National Bank of Ethiopia Annual Report 2013/2014

National Bank of Ethiopia 1 Annual Report 2013/14 I.THE OVERALL ECONOMIC PERFORMANCE 1.1. Economic Growth The Ethiopian economy continued to register remarkable growth. Real GDP expanded by 10.3 percent in 2013/14, compared to the GTP target of 11.2 percent for 2013/14.This economic growth has also been impressive compared with the5.4 percent growth estimated for Sub-Saharan Africa in 2014 (World Economic Outlook Update, July 2014). This remarkable growth was mainly attributed to service sector (51.7percent), agricultural sector (21.9 percent) and industrial sector (26.4 percent) (Table 1.1). Nominal GDP per capita went up to USD 631.5 from USD 557.6 in the preceding year. Similarly, real per capita GDP increased by 3.0 percent to USD 377.1against the preceding year. All in all Ethiopian economy registered average annual growth rate of 10.1 percent during the GTP period of 2010/11-2013/14. In line with the single digit inflation policy target and the Growth and Transformation Plan of the country, the Ethiopian economy is projected to grow by11.4 percent in 2014/15 in contrast to 4.0 and 5.8 percent growth projected by IMF for the world and SSA respectively (WEO, July 2014).

National Bank of Ethiopia 2 Annual Report 2013/14 Table 1.1: Sectoral Contributions to GDP and GDP Growth (In Billions of Birr) Items 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Sector Agriculture 158.5 170.3 181.2 195.0 212.5 222.9 238.8 251.8 Industry 32.1 35.4 38.8 43.0 49.8 59.6 73.9 89.6 Services 123.3 143.1 163.2 184.7 216.6 237.4 258.7 289.4 Total 313.9 348.8 383.2 422.7 478.9 519.9 571.4 630.8 Less FISIM 1.8 2.4 2.7 2.9 3.2 2.9 3.5 4.2 Real GDP 312.1 346.4 380.5 419.8 475.7 517.0 567.9 626.6 Growth in Real GDP 11.7 11.0 9.8 10.3 11.4 8.7 9.8 10.3 Real GDP per capita(in thousands of Birr) 4.3 4.6 5.0 5.3 5.9 6.3 6.7 7.2 Growth in Real GDP per capita 8.0 7.3 7.1 7.5 10.6 6.1 7.1 7.5 Mid-year population(in millions) 72.4 74.9 76.8 78.8 80.7 82.7 84.8 87.0 Share in GDP (in %) Agriculture 50.5 48.8 47.3 46.1 44.4 42.9 41.8 39.9 Industry 10.2 10.1 10.1 10.2 10.4 11.5 12.9 14.2 Services 39.3 41.0 42.6 43.7 45.2 45.7 45.3 45.9 Agriculture Absolute Growth 9.5 7.4 6.4 7.6 9.0 4.9 7.1 5.4 Contribution to GDP growth 4.8 3.6 3.0 3.5 4.0 2.1 3.0 2.2 Contribution in % 41.6 33.8 31.7 34.9 31.1 25.4 30.9 21.9 Industry Absolute Growth 9.6 10.3 9.6 10.8 15.8 19.7 24.0 21.2 Contribution to GDP growth 1.0 1.1 1.6 2.3 3.1 3.0 Contribution in % 8.5 9.5 9.9 10.6 12.1 23.9 27.8 26.4 Services Absolute Growth 15.3 16.1 14.0 13.2 17.3 9.6 9.0 11.9 Contribution to GDP growth 6.0 6.6 6.0 5.8 7.8 4.4 4.1 5.4 Contribution in % 49.8 5.7 58.4 54.4 56.8 50.7 41.4 51.7 Source: Ministry of Finance and Economic Development (MoFED)

National Bank of Ethiopia 3 Annual Report 2013/14 Fig. I.1: Real GDP Growth by Major Sectors Source: MoFED The agricultural sector showed a moderate growth rate of 5.4 percentin 2013/14 ascrop production increased by 6.6 percent,(Table 1.3),in general and grain crop production by 8.8 percent in particular (Table 1.2). Of the total 251.5 million quintals of grain production, cereal production alone constituted 85.8 percent while pulses and oil seeds comprised14.2 percent. The production of cereals increased by 9.8 percent overthe preceding year owing to 2.6 percent expansion in cultivated land area.Pulses production also grew by 3.9 percent while the production of oilseedsdeclined by 2.1 percent during the same period (Table 1.2). Meanwhile, out of 12.4 million hectares of land cultivated for crop production, 79.4 percent was covered by cereals while the remaining 14.0 percent and 6.6 percent were taken up by pulses and oil seeds, respectively (Table 1.2). The growth in agricultural output was mainlyattributed to productivity improvements supported by favorable and conducive agricultural development policies and by better productive safety net programs through rehabilitation of the environment by strengthening soil and water conservations. 0 5 10 15 20 25 30 Percent Agriculture Industry Service Real GDP

National Bank of Ethiopia 4 Annual Report 2013/14 The share of agriculture in Ethiopian economy during the F.Y 2013/14 was 39.9percent which went down by 1.9 percentage points in relation with the preceding year. Likewise, thesector’s contribution to GDP growth rate was down by 9.0 percentage points to 21.9 percent against the previous year witnessing the structural shift of the economy from agriculture to service sector (Table 1.1). On the other hand, the growth rate of industrialsectorwas21.2 percent; about 2.8percentage point lower than a year earlier.The share of industry in total domestic output was 14.2 percent; 1.3 percentage point up over the preceding year. The sector contributed 26.4percent to the overall economic growth during the review fiscal year (Table1.1). The share of industrial sector in GDP was very low, despite its faster growth than the other two sectors. This calls for enhancing investment in manufacturing sector taking into account the country’s competitive advantages. Manufacturing sector expanded by 11.3percent and it contributed about 30.8 percent to industrial output growth and 4.4 percent to real GDP growth. Construction industry, on the other hand, contributed more than half (53.1percent) to industrial sector growth and7.6 percent to GDP growth; implying that construction sector is currently the leading industry due to expanding in the construction of roads, railways, dams and residential houses in the country. Meanwhile, mining & quarrying and electricity & water contribute 8.8 and 7.4 percent to industrial growth, respectively(Table 1.3). Similarly, the service sector was relatively the dominant sector in Ethiopia after it overtook the agricultural sector in 2010/11. Its year￾on-year growth was 11.9 percent which was 2.9 percentage point higher than last year. The share of service sector in GDP was about 45.9 percent and its contribution to GTP was about 51.7 percent in 2013/14 (Table 1.1). The significant contribution of the sector to GDP had become gripping due to the massive contribution and growth of the major sub-sectors. Whole sale and retail trade services which expanded by14.5 percent were the major contributors (34.9 percent) to service sector growth followed by real estate, renting and business activities sub-sector which grew annually by 3.9

National Bank of Ethiopia 5 Annual Report 2013/14 percent and contributed 17 percent to the sector’s growth. Similarly, hotels and restaurants contributed 9.8 percent to the service sector, followed by transport and communication (10.1 percent) and public administration and defense (10.2 percent)(Table 1.3). Table 1.2: Estimates of Agricultural Production and Cultivated Areas of Major Grain Crops for Private Peasant Holdings - Meher Season [Area in thousands of Hectares and Production in thousands of quintals] Source: Central Statistical Agency (CSA) Agricultural Production 2010/11 2011/12 2012/13 2013/14 Cultivated Area Total Production Cultivated Area Total Production Cultivated Area Total Production Cultivated Area Total Production Cereals 9,690 177,613.0 9,588 188,099 9,601 196,512 9,848 215,835 Percentage changes 4.9 14.3 -1.1 5.9 0.1 4.5 2.6 9.8 Pulses 1,357.0 19,531.0 1,616.0 23,162 1,863 27,510 1,743 28,589 Percentage changes -8.9 2.9 19.1 18.6 15.3 18.8 -6.5 3.9 Oilseeds 774.0 6,339.0 880.0 7,308.0 818.4 7,266.6 816.0 7,112.6 Percentage changes -0.88 -1.5 13.7 15.3 -7.0 -0.6 -0.3 -2.1 Total 11,821.0 203,483.0 12,084.0 218,569.0 12,282.9 231,288.5 12,406.6 251,536.4 Percentage changes 2.8 12.6 2.2 7.4 1.6 5.8 1.0 8.8

National Bank of Ethiopia 6 Annual Report 2013/14 Table 1.3: Growth and Percentage Contribution of Major Agricultural, Industrial and Service Sub-sectors Sub-sectors/Year 2011/12 2012/13 2013/14 Percentage Contribution of Major Agricultural Sub-Sectors Crop 69.2 69.9 70.7 Animal Farming and Hunting 21.7 21.3 20.6 Forestry 9.1 8.8 8.7 Growth of Major Agricultural Sub-Sectors (in %) Crop 5 8.2 6.6 Animal Farming and Hunting 5.4 5.2 2.1 Forestry 3.1 3.3 4.2 Percentage Contribution of Major Industrial Sub-Sectors Mining and Quarrying 12.9 11.0 8.8 Manufacturing 35.6 33.6 30.8 Large and Medium Scale Manufacturing 24.0 24.0 22.7 Small Scale and Cottage Industries 11.6 9.5 8.1 Electricity and Water 9.3 8.3 7.4 Construction 42.1 47.1 53.1 Growth of Major Industrial Sub-sectors (in %) Mining and Quarrying 12.7 6.3 -3.4 Manufacturing 11.8 16.9 11.3 Large and Medium Scale Manufacturing 15.9 24.2 14.5 Small Scale and Cottage Industries 4.2 1.9 3.1 Electricity and Water 13.5 10.0 7.5 Construction 31.5 38.7 36.4 Percentage Contribution of Major Service Sub-Sectors Whole Sale and Retail Trade 33.6 34.0 34.9 Hotels and Restaurants 7.9 8.6 9.8 Transport and Communications 9.4 10.0 10.1 Real Estate, Renting and Business Activities 19.3 18.4 17.0 Public Administration and Defense 11.2 10.9 10.2 Others* 18.6 18.2 18.0 Growth of Major Service Sub-sectors (in %) Whole Sale and Retail Trade 12.5 10.1 14.9 Hotels and Restaurants 10.1 19.1 26.4 Transport and Communications 12.6 15.2 13.7 Real Estate, Renting and Business Activities 3.8 3.8 3.9 Public Administration and Defense 3.1 6.5 5.0 Others* 13.4 6.2 10.7 Source: MoFED

• Includes: financial intermediation, education, health and social work, private households with employed persons and other community, social and personal services.

National Bank of Ethiopia 7 Annual Report 2013/14 1.2. GDP by Expenditure Components During 2013/14, the total consumption expenditure (public and private) as a percent of GDP went down to 77.5 percent from 80.8 percent last year and 85.6 percent GTP target set for the year. This slowdown in consumption expenditure was mainly due to 3 percentage point decline in private consumption expenditure to GDP ratio andthe 4.5 percentage point rise in capital formation. As a result, gross domestic saving to GDP ratio went up to 22.5 percent from 19.2 percent in the previous year, and 14.4 percent GTP target for the year. The 3.3 percentage point decrease in the level of total consumption expenditure to GDP ratio has contributed to an improvement in domestic savings by the same percentage points (Table 1.4). The increase in the level of domestic saving was 41.8 percent while that of total consumption expenditure was 16.2 percent. The trade deficit to GDP ratio rose by 1.2 percentage pointsto reach 17.8against the preceding year owing to the marginal rise (by 0.4 percent percentage points) in the value of import bill to GDP ratio and marginal decrease in the value of export bill to GDP ratio by 0.8percentage points. In other words, the growth in the value of import (22.8 percent) was relatively higher than the growth in the value of export (13.6 percent); as the country’s import expenditure usually remain more than double of its export earnings. In this regard, the performance of the external sector was moderately not in a row to hit the GTP target of 14.5 percent resource gap to GDP ratio as a result of continued increase in the level of importation of capital goods and machineries which were believed to positively contribute to the ongoing renaissance of the country. In the review year, the level of gross capital formation to GDP ratio reached 40.3 percent; showing 11.4 percentage points increase over last year and compared to the GTP target of 28.9 percent for the same year. The level of gross capital formation and private consumption expenditures were the main sources of aggregate demand of the country as the public consumption merely constituted 8.0 percent of GDP. The contribution of gross capital formation to GDP was less than the contribution of private consumption expenditure which accounted for 69.5 percent of GDP.

National Bank of Ethiopia 8 Annual Report 2013/14 Table1.4: Expenditure on GDP and Gross Domestic Savings (As Percentage of GDP) Year Domestic Absorption Consumption Expenditure Gross Capital Formation Resource Balance Exports of Goods & Services Imports of Goods & Services Gross Domestic Total Govt. Pvt. Savings 1999/00 110.4 88.2 19.1 69.1 22.2 (12.0) 12.1 24.2 11.8 2000/01 110.5 86.9 15.7 71.2 23.6 (11.8) 12.1 23.9 13.1 2001/02 117.1 90.7 15.9 74.8 26.4 (14.1) 12.7 26.9 9.3 2002/03 116.7 92.4 14.3 78.1 24.3 (14.2) 13.5 27.7 7.6 2003/04 113.9 84.9 14.0 70.9 29.0 (16.8) 15.1 31.9 15.1 2004/05 116.5 90.5 13.3 77.3 26.0 (20.6) 15.3 35.8 9.5 2005/06 119.3 91.7 13.1 78.7 27.6 (22.9) 14.0 36.9 8.3 2006/07 111.9 87.6 11.2 76.4 24.2 (19.5) 12.8 32.4 12.4 2007/08 115.3 90.8 10.5 80.3 24.5 (19.6) 11.5 31.1 9.2 2008/09 115.1 90.2 9.5 80.7 24.9 (18.4) 10.6 29.0 9.8 2009/10 117.7 90.7 9.2 81.5 27.0 (19.6) 13.8 33.3 9.3 2010/11 114.9 82.8 10.3 72.4 32.1 (14.9) 16.7 31.5 17.2 2011/12 117.9 80.8 8.3 72.5 37.1 (17.9) 13.8 31.6 19.2 2012/13 116.6 80.8 8.3 72.5 35.8 (16.6) 12.5 29.1 19.2 2013/14 117.8 77.5 8.0 69.5 40.3 (17.8) 11.7 29.5 22.5 Average 115.4 87.1 12.0 75.1 28.3 -17.1 13.2 30.3 12.9 Source:MoFED

National Bank of Ethiopia 9 Annual Report 2013/14 1.3. Micro and Small-Scale Enterprises The five-year Growth and Transformation Plan envisagestocreate3 million employment opportunities in micro and small scale enterprises (MSEs) at the end of the plan period. The development of this sector is generally believed to be the major source of employment and income generation for a wider group of the society in general and urban youth in particular. According to the Federal Micro and Small Scale Enterprise Development Agency (FeMESDA), a total 200,319 new MSEs were established during the fiscal year 2013/14 which employed about 2.5 million people. The number of establishmentsand the employment created during the periodsurged by 158.8 and 104.1percent, respectively.At the same time, MSEs receivedmore than Birr 5 billionin loans which was85.6 percent higher than a year ago. According to the Agency’s report, the remarkable performance of the sector with respect to the number of new enterprises, employment created and credit disbursement during the periodwas attributed to the commitment of all regions to meet the GTP plan and the commencement ofmany government projects that began operation during the fiscal year. Table: 1.4: Numbers, Amount of Credit and Jobs Created through MSEs (Credit in Millions of Birr) Source:FeMSEDA 2012/13 2013/14 Percentage Change A B B/A No. of MSE's 77,415 200,319 158.8 Amount of credit 2,728.7 5,063.9 85.6 No of Total employment 1,223,679 2,497,181 104.1

National Bank of Ethiopia 10 Annual Report 2013/14 Table: 1.5: Numbers, Amount of Credit and Jobs Created through MSEs by Region (Credit in Millions of Birr) Source:FeMSEDA In terms of regional distribution of new MSE’s established,Oromia region took the leading share (35.1 percent) followed by Amhara (32 percent), Tigray (16.3percent) SNNPR (11.3 percent) and Addis Ababa (3.7 percent). In terms of loans, however, Addis Ababa received 31 percent of the credit disbursed during the review period followed by Amahara(26.2 percent), Tigray (19.6percent), Oromia (14.9 percent), and SNNPR (6.7 percent). With regard to the employment opportunities created during the period Oromiahadthe highest share (44.6 percent) followed by Amhara region (18.4 percent) SNNPR (12.9 percent), Tigray (11.6 percent) and Addis Ababa (10.1 percent). Addis Ababa Oromia SNNPR Amhara Tigray Dire Dawa Harari Benishan gul Somali Gambela Afar Total No. of MSEs 7,392 70,259 22,632 64,135 32,726 2,017 240 296 222 309 91 200,319 Amount of credit 1,567.4 755.6 338.7 1,327.1 994.1 43.3 17.1 6.0 7.5 7.2 0.0 5,063.9 No. of total Employment created by MSEs 251,399 1,113,741 320,956 460,297 289,885 24,561. 12,663 7,373 11,009 3,262 2,035 2,497,181 Regional Percentage Share No. of MSEs

3.7

35.1

11.3

32.0

16.3

1.0

0.12 0.15

0.11

0.2

0.05

100.0 Amount of credit 31.0 14.9 6.7 26.2 19.6 0.9 0.3 0.1 0.0 100.0 No. of total Employment created by MSEs 10.1 44.6 12.9 18.4 11.6 1.0 0.5 0.3 0.4 0.1 0.1 100.0

National Bank of Ethiopia 11 Annual Report 2013/14 Figure I.2 Regional Distribution of Numbers of MSEs during 2012/13 and 2013/14 Source: FeMSEDA FigureI.3: Regional Distribution of Amount of Credit during 2012/13 and 2013/14 Source: FeMSEDA 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012/13 2013/14 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012/13 2013/14

National Bank of Ethiopia 12 Annual Report 2013/14 Figure I.4: Regional Distribution of Employment Created during 2012/13 and 2013/14 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012/13 2013/14 Source: FeMSEDA 1.4. Access to Water Supply During 2013/14, the proportion of people having access to potable water supply improved by 8.3 percentage point to 76.7percent (84.2 percent urban and 75.5 percent rural population); relative to 68.5percent (81.3 percent urban and 66.5 percent rural people) in 2012/13. Urban population with access to potable water within radius of 0.5 km increased to 84.2 percent in 2013/14 from 81.3 percent in 2012/13, depicting a 2.9 percentage point improvement. Similarly, rural population with access to potable water within 1.5 km radius reached 75.5 percent by the end of 2013/14, exhibiting 8.9 percent expansion over the 66.5 percent in 2012/13. In the Growth & Transformation Plan, the total population (rural and urban) having access to safe drinking water is envisaged to reach 98.5 percent by the end 2014/15. Urban and rural population with access to potable water within a radius of 0.5 Km and 1.5 Km are also expected to increase to 100 and 98 percent, respectively, by the end of the plan period.

