MONTHLY ECONOMIC REVIEW FOR FEBRUARY 2008

UNCLAS SECTION 01 OF 02 ADDIS ABABA 000716 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EINV EAGR ET SUBJECT: MONTHLY ECONOMIC REVIEW FOR FEBRUARY 2008 ¶1. SUMMARY -- The Ethiopian Parliament passed a law imposing taxes on the export of raw and semi-processed leather and hides; the Council of Ministers lifted 5 percent duty and 10 percent surtax on imports of computers. -- The Government of Ethiopia (GoE) adjusted domestic oil prices effective January 26; the price for ordinary benzene (automobile fuel) rose by over 23 percent. -- Annual headline inflation soared to 19.7% and food inflation to 27.8% in January. -- The Ethiopian Birr is steadily depreciating against the US dollar, and the premium between the official and black market rate is widening significantly. --The U.S. Patent and Trademark Office awarded Ethiopia trademarks for its specialty Harar and Sidamo coffee brands. --Ethiopian exports under the African Growth and Opportunity Act and Generalized System of Preferences (AGOA and GSP) increased to $8.9 million. FISCAL POLICY -------------- ¶2. On February 7, the Ethiopian Parliament approved a bill imposing export duties ranging from 5 to 150 percent on raw and semi-processed hides and skins. The major objective of the bill is to encourage exports of processed hides and skins to increase the country's foreign exchange earnings from the leather sector. ¶3. The Council of Ministers passed a decision to lift the 5 per cent duty and 10 percent surtax on imports of computers based on the role computers play in technology transfer and education. The 15 percent VAT and 3 percent withholding tax charged on these goods, however, have not been lifted. Scholars and businessmen have been lobbying the government for the last 10 years to lift duties and taxes on computers claiming that they are fundamental for the economic growth of the country and continue to advocate the lifting of VAT and withholding. DOMESTIC FUEL PRICE INCREASE -------------- ¶4. The Council of Ministers approved a domestic fuel price readjustment effective January 26, 2008. Domestic oil prices are adjusted every three months while price shocks are absorbed by a Fuel Stabilization Fund set for this purpose. Despite oil price hikes in the world market, the GoE had not increased domestic prices in the last year, costing the GoE over $350 million in subsidies. According to the new prices, a liter of regular gasoline is sold for $1.04, kerosene for $0.62, white diesel for $0.75, black diesel for $0.64 and super benzene for $0.80 at filling stations in Addis Ababa. Regular benzene increased by 23.7%, kerosene by 38.8%, white diesel by 26.8%, black diesel by 42% and super benzene by 43.2%. It is feared that the oil price adjustment will aggravate already rising inflation. PRICE DEVELOPMENTS -------------- ¶5. According to official statistics published by the Central Statistics Agency (CSA),annual headline inflation rose to 19.7% in January from 18.4% in December. Food inflation reached 27.8% in January in contrast to 25.7% in December. The rise on prices is fueled by the recent domestic oil price adjustment and the inflation rate is expected to rise further in February. The GoE argues that the rise in inflation is a reflection of the broad based economic growth achieved in the past few years that boosted demand for goods and services. Meanwhile many economists in the private sector, the Chamber of Commerce, and opposition parties argue that the different measures taken by the Government to curb inflation so far have not brought the desired results. DEVELOPMENTS IN THE EXCHANGE RATE OF THE BIRR -------------- ¶6. The Ethiopian Birr has depreciated significantly against the United States dollar in recent months. The inter-bank rate at the end of February reached Birr 9.3356 per USD in contrast to Birr 9.239 at end of January and Birr 8.8415 a year earlier. The black market rate has become more volatile and the premium between the official and black market is widening. Up to Birr 10.25 is exchanged for a USD in the parallel (black) market, indicating a widening gap between the official and black market rates. The depreciation in the local currency is triggered by import demand pressures as a result of the acute shortages of foreign exchange in the country. EXPORTS ADDIS ABAB 00000716 002 OF 002 -------------- ¶7. Coffee is the country's leading export item contributing 35% of Ethiopia's annual merchandise export receipts. Annual production for 2006/07 was estimated at 330,000 tons of beans, of which 220,000 tones were exported earning over $420 million. Ethiopia plans to boost production of coffee by 20 percent annually over the coming five years from an estimated production of 400,000 tons and export receipts of $500 million in fiscal year 2007/08. The U.S. Patent and Trademark Office awarded trademarks on March 5 to Ethiopia for its specialty Harar and Sidamo coffee brands, following a dispute with leading coffee chain Starbucks Corporation over the use of the two names in the United States. Starbucks is in the process of setting up a support centre for coffee farmers in Ethiopia. ¶8. USAID's VEGA Ethiopia's AGOA+ Project, the only bilateral AGOA trade program in Africa, announced that Ethiopia has been making steady gains in its efforts to break into the U.S market. Ethiopian exports under AGOA/Generalized System of Preference (GSP) have increased by almost 100% to $8.9 million in 2007 since the project's inauguration two years ago. YAMAMOTO