. The Birr also significantly depreciated in the parallel market, reaching Birr 9.65 per USD in December versus Birr 8.91 a year earlier. The depreciation in the local currency is triggered by the acute problems of foreign exchange in the country. Driven by rising domestic inflation relative to prices of Ethiopia's major trading partners, the real effective exchange rate is appreciating, making the country's exports less competitive in the world market. EXTERNAL ASSISTANCE -------------- ¶8. The World Bank's Board of Executive Directors recently approved a USD 215 million International Development Association (IDA) grant to Ethiopia to extend the Protecting Basic Services (PBS) program which delivers block grants to sub-national governments and aims to increase transparency and local accountability in service delivery. The Bank said current financing supplements the USD 215 million already committed over the past 18 months of implementation of the Program, bringing the total IDA financing of the PBS project to USD 430 million. ¶9. The PBS project is supported by a broad coalition of development partners including the African Development Bank (AfDB),Canadian International Development Agency (CIDA),Britain's Department for International Development (DFID),the European Commission (EC), Irish Aid, Germany's KfW, the Netherlands, and the World Bank. The development partners have contributed over USD 800 million thus far via the original PBS, with additional financing of approximately USD 375 million expected of which the World Bank is providing USD 215 million. The Government and the international community have agreed that these additional funds will be utilized for the next year, during which time preparations will be launched to develop a successor to the PBS in support of decentralized service delivery for the medium-term. ¶10. The World Bank's Board of Executive Directors also approved an International Development Association (IDA) credit of USD 41.05 million to the Government of Ethiopia to help the country finance its portion of a new transmission line connecting Ethiopia's power grids to Sudan's. The Ethiopia-Sudan Inter-connector will allow power trading between the two countries thereby promoting Ethiopia's power export revenue generation capacity. The project will also enable Sudan to replace domestic thermal generation with surplus hydropower from Ethiopia, reducing Sudan's greenhouse gas emissions. This project is the first power connection within the framework of the Nile Basin Initiative and is an important step in contributing to cross-border trade and regional interconnection as part of a growing power trade agenda in the region. ¶11. Ethiopia and India signed a loan agreement for $640 million to support Ethiopia's two sugar factories, Tendaho and Fincha. India's ExIm Bank will finance the $640 million. "It is the largest ever line of credit that India has provided to any country so far," Gurjit Singh, the country's ambassador to Ethiopia, said while signing the agreement. Girma Birru, Minster of Trade and Industry said with the completion of Tendaho sugar factory and enhancing capacities of the existing four sugar factories, Ethiopia's annual production of sugar will grow to 1.3 million tones from the current level of 300,000 tones. Yamamoto