National Bank of Ethiopia 13 Annual Report 2013/14 Table1.5: Percentages of People with Access to Potable Water by Region Regions 2012-13 2013-14 Change in Percentage A B C D E F Point Rural Urban Average Rural Urban Average D-A E-B F-C Addis Ababa 94.0 94.0 87.7 87.7 0.0 -6.3 -6.3 Tigray 74.1 70.2 73.4 83.8 75.4 82.2 9.7 5.2 8.8 Amhara 78.2 72.8 77.6 85.5 83.3 85.3 7.3 10.4 7.6 Oromia 66.4 85.2 67.9 79.5 86.1 80.1 13.1 0.9 12.2 SNNPR 53.1 94.4 55.6 56.1 97.0 59.0 3.0 2.6 3.4 Afar 42.4 79.2 44.7 48.6 82.0 51.7 6.2 2.8 7.0 Somali 70.8 89.2 73.5 78.0 91.4 79.9 7.2 2.2 6.4 Ben-Gumuz 69.4 63.8 69.2 72.2 65.3 71.7 2.8 1.5 2.5 Harari 97.0 98.8 98.0 97.0 96.0 96.5 0.0 -2.8 -1.5 Gambella 85.7 98.0 91.9 95.7 97.6 96.1 10.0 -0.4 4.3 Dire Dawa 85.3 83.4 82.6 88.6 87.5 87.8 3.3 4.1 5.3 National 66.5 81.3 68.5 75.5 84.2 76.7 8.9 2.9 8.3 Source: Ministry of Water, Irrigation and Energy and NBE Staff Computation Note: Water supply access is calculated based on the provision of 20 liters/capita/day for urban and 15 l/c/d for rural at a radius of 0.5 and 1.5 kilo meters, respectively.

National Bank of Ethiopia 14 Annual Report 2013/14 FigI.4: Access to water supply by Region Source: Ministry of Water, Irrigation and Energy; and NBE Staff Computation 1.5. Road Sector Development 1.5.1. Road Network The government of Ethiopia has been engaged in extensive investment in infrastructure development to sustain economic growth, improve product competitiveness and encourage private investors. The development of road transport, which is the dominant mode of transport in Ethiopia, is believed to create a network over a wide array of infrastructural facilities so as to improve the accessibility and mobility of agricultural and industrial products. Accordingly, in 2013/14, the total stock of road network reached 99,522 Km of which 26,857 Km was Federal1 , 33,609 Km rural and 39,056 Km woreda road. The Federal road includes 12,640 Km (47.1 percent) asphalt and 14,217 Km

1 Federal roads are roads administered by federal government 0 20 40 60 80 100 120 Average values in % Region 2012/13 2013/14

National Bank of Ethiopia 15 Annual Report 2013/14 (52.9 percent) gravel roadwhich, showed annual expansion of 11.8 percent and reduction of 1.6 percent, respectively. The asphalt road network in 2013/14 constituted about 12.7 percent of the total stock of road network in the country. It includes 85 Km Addis￾AdamaExpressWay, the first of its kind in the country, which was completed in 2013/14. In 2013/14, total road network reached 99,522 Km,which expanded by 15.8 percent compared to 85,966 Km recorded in 2012/13. Similarly, rural road network increase by 3.2 percent per annum constituting 33.8 percent or 33,609 Km of the total road network during the period. The community road, which was renamed as woreda road in 2010/11 and included under the total road network, has remarkably increased to 39,056 km from 27,628 km a year ago. Hence, the government’s plan to connect each kebele to the main road in line with the woreda road program during the Growth and Transformation Plan period is proceeding well.

National Bank of Ethiopia 16 Annual Report 2013/14 Table 1.7: Classification of Road Network (Length in km) Year Federal Road Asphalt Gravel Rural road Woreda road * Total** Length Growth rate Length Growth rate Length Growth rate Length Growth rate Length Growth rate 2000 /01 3,924 - 12,467 - 16,480 - NA - 32,871 - 2001/02 4,053 3.3 12,564 0.8 16,680 1.2 NA - 33,297 1.3 2002/03 4,362 7.6 12,340 -1.8 17,154 2.8 NA - 33,856 1.7 2003/04 4,635 636 13,905 12.7 17,956 4.7 NA - 36,496 7.8 2004/05 4,972 7.3 13,640 -1.9 18,406 2.5 NA - 37,018 1.4 2005/06 5,002 0.6 14,311 4.9 20,164 9.6 NA - 39,477 6.6 2006/07 5,452 9.0 14,628 2.2 22,349 10.8 57,763.7 - 42,429 7.5 2007/08 6,066 11.3 14,363 -1.8 23,930 7.1 70,038.1 21.3 44,359 4.5 2008/09 6,938 14.4 14,234 -0.9 25,640 7.2 85,767.0 22.5 46,812 5.5 2009/10 7,476 7.8 14,373 1.0 26,944 5.1 100,384.9 17.0 48,793 4.2 2010/11 8,295 11.0 14,136 -1.6 30,712 14.0 854.0 - 53,997 10.7 2011/12 9,875 19.1 14,675 3.8 31,550 2.7 6,983.0 717.7 63,083 16.8

2012/13 11,301 14.4 14,455 -1.5 32,582 3.3 27,628.0 295.6 85,966 36.3 2013/14 12,640 11.8 14,217 -1.6 33,609 3.2 39,056 41.4 99,522 15.8 Source: Ethiopian Roads Authority

• Includescommunity road was replaced byworeda road and registered as new road in 2010/11 ** Total road length does not include community road length till 2010/11as it is non-engineered road; but it includes woreda road.

National Bank of Ethiopia 17 Annual Report 2013/14 1.5.2. Road Density The proper level of road network is assessed by road density which is measured by road length per 1,000 persons or by road length per 1,000 km2 . In the five year GTP period, the plan is to increase road density from 44.5 Km to 123.7 km per 1,000 km2 and from 0.64 Km to 1.54 km per 1000 population. At the end of 2013/14, the road density per1,000 square Km showed improvement to 90.5 km from 78.2 km a year ago though slightly lower than GTP target of 106.9km for the year 2013/14. The road density per 1,000 population in 2013/14 was 1.1 km and up by 10 percent over preceding fiscal year. GTP target was 1.37 km per 1,000 population for the year 2013/14 (Table 1.8). Table 1.8: Road Densities Source: Ethiopian Roads Authority Year Road Density /1000 person Road density /1000 sq. km 2000/01 0.5 29.9 2001/02 0.5 30.3 2002/03 0.5 30.8 2003/04 0.5 33.2 2004/05 0.5 33.7 2005/06 0.5 35.9 2006/07 0.6 38.6 2007/08 0.6 40.3 2008/09 0.6 42.6 2009/10 0.6 44.4 2010/11 0.7 48.3 2011/12 0.8 57.3 2012/13 1.0 78.2 2013/14 1.1 90.5

National Bank of Ethiopia 18 Annual Report 2013/14 1.5.3. Road Accessibility During 2013/14 the annual average distance from all-weather roads declined by 8.3 percent from 6 kilometers in 2012/13 to 5.5 kilometers. Similarly, the proportion of area more than 5 km from all-weather roads went down to 40.5 percent from 46 percent during the same period. In the Growth and Transformation Plan the target for 2013/14 was to reach 34.3 percent (Table 1.9). About 70 percent of the total road network in the country is found in good condition, as it was the case last year. The highest proportion of road in good condition was woreda road (87 percent) followed by asphalt road (74 percent), gravel road (58 percent) and rural road (55 percent). Both asphalt and gravel roads showed no improvement over the previous fiscal year 2013/14 (Figure I.4). Table 1.9: Road Accessibility Indicators 2012/13 2013/14 Percentage change Proportion of area more than 5Km from all-weather road 46 40.5 -12 Average distance from all-weather roads 6 5.5 8.3 Source: Ethiopian Roads Authority

National Bank of Ethiopia 19 Annual Report 2013/14 Fig I.4: Status of Road Source: Ethiopian Roads Authority 1.5.4. Road Sector Financing Construction and maintenance of roads remained one of the key investments for the government over the past few years. Hence, large sum of finance has been mobilized for road construction and maintenance both from foreignand domestic sources. In 2013/14, total investment in road construction and expansion rose by 14.7 percent to Birr 38.6 billion from Birr 33.7 billion a year earlier ( see Table 1:10 and fig.I.5). Investment in the Federal road construction and expansion also reached Birr 29.7 billion thereby taking up 76.9 percent share in total road investment capital. The higher percentage change of investment registered 131.1 percent for urban road (municipalities’ maintenances). Similarly, financing of regional and federal roads rose by 32 and 31.3 percent, respectively as compared to 2012/13.Investment in woreda road, however, declined by 33.4 percent (Table 1.10), due to lower physical accomplishment of 11,428 Km new woreda road in 2013/14 compared with the previous year’s 20,645 Km (Table 1.7). 0 10 20 30 40 50 60 70 80 percentage Asphalt Roads in Good Condition Gravel Roads in Goods Condition Rural Roads in Good Condition Total Roads Network in Good Condition

National Bank of Ethiopia 20 Table 1.10: Investments in the Road Sector (In millions of Birr) Road Type 2012/13 2013/14 Percentage change A Share (In %) B Share (In %) Federal roads 22,615.5 67.2 29,697.0 76.9 31.3 Regional road 2,266.9 6.7 2,992.7 7.7 32.0 Woreda road 8,725.1 25.9 5,809.0 15.0 -33.4 Urban road* 51.4 0.2 118.8 0.3 131.1 Total 33,658.9 100.0 38,617.5 100.0 14.7 Source: Ethiopian Roads Authority

• All municipalities’ maintenance Fig I.5 Investment in Road construction and expansion Source: Ethiopian Roads Authority 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 In Millions of Birr Federal Road Regional Road woreda Road Urban Road Total Road Investment

National Bank of Ethiopia 21 1.8. Developments in Education Sector The education sector has been improving both in terms of qualities and coverage during the previous years. In the sector, there were positive trends to achieve the goals of Growth and Transformation Plan through producing efficient, effective and innovative citizens which can contribute to the realization of the long term vision to become a middle income country. In 2013/14, Primary education (1- 8 grades) enrolment improved from 15.8 million in 2009/10 to 18.3 million in 20013/14; grew by 4.6 percent against the preceding year. In 2013/14, the number of primary schools reached 32, 048 from 30,534 in the preceding year and 26,951 five years ago. Of the total number of primary schools, 27,597 (86 percent) were located in the rural area whereas 4,451 (14 percent) were located in urban. Similarly, secondary education enrolment reached 2.0 million, 17.8 percent and 5.2 percent higher than 2009/10 and 2012/13, respectively. By the end of 2013/14, moreover, the number of secondary schools (9-12 grades) reached 2,329 exhibiting 72.4 and 22 percent growth over 2009/10 and 2012/13. Of the total secondary schools, 1,636 (70 percent) were found in the urban areas while the remaining were located in the rural areas. The Technical and Vocational Education and Training (TVET) enrolment was 238,049; showing 0.1 percent increment vis￾à-vis 2012/13 but declined by 32.6 compared with 2009/10. Parallel to this, the number of TVET institutions remained 437 compared with previous year, but decreased by 13.5 percent from 505 institutions in 2011/12. This was due to the under￾reporting of data from most of the regions and no report at all from Somali, Bunishangul Gumuz and Harari regions for 2013/14. Education share of the annual government expenditure was 25.0 percent which was 0.2 and 0.9 percentage points lower than the preceding year and the year 2009/10, respectively.

National Bank of Ethiopia 22 Annual Report 2013/14 Table 1.8: Education Sector Data Indicators 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2000 2001 2002 2003 2004 2005 2006 Number of primary schools (urban, rural) 23,354 25,212 26,951 28,349 29,482 30,534 32,048 i. Urban 3,100 3,206 3,206 3,988 4,241 4,536 4,451 ii. Rural 20,254 21,886 23,745 24,313 25,227 25,998 27,597 Number of secondary schools (urban, rural) 1,087 1,185 1,351 1,392 1,710 1,912 2,329 iii. Urban 904 976 1,053 1,053 1,342 1,451 1,636 iv. Rural 183 209 298 339 368 461 693 Number of TVET centers (public, private, mission) 458 458 448 505 505 437 437 Number of tertiary level institutions by universities (public, private), colleges (public, private) 61 72 70 74 91 99 124 Universities 22 26 32 32 33 Participation of women in higher education institutions (%) 24 22.2 27 27 21.1 29.5 32 Primary enrolment (in millions) 15.3 15.6 15.8 16.7 17 17.5 18.3 Secondary enrolment (in thousands) 1,501 1,588 1,696 1,760 1,766 1,900 1,998 TVET enrolment 229,252 308,501 353,420 371,347 330,409 237,877 238,049 Girls' primary enrolment (%) 46.5 47.3 47.4 47.3 47.8 48 48 Grades (1-4) gross enrolment ratio (%) 127.8 122.6 118.8 124 122.6 124.9 128.9 a. Girls' gross enrolment ratio (%) 122.8 118.4 114.3 119.1 118.1 119.8 123.6 b. Boys' gross enrolment ratio (%) 133.0 126.7 123.2 128.8 127.0 129.7 134 Grades (5-8) gross enrolment ratio (%) 60.2 63.1 65.5 66.1 65.6 62.9 64.4 a. Girls' gross enrolment ratio (%) 55.5 60.5 63.5 64.8 65.3 62.2 63.4 b. Boys' gross enrolment ratio (%) 64.8 65.6 67.4 67.4 65.9 63.5 64.1 Girls’ gross primary enrolment ratio (%) 90.5 90.7 101.6 93.2 92.9 92.4 94.3 Boys' gross primary enrolment ratio (%) 100.5 97.6 108.4 99.5 97.9 98.2 100.1

National Bank of Ethiopia 23 Annual Report 2013/14 Indicators 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2000 2001 2002 2003 2004 2005 2006 Gross Primary Enrolment ratio (%) 95.6 94.4 93.4 96.4 95.4 95.3 97.2 Tigray 109.0 107.1 103.3 102.1 100.1 98.8 105.3 Afar 26.2 31.2 39.3 40.1 43.7 50.5 53.2 Amhara 112.4 112.5 104.9 104.2 1003 100.7 106.7 Oromia 91.4 89.3 88.4 94.8 92 91.2 89.3 Somali 32.7 35 65.6 61.3 75.1 96.9 84.8 Ben.Gumuz 112.3 112.1 114.6 119.7 115.9 111.9 95.4 SNNPR 102.9 101.0 97.3 102.6 100.7 98.4 100.3 Gambella 121.4 112.5 125.1 132 138.5 126.6 136.4 Harari 108.4 107.9 95.3 91.5 89.3 87.1 98.1 A.A 114.3 109.2 107.3 103.1 102.4 99.2 163.6 Dire Dawa 86.3 92.1 91.3 89.1 87.3 84.9 91.4 Primary net enrolment rate (%) 83.4 83.0 82.1 85.3 85.4 85.9 89 No. of students registered in the first cycle primary schools(1-4) (in millions) 10.7 10.6 10.5 11.3 11.4 12.0 12.7 No. of students registered in the second cycle primary schools(5-8) (in millions) 4.6 5 5.3 5.5 5.7 5.5 5.6 Number of students registered in the first cycle secondary schools(9-10) (in millions) 1.3 1.4 1.5 1.5 1.4 1.5 1.6 Gross enrolment rate in (9-10 grades) in percent 37.1 38.1 39.1 38.4 36.9 38.4 39.3 Preparatory admission(in millions) 0.20 0.21 0.24 0.29 0.32 0.36 0.39 Completion rate of primary school (%) 44.7 43.6 47.8 49.4 52.1 52.8 46.7 Girls/boys ratio in primary schools (%) 87 89.7 91 90.4 92 94 91 Girls/boys ratio in secondary schools (%) 63 67 75 79 84 88 89

National Bank of Ethiopia 24 Annual Report 2013/14 Indicators 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2000 2001 2002 2003 2004 2005 2006 Girls/boys ratio in (9-10) (%) 65 72 78 81 86 90 90 Girls/boys ratio in (11-12) (%) 48 40 56 83 75 80 82 Girls/boys ratio inTVET(%) 92 86 80 86 91 105 105 Girls/boys ratio in higher education (%) 24 0.28 36 36 39 42 46 Grade 1-8(primary) repetition rates (%) 6.7 6.7 4.9 8.5 8.5 7.9 8.4 Primary school dropout rate (%) 14.6 18.6 13.1 16.3 16.3 15.7 7.9 1 st grade dropout rate (%) 18.3 22.9 28.1 19.9 25 22.5 23.9 Pupil to Teacher Ratio i. Grade (1-8) 57 54 51 51 50 49.4 47 ii. Grade (9-12) 43 41 36 31 29 28.7 27.8 iii. TEVT 25 34 NA 29 24.7 18.6 16.5 iv. In higher education NA 28.2 26.8 26.7 25 24.4 25.9 Pupil to Section Ratio i. Grade (1-8) 62 59 57 57 55 53.7 54 ii. Grade (9-12) 74 68 64 58 56.1 59.3 56.9 Number of class rooms in primary schools 236,712 247,759 254,744 279,292 308,905 324,587 321,468 Pupil to Textbook Ratio i. Grade(1-8) 1.5 1.35 1 ii. Grade(9-12) 1 Pupil to School Ratio i. Grade(1-8) 657 619 573 590 576 571 571 ii. Grade(9-12) 1,381 1,345 1270 1160 1033 994 857 iii. TEVT 501 673 788 735 654 544 545 Proportion of pupils starting grade 1 who reach grade 5(%) 49.2 39.6 55 47 50.2 55.5 69.5

National Bank of Ethiopia 25 Annual Report 2013/14 Indicators 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2000 2001 2002 2003 2004 2005 2006 Percentage of female enrolled in under graduate degree (%) 24.1 29 27 27 22 30 30.3 Percentage of female graduated in under￾graduate degree (%) 20.6 29.7 23.4 27.2 25.3 28.7 25.6 Percentage of female enrolled in post￾graduate degree 9.6 11.3 11.9 13.8 20.2 20.6 19.5 Percentage of female graduated in post￾graduate degree 10.7 10.5 13.9 14.4 14.0 14.9 15 Annual education share of the national expenditure{%} 22.8 23.6 25.9 17.5 25.3 25.2 25 Source: Ministry of Education 1.7. Telecommunication Telecommunication is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Cognizant of this facts,the Ethiopian government has established a new telecom company known as Ethio Telecom, to replace the long serving Ethiopian Telecommunications Corporation, with a view to enhancing the development of the telecom sector and supporting the steady growth of the country. Pursuant to this grand objective,Ethio Telecom has set ambitious targets to enhance customer acquisition, customer satisfaction and provision of quality services to customers. The country’s five-year Growth and Transformation Plan (GTP) envisages increasing the number of fixed line subscribers from 1 million in 2009/10 to 3.1 million by the end of 2014/15. The number of mobile-telephone subscribers is expected to pick up to 40 million from 6.5 million. Similarly, the number of internet users will increase to 3.7 million from 187,000 by the end of the plan period. In 2013/14, the number of mobile subscribers surged by 19.2 percent and reached 28.3million from 23.8 million a

National Bank of Ethiopia 26 Annual Report 2013/14 year ago. Similarly, the number of fixed line subscribers slightly increased by 2.9percent to 813,410 from 790,168. Meanwhile, the number of internet subscribers surged by 39.2 percent on annual basis and reached 6.2 million from 4.4 million recorded (Table 1.11). Table1.11: Number of Subscribers Service Type 2012 /13 2013 /14 Percentage Change Fixed line 790,168 813,410 2.9 Total mobile pre-paid 23,637,007 28,050,182 18.7 Mobile GSM pre-paid* 23,526,519 27,832,955 18.3 3G mobile pre-paid** - 91,535 - Mobile CDMA pre- paid* 110,488 125,692 13.8 Voice 11,197 12,162 8.6 Voice + Data 99,291 113,530 14.3 Total mobile post-paid 119,600 257,480 115.3 Mobil GSM post- paid 107,739 238,323 Mobil CDMA post- paid 11,861 19,157 61.5 Voice 8,595 14,017 63.1 Voice + Data 2,621 4,290 63.7 GOTA only 645 850 31.8 All Mobile 23,756,607 28,307,662 19.2 Total data and Internet 4,430,032 6,168,046 39.2 Broadband (EVDO, WCDMA, ADSL) 44,032 61,913 40.6 Narrowband (1X, dialup, ADSL*< 256K) 177,011 186,038 5.1 GPRS 4,208,989 5,920,095 40.7 Total 24,767,818 29,369,023 18.6 Source: Ethio-Telecom

National Bank of Ethiopia 27 Annual Report 2013/14 *CDMA (Code Division Multiple Access), GSM (Global System for Mobiles),GPRS (General Packet Radio Service)and ADSL (Asymmetric Digital Subscriber Line) *3G service started in 2013/14. Meanwhile,the country's telecommunicat ion penetration rate (telecom density) increased from 28.5 in 2012/13 to34.3 in 2013/14. Mobile density has also rose to 33.3 in 2013/14. In the review period, internet and data density improved to 7.3from 5.2 a year ago. The fixed line density has increased slightly to 1.0 in 2013/14 from 0.9 in 2012/13 (Table 1.12). Table 1.12: Telecom Density Tele density/100 Subscribers 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Fixed line 1.2 1.4 1.0 1.0 0.9 1.0 Mobile 5.4 8.7 12.9 20.4 27.6 33.3 Total 6.6 10.1 13.9 21.4 28.5 34.3 Internet and data 0.1 0.3 0.2 0.3 5.2 7.3 Source:Ethio-Telecom *Tele-density is mobile plus fixed telephone subscribers per 100 inhabitants International outgoing minutes in mobile telephone and internet traffic increased by 17.0percent from 59.3 million in 2012/13 to 69.4 million in 2013/14. However,international incoming minutesdecreased by 15.8 percent to 670.9 million compared to 797.1 million a year ago (Table 1.13).

