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Ethiopian Reporter - English Version

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Home arrow Sections Blog arrow External sector development during 2006/07
External sector development during 2006/07 Print E-mail
Saturday, 21 June 2008

During the 2006/07 fiscal year the overall balance registered surplus of USD 84.7 million compared to a deficit of USD 207.5 million during the preceding fiscal year. According to the annual report of the National Bank of Ethiopia (NBE), despite the widening of the trade deficit from USD 3.6 billion to USD 3.9 billion, improvement in the surplus of the service account, increase in private transfers and higher disbursement of loans and grants to the government helped to finance the trade deficit and register the overall surplus.

 

The trade deficit widened to 26.4 percent of GDP as imports rose by 11.6 percent offsetting a substantial increase of 18.5 percent in export earnings. On the other hand, the surge in net service (26.8 percent), private (32.1 percent) and official transfers (38.4 percent) has contributed to the significant improvement in the current account balance (including official transfers) by 36.7 percent against the preceding year. The capital account also recorded a surplus of USD 780.2 million.

Merchandise trade deficit continued to widen reaching USD 3.9 billion (26.4 percent of GDP) during 2006/07 compared to USD 3.6 billion (27.0 percent of GDP) in 2005/06 and USD 2.8 billion (24.5 percent of GDP) in 2004/05. This was a reflection of a continuous surge in imports, which more than offset an impressive growth in export earnings.

The growth in export earnings witnessed during the past three fiscal years also continued during 2006/07. Exports reached USD 1,185.1 million during the fiscal year, 18.5 percent higher than export earnings of the preceding fiscal year. Increases in all export items except oilseeds and meat contributed to this substantial rise in export. Export earnings from coffee grew by 19.7 percent as a result of a 19.4 percent increase in volume of exports while its average international price remained at its preceding fiscal year level. The share of coffee from total export showed a marginal increase by 1.1 percent vis-à-vis 2005/06 but went down by 10 percent against its position in 2004/05.

Oilseeds exports, which were growing rapidly during the past four fiscal years, declined by 11.3 percent during 2006/07 due to an 11.5 percent fall in the volume of exports although its international price remained constant. As a result, the share of oilseeds from total exports, which was 21.1 percent during the preceding fiscal year, dropped to 15.8 percent.

The international price of gold continued to surge and reached USD 650.21 per Troy ounce at the end of 2006/07 compared to USD 611.01 in 2005/06 and USD 437.1 in 2004/05. Hence, the value of gold exports reached USD 97.0 million in 2006/07 about 49.8 percent higher than the amount recorded in the preceding fiscal year. A 33.6 percent pick-up in the international price coupled with a 12.1 percent increase in the volume of exports contributed to the rise in export earnings from gold. In the fiscal year, gold became the third largest export commodity of the country with a share of 8.2 percent compared to 6.5 percent in the preceding fiscal year. Flower exports continued to grow reaching USD 63.6 million in 2006/07 compared to USD 21.8 million last fiscal year. This surge in flower exports was due to increase in volume of exports and prices. Earning from flower is expected to continue to grow in the coming years owing to continued incentives provided by the government for investors engaged in horticulture business.

Export earnings from leather and leather products also grew by 19.4 percent mainly due to higher international prices.

Similarly, export earning from pulses went up by 90.1 percent as a result of a 43.7 percent increase in volume of exports. On the other hand, exports of meat and meat products fell by 16.5 percent due to the slow down in volume of export by 26.5 percent.

The rapid growth in imports witnessed during the past three fiscal years moderated in 2006/07. Imports grew by 11.6 percent during the fiscal year compared to 40.4 percent in 2004/05 and 26.4 percent in 2005/06 putting average annual growth rate of imports during the last three years at 26.1 percent. Total imports reached USD 5,126.2 million or 34.4 percent of GDP. All major import categories except for semi-finished goods increased during the fiscal year.

NBE's report shows that imports of raw materials continued to surge mainly as a result of the recent increase in economic activity in the country and the continuous rise of commodity prices in the international market. Raw materials imports which accounted for 2.9 percent of total imports increased by 92.4 percent in 2006/07. Semi-finished goods imports tended to slow down over the previous year but went up by about 15 percent against the level of imports in 2004/05. Semi-finished goods accounted for 15 percent of the total import in 2006/07.

Reflecting the increased investment activity in the economy, imports of capital goods grew by 28.6 percent and reached USD 1,868.5 million during the fiscal year. The average annual growth in capital goods imports during the past four years was 36.5 percent indicating a high degree of association between imports and economic growth in the country. The share of capital goods imports from total imports increased from 31.6 percent in 2005/06 to 36.5 percent in 2006/07.

Growth in consumer goods imports was 2.7 percent during the fiscal year compared to a growth rate of 30.0 percent during the preceding fiscal year. Declines in imports of non-durable consumer goods such as cereals and textiles were the major factors for the slowdown in the growth of consumer goods imports whose share in total imports declined to 25.7 percent from 27.9 percent a year ago.

The rise in fuel imports moderated to 1.7 percent in the face of continuously high and volatile oil prices in the international market. In the preceding fiscal year, the annual increase in the value of fuel imports was nearly 30 percent. Accordingly, the share of fuel in total imports slightly went down to 17.0 percent compared to 18.6 percent in 2005/06.

The major export market for Ethiopia during 2006/07 was Europe, which accounted for 47.8 percent of total exports. From European countries, Germany was the largest market buying about 11.8 percent of the total exports followed by Switzerland (8.8 percent) and Italy (6.3 percent). The major export items to Germany were coffee and flower while Switzerland was the major market for gold exports.

