Inflation has been contained in the advanced economies, but it has risen in many emerging and developing countries, reflecting higher energy and food prices.  Inflation in advanced economies declined to 2.1 percent in 2007 while inflation in emerging markets and developing 5.1 percent in 2006.

Global credit market conditions have deteriorated sharply since late July as a re-pricing of credit risk sparked increased volatility and a broad loss of market liquidity. Initially, rising delinquencies on U.S. sub-prime mortgages led to a spike in yields on securities collateralized with such loans and to a sharp widening in spreads on structured credits, particularly in the United States and the euro area. From mid-August, rising uncertainty about the amount and distribution of associated valuation losses and concerns about the off balance sheet exposures of financial institutions have added to market strains.

The result has been a drying up of high yield corporate bond issues, a sharp contraction in the asset-backed commercial paper market, a dramatic disruption of liquidity in the inter-bank market, and stress on institutions funded through short-term money markets. Prior to the recent turbulence, central banks around the world were generally pushing up policy rates to head off nascent inflationary pressures.

However, in August, faced by mounting market disruptions, central banks in the major advanced economies injected liquidity through open market operations to stabilize overnight interest rates. They also facilitated access to their discount windows, and in the United Kingdom, the authorities extended deposit insurance coverage to reassure depositors after a bank experienced difficulties. In September, the Federal Reserve reacted to rising risks to growth by lowering the federal funds rate by ½ percentage point, and market participants expect further reductions in the coming months.

Moreover, expectations of policy tightening by the European Central Bank (ECB) and the Bank of Japan (BoJ) have been rolled back. Central banks in a number of emerging market countries (e.g., Argentina, Kazakhstan, and Russia) also provided liquidity to relieve strains in inter-bank markets, but for others the principal challenge has continued to be addressing inflation concerns (Chile, China, and South Africa have all raised interest rates since August).

In the commodity market, prices have generally been increasing during the first eight months of 2007. The IMF commodities and energy price index rose by 21 percent during this period largely driven by resurgence in oil prices and rising metals and food prices. Oil prices rose to all time highs and came close to USD 100 per barrel in September 2007 as a result of sustained demand growth in the face of limited supply. Food prices have also been rising driven by strong demand-particularly for biofuel production and supply shortfalls.

Oil prices are expected to remain high as a result of continued geopolitical and supply risks coupled with stronger demand especially from China, the Middle East and the United States. On the other hand, prices of metals and food are expected to moderate.

Until recently, Ethiopia has been a low inflation country in sub-Saharan Africa. The historic peak level of inflation, 21 percent, was recorded in 1991/92, mainly due to the severe drought and absence of peace in the country. On the other hand, a significant deflation, (7.2 percent), was observed in 2001/02 basically due to the decline in food prices associated with the bumper agricultural production following the good weather condition.

According to the National Bank of Ethiopia (NBE), since 2005/06, however, prices continued to creep up despite good agricultural produce. Moreover, non-food inflation (which takes up 40 percent of the General CPI at country level) registered a significant increase. Accordingly, general inflation at the end of fiscal year 2006/07 reached 17.7 percent, food inflation 18.8 percent and core inflation, as proxied by non-food prices, 15.2 percent from their respective levels of 12.3, 14.0 and 8.1 percent in 2005/06.

Food price inflation in 2006/07 was attributable to a rise in the prices of cereals, pulses, oil and fats, and vegetables and fruits. The increase in core inflation was basically due to the increase in house rent, construction materials, water, fuel and power subgroup of the CPI, and clothing and footwear subgroup.

Studies and coordinated efforts are under way to identify the real and major causes of the inflation and to mitigate the adverse effects of the inflationary pressure on the economy and the living standard of the population particularly the urban poor.

Headline inflation increased in all Regional States, but three. The lowest regional headline inflation was 7.0 percent and the highest 19.7 percent). In virtually all the regions, the rising food inflation contributed significantly to higher headline inflation.

Food price inflation ranged from 8.4 percent and 25.2 percent while non-food inflation was between 5.8 and 23.4 percent.

There is immense potential for hydroelectric power and geothermal energy generation in Ethiopia. Nine of its major rivers are suitable for hydroelectric power generation with a total capacity of 15,000-30,000 MW. Similarly, geothermal energy generation potential of the country is also immense.

Despite such huge resources, however, the country so far has managed to utilize a mere 790 MW of its power generating potential and, hence, only about 17 percent of the population has access to electricity.

The Ethiopian Electric Power Corporation (EEPCo), a public enterprise, is mandated to generate, transmit, distribute, and sell electricity. The corporation generates electricity through two different power supply systems: the Interconnected System (ICS) and the Self-Contained System (SCS). The ICS, which is largely generated by hydropower plants, is the major source of electric power generation.

On the other hand, the power generated from SCS system has become increasingly less with its share in total electric power production dropping to 1.2 percent in 2006/07 from an average of 3 percent during 1995/96-1999/00.  The total electricity generated during 2006/07 was 3,310.4 million RWH, which was 14.3 percent higher than the preceding year. Out of the total, 98.6 percent of the electricity was generated through hydropower while the rest (1.4 percent) came from thermal power.

As per the government’s five year Plan for Accelerated and Sustained Development to End Poverty (PASDEP), it is envisaged to increase electricity generation capacity of the country by completing the power projects currently under construction and building new ones and increasing the distribution to rural towns and Kebeles. By 2010, when the power generation projects such as Tekeze (300 MW), Gilgel Gibe 2nd (420 MW), Amertenesh (97 MW), Wind Power (50 MWH) and Yayo (100 MW) are completed, the country’s power generation capacity is expected to reach 2218 MW per hour.

The number of electrified cities and towns is also planned to reach 6000 from the current level of 1166 In 2006/07, a total of 1, 608.4 million metric tons of petroleum products worth 7,873.6 million birr (about USD 871.8) million ) were imported by the Ethiopian Petroleum Enterprise.

The value was 18.1 percent higher than that of the preceding fiscal year on account of the continuous rise in international oil prices and increased fuel demand owing to the growing domestic economy. As Ethiopia is a net importer of fuel, the escalating oil price in the international market has contributed to a widening trade deficit and inflationary pressure by way of a pass through effect.

Component-wise, the values of imports of Regular gasoline declined by 11.6 percent, while that of Jet fuel, Fuel oil and Gas oil surged by 13.2, 16.6, and27.9 percent, respectively. Generally, domestic retail prices of petroleum products are adjusted quarterly in line with the movements of oil prices in the world market. The retail prices of Kerosene, and Gas oil were held constant, while that of MGR and fuel oil were adjusted downward in the third quarter of 2006/07. Yet, the average prices of all petroleum products tended to increase over the preceding fiscal year.