National Bank of Ethiopia 28 Annual Report 2013/14 Table 1.13: Annual Traffic for Local and International Calls Annual Traffic 2012/13 2013/14 Percentage Change Mobile local traffic (In millions) 17,234.6 17,379.8 0.8 International Traffic International outgoing calls (In number) 37,253,286 44,570,184 19.6 International outgoing minutes 59,264,121 69,366,192 17.0 International incoming calls (In number) 207,483,552 176,849,300 -14.8 International incoming minutes 797,113,550 670,853,817 -15.8 Source:Ethio-Telecom Income of Ethio-telecom rose by 4.3 percent to Birr 17.4 billion in 2013/14 vis-à-vis Birr 16.6 billion in 2012/13. Similarly, total expense of the company reached Birr 5.6 billion showing a 30 percent increase. Yet, Ethio – telecom earned a gross profit of Birr 11.8 billion;in 2013/14 which was 3.5 percent lower thanthe previous year (Table 1.14).

National Bank of Ethiopia 29 Annual Report 2013/14 Table 1.14: Financial Performance and Asset of Ethio -Telecom (In Millions of Birr) Percentage Change Finance and Asset 2011/12 2012/13 2013/14 A B C C/B C/A Income 12,770 16,644 17,358.40 4.3 35.9 Expense 1,722 4,270 5,554 30.1 222.5 Gross Profit 9,657 12,227 11,804.4 -3.5 22.2 Assets NA 37,244 NA - - Fixed Gross NA 15,834 24,209.3 52.9 - Depreciation 4,297 4,622 4,303.3 -6.9 0.1 Source:Ethio – Telecom Note: The financial figures in the above table are not audited.

National Bank of Ethiopia 30 Annual Report 2013/14 II. ENERGY PRODUCTION 2.1.Electric Power Generation Ethiopia has immense potential for hydroelectric power, geothermal and wind energy generation. According to Ethiopian Electric Power (EEP), the country has an estimated hydro-power potential of 45,000 MW, a geothermal potential of 10,000 MW and 1.3 million MW potential from wind farm. The country’s generating capacity is largely based on hydropower reservoirs as nine of its major rivers are suitable for hydroelectric power generation.Though it is vulnerable to the effects of climatic changeit will remain a predominant energy source. Considering the increasing power demand and capacity shortfall in the system and to have a better generation mix, the country is looking to diversify its production of renewable energy to wind and geothermal sources. Wind energy is found an immediate and clean energy solution as wind power is renewable with short construction period and it has significant advantage of quick result. Ethiopian Electric Power implemented different wind power projects in several parts of Ethiopia. Ashegoda Wind Farm, with a generating capacity of 120MW, is the second project in the country after the first 51 MW AdamaWind Farm Project, which began production in 2011. In addition, preparation for undertaking a feasibility study is under way for a 300 MW AyshaWind Power. The country has also been identified as being one of the huge solar energy potentials in Africa because of its geographical location near the equator. Therefore, utilizing such untapped solar energy potential enables the country to provide electricitycover for remote regions. As part of Ethiopia’s plan to become a major power exporter in East Africa, the country is building several geothermal power plants. The project will be a crucial input to enhance Ethiopia’s economic growth to become a carbon-neutral middle

National Bank of Ethiopia 31 Annual Report 2013/14 income economy by 2025. The geothermal development will help Ethiopia towards achieving sustainable energy supply in line with the country’s green economy. The former Ethiopian Electric Power Corporation has been divided into two separate institutions, namely Ethiopian Electric Power (EEP) and Ethiopian Electric Utility.The former is mandated with the task of network construction and generating energy while the latter is responsible for distributing generated power and selling electricity to users. The EEP generates electricity through two different power supply systems, namely, the Inter Connected System (ICS)2 and Self Contained System (SCS)3 . ICS, constituted 99.9 percent of electric power generating system (Table 2.1). The total amount of electric power generated in 2013/14 was about 8.7 billion KWH, showing a 14.7 percent annual growth and 38.4 percent increase compared to 2011/12. During the review period, 95.8 percent of the electric power was generated by hydropower while the remaining 4.1 and 0.1 percent came from

2 Generates power by connecting to other systems 3 Generates power independently wind and thermal sources, respectively (Table 2.1). During the FY 2013/14, the production of wind energy got momentum as the total electric energy generated from wind sources increased to 355.8 million KWH from 191.8 million KWH last year and 29.3 million KWH in 2011/12 (Table 2.1). As per the government’s five-year Growth and Transformation Plan, the electricity coverage is planned to scale up to 75 percent in 2014/15 from 41 percent in 2009/10. Similarly,energy production capacity is planned to grow to 32,656 GWH at the end of the GTP period from 7,653 GWH in the base year. In 2013/14 actual performance was 8,701 GWH, or about 45 percent compared with the annual plan.

National Bank of Ethiopia 32 Table 2.1: Electric Power Generation in ICS and SCS (I n ‘000 KWH) Source:Ethiopian Electric Power 2.2. Volume and Value of Petroleum Imports During the FY 2013/14, a total of about 2.63 million metric tons of petroleum products worth Birr 47.6 billion were imported into the country by the Ethiopian Petroleum Enterprise. As compared to previous year the total value of import for the year 2013/14 increased by 22.9 percent mainly due to higher import of gas oil (29.5 percent), jet fuel (19.9 percent) and gasoline (9.2 percent), despite a 5.4 percent decline in imports of fuel oil. Similarly, the total volume of petroleum imports went up by 18.5 percent owing to higher volume of gas oil (23 percent), jet fuel (16.4 percent) and gasoline (13.4 percent) outweighing a 5.4 Source 2011/12 2012/13 2013/14 Percentage Change [A] Share (In %) [B] Share (In %) [C] Share (In %) [C/A] [C/B] ICS Hydro Power

6,239,288.9

99.3

7,384,011.4

97.3

8,335,745.7

95.8 33.6 12.9 Thermal Power

37.8

0.0 -

• • -100.0 Geothermal

7,979.9

0.1

---

• -100.0 - Wind

29,256.3

0.5

191,784.7

2.5

355,757.9

4.1 1,116.0 85.5 Sub Total

6,276,525.2

99.8

7,575,833.9

99.8

8,691,503.5

99.9 38.5 14.7 SCS Hydro Power

1,715.7

0.0

1,648.2

0.0

676.9

0.0 -60.5 -58.9 Thermal Power

8,180.4

0.1

10,865.8

0.1

8,837.0

0.1 8.0 -18.7 Sub Total

9,896.2

0.2

12,514.0

0.2

9,513.9

0.1 -3.9 -24.0 Total Hydro Power

6,241,004.6

99.3

7,385,659.6

97.3

8,336,422.6

95.8 33.6 12.9 Thermal Power

8,180.4

0.1

10,903.6

0.1

8,837.0

0.1 8.0 -19.0 Geothermal

7,979.9

0.1

• -100.0 - Wind

29,256.3

0.5

191,784.7

2.5

355,757.9

4.1 1,116.0 85.5 Grand Total

6,286,421.3

100.0

7,588,347.9

100.0

8,701,017.5

100.0 38.4 14.7

National Bank of Ethiopia 33 percent decline in import volume of fuel oil (Table 2.2). In general, higher import bill of petroleum products was associated with rise in international oil price, and higher volume of import during the period (Fig II.1&Fig II.2). Table 2.2 Volume and Value of Petroleum Imports (Volume in MT and Value in '000 Birr) Petroleum Products 2012/13 2013/14 Volume Value Volume Value Percentage Change A B C D C/A D/B Regular Gasoline (MGR)

186,517.5

3,700,854.8

211,597.2

4,042,535.8 13.4 9.2 Jet Fuel

602,427.0

11,190,669.9

701,418.9

13,416,935.9 16.4 19.9 Fuel Oil

159,297.4

2,093,480.5

152,093.7

1,979,727.1 -4.5 -5.4 Gas Oil (ADO)

1,266,562.9

21,759,803.1

1,558,341.1

28,180,671.4 23.0 29.5 Total

2,214,804.8

38,744,808.3

2,623,450.8

47,619,870.2 18.5 22.9 Source:Ethiopian Petroleum Enterprise Fig. II.1 Trends in Volume of Petroleum Imports (In ‘000)

National Bank of Ethiopia 34 Source:Ethiopian Petroleum Enterprise Fig. II.2 Trends in Value of Petroleum Imports (In ‘000) Source:Ethiopian Petroleum Enterprise As international oil prices tended to increase during 2013/14 domestic retail prices were also adjusted accordingly. Thus, the average domestic retail prices of petroleum products

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Volume In MT Year MGR Jet Fuel Fuel Oil Gas Oil

5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Value in Birr Year MGR Jet Fuel Fuel Oil Gas Oil

National Bank of Ethiopia 35 increased vis-à-vis the previous year because of the rise in retail prices of Jet fuel (10.8 percent), Kerosene (7.7 percent), Regular Gasoline (5.7 percent), Gas Oil (5.5 percent) and Fuel Oil (5.4 percent) in the review period (Table 2.3). As illustrated in Fig.II.3 and Table 2.3, the retail fuel prices in Addis Ababa tended to increase for all types of petroleum products over the last five years except in 2012/13. Table 2.3 : Annual Retail Prices of Petroleum Products in Addis Ababa (Birr/liter) Year Quarter Regular Gasoline (MGR) Fuel Oil Gas Oil Kerosene Jet fuel 2011/12 Qtr.1 20.94 14.09 17.73 14.05 21.74 Qtr.2 19.81 14.84 17.28 13.95 20.49 Qtr.3 20.42 15.27 17.89 13.95 20.94 Qtr.4 20.42 15.27 17.89 13.95 21.25 Average 20.40 14.86 17.70 13.98 20.69 2012/13 Qtr.1 18.78 14.59 16.91 13.85 20.06 Qtr.2 18.78 14.59 16.91 13.85 20.01 Qtr.3 18.78 14.59 16.91 13.85 20.01 Qtr.4 18.78 14.59 16.91 13.85 20.01 Average 18.78 14.59 16.91 13.85 20.01 2013/14 Qtr.1 18.94 14.59 16.91 13.85 20.01 Qtr.2 19.67 15.09 17.49 14.50 21.34 Qtr.3 20.30 15.81 18.28 15.50 22.68 Qtr.4 20.53 16.04 18.70 15.83 23.04 Average 19.86 15.38 17.85 14.92 22.17 Annual percentage change 5.7 5.4 5.5 7.7 10.8 Source: Ethiopian Petroleum Enterprise Fig. II.3: Trends in Average Fuel Price in Addis Ababa

National Bank of Ethiopia 36 0 5 10 15 20 25 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Birr/Litre Year MGR Fuel Oil Gas Oil Kerosene Source:Ethiopian Petroleum Enterprise. III.PRICE DEVELOPMENTS

National Bank of Ethiopia 37 3.1. Developments in Consumer Price at National Level Annual average national headline inflation at the end of fiscal year 2013/14 was 8.1 percent, about5.4 percentage pointslower than last year. This was due to the slowdown in both food & non-alcoholic beverages and non-food inflation by 6.7 and 3.9 percentage points, respectively. As usual, food & non-alcoholic beverage inflation contributed the lion’s share to the 5.4 percentage point slowdown in annualized headline inflation (Table 3.1). Annualized food & non-alcoholic beverages inflation, scaled down to 5.9 percent from 12.6 percent in 2012/13 on account of a significant drop in the prices of most food& non-alcoholic beverages items except non-alcoholic beverages & coffee, food products and oils & fats which saws price surges. Similarly, annual average non-food inflation registered 3.9 percentage point decline compared to last year same period and stood at 10.6 percent. The year- on– year slowdown in annualized non-food inflation was due to lower price inflation of all non-food items except alcoholic beverages & tobacco and transport which rose by 6.4 and 0.7 percentage points respectively (Table 3.1 and Fig.III.1). In contrast, annual headline inflation slightly went up to 8.5 percent from 7.4 percent a year ago as food& non-alcoholic beverages inflation rose by2.6 percentage point offsetting a 0.9 percentage point decline in non-food inflation. Annual food& non-alcoholic beverages inflation, which was3.7 percent in 2012/13, increased to 6.2 percent in 2013/14 while annual non-food inflation slightly declined to 11 percent from 11.9 over the same period (Table 3.2 and Fig.III.2). All in all, prudent fiscal, tight monetary policies, relative decline in price of tradable commodities in the international market and improvement in domestic supply have contributed to slowdown in headline, food and non-food inflation.

National Bank of Ethiopia 38 Table 3.1: Annual Average Inflation Rates (in percent) Items 2012/13 2013/14 Percentage Points Change Contribution to headline inflation percentage points A B B-A C General 13.5 8.1 -5.4 -5.4 Food &Non￾alcoholic beverages 12.6 5.9 -6.7 -3.7 Non-Food 14.5 10.6 -3.9 -1.7 Source: CSA and NBE Staff Computation Source: CSA and NBE Staff Computation Table 3.2: Annual Inflation Rates (in percent) Items 2012/13 2013/14 Change(Percentage Points) A B B-A General 7.4 8.5 1.1 Food&Non-alcoholic beverages 3.7 6.2 2.6 Non-Food 11.9 11.0 -0.9 Source: CSA and NBE Staff Computation General Food&Non-alcoholic bevarages Non Food Fig III.1:Development in Annualized National Headline,Food & Non -alcoholic beverages and Core Inflation CPI growth in %

National Bank of Ethiopia 39 Source: CSA and NBE Staff Computation 3.2. Consumer Price Developments in Regional States At the close of 2013/14, regional simple average general inflation declined to 9.9 percent from 13.9 percent a year earlier. Dire Dawa, Somali, Afar and Harari regional states registered headline inflation rates greater than the regional simple average (Table 3.3). Dire Dawaexperienced the highest headline inflation of 16.9 percent; while the lowest7.7 percent was recorded in Amhara, revealing 9.2 percentage point margin in the rates of inflation between regions with the highest and the lowest headline inflation. 0.0 10.0 20.0 30.0 40.0 50.0 60.0 July September November January March May July September November January March May July September November January March May 2012 2013 2014 General Food&Non-alcoholic bevarages Non Food Fig.III.2.Development in Annual National,Headline,Food & Non-alcoholic Beverages and Non-food Inflation

National Bank of Ethiopia 40 Table 3.3: Regional Average Annual Inflation (2013/14 FY) Regions 2012/13 2013/14 Change General Food &Non￾alcoholic beverages Non￾food General Food &Non￾alcoholic beverages Non￾food General Food &Non￾alcoholic beverages Non￾food A B C D E F G=D-A H=E-B I=F-C SNNP 15.9 15.1 16.5 8.8 6.7 11.6 -7.1 -8.4 -4.9 Harari 12.0 20.0 3.8 10.6 10.5 10.8 -1.4 -9.5 7.1 Oromia 11.3 10.3 12.9 7.9 6.7 9.3 -3.4 -3.7 -3.6 Tigray 17.4 15.2 20.4 8.5 7.3 9.6 -8.9 -7.8 -10.7 Gambella 11.7 11.2 12.5 9.2 8.2 10.7 -2.6 -2.9 -1.8 Addis Ababa 12.6 13.1 11.9 8.5 4.6 11.4 -4.0 -8.5 -0.6 Dire Dawa 11.3 9.0 13.4 16.9 7.1 24.7 5.6 -1.8 11.3 Ben. Gum 11.9 7.5 18.4 9.1 7.0 11.9 -2.8 -0.6 -6.6 Somali 15.9 14.1 18.4 11.1 6.5 16.8 -4.8 -7.5 -1.6 Afar 18.0 13.3 24.6 10.8 7.2 15.6 -7.1 -6.1 -9.0 Amhara 14.6 15.8 13.9 7.7 4.7 11.0 -6.9 -11.1 -2.8 Regions Average 13.9 13.1 15.2 9.9 7.0 13.0 Standard deviation 2.5 3.5 5.4 2.6 1.6 4.5 Coefficient of variation 0.2 0.3 0.4 0.3 0.2 0.3 Sources: CSA and NBE’s staff computation SNNP Harari Oromia Tigray Gambell a Addis Ababa Dire Dawa Ben. Gum Somali Afar Amhara 2013/14 8.8 10.6 7.9 8.5 9.2 8.5 16.9 9.1 11.1 10.8 7.7 2012/13 15.9 12 11.3 17.4 11.7 12.6 11.3 11.9 15.9 18 14.6 0 5 10 15 20 25 30 35 Inflation in % Regional States Fig III.3: Regional Annual Avarage Headline Inflation 2012/13 2013/14

National Bank of Ethiopia 41 The regional simple average food& non￾alcoholic beverages inflation was 7.0 percent in 2013/14 (Table 3.3). Food & non-alcoholic beverage inflation in regional states likeHarari, Gambela, Tigray, Afar and Dire Dawa was higher than the regional simple average. The highest food& non-alcoholic beverages inflation was registered in Harari (10.5 percent); and the lowest in Addis Ababa (4.6 percent)revealing 5.9 percentage point margin in the rate of food and non-alcoholic beverages inflation among regions, which is lower than the 12.5 percentage point margin during the previous year.This might specify more regional integration through communication and transportation among other factors in reducing regional differences. SNNP Harari Oromia Tigray Gambell a Addis Ababa Dire Dawa Ben. Gum Somali Afar Amhara 2013/14 6.7 10.5 6.7 7.3 8.2 4.6 7.1 7 6.5 7.2 4.7 2012/13 15.1 20 10.3 15.2 11.2 13.1 9 7.5 14.1 13.3 15.8 0 5 10 15 20 25 30 35 Inflation in % Regional States Fig III. 4: Regional Annual Avarage Food and Non-alcoholic Beverage Inflation 2012/13 2013/14 During 2013/14, simple average regional non-food inflation stood at 13 percent (Table 3.3) declining from 15.2 percent in the previous year. Dire Dawa, Somali and Afar regional states recorded non-food inflation higher than the regional simple average.