The second largest market was Asia, which imported about 30.3 percent of Ethiopia’s exports. Saudi Arabia was the largest importer with a share of 6.2 percent followed by Japan (6.1 percent) and China (5.0 percent). Coffee was the major export item destined to Saudi Arabia and Japan while China mainly imported oilseeds and hides and skins. The share of Africa in total exports was 15.5 percent of which 88.5 percent went to neighboring countries namely Sudan, Djibouti and Somalia. Chat was the main export item to Somalia. Djibouti mainly imported chat, vegetables and fruits. On the other hand, the major export items to Sudan were live animals, coffee and pulses.

Meanwhile about 60.0 percent of Ethiopia’s import originated from Asia where China accounted for 16.6 percent followed by Saudi Arabia (15.2 percent) and India (7.0 percent). The major imported items from China included clothing, textiles, metals and machineries while more than 90.0 percent of imports from Saudi Arabia constituted petroleum products. About 25 percent of imports originated from Europe of which Italy accounted for 7.7 percent, Germany 3.7 percent and Belgium 2.0 percent. Electrical materials, machinery and vehicles were the main items imported from Europe.

African countries accounted for only 6.3 percent of Ethiopia’s imports. The leading exporters to Ethiopia were Egypt 1.9 percent, Djibouti 1.1 percent and South Africa 0.8 percent. Petroleum products and metals were the major items imported from African countries. Imports from the Americas accounted for 5.8 percent of total imports of which 94 percent originated from three countries. The United States of America was the leading exporter with a share of 3.8 percent followed by Brazil 1.6 percent and Canada 0.2 percent. Imports of machineries and grains accounted for the bulk of the imports from the Americas.

The report also reveals that the surplus in net services account improved from USD 148.1 million in 2005/06 to USD 190.8 million in 2006/07 mainly as a result of increased net receipts from travel and transportation services and lower interest payments on official debt. Net receipts from travel services rose by 29.0 percent from USD 60.4 million last year to USD 69.4 million in the review year. Similarly, net receipts from transport services grew to USD 72.7 million from USD 43.0 million last year or by 69 percent. There was a slight decline of 7.1 percent in net receipts from government services from USD 278.5 million last year to USD 258.8 million.

Net interest income grew from USD 27.4 million in 2005/06 to USD 47.2 million in 2006/07 mainly as a result of a 50.0 percent drop in interest payment on external debt coupled with a marginal increase in gross interest receipts. On the other hand, net payment for other services increased by 3.2 percent and reached USD 240.1 million in 2006/07.

Net private transfers increased by 38.3 percent during 2006/07 and reached USD 1,695.6 million. Cash transfers through non-governmental organizations rose by 7.6 percent while cash transfers by private individuals surged by 78.3 percent. Transfers in-kind by private individuals also grew by more than three fold during the fiscal year due to the government’s policy to allow import of cement on franco valuta basis in order to augment the domestic supply. Similarly, net official transfers significantly increased by 38.4 percent from USD 866.2 million in 2005/06 to USD 1,199.1 million in 2006/07as a result of increased disbursement of grants from both multilateral and bilateral donors. Official cash transfers reached USD 1,180.4 million in 2006/07 compared to USD 811.3 million in the preceding fiscal year.

Despite the widening of the trade deficit, the current account deficit narrowed down to USD 855.4 million (5.7 percent of GDP) in 2006/07 from USD 1,351.8 million (10.2 percent of GDP) in the preceding fiscal year as a result of the improvement in the surplus of the service account and the significant increases in private as well as official transfers.

The surplus in the capital account increased by 23.1 percent to reach USD 780.2 million compared to USD 633.8 million in the preceding fiscal year. Increased net official loan disbursement and higher foreign investment inflow were behind the improvement in the surplus of the capital account. Net official long-term capital increased by 13.5 percent and reached USD 340.0 million due to a moderate rise in disbursement of loans to the government and a sharp decline in amortization payments. On the other hand, foreign direct investment is estimated to have reached USD 482.0 million in 2006/07 compared to USD 365.1 million in the preceding fiscal year.

As a result the surplus in the balance of payments, the net foreign assets of the banking system recorded a build-up of USD 84.7 million compared to a drawdown of USD 207.5 million in the preceding fiscal year. Net foreign assets of the National Bank of Ethiopia increased by USD 39.4 million while that of commercial banks rose by USD 45.3 million. Hence, at the end of the fiscal year, gross foreign reserves were equivalent to cover 2.2 months of imports of goods and non-factor services.

The stock of Ethiopia’s external debt drastically fell by 61.8 percent from USD 6,029.1 million at the end of the preceding fiscal year to USD 2,300.3 million in 2006/07. Accordingly, debt owed to multilateral creditors declined from USD 4.9 billion (80.9 percent of the total debt) to USD 1.2 billion (51.7 percent). Similarly, debt owed to bilateral creditors dropped from USD 797.7 million to USD 663.9 million where share in total external debt reached 2.8 percent. In contrast, the country’s commercial debt increased from USD 355.1 million to USD 447.8 million accounting for 19.5 percent of the total debt.

The ratio of external debt to GDP which was 39.8 percent at the end of the preceding fiscal year plummeted to 12.2 percent at the end of 2006/07. Similarly, the ratio of the stock of debt to export of goods and services also declined from 287.5 percent to 92.5 percent. The debt service ratio (which is the ratio of principal and interest payments on external debt to export of goods and services) declined from 3.6 percent in 2005/06 to 1.2 percent in 2006/07.Ethiopia has contracted no arrears.
 
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