Abstract
The Federal Democratic Republic of Ethiopia’s 2005 Article IV Consultation reports that domestic credit growth has accelerated, driven by strong demand from the government, public enterprises, and the private sector. High import content, particularly from public infrastructure investments, together with higher oil imports, has translated into widening trade and current account deficits, and emerging pressures on international reserves. Inflation pressures are rising, driven by both demand pressures and higher import costs. The real effective exchange rate has appreciated moderately.
This statement provides additional information that has become available since the issuance of the staff report for Ethiopia. This information does not alter the thrust of the staff’s assessment.
The crop forecast for the main 2005/06 Meher harvest issued by the Central Statistical Agency projects a 15 percent increase in grain production, driven mainly by a 10 percent increase in yields. If confirmed this would suggest an annual real GDP growth rate closer to the authorities’ projection of 7 percent. Crop estimates to be released in April/May will provide firmer indications of whether grain yields are indeed set to record their highest levels on record.
January inflation was in line with staff’s projections with the general year-on-year CPI rate declining to 11.5 percent, reflecting lower food and non-food inflation rates.
Preliminary federal revenue and expenditure data for the first half of 2005/06 are also consistent with meeting staff’s annual projections. During this period the federal deficit reached 2.6 percent of full-year GDP. This was largely financed by an increase in domestic financing, which offset lower external support.
Annualized export growth of 21 percent in the first half of 2005/06 was broadly in line with staff projections, while import growth of 26 percent was somewhat faster. Fuel imports of US$300 million were consistent with the end-year projection of US$700 million. As noted in the staff report, through end-December, net international reserves fell by US$323 million to around 3 months of imports. This is in line with the full-year projection, which took into account expected donor disbursements targeted to support regional social service delivery. No additional data on international reserves have been released to Fund staff.
Broad money growth slowed to 17.2 percent (year-on-year) in December 2005 reflecting the decline in net foreign assets. While domestic credit growth remained strong, rising by 34 percent year-on-year, and higher than staff’s end-year projection of 20.6 percent. Net bank borrowing by the government reached 1.3 percent of GDP in the first half of the year. This was entirely financed by the National Bank of Ethiopia. However, consistent with the government’s commitments in December to shift financing away from the central bank, treasury bill issuance has subsequently risen, and data through March 1, 2006, show a Birr 1.4 billion (1.2 percent of GDP) increase in commercial bank treasury bill holdings.
As of March 10, 2006, there has been no adjustment in domestic fuel prices, although the authorities have reiterated their commitment to implementing this during the 2005/06 fiscal year.
Reports have emerged of an outbreak of Avian flu in a poultry farm in the south of the country. These have yet to be officially confirmed and staff will continue to monitor developments.
To date, 90 of the 109 elected opposition parliamentarians have taken their seats. UN reports indicate that tension on the Eritrean border has decreased. Ethiopia’s main donors have reconfirmed that they are continuing to provide project aid, while reiterating that a resumption of direct budget support will require progress in addressing concerns over political governance and human rights.
No further information has been received regarding the remaining current account restrictions inconsistent with Article VIII section 2(a) and staff are not recommending approval of such restrictions at this time.