National Bank of Ethiopia 42 Annual Report 2013/14 SNNP Harari Oromia Tigray Gambell a Addis Ababa Dire Dawa Ben. Gum Somali Afar Amhara 2013/14 11.6 10.8 9.3 9.6 10.7 11.4 24.7 11.9 16.8 15.6 11 2012/13 16.5 3.8 12.9 20.4 12.5 11.9 13.4 18.4 18.4 24.6 13.9 0 5 10 15 20 25 30 35 40 45 Inflation in % Regional States Fig III. 5: Regional Annual Avarage Non-food Inflation 2012/13 2013/14 Source: CSA and NBE Staff Computation The highest rise in non-food inflation was recorded in Dire Dawa(24.7 percentage), and the lowest inOromia (9.3 percentage). Yet, regarding convergence indicators there isno significant change observed due to the growing domestic market integration as transportation and communication facilities improved.

National Bank of Ethiopia 43 Annual Report 2013/14 IV. MONETARY AND FINANCIAL DEVELOPMENTS 4.1 Monetary Developments and Policy Ethiopia’s monetary policy continued to focus on containing inflation rate at single digit. Accordingly, the National Bank of Ethiopia (NBE) has been closely monitoring monetary developmentsto achieve the single digit inflation objective. NBE uses reserve money as nominal anchor for its monetary policy. 4.1.1. Developments in Monetary Aggregates At the end of 2013/14 domestic liquidity, as measured by broad money supply (M2), reached Birr297.7 billion reflecting a 26.5 percent annual growth mainly due to a 28.4 percent surge in domestic credit accompanied by 0.9 percent slight growth in external assets (net). The significant expansion of domestic credit was attributed to a 29.2 percent increase in credit to the non-central government and 21.2 percent growth in credit to central government (Table 5.2). As for developments in components of broad money,narrow money rose by 16.8 percent due to 17.1 percent increase in demand depositsand 16.4 percent pick up in currency outside banks reflecting the growth in economic activities and improvementsin money demand for transactionpurposes. Similarly, quasi￾money that comprises savings and time deposits rose by 35.8 percent and reached Birr 163.7billion by the close of the fiscal yearowing to stability of domestic prices and increased capacity of banks in deposit mobilization as witnessed by the opening of480 new branches (Table 4.1).

National Bank of Ethiopia 44 Annual Report 2013/14 Table 4.1: Components of Broad Money (In Millions of Birr, where applicable) Particulars Year Ended June 30 Annual Percentage Change 2010/11 2011/12 2012/13 2013/14 2010/11 2011/12 2012/13 2013/14 Narrow Money Supply 76,171.0 94,849.9 114,745.7 134,049.2 45.3 24.5 21.0 16.8 . Currency Outside Banks 32,574.9 38,537.1 45,671.0 53,161.4 34.6 18.3 18.5 16.4 . Demand Deposits (net) 43,596.1 56,312.7 69,074.7 80,887.8 54.4 29.2 22.7 17.1 Quasi-Money 69,206.0 94,548.9 120,567.9 163,682.8 33.1 36.6 27.5 35.8 . Savings Deposits 64,539.6 82,487.8 106,276.2 145,810.5 34.3 27.8 28.8 37.2 . Time Deposits 4,666.4 12,061.1 14,291.7 17,872.3 18.0 158.5 18.5 25.1 Broad Money Supply 145,377.0 189,398.8 235,313.6 297,732.0 39.2 30.3 24.2 26.5 Source: National Bank of Ethiopia (NBE) Source: NBE 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 03/04 05/06 07/08 09/10 11/12 13/14 (In Millions of Birr) Fig IV.1: Major Components of Broad Money (2003/04 - 2013/14) Currency Outside Banks Net Demand Deposit Quasi- Money Broad Money Year

National Bank of Ethiopia 45 Annual Report 2013/14 Table 4.2: Factors Influencing Broad Money (In Millions of Birr, where applicable) Particulars Year Ended June 30 Annual Percentage Change 2010/11 2011/12 2012/13 2013/14 2010/11 2011/12 2012/13 2013/14 External Assets (net) 55,534.7 39,787.7 45,648.5 46,079.4 104.2 -28.4 14.7 0.9 Domestic Credit 135,553.9 189,080.8 233,404.3 299,727.6 29.8 39.5 23.4 28.4 Claims on Central Gov't (net) 28,651.7 21,557.4 21,965.5 26,630.8 -13.2 -24.8 1.9 21.2 Claims on Non-Central Gov't 106,902.2 167,523.4 211,438.8 273,096.8 49.7 56.7 26.2 29.2 Other Items (net) 45,711.6 39,469.7 43,739.3 48,075.0 68.2 -13.7 10.8 9.9 Broad Money (M2) 145,377.0 189,398.8 235,313.6 297,732.0 39.2 30.3 24.2 26.5 Source: NBE Source: NBE 4.1.2. Developments in Reserve Money and Monetary Ratios During the year under review, reserve money or base money reached Birr 89.0 billion reflecting an 18.7 percent expansion over last year. The outturn wasmerely 0.2 percentage points above the annual target of 18.5 percent. The reserve money growth was attributed to -40.0 -20.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 Annual Percentage Growth Fig IV.2: Major Determinants of Monetary Growth Credit to Central Gov't Credit to Non-Central Gov't Broad Money Net Foreign Assets

National Bank of Ethiopia 46 Annual Report 2013/14 17.2 percent rise incurrency in circulation and 22.9 percent increase in deposits of banks at NBE. Determinant wise, the increment in reserve money was the result of the rise in net domestic credit by 17.5 percent coupled with a buildup of NBE’s net foreign assets by 8.8 percent. Excess reserves of commercial banks reached Birr 10.0 billion at the end of June 2013/14 from Birr 9.5 a year ago. The ratio of M2 to GDP, an indicator of financial deepening, went up slightly by 4.5 percent to reach 0.28points in 2013/14, partly indicating the prudent monetary policy measures taken to mitigate the inflationary pressure. Compared to last year same period, the money multipliers defined as narrow money to reserve money showed no change at 1.5 whereas ratio of broad money to reserve money saw slight increment to reach 3.3 from 3.1 last year reflecting improvements in deposit mobilization by commercial banks (Table 4.3). Table 4.3: Reserve Money and Monetary Ratios (In Millions of Birr, where applicable)

National Bank of Ethiopia 47 Annual Report 2013/14 Particulars Year Ended June 30 Annual Percentage Change 2010/11 2011/12 2012/13 2013/14 2010/11 2011/12 2012/13 2013/14 Reserve Requirement (CB's) 20,495.2 18,080.6 11,708.8 14,479.4 42.6 -11.8 -35.2 23.7 Actual Reserve (CB's) 27,757.3 21,791.8 21,160.9 24,493.3 34.6 -21.5 -2.9 15.7 Excess Reserve (CB's) 7,262.1 3,711.3 9,452.1 10,013.9 16.1 -48.9 154.7 5.9 Reserve Money 69,043.1 65,972.6 74,942.3 88,951.0 39.7 -4.4 13.6 18.7 . Currency in Circulation 39,100.6 45,785.2 54,917.7 64,340.5 35.8 17.1 19.9 17.2 . Bank Deposits 29,942.5 20,187.4 20,024.6 24,610.5 45.2 -32.6 -0.8 22.9 Money Multiplier (Ratio): . Narrow Money to Reserve Money 1.1 1.4 1.5 1.5 4.0 30.3 6.5 -1.6 . Broad Money to Reserve Money 2.1 2.9 3.1 3.3 -0.3 36.3 9.4 6.6 Other Monetary Ratios (%): . Currency to Narrow Money 42.8 40.6 39.8 39.7 -7.4 -5.0 -2.0 -0.4 . Currency to Broad Money 22.4 20.3 19.4 17.9 -3.3 -9.2 -4.6 -8.0 . Narrow Money to Broad Money 52.4 50.1 48.8 45.0 4.4 -4.4 -2.6 -7.7 . Quasi Money to Broad Money 47.6 49.9 51.2 55.0 -4.4 4.9 2.6 7.3 M2/GDP Ratio 0.28 0.25 0.27 0.28 -2.7 -10.2 7.4 4.5 Source:NBE Source: NBE 4.2. Developments in Interest Rate 0 20000 40000 60000 80000 100000 Value in Millions of Birr year Fig. IV.3: Reserve Money Reserve Requirement (CB's) Actual Reserve (CB's) Excess Reserve (CB's) Reserve Money

National Bank of Ethiopia 5 Annual Report 2013/14 In 2013/14, both minimum and maximum deposit interest rates remained at the past two years’ level of 5.0 percent and 5.75 percent, respectively. Consequently, average interest rate on savings deposit was 5.38 percent while weighted annual average interest rate on time deposit stood at 5.66 percent and demand deposit and lending ratesat 0.03 percent and 11.88 percent, respectively. On the other hand, the real rate of interest on savings and time deposit showed a slight improvement over the past year as a result of a year-on-year drop in inflation from 8.7 percent to 8.5 percent. Consequently, the real lending interest rate was positive at 3.41 percent although yield on T-Bills remained negative(Table 4.4).

National Bank of Ethiopia 49 Annual Report 2013/14 Table 4.4: Interest Rate Structure of Commercial Banks (In percent per annum) Rates 2007/08 2009/10 2010/11 2011/12 2012/13 2013/14

1. Deposit Rate 1.1 Savings Deposit (Simple Average) 4.08 4.50 5.38 Minimum 4.00 4.00 5.00 Maximum 4.15 5.00 5.75 1.2 Time deposit (Weighted Average) 5.16 4.79 5.49 5.55 5.66 5.66 Up to 1 year 4.67 4.56 5.37 5.48 5.57 5.55 1 -2 years 5.23 4.80 5.51 5.57 5.68 5.68 Over 2 years 5.59 5.01 5.60 5.61 5.74 5.74 1.3 Demand Deposit (Weighted Average) 0.04 0.06 0.06 0.02 0.03 0.03
2. Lending Rate (Average) 11.50 12.25 11.88 Minimum 8.00 8.00 7.50 Maximum 15.00 16.50 16.25
3. T-bills (Nominal) 0.67 0.89 1.31 1.25 1.86 1.59
4. Headline Inflation (Year-onYear) 7.8 7.9 8.8 9.1 8.7 8.5
5. Real Rate of Interest on: 5.1 SavingDeposit (1.1 - 4) -3.74 -3.37 -3.39 -3.75 -3.33 -3.09 5.2 Time Deposit (1.2 - 4) -2.65 -3.07 -3.27 -3.57 -3.04 -2.81 5.3 Lending (2 - 4) 3.69 4.38 3.11 2.75 3.17 3.41 Source: NBE Source: NBE 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Value in % Years Fig. IV.4: Interest Rate Structure of Commercial Banks Average Saving Deposit Rate Average Time Deposit Rate Average Lending Rate

National Bank of Ethiopia 50 Annual Report 2013/14 4.3. Developments in Financial Sector The major financial institutions operating in Ethiopia are banks, insurance companies and micro-finance institutions. The number of banks operating in the country reached 19of which 16 were private, and the remaining 3 state-owned. During the fiscal year these banks opened 480 new branches raising the total branch network in the country to 2,208 from 1,728 last year. As a result, bank branch to population ratio declined from 1:49,826people to 1:39,402 in 2013/14. The significant branch expansion was undertaken by Commercial Bank of Ethiopia (CBE) with 124 branches, followed by Oromiya International Bank (44 branches),Awash International Bank (38 branches), Cooperative Bank of Oromiya (31 branches), Dashen Bank and Bunna International Bank (30 brancheseach),Berhan International Bank (26 branches), and United Bank (24 branches). The share of public banks in total branch network slightly went down to 45.4 percent at the end of 2013/14 from 50.3 percent last year signifying the steady growth in private banks. The number of bank branches in Addis Ababa, the capital city and major business center of the country, increased by 29.4 percent over last year, indicating the booming economic activities in the city. Following a significant capital injection by private banks mainly Dashen Bank, Bank of Abyssinia, United Bank, Awash International Bank, Nib International Bank, WegagenBank andCooperative Bank of Oromiya,the total capital of the banking industry increased by 13.2 percent and reached Birr 26.4 billion by the end of June 2014. As a result, the share of private banks in total capital surged to 55.3 percent from 48.4 percent last year.At the same time, the share of CBE in total capital of the banking sector went down to 34.2 percent from 38.7 percent a year ago (Table 4.5). The number of insurance companies operating in Ethiopia increased to 17 from 16 last year and other branch network reached 332 following the opening of 59additional branches. Majorbranch expansion was undertaken by the state owned Ethiopian

National Bank of Ethiopia 51 Insurance Corporation (EIC) (13 branches) followed by Abay Insurance (7 branches), Oromia Insurance and Nile Insurance Company (5 branches) each. About, 55 percent of insurance branches were located in Addis Ababa.The share of private insurance companies in total branches stood at 81.3 percent, slightly down from 82.1 percent a year ago. On the other hand, total capital of insurance companies increased by 36.6 percent reaching Birr 2.0 billion from Birr 1.5 billion last year. Private insurance companies accounted for 78.6 percent of the total capital of insurance sector while theshare of EIC was21.4 percent (Table 4.6).

National Bank of Ethiopia 52 Fig IV.5: Capital and Branch Network of the Banking system (2010/11-2013/14) Source: Commercial Banks

1. Public Banks Commercial Bank of Ethiopia 595 137 732 42.4 700 156 856 38.8 9,027.0 38.7 9,045.0 34.2 Construction & Business Bank 63 42 105 6.1 68 47 115 5.2 465.0 2.0 642.1 2.4 Development Bank of Ethiopia 31 1 32 1.9 31 1 32 1.4 2,554.0 10.9 2,134.8 8.1 Total Public Banks 689 180 869 50.3 799 204 1003 45.4 12,046.0 51.6 11,821.9 44.7
2. Private Banks Awash International Bank 47 67 114 6.6 62 90 152 6.9 1,628.0 7.0 1,979.3 7.5 Dashen Bank 59 53 112 6.5 69 73 142 6.4 1,493.0 6.4 1,994.1 7.5 Abyssinia Bank 41 45 86 5.0 55 54 109 4.9 909.0 3.9 1,326.0 5.0 Wegagen Bank 38 41 79 4.6 51 49 100 4.5 1,570.0 6.7 1,825.8 6.9 United Bank 30 45 75 4.3 44 55 99 4.5 951.0 4.1 1,334.4 5.0 Nib International Bank 30 42 72 4.2 39 55 94 4.3 1,453.0 6.2 1,731.3 6.5 Cooperative Bank of Oromiya 62 12 74 4.3 84 21 105 4.8 549.0 2.4 739.9 2.8 Lion International Bank 23 22 45 2.6 35 27 62 2.8 415.0 1.8 514.3 1.9 Oromia International Bank 44 21 65 3.8 80 29 109 4.9 490.0 2.1 594.3 2.2 Zemen Bank 3 5 8 0.5 3 6 9 0.4 400.0 1.7 529.1 2.0 Buna International Bank 20 13 33 1.9 41 22 63 2.9 321.0 1.4 446.6 1.7 Berhan International Bank 11 11 22 1.3 22 26 48 2.2 340.0 1.5 488.7 1.8 Abay Bank 37 10 47 2.7 54 16 70 3.2 300.0 1.3 395.0 1.5 Addis International Bank 2 9 11 0.6 5 16 21 1.0 205.0 0.9 277.9 1.1 Debub Global Bank 10 4 14 0.8 12 7 19 0.9 114.0 0.5 177.3 0.7 Enat Bank 0 2 2 0.1 0 3 3 0.1 162.0 0.7 261.6 1.0 Total Private Banks 457.0 402.0 859.0 49.7 656.0 549.0 1,205.0 54.6 11,300.0 48.4 14,615.4 55.3 3.Grand Total Banks 867 582 1728 100 1455 753 2208 100.0 23,346.0 100.0 26,437.3 100.0 Source: Commercial Banks Banks Branch Network Regions Addis Ababa Total Addis Ababa % Share Region s Capital 2012/13 2013/14 Table 4.5: Capital and Branch Network of the Banking System as at the Close of June 30, 2014 (Branch in Number and Capital in Millions of Birr) 2012/13 2013/14 % Share % Share Total Capital % Share Total Capital Total 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Percent(%) Total Public Banks Total Private Banks

National Bank of Ethiopia 53 2012/13 2013/14 % Change A.A Regio ns Total A.A Regio ns Total A B B/A 1 Ethiopian Ins. Cor. 11.0 38.0 49 18 44 62 376.0 434.4 15.5 2 Awash Ins.Com.S.C. 20.0 12.0 32 21 12 33 145.7 182.9 25.6 3 Africa Ins.Com S.C. 6.0 7.0 13 8 7 15 106.5 134.9 26.7 4 National Ins. Co. of Eth. 9.0 10.0 19 9 12 21 54.9 72.6 32.1 5 United Ins.Com. S.C 16.0 8.0 24 18 10 28 88.9 203.1 128.3 6 Global Ins. Com.S.C 6.0 5.0 11 6 5 11 44.2 67.1 51.9 7 Nile Ins.Com.S.C 11.0 12.0 23 14 14 28 158.9 182.0 14.6 8 Nyala Ins.Com.S.C 12.0 9.0 21 12 9 21 163.0 206.3 26.6 9 Nib Ins. Com.S.C 15.0 8.0 23 17 8 25 151.8 207.3 36.5 10 Lion Ins. Com.S.C 11 5 16 14 6 20 52.7 83.4 58.4 11 Ethio-Life Ins.Com.S.c 3.0 0.0 3 6 1 7 25.9 20.3 -21.9 12 Oromia Ins.Com.S.c 12 8 20 14 11 25 76.6 119.2 55.5 13 Abay Insurance Company S.C 3 4 7 14 12.1 48.5 300.1 14 Berhan insurance S.C 6 1 7 6 1 7 15.5 22.4 45.0 15 Tsehay Insurance S.C 5 0 5 6 2 8 7.9 24.3 206.6 16 Lucy 0 2 1 3 8.4 16.8 100.4 17 Bunna Insurance S.C 4 0 4 0.0 8.6 - 18 Total 146 127 273 182 150 332 1,489.0 2,034.1 36.6 Note: A.A=Addis Ababa Table 4.6: Branch Network & Capital of Insurance Companies as at June 30, 2014 No. Branch Source: Insurance Companies Capital 2013/14 Insurance Companies 2012/13 (Branch in Number and Capital in Millions of Birr) Fig IV.6: Capital and Branch Network of Insurance Companies (2010/11-2013/14) Source: Insurance Companies 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 Percentage Public Insurance companies Private Insurance Companies

National Bank of Ethiopia 54 By the end of 2013/14, the number of micro-finance institutions (MFIs) operating in the country reached 31. Their overall performance was encouraging as their total capital and total asset increased by 24.6 and 38.6 percent and reached Birr 5.6 billion and Birr 24.5 billion, respectively. At the same time, their deposit mobilization and credit provision have expanded remarkably. Compared to last year, deposit mobilization of MFIs went up by 54.8 percent and reached Birr 11.8 billion while their outstanding credit rose by 31.9 percent indicating their expanded outreach (Table 4.7). The four largest MFIs, namely Amhara, Dedebit, Oromiya and Omo Credit and Savings institutions accounted for 74.9 percent of the total capital, 84.0 percent of the savings, 80.6 percent of the credit and 81.6 percent of the total assets of MFIs at the end of 2013/14. Table 4.7: Microfinance Institutions Performance as of June 30, 2014 Particulars 2012/13 2013/14 % Change A B B/A Total Capital 4,536,577.6 5,652,005.7 24.6 Saving 7,611,397.0 11,784,059.6 54.8 Credit 12,781,816.6 16,855,556.8 31.9 Total Assets 17,700,416.3 24,535,850.0 38.6 ( In thousands of Birr) Source: Microfinance Institutions 4.3.1. Resource Mobilization Total resources mobilized by the banking system in the form of deposit, loan collection and borrowing increased by 13.6 percent and reached Birr 111.4 billion at the end of 2013/14 (Table 4.8). Spurred by remarkable branch expansion, deposit liabilities of the banking system reached Birr 292.8 billion reflecting annual growth rate of 23.5 percent over last year. Component wise, saving deposits registered a 37.2 percent

National Bank of Ethiopia 55 increase followed by time deposits (23.5 percent), and demand deposits (10.9 percent). Savings deposit accounted for 49.8 percent of the total deposits followed by demand deposits (44.0 percent) and time deposits (6.2 percent) (Table 4.9). The rise in saving deposits indicates an increase in financial intermediation of banks in the year under review. Despite the opening of 244 new branches by private commercial banks, the share of private banks’ deposit mobilization decreased marginally to 31.5 percent from 32.3 percent last year. CBE alone mobilized 66.4 percent of the total deposits due to expansion in its large branch network. Raising funds through borrowing by banks was not an important source of resource mobilization as most banks were sufficiently liquid due to the surge in deposit mobilization and collection of loans. As a result, total outstanding borrowing of the banking system at the end of the fiscal year was Birr 27.3 billion up from Birr 23.3 billion a year earlier(Table 4.8). Of the total borrowing, domestic sources accounted for 87.5 percent and foreign sources took the remaining balance. On the other hand, loan collection by banks stood at Birr 51.7 billion showing a 23.7 percent yearly increase (Table 4.8). Of this, 49.5 percent was collected by private banks.

National Bank of Ethiopia 56 Public Banks Private Banks Total (A) Public Banks Private Banks Total (B) Public Banks Private Banks Total (C) B/A C/B

1. Deposits (net change) 37,004.6 9,754.3 46,758.9 32,949.9 16,960.8 49,910.7 40,053.9 15,592.7 55,646.6 6.7 11.5 Demand 19,199.2 2,213.2 21,412.4 18,781.8 5,106.9 23,888.7 9,350.1 3,294.4 12,644.6 11.6 -47.1 Savings 12,049.3 5,916.5 17,965.9 12,937.5 10,856.5 23,794.0 29,850.8 9,685.0 39,535.8 32.4 66.2 Time 5,756.0 1,624.6 7,380.6 1,230.6 997.4 2,228.0 853.0 2,613.2 3,466.2 -69.8 55.6
2. Borrowing (net change) 7,247.1 - 7,247.1 6,343.0 - 6,343.0 4,034.1 - 4,034.1 -12.5 -36.4 Local 7,232.4 - 7,232.4 5,075.9 - 5,075.9 2,925.9 - 2,925.9 -29.8 -42.4 Foreign 14.7 - 14.7 1,267.1 - 1,267.1 1,108.2 - 1,108.2 8514.5 -12.5
3. Collection of Loans 18,479.9 16,707.6 35,187.4 22,935.5 18,884.7 41,820.2 26,127.5 25,617.2 51,744.7 18.8 23.7
4. Total Resources Mobilized (1+2+3) 62,731.5 26,461.9 89,193.4 62,228.4 35,845.5 98,073.9 70,215.4 41,209.9 111,425.3 10.0 13.6
5. Disbursement 36,949.2 19,152.9 56,102.1 33,249.7 21,001.8 54,251.5 38,937.9 21,027.5 59,965.4 -3.3 10.5
6. Change in Liquidity (4-5) 25,782.4 7,308.9 33,091.3 28,978.7 14,843.7 43,822.4 31,277.5 20,182.4 51,459.9 32.4 17.4 Memorandum Item:
7. Outstanding Credit* 85,721.7 36,740.4 122,462.1 103,585.1 47,618.9 151,203.9 127,634.3 53,693.1 181,327.4 23.5 19.9 *Includes government borrowing in the form of bonds and treasury bills from commercial banks, DBE and other sectors other than NBE (In Millions of Birr) Table 4.8: Annual Resource Mobilization & Disbursing Activities of Commercial Banks and DBE (Specialized Bank) as at June 30, 2014 Percentage Change Source: Commercial Banks &Staff Computation Particulars 2011/12 2012/13 2013/14

National Bank of Ethiopia 57 Table 4.9: Deposits and Borrowings of Commercial Banks and Specialized Bank as at June 30, 2014 2011/12 2012/13 2013/14 B/A C/B A B C A. Deposits -Demand 92,254.8 116,143.6 128,788.1 25.9 10.9 -Savings 82,494.6 106,288.6 145,824.3 28.8 37.2 -Time 12,541.3 14,769.2 18,235.4 17.8 23.5 T o t a l 187,290.7 237,201.3 292,847.9 26.6 23.5 B. Borrowings 0.0 -Local 15,898.9 20,974.8 23,900.8 31.9 13.9 -Foreign 1,034.1 2,301.2 3,409.4 122.5 48.2 T o t a l 16,933.1 23,276.1 27,310.1 37.5 17.3 Source: Commercial Banks &Staff Computation (In Millions of Birr) 4.3.2. New Lending Activities New lending to the economy has continued to increase. Commercial banks and Development Bank of Ethiopia(DBE) disbursed Birr 59.9 billion which went up by 10.5 percent over last year as the capacity of banks to lending remained strong due to higher deposit mobilization and loan collection. Of the total new loans disbursed by the banking system, 35.1 percent was by private banks, while the share of public bankswas 64.9 percent (Table 4.10). Regarding disbursement by sector, 34.0 percent went to Industry followed by agriculture (18.1 percent) and domestic trade (15.2 percent), while other sectors consumed the remaining balance (Table 4.12).

National Bank of Ethiopia 58 Fig IV.7: Development in Deposit Mobilization, Lending and Loan Collection Activities of the Banking System (2004/05- 2013/14) Source: Commercial Banks and DBE 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 Public Private Public Private Public Private Public Private Public Private Public Private Public Private Public Private Public Private Public Private 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Value in Millions of Birr Year & Bank Ownership Net Deposit Lending Loan collection

National Bank of Ethiopia 59 Table 4.10: Loans and Advances by Lenders 1/ (In Millions Birr) D* C* O/S* D* C* O/S* A B C D E F D/A E/B F/C A.Public Banks 1.Commercial Bank of Ethiopia 27365.9 19700.4 70,432.3 32184.1 22025.5 89,665.2 17.6 11.8 27.3 3. Construction & Business Bank of Ethiopia 548.2 687.7 1,792.7 1288.0 1088.5 2,332.0 135.0 58.3 30.1 2.Development Bank of Ethiopia 5335.6 2547.3 18,948.5 5465.8 3013.4 22,666.8 2.4 18.3 19.6 Sub-Total 33,249.7 22,935.5 91,173.4 38,937.9 26,127.5 114,664.0 17.1 13.9 25.8 B. Private Banks 4 Awash International Bank 2961.5 2027.3 7737.1 1944.6 2912.5 9176.4 -34.3 43.7 18.6 5. Dashen Bank 2917.3 3913.3 8836.6 3757.5 4943.6 9569.7 28.8 26.3 8.3 6. Bank of Abyssinia 2252.6 1800.9 4675.9 1534.2 2228.4 5153.5 -31.9 23.7 10.2 7. Wegagen Bank 3031.3 2493.6 4689.9 2070.9 2944.4 4604.4 -31.7 18.1 -1.8 8. United Bank 2210.4 2580.0 4710.8 2085.4 3303.6 5069.6 -5.7 28.0 7.6 9. Nib International Bank 2429.6 2131.3 4542.8 3382.8 3128.5 5521.6 39.2 46.8 21.5 10. Cooperative Bank of Oromia 332.9 635.0 1941.0 803.9 991.6 3718.4 141.5 56.1 91.6 11. Lion Interenational Bank 601.8 514.1 1318.1 567.0 718.0 1562.0 -5.8 39.7 18.5 12. Oromia International Bank 816.4 548.9 1621.2 787.3 1075.1 1430.0 -3.6 95.9 -11.8 13. Zemen Bank 1195.3 972.8 1369.7 1149.9 950.6 2551.6 -3.8 -2.3 86.3 14.Berhan International Bank 690.9 329.7 967.6 484.0 708.9 1184.4 -29.9 115.0 22.4 15.Bunna International Bank 532.4 448.3 948.4 679.3 557.0 1339.4 27.6 24.2 41.2 16.Abay Bank 686.5 383.9 864.9 806.8 652.4 1516.7 17.5 69.9 75.4 17. Addis International Bank 232.5 92.5 328.0 222.9 197.3 511.0 -4.1 113.2 55.8 18. Debub Global Bank 104.4 13.1 98.5 271.5 169.5 270.4 0.0 19. Enat Bank 6.0 0.0 6.0 479.4 135.8 511.9 0.0 Sub-Total 21,001.8 18,884.7 44,656.5 21,027.5 25,617.2 53,691.1 0.1 35.7 20.2 Grand Total 54,251.5 41,820.2 135,829.9 59,965.4 51,744.7 168,355.1 10.5 23.7 23.9 Source: Commercial Banks

1. O/S Credit excludes centeral government borrowing D*=Disbursement, C*=Collection, O/S*= Outstanding Credit Lenders 2012/13 Percentage Change 2013/14

National Bank of Ethiopia 60 Table 4.11: Percentage Share of Loans and Advances by Lenders D* C* O/S* D* C* O/S* A B C D E F D/A E/B F/C A.Public Banks 1.Commercial Bank of Ethiopia 50.443 47.1 51.9 53.7 42.6 53.3 6.4 -9.6 2.7 2.Development Bank of Ethiopia 9.835 6.1 14.0 2.1 2.1 1.4 -78.2 -65.5 -90.1 3. Construction & Business Bank of Ethiopia 1.010 1.6 1.3 9.1 5.8 13.5 802.1 254.1 920.1 Sub-Total 61.288 54.8 67.1 64.9 50.5 68.1 5.9 -7.9 1.5 B.Private Banks 4 Awash International Bank 5.5 4.8 5.7 3.2 5.6 5.5 -40.6 16.1 -4.3 5. Dashen Bank 5.4 9.4 6.5 6.3 9.6 5.7 16.5 2.1 -12.6 6. Bank of Abyssinia 4.2 4.3 3.4 2.6 4.3 3.1 -38.4 0.0 -11.1 7. Wegagen Bank 5.6 6.0 3.5 3.5 5.7 2.7 -38.2 -4.6 -20.8 8. United Bank 4.1 6.2 3.5 3.5 6.4 3.0 -14.6 3.5 -13.2 9. Nib International Bank 4.5 5.1 3.3 5.6 6.0 3.3 26.0 18.6 -1.9 10. Cooperative Bank of Oromia 0.6 1.5 1.4 1.3 1.9 2.2 118.5 26.2 54.6 11. Lion Interenational Bank 1.1 1.2 1.0 0.9 1.4 0.9 -14.8 12.9 -4.4 12. Oromia International Bank 1.5 1.3 1.2 1.3 2.1 0.8 -12.8 58.3 -28.8 13. Zemen Bank 2.2 2.3 1.0 1.9 1.8 1.5 -13.0 -21.0 50.3 14.Berhan International Bank 1.3 0.8 0.7 0.8 1.4 0.7 -36.6 73.8 -1.2 15.Bunna International Bank 1.0 1.1 0.7 1.1 1.1 0.8 15.4 0.4 13.9 16. Abay Bank 1.3 0.9 0.6 1.3 1.3 0.9 6.3 37.3 41.5 17. Addis International Bank 0.4 0.2 0.2 0.4 0.4 0.3 -13.3 72.3 25.7 18. Debub Global Bank 0.2 0.0 0.1 0.5 0.3 0.2 0.0 19. Enat Bank 0.0 0.8 0.3 0.3 0.0 Sub-Total 38.7 45.2 32.9 35.1 49.5 31.9 -9.4 9.6 -3.0 Grand Total 100.0 0.0 D*=Disbursement, C*=Collection, O/S*= Outstanding Credit Lenders 2012/13 Percentage change 2013/14 4.3.3. Outstanding Loans Total outstanding credit of the banking system (excluding NBE) including the central government increased by 19.9 percent and reached Birr 181.3 billion at the end of June 2014. While gross outstanding claims on the central government decreased by 15.6 percent, that of public enterprises and private sector increased by 31.3 percent and 23.5 percent respectively (Table 4.13). Sectoral distribution of outstanding loans indicated that credit to industry accounted for 37.1 percent followed by international trade (18.0 percent), housing and construction (10.9 percent), domestic

National Bank of Ethiopia 61 trade (9.0 percent) and agriculture (8.7 percent) (Table 4.12). Outstanding claims on the private sector including cooperatives stood at Birr 114.6 billion or 63.2 percent of the total outstanding claim reflecting a 20.9 percent growth over last year (Table 4.13). Table 4.12: Loans & Advances by Economic Sectors D* C* O/S* D* C* O/S* D* C* O/S* A B C D E F D/A E/B F/C Government Deficit Financing 0 0 15,374.1 0 0 12,972.3 - - (15.6) Agriculture 9,709.2 10,107.1 16,723.4 10,867.5 11,535.1 15,815.0 11.9 14.1 (5.4) Industry 19,298.4 7,845.9 48,739.0 20,391.1 9,400.9 67,219.4 5.7 19.8 37.9 Domestic Trade 8,325.0 7,980.3 14,185.1 9,104.1 9,506.2 16,399.2 9.4 19.1 15.6 International Trade 5,973.6 8,286.3 27,519.3 7,280.7 11,008.1 32,579.6 21.9 32.8 18.4 Export 2,569.1 2,777.2 10,616.1 2,973.3 4,625.4 13,312.0 15.7 66.6 25.4 Import 3,700.5 5,509.1 16,963.3 4,307.3 6,382.7 19,267.6 16.4 15.9 13.6 Hotels and Tourism 882.6 555.0 1,848.5 1,190.6 1,117.8 3,562.8 34.9 101.4 92.7 Transport and Communication 1,575.7 1,798.6 4,779.0 1,555.5 1,903.0 5,278.8 (1.3) 5.8 10.5 Housing and Construction 6,322.9 4,098.7 16,544.5 6,695.8 5,553.2 19,802.0 5.9 35.5 19.7 Mines, Power and Water resource 82.4 18.7 88.3 265.6 77.0 546.7 222.4 311.2 518.9 Others 1,529.5 790.8 4,624.5 1,899.8 1,384.3 6,033.5 24.2 75.0 30.5 Personal 256.3 185.7 554.6 268.4 221.2 1,052.0 4.7 19.1 89.7 Interbank Lending - 153.06 163.3 446.38 37.96 65.9 - (75.2) (59.6) Total 54,251.5 41,820.2 151,203.9 59,965.4 51,744.7 181,327.4 10.5 23.7 19.9 D*=Disbursement, C*=Collection, O/S*= Outstanding Credit Source: Commercial Banks &Staff Computation 2012/13 2013/14 Percentage Change Economic Sectors (In Millions of Birr)

National Bank of Ethiopia 62 Fig IV.8:Sectoral Breakdown of Bank Credit (1999/00-2013/14) Source: Commercial Banks including DBE & Staff Computation 2011/12 2012/13 O/S* O/S* D* C* O/S* B C E F G C/B G/C Central Government 12,261.6 15,374.1 - 0.0 12,972.3 25.4 -15.6 Public Enterprises 27,694.9 40,888.6 13,483.3 6,192.8 53,703.7 47.6 31.3 Cooperatives 13,750.2 12,219.7 9,189.3 10,470.4 12,664.7 -11.1 3.6 Private & Individuals 68,479.1 82,558.2 36,846.6 35,043.6 101,920.7 20.6 23.5 Inter-bank Lending 276.4 163.3 446.2 38.0 65.9 -40.9 -59.6 Total 122,462.1 151,203.9 59,965.4 51,744.7 181,327.4 23.5 19.9 Total less Inter-bank Lending 122,185.7 151,040.6 59,519.2 51,706.8 181,261.4 23.6 20.0 D*=Disbursement, C*=Collection, O/S*= Outstanding Credit 1/ inclueds lending to the central government 2013/14 Borrowing Sector Percentage change Source: Commercial Banks &Staff Computation (In Millions of Birr) Table 4.13: Loans and Advances by Borrowers/1 as at June 30, 2014

50,000.00 100,000.00 150,000.00 200,000.00 250,000.00 300,000.00 350,000.00 1999/002000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/14 In Millions of Birr Fiscal Year Total Others Housing & Construction International Trade Domestic Trade & Services Industry

National Bank of Ethiopia 63 4.4. Financial Activities of NBE By the end of 2013/14, outstanding claims of NBE on the central government reached Birr 73.3 billion due to a 16.3 percent increase in direct advance. Direct advances to the government stood at Birr 64.3 billion or 87.7 percent of the total claim, while bond holdings accounted the remaining 12.3 percent. By the end of 2013/14, the outstanding claim of NBE on DBE has reached Birr 18.2 billion. Regarding liabilities of NBE, total deposits at the NBE increased by 19.3 percent to Birr 35.1 billion, due to a surge in deposits of central government by 46.9 percent (Table 4.14). 2011/12 2012/13 2013/14 A B C B/A C/B Loans and Advances (1+2) 68,064.5 81,017.4 91,461.3 19.0 12.9 1.Claims on Central Gov’t 55,562.5 64,510.4 73,304.3 16.1 13.6 1.1 Direct Advance 46,264.9 55,264.9 64,264.9 19.5 16.3 1.2 Bonds* 9,297.5 9,245.4 9,039.4 -0.6 -2.2 2. Claims on DBE 12,502.0 16,507.0 18,157.0 32.0 10.0 3. Deposit Liabilities 30,756.9 29,464.2 35,140.8 -4.2 19.3 3.1 Government 10,218.4 9,133.0 13,412.5 -10.6 46.9 3.2 Financial Institutions 20,538.5 20,331.1 21,728.3 -1.0 6.9 Particulars % Change Source: NBE and Staff Computation ( In Millions of Birr) Table 4.14: Financial Activities of National Bank of Ethiopia as at the Close of June 30, 2014

• Including non-interest bearing special bond

National Bank of Ethiopia Annual Report 2013/14 64 4.5. Developments in Financial Markets Treasury bill market is the only regular market where securities are transacted on a weekly basis. However, Government bonds are occasionally issued to finance government expenditures and/or to absorb excess liquidity in the banking system.There is no secondary market for the securities. 4.5.1. Treasury Bills Market Treasury-bills market showed a mixed development. The amount of Treasury-bills offered registered annual decline while demand tended to increase. The amount ofTreasury-bills supplied reached Birr 91.2 billion, about 15.2 percent than last year, while total demand for rose by 4.0 percent to reach Birr 113.5 billion. The amount of T-bills sold during the year stood at Birr 95.3 billion indicating oversubscription of the by market Birr 18.2 billion (19.0 percent). At the end of 2013/14, the total outstanding T-bills stood at Birr 32.3 billion, 24.0 percent up from a year ago. Although banks participation in the T-bill market is showing a marked improvement, the dominance of non-bank institutions continued in the review year. Accordingly, the non-bank institutions account for the entire amounted of the total outstanding T-billsby the close of 2013/14 (Table 4.15). The average weighted yield of the four types of bills slightly fellto 1.597 from 1.889 percent last year (Table 4.15).

National Bank of Ethiopia Annual Report 2013/14 65 Table 4.15: Results of Treasury Bills Auction C/A C/B Number of Bidders 2.2 -31.3 Amount Demanded (Mn.Birr) 47.1 4.0 28-day bill -25.2 -53.6 91-day bill 141.6 78.2 182-day bill -13.5 -12.2 364-day bill - - Amount Supplied (Mn.Birr) -5.5 -15.2 28-day bill -46.7 -57.9 91-day bill 44.2 43.8 182-day bill -42.5 -22.5 364-day bill - - Amount Sold (Mn.Birr) 27.6 -12.7 Banks -22.7 -63.6 Non-Banks 51.7 32.8 28-day bill 0.0 0.1 91-day bill 0.0 0.0 182-day bill 2.4 0.1 364-day bill - - 28-day bill -25.7 -35.0 91-day bill -13.3 -13.5 182-day bill -45.5 -22.2 364-day bill 17.0 10.6 Banks -100.0 -100.0 Non-Banks 83.2 42.8 61.3 24.0 Outstanding bills at the end of period(Mn.Br.) 32,286.9 1.342 0.940 0.731 2.189 2.317 2.562 2.533 2.897 1.883 1.399 1.403 1.213 Average Weighted Yeild for Successful bids(%) 1.866 1.889 1.597 -14.4 -15.5 97.254 99.472 99.591 97.513 97.721 97.453 99.806 99.778 99.856 99.653 99.652 99.699 Average Weighted Price for Successful bids(Birr) 98.556 99.156 99.150 0.6 0.0 24,212.7 51,493.5 18,727.0 50,482.1 57,691.1 76,588.0 4,400.0 8,916.0 9,166.0 74,694.8 109,184.6 95,315.0 35,435.6 35,532.6 51,085.9 16,652.3 12,358.0 9,582.0 96,511.9 107,484.6 91,174.9 40,024.0 50,678.0 21,341.0 9,748.0 9,600.0 8,432.0 5,066.0 6,366.0 10,568.0 33,689.1 54,313.5 25,199.0 28,691.7 38,905.1 69,329.0 406 604 415 77,194.8 109,184.6 113,528.0 Particulars 2011/12 2012/13 2013/14 Percentage Change A B C 2,383.5 20,011.9 17,628.4 0.0 32,286.9 26,044.9 3,436.0 22,608.9 Source: NBE

National Bank of Ethiopia Annual Report 2013/14 66 4.5.2. NBE Bill Market On April 4, 2011, NBE has introduced NBE-Bill was introduced on April 4, 2014 to mobilize resources from domestic banks and finance priority sectors that are identified as key for long￾term growth of the economy. Sincethen,the total NBE bills purchased by the banking sector have reachedBirr 26.0 billion by end 2013/14. Fig IV.9: Treasury Bills Auction Result Source: NBE 4.5.3. Bonds Market In recent years, following the vibrant growth in economic activities and real income, there has been strong demand for corporate bonds. As a result, CBE has been purchasing corporate bondsfrom major public institutions whose outstanding holdingsincreased to Birr 109.1 billion in 2013/14 from Birr 80.5 billion a year ago. The share of EEPCO in outstanding corporate bonds marginally fell to 79.1 from 80.8 percent the previous year,while the holdingsby City Government of 0.00 0.50 1.00 1.50 2.00 2.50 3.00 0.00 20000.00 40000.00 60000.00 80000.00 100000.00 120000.00 Value in Millions of Birr Year Demand Supply Average Weighted Yield

National Bank of Ethiopia Annual Report 2013/14 67 Addis Ababa, Railway Corporation and Regional States accounted for14.9, 4.7 and 1.3percent, respectively. During the year under review, new corporate bonds issued by public institutions and City Government of Addis Ababa reached Birr 33.2 billion, reflecting a 44.5 percentsurge over last year (Table 4.16). Table 4.16: Disbursement, Redemption and Outstanding of Coupon and Corporate Bond of CBE (In Millions of Birr) Annual Percentage Change 2012/13 2013/14 A B

1. Corporate Bond Purchases by holders 22,975.0 33,200.0 44.5 EEPCO 16,200.0 22,000.0 35.8 Regional governments 0.0 Development Bank of Ethiopia 0.0 City Government of Addis Ababa 5,675.0 7,000.0 23.3 Railway Corporation 1,100.0 4,200.0 281.8 Private Sector 0.0 0.0
2. Redemption of Bonds by Clients 4,202.2 8,167.4 94.4 EEPCO 0.0 4,092.0 0.0 Regional governments 1,913.4 1,281.6 -33.0 Development Bank of Ethiopia 1,182.2 689.4 -41.7 City Government of Addis Ababa 1,106.6 2,104.4 90.2 Railway Corporation 0.0 Private Sector 0.0
3. Outstanding Bonds by Clients 80,559.5 109,138.0 35.5 EEPCO 65,100.0 86,300.0 32.6 Regional governments 2,649.0 1,397.4 -47.2 Development Bank of Ethiopia 688.7 43.4 -93.7 City Government of Addis Ababa 11,021.8 16,297.2 47.9 Railway Corporation 1,100.0 5,100.0 363.6 Private Sector 0.0 Particulars Annual B/A Source: Commercial Bank of Ethiopia

National Bank of Ethiopia Annual Report 2013/14 69 4.5.4. Inter-bank Money Market Interbank money market has continued to remaindormant due to the existence of excess reserves in the banking system. Accordingly, no inter-bank money market transaction has been conducted since April 2008. Since the introduction of the interbank money market in September 1998, merely twenty three transactions worth Birr 259.2 million were transacted with interest rates ranging between 7 to 11 percent per year. The maturity period of these loans widely spanned from overnight to 5 years (Table 4.17).

National Bank of Ethiopia 70 Annual Report 2013/14 Table 4.17: Interbank Money Market Transactions up to June 30, 2012 Borrower Lender Amount Borrowed (In Thousand Birr) Interest Rate % Date of Transaction Maturity Period Nib International Bank Awash International Bank 7,000.0 11 16/11/00 Overnight Wegagen Bank Commercial Bank of Ethiopia 10,000.0 8 3/1/2001 5 years Nib International Bank ,, 10,000.0 8 3/31/2001 3 months Wegagen Bank ,, 10,000.0 8 3/22/2001 1 year Nib International Bank ,, 3,600.0 8 5/31/2001 6 months Nib International Bank ,, 3,700.0 8 06/31/01 6 months Nib International Bank ,, 778.0 8 30-11-2001 6 months Nib International Bank Bank of Abyssinia 28,999.8 7 31/12/02 3.5 months Nib International Bank Bank of Abyssinia 19,046.9 7 31/01/03 3.5 months Nib International Bank Bank of Abyssinia 20,310.0 7 28/02/03 3.5 months Nib International Bank Bank of Abyssinia 28,987.0 7 31/03/03 3.5 months Nib International Bank Commercial Bank of Ethiopia 25,000.0 7.5 7/7/2003 5.2 months Nib International Bank Bank of Abyssinia 50.1 7.5 26/03/2005 open Nib International Bank Bank of Abyssinia 50.5 7.5 26/03/2005 open Wegagen Bank Awash International Bank 19,744.6 7.5 December, 2006 21/05/07 Wegagen Bank Awash International Bank 19,870.4 7.5 January, 2007 21/05/07 Wegagen Bank Awash International Bank 10,937.2 7.5 February, 2007 21/05/07 Awash International Bank Nib International Bank 30,000.0 7.5 February, 2007 18/08/07 Wegagen Bank Awash International Bank 10,931.4 7.5 March, 2007 21/05/07 Nib International Bank Awash International Bank 142.0 8.5 January, 2008 25/4/08 Nib International Bank Awash International Bank 7.0 8.5 February, 2008 25/04/08 Nib International Bank Awash International Bank 3.0 8.5 March, 2008 25/04/08 Nib International Bank Awash International Bank 17.0 8.5 April,2008 25/04/08 Total/Average - 259,174.8 7.87 - - Source: NBE

National Bank of Ethiopia 71 Annual Report 2013/14 V. DEVELOPMENTS IN EXTERNAL SECTOR 5.1 Overall Balance of Payments The overall balance of payments deficit in FY 2013/14 was USD 91.4 million, higher than USD 6.5 million deficit registered in the preceding year. The trade deficit also widened by 24.8 percent during the review period owing to a 19.7 percent growth in merchandise imports compared to a moderate increase (5.6 percent) in merchandise exports. Meanwhile, despite a 13 percent increase in net private transfers in the same period, the current account deficit (including official transfers) widened to USD 4.7 billion from USD 2.8 billion in the previous year. As a result, current account deficit to GDP ratio increased to 8.6 percent from 5.9 percent a year ago. Table 5.1: Balance of Payments (In Millions of USD) S/N Particulars FY 2011/12 FY2012/13 FY2013/14 Percentage Change A B C B/A C/B 1 Exports, f.o.b. 3,152.7 3,081.2 3,254.8 -2.3 5.6 Coffee 833.0 746.6 714.4 -10.4 -4.3 Other 2,319.7 2,334.6 2,540.4 0.6 8.8 2 Imports 11,061.2 11,467.3 13,721.9 3.7 19.7 Fuel 2,124.7 2,163.8 2,543.2 1.8 17.5 Cereals 652.5 560.8 351.7 -14.1 -37.3 Aircraft 42.1 7.7 35.4 -81.8 363.0 Imports excl. fuel, cereals, aircraft 8,241.8 8,735.1 10,791.6 6.0 23.5 3 Trade Balance (1-2) -7,908.5 -8,386.1 -10,467.2 6.0 24.8 4 Services, net 74.9 459.1 559.5 512.9 21.9 Non-Factor services, net 171.1 571.7 712.2 234.2 24.6 Exports of non-factor services 2,810.5 2,852.9 3,174.2 1.5 11.3 Imports of non-factor services 2,639.4 2,281.2 2,461.9 -13.6 7.9 Income, net -96.2 -112.645 -152.8 17.1 35.6 O/w Gross office. int. payment 89.1 120.7 143.5 35.5 18.9 Dividend -15.5 -1.7 -17.9 -89.0 954.0 5 Private transfers 3,245.8 3,577.5 4,042.5 10.2 13.0 o/w: Private Individuals 1,945.9 2,491.3 2,971.4 28.0 19.3 6 Current account balance excluding official transfers (3+4+5) -4,587.8 -4,349.4 -5,865.2 -5.2 34.8 7 Official transfers, net 1,787.9 1,529.9 1,161.6 -14.4 -24.1 8 Current account balance including official transfers (6+7) -2,799.8 -2,819.5 -4,703.7 0.7 66.8 9 Capital account 2,119.8 3,226.4 3,901.6 52.2 20.9 Off. Long-term Cap., net 937.8 1,687.5 1,287.4 80.0 -23.7 Disbursements 1,007.0 1,743.3 1,374.1 73.1 -21.2 Amortization 69.2 55.8 86.7 -19.4 55.3 Other pub. Long-term cap. 230.8 398.9 1,082.9 72.9 171.4 Foreign Direct Investment(net) 1,072.1 1,231.6 1,467.0 14.9 19.1 Short-term Capital -120.9 -91.6 64.3 -24.2 -170.2 10 Errors and omissions -292.7 -413.4 710.7 41.2 -271.9 11 Overall balance (8+9+10) -972.8 -6.5 -91.4 12 Financing 972.8 6.5 91.4 13 Reserves [Increase (-), Decrease (+)] 980.8 15.5 94.9 14 Central Bank (NFA) 846.5 -57.2 -48.0 Asset 810.0 -127.2 -95.2 Liabilities 36.6 70.0 47.2 15 Commercial banks (NFA) 134.3 72.7 142.9 16 Debt Relief -8.0 -9.0 -3.5 Principal 6.7 7.1 2.9 Interest 1.3 2.0 0.6 Source: NBE Staff Compilation

National Bank of Ethiopia 72 Annual Report 2013/14 Table 5.2: Components of External Trade as Percentage of GDP4 Particulars FY 2011/12 FY 2012/13 FY 2013/14 Percentage Change A B C B/A C/B Exports 7.3 6.5 5.9 -10.9 -8.4 Imports 25.5 24.1 25.0 -5.5 3.8 Trade Balance -18.3 -17.6 -19.1 -3.4 8.2 Net Services 0.2 1.0 1.0 458.7 5.7 Net Private Transfers 7.5 7.5 7.4 0.5 -2.0 Current Account Deficit (excluding official transfers) -10.6 -9.2 -10.7 -13.6 16.9 Current Account Deficit (including official transfers) -6.5 -5.9 -8.6 -8.2 44.6 Source: NBE Staff Compilation Source:NBE Staff Computations

4 CA to GDP ratios for FY2013/14 are based on GDP actual from MoFED 0 2000 4000 6000 8000 10000 12000 14000 16000 In Million of USD Fig. V.1: Trends in Components of Current Account Exports Imports Net Services Private Transfers

National Bank of Ethiopia 73 Annual Report 2013/14 5.2. Developments in Merchandise Trade The trade deficit in merchandise trade during 2013/14 stood at USD 10.5 billion, widened by 24.8 percent relative to the preceding fiscal year mainly due to the 19.7 percent growth in total import bills coupled with low performance (5.6 percent) increase in total export proceeds. Export to GPP ratio went down by8.4 percent of 6.5 percent last year, however, import to GDP ratio went up by 3.8 percent and reached 25 percent of GDP in the review period. Compared to same period last year, export to GDP ratio went down by 0.7 percentage point from 7.2 percent, while import to GDP ratios went up 0.8 percentage points, from 26.7 percent last year. 5.2.1 Exports Total export proceeds during 2013/14 amounted to USD 3.3 billion showing a 5.6 percent moderate growth vis-à-vis the previous fiscal year. This export growthwas achieved through increased earnings from oilseeds (47.0 percent), chat (9.6 percent), pulses (7.4 percent), flower (7.0 percent), live-animals (12.2 percent), leather & leather products (7.2 percent), meat & meat products (0.5 percent), fruits & vegetables (4.7 percent) and bees’ wax (3.7 percent) owing to higher global commodity prices and/or increased in volume of exports. Export earnings from oilseeds reached USD 651.9 million, depicting a 47.0 percent hikeover the preceding year owing to increased volume of export (10.5 percent) and international price (33.1 percent). Export earnings from oilseeds accounted for 20 percent of the total merchandise export proceeds as they rose from 14.4 percent in the previous year. Export proceeds from chat increased by 9.6 percent and reached USD 297.3 million solely due to a 9.6 percent improvement in export volume. As a result, its share in total export proceeds went up to 9.1 percent from 8.8 percent last year.

National Bank of Ethiopia 74 Annual Report 2013/14 Likewise, earnings from export of pulses rose by 7.4 percent in 2013/14 and amounted to USD 250.7 million. This increase in export revenue was solely attributed to 8.8 percent rise in international price. Despite the significant growth in proceeds from export of pulses its share in total earnings remained at about 8 percent. During the review period, export proceeds from flower increased by 7.0 percent and stood at USD 199.7 million driven higher volume of export (5.4 percent) and international price (1.6 percent). As it was the case last year, receipts from flower export constituted 6.1 percent of the total merchandise export earnings. Earning from export of live-animals in the review period was USD 186.7 million, which showed a 12.2 percent growth due to 4.9 percent increase volume and 7 percent rise in international price. The share ofExport proceeds from live animals in total exports increased marginally from 5.4 percent to 5.7 percent. Similarly, earnings from export of leather and leather products reached USD 129.8 million, up by 7.2 percent vis-à-vis the previous year. Thiswas solely attributed to20.8 percent growth in volume of export. Its share in total export proceeds slightly improved from 3.9 percent to 4.0 percent in the review period. Earnings from export of meat & meat products also improved by a 0.5 percent and reached USD 74.6 million. The rise in export proceeds was due to 3.8 percent increase in international price despite a 3.2 percentfall in export volume. However, the share of earnings from export of meat & meat products in total export proceeds decreased from 2.4 percent last year to 2.3 percent in the review period. The country earned USD 45.9 million from export of fruits and vegetables, 4.7 percent higher than the previous year. The rise in the value of export was due to a 7.6 percent increase in volume of exports that offset a2.7 percent decline in international price.Fruits and vegetables accounted for only 1.4 percent of the total export earnings.

National Bank of Ethiopia 75 Annual Report 2013/14 Table 5.3: Values of Major Export Items* (In Millions of USD) Particulars 2011/12 % share 2012/13 % share 2013/14 % share Percentage change A B C C/A C/B Coffee 833.1 26.4 746.6 24.2 714.4 21.9 -14.2 -4.3 Oilseeds 472.3 15.0 443.5 14.4 651.9 20.0 38.0 47.0 Leather & Leather products 109.9 3.5 121.1 3.9 129.8 4.0 18.1 7.2 Pulses 159.7 5.1 233.3 7.6 250.7 7.7 57.0 7.4 Meat & Meat Products 78.8 2.5 74.3 2.4 74.6 2.3 -5.3 0.5 Fruits & Vegetables 44.9 1.4 43.9 1.4 45.9 1.4 2.2 4.7 Live Animals 207.1 6.6 166.4 5.4 186.7 5.7 -9.8 12.2 Chat 240.3 6.7 271.3 8.8 297.3 9.1 23.7 9.6 Gold 602.4 19.1 578.8 18.8 456.2 14.0 -24.3 -21.2 Flower 197.0 6.2 186.7 6.1 199.7 6.1 1.4 7.0 Others 207.1 6.6 215.4 7.0 247.4 7.6 19.4 14.9 Total 3,152.7 100.0 3,081.2 100.0 3,254.8 100.0 3.2 5.6 Source: Ethiopian Revenue and Customs Authority *Data for 2012/13 was revised by ERCA Earnings from coffee export declined by 4.3 percent and reached USD 714.4 million. This poor export performance was attributed to a 4.7 percent drop in export volume in contrast with a marginal (0.5 percent) improvement in international price.Hence, the share of coffee in total export revenue in the review period, dropped from 24.2 percent last year to 21.9 percent in 2013/14. Similarly, earnings from export of gold contracted by 21.2 percent annually to reach USD 456.2 million, driven by 16.6 percent and 5.4 percent decline in international price and export volume, respectively. Gold accounted for 14.0 percent of total export proceeds, 4.8 percentage points lower than that of the preceding year.

National Bank of Ethiopia 76 Annual Report 2013/14 Source: Ethiopian Revenue and Customs Authority Source: NBE Staff Compilation 0 100 200 300 400 500 600 700 800 900 In Million USD Fig. V. 2: Foreign Exchange Earning From Selected Export Items Coffee Oilseeds Leather and Leather Products Pulses Chat Gold Coffee 21.9% Oilseeds 20.0% Leather and Leather Products 4% Pulses Chat 7.7% 9.1% Gold 14% Flower 6.1% Others 17% Fig V. 3. Export Share of Selected Commodities in 2013/14

National Bank of Ethiopia 77 Annual Report 2013/14 Table 5.4: Volume of Major Exports (In Millions of K.G.) Particulars 2011/12 2012/13 2013/14 Percentage Change A B C C/A100-100 C/B100-100 Coffee 169.4 199.1 189.7 12.0 -4.7 Oilseeds 367.4 283.9 313.5 -14.7 10.5 Leather & Leather products 4.4 4.6 5.6 25.6 20.8 Pulses 226.2 357.5 353.0 56.1 -1.3 Meat & Meat Products 17.7 15.5 15.0 -15.2 -3.2 Fruits & Vegetables 123.5 135.2 145.4 17.7 7.6 Live Animals 144.9 100.9 105.8 -27.0 4.9 Chat 41.1 47.2 51.7 25.9 9.6 Gold 0.0122 0.0123 0.0116 -4.5 -5.4 Flower 46.8 42.4 44.7 -4.4 5.4 Source: Ethiopian Revenue and Customs Authority Source: Ethiopian Revenue and Customs Authority 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 In Million K.G. Fig. V.4 Export Volume of Selected Commodities Coffee Oilseeds Leather and Leather Products Pulses Chat Gold (MT)

National Bank of Ethiopia 78 Annual Report 2013/14 Table 5.5: Unit Value of Major Exports (In USD per K.G.) Particulars 2011/12 2012/13 2013/14 Percentage Change A B C C/A100-100 C/B100-100 Coffee 4.9 3.7 3.8 -23.4 0.5 Oilseeds 1.285 1.562 2.079 61.8 33.09 Leather & Leather products 24.8 26.2 23.3 -6.0 -11.2 Pulses 0.71 0.65 0.71 0.6 8.8 Meat & Meat Products 4.5 4.8 5.0 11.7 3.8 Fruits & Vegetables 0.36 0.32 0.32 -13.1 -2.7 Live Animals 1.43 1.65 1.76 23.4 7 Chat 5.85 5.75 5.75 -1.74 0.01 Gold (USD/gm) 49.4 47.0 39.2 -20.7 -16.6 Flower 4.21 4.40 4.47 6.1 1.6 Source: Calculated from Tables 5.3 and 5.4 Source: NBE Staff Compilation 0.0 10000.0 20000.0 30000.0 40000.0 50000.0 60000.0 USD/K.G. Fig. V. 5: Unit Value of Exports of Selected Commodities Coffee Oilseeds Leather and Leather Products Pulses Chat Gold

National Bank of Ethiopia 79 Annual Report 2013/14 5.2.2. Imports Total merchandise import bills in 2013/14 hiked by 19.7 percent compared to last year and reached USD 13.7 billion as a result of a rise in values of imports of capital goods (26 percent), consumer goods (11.1 percent), fuel (17.5 percent), semi-finished goods (19.6 percent) and raw materials (13.5 percent). Accordingly, import to GDP ratio grew by 3.8 percent and reached25 percent from 24.1 percentof last year. Import of capital goods rose considerably by 26 percent and amounted to USD 4.5 billion mainly due to higher import bills of industrial (27.9 percent), transport (20.1 percent) and agricultural goods (28.4 percent). Consequently, the share of capital goods in total import bill increased to 32.8 percent from 31.2 percent last year. Similarly, import of consumer goods increased by 11.1 percent owing to37.7 percent rise in import durable goods while non-durable goods import declinedby 1.3 percent. Hence, the share of consumer goods in total import decreased to 27.9 percent from 30.1 percent the preceding year. Fuel import rose by 17.5 percent in 2013/14 and amounted to USD 2.5 billion, as volume of fuel import increased by 18.5 percent though international crude oil price declined by 3.7 percent. Thus, the share of fuel import in total import went down marginally to 18.5 percent from 18.9 percent last year. Similarly, semi-finished goods import stood at USD 2.1 billion, which was 19.6 percent higher than a year earlier as one of its components. Particularly fertilizer import increased by 36.7 percent and reached USD 398.9 million. Meanwhile, raw materials import rose by 13.5 percent relative to the preceding year and accounted for 1.2 percent of total imports.

National Bank of Ethiopia 80 Annual Report 2013/14 Table 5.6: Value of Imports by End Use (In Millions of USD) Particulars 2011/12 % share 2012/13 % share 2013/14 % share Percentage change A B C C/A C/B Raw Materials 199.7 1.8 145.6 1.3 165.2 1.2 -17.2 13.5 Semi-finished Goods 1,957.2 17.7 1,753.9 15.3 2,098.1 15.3 7.2 19.6 Fertilizers 604.6 5.5 291.8 2.5 398.9 2.9 -34 36.7 Fuel 2,124.8 19.2 2,163.9 18.9 2,543.2 18.5 19.7 17.5 Petroleum Products 2,078.3 18.8 2,128.2 18.6 2,494.9 18.2 20 17.2 Others 46.4 0.4 1,236.1 10.8 48.4 0.4 4.3 -96.1 Capital Goods 2,961.7 26.8 3,572.6 31.2 4,500.3 32.8 52 26.0 Transport 809.7 7.3 903.1 7.9 1,084.3 7.9 33.9 20.1 Agricultural 119.5 1.1 129.9 1.1 166.8 1.2 39.6 28.4 Industrial 2,032.5 18.4 2,539.6 22.1 3,249.2 23.7 59.9 27.9 Consumer Goods 3,531.7 31.9 3,452.4 30.1 3,834.1 27.9 8.6 11.1 Durables 1,105.3 10.0 1,089.8 9.5 1,501.1 10.9 35.8 37.7 Non-durables 2,426.4 21.9 2,362.6 20.6 2,333.0 17.0 -3.9 -1.3 Miscellaneous 286.3 2.6 378.9 3.3 581.0 4.2 103 53.3 Total Imports 11,061.2 100.0 11,467.3 100.0 13,721.9 100.0 24.1 19.7 Source: Ethiopian Revenue and Customs Authority

National Bank of Ethiopia 81 Annual Report 2013/14 5.2.3. Direction of Trade Europe accounts for 37.7 percent of Ethiopia’s total merchandise exports. Within European countries, Switzerland was the largest market which had 14.1 percent share in total Ethiopian exports, largely for gold and coffee. The Netherlands was the second important destination market within Europe accounting for 6 percent of Ethiopia’s export proceeds mainly from flower, oilseeds, and coffee, pulses and textile products. Germany, constituting 5.8 percent of Ethiopia’s total export was another major export destination primarily for coffee and gold. About 34.5 percent of the total Ethiopian export proceeds originated from Asian market of which China, Saudi Arabia, Israel and United Arab Emirates had 12.2 percent, 5.7 percent, 3 percent 2.4 percent share, respectively. The major export items shipped to China include oilseeds, leather and leather products, textile materials, mineral products, natural gums and coffee. Coffee, meat & meat products, oilseeds, live-animals and flower were the main commodities shipped to Saudi Arabia. Israel importedmainly oilseeds, cereals, coffee and vegetables. Meat and meat products, coffee, pulse, oilseeds, live- animals, flower and food were the major products exported to United Arab Emirates. Similarly, coffee, oilseeds, and flower were imported by Japan. Meanwhile, about 22.6 percent of Ethiopia’s total export proceeds were from Africa of which Somalia, Djibouti and Sudan, constituted 82.2 percent of the total export proceeds obtained from the continent. Exports to Somalia mainly included vegetables,live- animals, chat and coffee while pulses, coffee, spices, live-animals and textiles were the main exports to Sudan. Djibouti imported coffee, vegetables, live-animals, oilseeds, pulses and chat from Ethiopia. Export earnings from American market comprised 4.6 percent of Ethiopia’s total export proceeds during 2013/14.Of this item, United States and Canada made up 88.9 percent and 6.6 percent respectively. The United States imported mainly coffee, leather and leather products,

National Bank of Ethiopia 82 Annual Report 2013/14 oilseeds, flower and food while coffee was the primary export item to Canada. Africa 22.6% Europe 37.7% America 4.6% Asia 34.5% Oceania 0.6% Fig V.6: Export by Destinations Source: NBE staff compilation Concerning Ethiopia’s imports by countries of origin, about 70.6 percent of the total merchandise imports in 2013/14 came from Asia, 20.3 percent from Europe, 6.0 percent from America and 3.0 percent from Africa. Among Asian countries the major countries with the largest share during the review period were China (24.9 percent), Saudi Arabia (8.9 percent), India (7.4 percent) and Kuwait (4.9 percent). The prime imports from China include metal & metal manufacturing, machinery & air craft materials, electric materials, road & motor vehicles, clothing, textiles & rubber products. Petroleum products were the major imports from Saudi Arabia which accounted for 50.8 percent of Ethiopia’s total petroleum imports in 2013/14. The share of European countries in total import bill was 20.3 percent of which 64.1 percent went to five countries; namely, Italy (17.9 percent), Turkey (16.2 percent), Germany (12.3 percent), Ukraine (10.7 percent) and theNetherlands (6.9 percent). Machinery & aircraft equipment, road & motor vehicles, metals & metal manufacturing and electrical materials were imported from Italy.Meanwhile, metal & metal manufacturing, machinery & aircraft equipment and electrical materials were bought from Turkey. The principal imports from Germany were machinery& aircraft equipment, road & motor vehicles, rubber products, metal & metal

National Bank of Ethiopia 83 Annual Report 2013/14 manufacturing and electrical materials.Metal & metal manufacturing, grain & fertilizer were imported from Ukraine. Imports from the Netherlands were medical & pharmaceutical products, machinery and aircraft materials. About 6.0 percent of Ethiopia’s importsoriginated from Americaof which, USA and Brazil alone constitute over 94.1 percent of import bills. Machinery & aircraft equipment, grain, food & electrical materials were major imports from USA while machinery & aircraft equipment and road & motor vehicles came from Brazil. African constituted merely 3.0 percent of Ethiopia’s total imports.Within African countries, the major import origins were Egypt (30.3 percent), South Africa (29.3 percent), Sudan (12.7 percent) and Morocco (10.3 percent). These four countries accounted for 82.6 percent of total importsfrom Africa. The major import items from Egypt were metal & metal manufacturing, rubber products and food & live animals.Imports from South Africa included road & motor vehicles, machinery & aircraft equipment and metals. Source: NBE staff compilation Africa 3% Europe 20.3% America 6% Asia 70.6% Oceania 0.1% Fig.V.7:Import by Origin

National Bank of Ethiopia 84 Annual Report 2013/14 5.3. Services and Transfers In 2013/14, net services account recorded USD 559.5 million inflows, showing a 21.9 percent rise over the preceding year on account of higher net transport services (6.1 percent) and net government services (45.3 percent). 5.3.2 Unrequited Transfers Net transfers in 2013/14 improved by 1.9 percent, owing to a 19.3 percent growth in private individual transfersmainly cash component (19.8 percent). Net official transfers and receipts from NGO transfers, however, declined by 24.1 and 5.8 percent, respectively.

National Bank of Ethiopia 85 Annual Report 2013/14 Table 5.7፡ Services Accounts (In Millions of USD) S/N Particulars 2011/12 2012/13 2013/14 Percentage Change A B C B/A C/B 1 Investment Income (2+5) -96.2 -112.6 -152.8 17.09 35.61 2 Interest, net (3-4) -80.7 -110.9 -134.8 37.48 21.54 3 Credit 8.4 9.8 8.7 16.67 -11.61 4 Debit 89.1 120.7 143.5 35.52 18.85 5 Dividend, net -15.5 -1.7 -17.9 -89.03 953.98 6 OTHER SERVICES, net (7-8) 171.1 571.7 712.2 234.16 24.57 7 Exports of non-factor services 2810.5 2852.9 3174.2 1.51 11.26 Travel 680.9 514.1 538.8 -24.50 4.80 Transport 1,690.8 1889.7 2144.9 11.76 13.51 Gov't 212.1 201.0 297.3 -5.23 47.93 Other 226.7 248.1 193.1 9.44 -22.15 8 Imports of non-factor services 2,639.4 2281.2 2461.9 -13.57 7.93 Travel 188.2 192.9 223.5 2.50 15.87 Transport 1355.7 1322.4 1542.8 -2.46 16.67 Gov't 10.2 0.7 6.3 -93.14 805.48 Other 1085.3 765.2 689.2 -29.50 -9.92 9 Net Services (10+11+12+13+14) 74.9 459.1 559.5 512.94 21.86 10 Travel 492.6 321.2 315.3 -34.79 -1.85 11 Transport 335.1 567.3 602.1 69.29 6.13 12 Gov't 202 200.3 291.0 -0.84 45.28 13 Other -858.6 -517.1 -496.1 -39.78 -4.05 14 Investment Income -96.2 -112.6 -152.8 17.09 35.61 Source: MOFED, Transport and Telecommunication Companies, NBE- FEMEMD and Staff Compilation.

National Bank of Ethiopia 86 Annual Report 2013/14 Table 5.8: Unrequited Transfers (In Millions of USD) No. Particulars 2010/11 2011/12 2012/13 Percentage Change A % Share B % Share C % Share B/A C/B 1 Private Transfers 3,245.8 64.5 3,577.5 70.0 4,042.5 77.7 10.22 13.00 1.1 Receipts 3,318.3 64.7 3,655.5 70.4 4,067.8 76.5 10.16 11.28 NGOs 1,372.4 26.8 1164.2 22.4 1096.4 20.6 -15.17 -5.82 Cash 1,186.5 23.1 1028.0 19.8 982.3 18.5 -13.36 -4.45 Food 185.9 3.6 136.2 2.7 0.0 0.0 -26.77 -100.00 Other 0.0 114.1 2.2 Private individuals 1,945.9 37.9 2,491.3 48.0 2,971.4 55.9 28.03 19.27 Cash 1,347.5 26.3 1,821.9 35.1 2,182.9 41.1 35.21 19.81 In kind 70.8 1.4 30.9 0.6 25.4 0.5 -56.34 -17.91 Underground Transfers(in kind) 527.6 10.3 638.5 12.3 763.2 14.4 21.02 19.53 1.2 Payments 72.5 75.0 77.9 93.1 25.3 22.4 7.52 -67.57 2. Official Transfers 1,787.9 35.5 1,529.9 30.0 1,161.6 22.3 -14.43 -24.08 2.1 Receipts 1,812.1 35.3 1,535.7 29.6 1,248.9 23.5 -15.25 -18.67 Cash 1,692.3 33.0 1,535.7 29.6 1,248.9 23.5 -9.25 -18.67 Food 119.8 2.3 0.0 -100.00 Other 0.0 2.2 Payments 24.2 25.0 5.8 6.9 87.4 77.6 -76.00 1406.40 Total Net Transfers 5,033.7 100.0 5,107.4 100.0 5,204.0 100.0 1.46 1.89 Source: Disaster Prevention and Preparedness Agency, MoFED and NBE The decline in net official transfers was due to lower grants from both international financial institutions and bilateral donors. Cash component of official transfers declined by 18.7 percent to reach USD 1.2 billion compared to USD 1.5 million in the previous year. 5.4. Current Account Due to the widening of trade deficit coupled with the decline in public transfers, the current account deficitwidened to USD 4.7 billion (8.6 percent of GDP) in 2013/14 from USD 2.8 billion (5.9 percent of GDP) deficit recorded last fiscal year.

National Bank of Ethiopia 87 Annual Report 2013/14 5.5. Capital Account The balance in capital account showed a surplus of USD 3.9 billion, about 20.9 percent higher than last year owing to the surge in other public long term net capital inflows(171.4 percent) and foreign direct investment (19.1 percent). Net official long term capital flow, however, declined by 23.7 percent 5.6.Changes in Reserve Position Net foreign assets of the banking system at the end of 2013/14 recorded a reserve drawdown of USD 91.4 million, due to decrease in net foreign assets of commercial banks by USD 142.9 million.The buildup in foreign assets of NBE, however,was USD 48 million. Hence, by end 2013/14 gross international reserve of NBE was adequate to cover 2.3 months of imports of goods and non-factor services. 5.7. External Debt External debt stock of the country at the end of 2013/14 amounted to USD 13.9 billion, depicting a 36.7 percent increase over the preceding year. Of the total debt stock (USD 5.85 billion) was to multilateral, (USD 2.5 billion)bilateral and USD5.5 billion commercial creditors.In other words, of the total debt stock, 42.1 percent was owed to multilateral, 18.2 percent to bilateral and 39.7 percent to commercial creditors. Hence, the country’sexternal debt stock to GDP ratio rose to 27.9 percent from 23.7 percent in 2012/13. Debt stock to total receipts from export of goods and non-factor services ratio also went up to 2.2 from 1.7 a year ago. Similarly, the country’s external debt burden as measured by debt services to export of goods and services ratio increased from8.2 percent last yearto10.2 percent in the review year.

National Bank of Ethiopia 88 Annual Report 2013/14 Table 5.9: External Public Debt (In Millions of USD) Particulars 2011/12 2012/13 2013/14 Percentage Change A B C B/A C/B Annual Debt

1,471.8

2,445.7

2,879.1 66.2 17.7 Debt Stock

8,846.3

10,185.1

13,923.8 15.1 36.7 Multilateral

4,001.1

4,721.9

5,856.8 18.0 24.0 Bilateral

2,227.5

2,052.5

2,537.7 -7.9 23.6 Commercial

2,617.7

3,410.7

5,529.3 30.3 62.1 Debt Service

391.8

489.0

651.5 24.8 33.2 Principal repayments

302.2

366.3

512.9 21.2 40.0 Interest payments

89.1

122.7

138.6 37.7 13.0 Debt stock to GDP ratio (In percent )

22.4

23.7

27.9 5.8 17.7 Debt stock to export of goods and non-factor services

1.5

1.7

2.2 15.7 26.2 Receipts from goods and non-factor services

5,963.2

5,934.1

6,429.0 -0.5 8.3 Debt service ratio (In percent )1/

6.6

8.2

10.1 25.4 23.0 Arrears2/ Principal Interest Relief

7.9

7.9

3.5 0.0 -56.5 Principal

6.7

7.1

2.9 5.2 -59.3 Interest

1.3

2.0

0.6 47.7 -70.0 Source:MoFED 1/ Ratio of debt service to receipts from export of goods and non-factor services

National Bank of Ethiopia 89 Annual Report 2013/14 5.8. Developments in Foreign Exchange Markets 5.8.1. Developments in Nominal Exchange Rate Theweighted average exchange rate of the Birr in the inter-bank foreign exchange mmarket, depreciated by 4.8 percentin 2013/14 to Birr 19.0748/USD compared to Birr 18.1947/USD last year (Table 5.9). Similarly, the Birr in the parallel foreign exchange market stood at Birr 19.8666/USD on average, showing a 2.9 percent depreciation against the preceding fiscal year. As a result, the premium between the official and parallel market narrowed to 4.2 percent from 6.1 percent the previous year, mainly due to relatively slow depreciation of the Birr in the parallel market . Table 5.10 Inter-Bank and Parallel Forex Market Exchange Rates Period Average Weighted Rate Amount Traded in millions of USD Average Rates in parallel Market Number of Trades Total o/w Among CBs Total o/w Among CBs 2011/12 17.2536 152.2 90.9 292.0 37.0 17.9883 Qtr. I 17.0011 80.3 28.6 75.0 10.0 17.3900 Qtr. II 17.1522 17.5 14.2 73.0 8.0 17.8333 Qtr. III 17.3107 41.4 38.2 78.0 15.0 18.2400 Qtr. IV 17.5503 13.1 10.0 66.0 4.0 18.4900 2012/13 18.1947 15.6 3.0 231.0 2.0 19.3022 Qtr. I 17.8705 6.2 3.0 65.0 2.0 18.4400 Qtr. II 18.0782 3.3 0.0 65.0 0.0 18.7333 Qtr. III 18.2971 3.1 0.0 61.0 0.0 19.8367 Qtr. IV 18.5331 3.1 0.0 40.0 0.0 20.1988 2013/14 19.0748 18.7 6.2 254.0 7.0 19.8666 Qtr. I 18.7384 3.2 0.0 63.0 0.0 19.7621 Qtr. II 18.9390 8.2 5.0 65.0 4.0 19.5372 Qtr. III 19.1819 4.30 1.20 65.00 3.00 19.8222 Qtr. IV 19.4400 3.05 0.00 61.00 0.00 20.3448 Source:NBE, FEMRMD and EEAIRD staff compilation

National Bank of Ethiopia 90 Annual Report 2013/14 Following the depreciation of the exchange rate of the Birr in the inter-bank foreign exchange market, the average retail buying and selling rates of forex bureau also depreciated by 4.8 percent and 4.5 percent and stood at Birr 19.0861/USD and Birr 19.4246/USD, respectively. Accordingly, the average spread between forex bureaus buying and selling rates marginally went down to 1.8 percent in 2013/14 compared to 2.1 percent last fiscal year (Table 5.13). Table 5.11: End Period Mid-Market Rates (USD per Unit of Foreign Currency) Currency 2011/12 2012/13 2013/14 Percentage change A B C C/B C/A Pound Sterling 1.6036 1.5563 1.7023 11.41 9.38 Swedish Kroner 0.1566 0.1416 0.1481 -0.47 4.57 Djibouti Frank 0.0056 -0.07 -0.01 Swiss Frank 1.1989 1.0365 1.1194 5.92 8.00 Saudi Riyal 0.2666 -0.01 0.00 UAE Dirhams 0.2723 0.2722 0.2723 0.00 0.00 Canadian Dollar 1.0274 0.9745 0.9349 -2.35 -4.06 Japanese Yen 0.0123 0.0126 0.0099 -3.15 -21.61 Euro 1.4434 1.2450 1.3616 4.51 9.37 SDR 1.5903 1.5139 1.5438 2.57 1.98 Source: NBE, FEMRMD and EEAIRD staff compilation The mid exchange rate of USD at the end of FY 2013/14 depreciated annually against some major international currencies such as Pound Sterling (11.4 percent), Swiss Franc (5.9 percent), Euro (4.5 percent), and SDR (2.6 percent), while it appreciated vis-à-vis Japanese Yen (3.2 percent), Canadian Dollar (2.4 percent), Swedish Kroner (0.5 percent) and Djibouti Frank (0.1 percent). However, US dollar remained stable with respect to Saudi Riyal and UAE Dirhams (Table 5.10).

National Bank of Ethiopia 91 Annual Report 2013/14 Table 5.12: End Period Mid-Market Rates (Birr per Unit of Foreign Currency) Currency 2011/12 2012/13 2013/14 Percentage change A B C C/B C/A USD 17.8192 18.7358 19.675 5.01 10.41 Pound 27.732 28.6284 33.49275 16.99 20.77 Swedish Kroner 2.5231 2.7871 2.9131 4.52 15.46 Djibouti Frank 0.1000 0.1052 0.1104 4.94 10.40 Swiss Frank 18.4693 19.8011 22.02505 11.23 19.25 Saudi Riyal 4.7513 4.9959 5.246 5.01 10.41 UAE Dirhams 4.8513 5.101 5.35665 5.01 10.42 Canadian Dollar 17.3642 17.9376 18.3947 2.55 5.93 Japanese Yen 0.2242 0.1908 0.19405 1.70 -13.45 Euro 22.1849 24.4109 26.78945 9.74 20.76 SDR 26.9757 28.1998 30.37425 7.71 12.60 Source: NBE, FEMRMD and EEAIRD staff compilation The end period exchange rate of the Birr also depreciated against most international currencies vis-à-vis the previous year. For instance, it depreciated against Pound Sterling (17 percent), Swiss Franc (11.2 percent), Euro (9.7 percent) and SDR (7.7 percent),Swedish Kroner, (4.9 percent) Canadian Dollar, (4.5 Percent) and Japanese Yen (1.7 percent) (Table 5. 11). 5.8.2. Movements in Real Effective Exchange Rate Though the real effective exchange rate (REER) of the Birr had been appreciating since FY 2010/11, due to higher domestic inflation relative to that of major trading partner countries, the rate of appreciation has slowed down in the review year as domestic inflation remained in single digit. Accordingly, REER appreciated by 0.4 percent annually in 2013/14, slightly lower than 0.6 percent appreciation in the preceding year (Table 5.12).

National Bank of Ethiopia 92 Annual Report 2013/14 On the other hand, the nominal effective exchange rate depreciated by 3.3 percent annually compared to 2.7 percent deprecation in 2012/13. Table 5.13: Trends in Real and Nominal Effective Exchange Rates Fiscal Year REERI NEERI Percentage Change REERI NEERI 2007/08 150.5 74.0 27.86 -12.4 2008/09 140.7 67.5 -6.54 -8.7 2009/10 121.2 56.1 -13.84 -17.0 2010/11 122.8 42.9 1.33 -23.5 2011/12 139.4 43.2 13.49 0.7 2012/13 140.2 42.0 0.59 -2.7 2013/14 140.8 40.7 0.44 -3.3 Source:NBE, FEMRMD and EEAIRD staff compilation An increase in REERI and NEERI indicates appreciation and vice versa. Where: REERI = Real Effective Exchange Rate Index NEERI = Nominal Effective Exchange Rate Index 5.8.3 Foreign Exchange Transactions With regard to the volume of foreign exchange transaction, the amount of foreign exchange traded in the inter-bank foreign exchange market increased to USD 18.7 million relative to USD 15.6 million in FY 2012/13. Of the total transaction, USD 6.2 million (33.2 percent) was traded among commercial banks and USD 12.5 million (66.8 percent) was supplied by the NBE (Table 5.9). The volume of foreign exchange purchase of forex bureau of commercial banks decreased by 40.6 percent to USD 101.9 million while, their sales increased from USD 89.7 million in 2012/13 to USD 97.9 million in 2013/14. This was due to higher foreign exchange demand by

National Bank of Ethiopia 93 Annual Report 2013/14 travelers as reflected on the rise of travel service payments (Table 5.14). Table 5.14: Foreign Exchange Transactions by ForexBureaux of Commercial Banks (In Millions of USD) Name of Forex Bureau 2011/12 2012/13 2013/14 Percentage Change A B C D E F E/C F/D Purchases Sales Purchases Sales Purchases Sales Purchases Sales Commercial Bank of Ethiopia 55.77 2.26 73.64 2.24 9.95 6.55 -86.49 192.44 Bank of Abyssinia 5.97 7.24 4.50 6.77 4.41 5.13 -2.03 -24.21 Dashen Bank 17.20 29.56 28.52 34.84 33.55 37.30 17.62 7.07 Awash International Bank 7.82 14.75 7.09 13.08 9.13 12.53 28.82 -4.18 Construction & Business Bank 4.56 0.91 4.91 1.25 4.27 1.40 -13.01 12.14 Wegagen Bank 3.06 4.44 5.73 4.26 5.02 6.73 -12.46 57.87 United Bank 22.29 12.05 25.87 12.10 16.25 10.09 -37.18 -16.63 Development Bank 0.00 0.00 3.53 0.27 3.72 0.73 5.50 170.08 Nib International Bank 8.89 7.75 5.94 6.67 4.47 6.40 -24.68 -4.03 Lion International Bank 1.93 1.76 3.65 1.03 2.59 1.73 -29.03 68.21 Oromia International Bank 2.34 1.28 1.99 1.66 2.81 2.11 41.14 27.15 Zemen Bank 2.89 3.92 0.97 2.65 0.90 4.07 -7.01 53.55 Cooperative Bank of Oromia 0.49 0.70 0.58 0.79 0.41 0.41 -29.05 -47.56 Buna International Bank 1.00 0.05 1.51 0.57 0.38 0.29 -74.79 -48.96 Birhan International Bank 0.59 1.05 0.45 0.37 0.01 0.03 -97.74 -91.94 Abay Bank 0.37 0.21 1.00 0.90 0.54 1.36 -45.69 51.24 Addis International Bank 0.09 0.08 1.80 0.22 1.61 0.47 -10.53 115.58 Debub Global Bank 0.00 0.00 0.05 0.05 1.28 0.25 2450.84 397.60 Enat Bank 0.62 0.26 - - Total 134.64 88.0 171.70 89.70 101.93 97.86 -40.64 9.09 Average Exchange Rate 17.2531 17.6002 18.2085 18.5881 19.0861 19.4246 4.82 4.50 Source: NBE, FEMRMD and EEAIRD staff compilation

National Bank of Ethiopia 94 Annual Report 2013/14 VI.GENERAL GOVERNMENT FINANCE 6.1.General Overall fiscal performance of general government during the review year indicateda widening of overall fiscal deficit (including grants) from Birr 16.7 billion in 2012/13 to Birr 27.4 billion in 2013/14. Its ratio to GDP also rose to 2.6 percent compared to 2.0 percent last year. Total revenue (including grants) during the same period depicted a 15.2 percent growth over the preceding fiscal year. However, revenue to GDP ratio went down slightly to 14 percent from 14.6 percent. Meanwhile, general government expenditure increased by 20.5 percent due to an increase in current and capital expenditures. However, the ratio of total government expenditure to GDP declined to 17.7 percent from 18.1 percent during the same period (Table 6.1).

National Bank of Ethiopia 95 Annual Report 2013/14 6.2. Revenue and Grants During the review period, the general government revenue including grants registered a 15.2 percent growth compared to a year earlier and amounted to Birr 158 billion. However, its ratio to GDP slightly declined from 15.9 percent to 15.1 percent. Total domestic tax revenue surged by 17.8 percent vis-à-vis the preceding year and reached Birr 146.1 billion on account of both higher direct tax(29.2 percent) and indirect taxcollection (21.9 percent). The respective contributions of direct and indirect taxes to total tax revenue were 35.3 percent and 64.7 percent, respectively. Revenue from non-tax sources was Birr 13.1 billion, about 23.5 percent lower than last year mainly due to 57.3 percent Table 6.1: Measuring Fiscal Sustainability (In percent) Fiscal Year PD/GDP IP/RR Debt/GDP R(Debt) R(GDP) Exp/GDP Rev/GDP R(OR) 2000/01 -3.7 7.9 40.9 4.9 2.1 23.4 15.7 8.5 2001/02 -7.3 7.8 41.8 0.0 -2.2 26.8 15.8 -1.8 2002/03 -6.6 7.8 38.8 2.4 10.3 28.2 15.3 7.1 2003/04 -3.0 6.0 36.3 10.4 18.0 23.9 16.2 24.8 2004/05 -4.5 5.0 38.2 29.4 22.9 23.5 14.7 11.1 2005/06 -4.7 4.5 37.8 22.3 23.6 22.5 15.0 26.3 2006/07 -3.7 4.1 36.3 25.5 30.6 20.9 12.8 11.6 2007/08 -2.9 2.9 32.5 29.3 44.4 19.1 12.1 36.7 2008/09 -0.9 2.4 26.9 11.5 35.1 17.4 12.1 34.8 2009/10 -1.3 2.4 27.5 17.1 14.2 18.8 14.2 34.1 2010/11 -1.6 2.2 26.8 29.8 33.4 18.6 13.7 28.3 2011/12 -1.2 1.9 25.6 39.5 46.1 16.8 13.9 48.8 2012/13 -2.0 2.1 27.4 23.4 15.5 18.1 14.6 20.6 2013/14 -2.6 2.4 28.6 28.4 21.1 17.7 14.0 17.8 Source: Staff Computation PD = Primary Deficit IP/RR = Share of interest payments in Recurrent revenue Ddebt/GDP = Ratio of Domestic Debt to GDP R(Debt) = Growth rate of Domestic Debt R(GDP) = Growth rate of GDP at current market price Exp/GDP = Ratio of General Government Expenditure to GDP Rev/GDP = Ratio of General Government Revenue to GDP R(OR) = Growth rate of ordinary Revenue

National Bank of Ethiopia 96 Annual Report 2013/14 decline in government investment income. Similarly, grants dropped by 9.2 percent over the same period of last year. All in all, the total revenue performance including grantswas 96.7 percent of the annual plan. 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 In million Birr Fiscal Year Fig. VI.1 Trend of General Government Revenue by Component Total Revenue and Grants Tax Revenue Direct tax revenue Indirect tax revenue

National Bank of Ethiopia 97 Annual Report 2013/14 Table6. 2: Summary of General Government Revenue by Component (In Millions of Birr) Particulars 2012/13 2013/14 Percentage Change [C/A] Performance [A] [B] [C] Rate Pre. Act Revised Budget Pre. Act [C/B] Total Revenue and Grants

137,192.48 163,455.20 158,076.52 15.2 96.7 Total Revenue 1/

124,077.43 147,690.67 146,172.77 17.8 99.0 Tax Revenue

107,010.31 133,329.11 133,118.26 24.4 99.8

1. Direct Tax Revenue

36,392.64 47,623.68 47,020.68 29.2 98.7 1.1 Income and Profit Taxes

35,354.77

44,554.08

45,708.71 29.3 102.6 Personal

11,567.05

14,312.14

13,796.25 19.3 96.4 Business

19,437.13

23,677.39

26,909.94 38.4 113.7 Others 2/

4,350.59

6,564.55

5,002.52 15.0 76.2 1.2 Rural Land Use Fee

340.95

457.59

326.25 -4.3 71.3 1.3 Urban Land Use Fee

696.91

2,612.01

985.72 41.4 37.7 2. Indirect Taxes

70,617.67 85,705.42 86,097.58 21.9 100.5 2.1 Domestic Taxes

32,440.34

38,077.00

40,498.88 24.8 106.4 2.2 Foreign Trade Taxes

38,177.32

47,628.42

45,598.70 19.4 95.7 Import

38,177.32

47,628.42

45,598.70 19.4 95.7 Export 3. Non-Tax Revenue

17,067.12 14,361.57 13,054.51 -23.5 90.9 3.1 Charges and Fees

1,087.93

1,394.94

1,527.53 40.4 109.5 3.2 Govt. Invt. Income 3/

8,347.79

2,206.70

3,562.84 -57.3 161.5 3.3 Reimb. And Property Sales

177.39

235.35

245.27 38.3 104.2 3.4 Sales of Goods & Services

1,998.88

3,322.32

2,538.34 27.0 76.4 3.5 Others 4/

5,455.13

7,202.26

5,180.53 -5.0 71.9 4. Grants

13,115.05 15,764.53 11,903.75 -9.2 75.5 Source:Ministry of Finance and Economic Development 1/ It does not include privatization proceeds 2/ Others include rental income tax, withholding income tax on imports, interest income tax, capital gains tax, agricultural income and other income 3/ Government investment income includes: residual surplus, capital charge, interest payments and state dividend. 4/Other extraordinary, miscellaneous and pension contribution

National Bank of Ethiopia 98 Annual Report 2013/14 6.3. Expenditure In the review period total general government expenditure amounted to Birr 185.5 billion about 20.5 percent higher than last fiscal year as both capital and recurrent expenditures tended to increase. Recurrent expenditure amounted to Birr 78.1 billion, showing a 24.4 percent growth over the previous year and accounted for 42.1 percent of the totalexpenditure of the review fiscal year. Its performance was 94.4 percent. Likewise capital expenditure rose by 17.8 percent relative to last year to Birr 107.4 billon and constituted 57.9 percent of the annual expenditure. Capital expenditure performancewas 96.2 percent. In summary, the performance of general government expenditure was 95.4 percent of the annual budget in 2013/14.

National Bank of Ethiopia 99 Annual Report 2013/14 Table 6.3: Summary of General Government Expenditure (In Millions of Birr) Particulars 2012/13 2013/14 Percentage Change Perform- [A] [B] [C] ance Rate Pre. Act [C/A] Revised Budget Pre. Act [C/B] Total Expenditure

153,928.68

194,343.69 185,471.78 20.5 95.4

1. Current Expenditure

62,745.80

82,690.20

78,086.90 24.4 94.4 General Services

23,301.58

25,216.96

29,193.90 25.3 115.8 Economic Services

8,408.10

11,444.18

10,370.60 23.3 90.6 Social Services

26,891.15

34,771.25

32,519.40 20.9 93.5 Interest and Charges

2,931.37

4,460.22

3,794.20 29.4 85.1 External Assistance1/ Social Safety Net Others (miscellaneous)

1,213.60

6,797.59

2,208.80 82.0 32.5 2. Capital Expenditure

91,182.88

111,653.49 107,384.88 17.8 96.2 Economic Development

64,271.40

75,449.94

73,461.69 14.3 97.4 Social Development

21,131.58

27,807.50

26,200.00 24.0 94.2 General Development

5,779.90

8,396.05

7,723.18 33.6 92.0 3. Special programs Source: Ministry of Finance and Economic Development Note: 1/ Includes mapping, science and technology, public buildings, etc

National Bank of Ethiopia 100 Annual Report 2013/14 Source: Ministry of Finance and Economic Development 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 1998/99 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Fig. VI.2: Trends in General Government Expenditure by Component Total Expenditure Current Expenditure Capital Expenditure

National Bank of Ethiopia 101 Annual Report 2013/14 Source: Ministry of Finance and Economic Development 6.4. Deficit Financing 0.0 5.0 10.0 15.0 20.0 25.0 30.0 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 In Percent of GDP Fiscal Year Fig.VI.3 Trends in General Government Expenditure and Revenue (% of GDP) Expenditure/GDP Revenue/GDP

National Bank of Ethiopia 102 Annual Report 2013/14 Government budgetary operation including grants during 2013/14 resulted in a Birr 27.4 billion deficit, compared to Birr 16.7 billion deficit a year ago as expenditure growth outstripped that of revenue.Its ratio to GDP stood at 2.6 percent. The deficit was financed through external and domestic borrowings. Almost 75 percent of deficit was financed from external sources.

103 Annual Report 2013/14 Table 6.4: Summary of General Government Finance (In Millions of Birr) Particulars 2012/13 2013/14 Percentage Change [C/A] Perform-ance [A] [B] [C] Rate Pre. Act Revised Budget Pre. Act [C/B] Revenue and Grants 137,192.5 163,455.2 158,076.5 15.2 96.7 Revenue 124,077.4 147,690.7 146,172.8 17.8 99.0 Grants 13,115.1 15,764.5 11,903.7 -9.2 75.5 Total Expenditure 153,928.7 194,343.7 185,471.8 20.5 95.4 Current Expenditure 62,745.8 82,690.2 78,086.9 24.4 94.4 Capital Expenditure 91,182.9 111,653.5 107,384.9 17.8 96.2 Special Programs Overall Surplus/ Deficit (Including Grants) -16,736.2 -30,888.5 -27,395.3 63.7 88.7 (Excluding Grants) -29,851.2 -46,653.0 -39,299.0 31.6 84.2 Total Financing 16,736.2 30,888.5 27,395.3 63.7 88.7 Net External Borrowings 16,845.6 14,865.5 20,493.3 21.7 137.9 Gross Borrowing 17,964.9 16,478.9 21,877.4 21.8 132.8 o/w Special Programs Amortization Paid 1,281.0 1,711.5 1,424.3 11.2 83.2 HIPC Relief 161.7 98.0 40.2 -75.1 41.0 Net Domestic Borrowings 1,764.3 16,023.0 13,510.0 665.7 84.3 Banking System -3,245.0 2,218.2 -168.4 Non-Banking Systems 5,009.3 11,291.8 125.4 Privatization Receipts 1,200.0 Others and Residuals -3,073.7 -6,608.0 115.0 Source: Ministry of Finance and Economic Development

104 Annual Report 2013/14 VII. INVESTMENT The Ethiopian Investment Agency (EIA) and Regional Investment Offices licensed a total of 163 projects having a combined investment capital of Birr 5.6 billion. Private investment projects constituted 99.4 percent of the total licensed projects, Out of the total private investment projects, 128 were domestic with a capital of Birr 628 million while 34 projects were foreign with total capital of Birr 2.5 billion. The investment projects licensed during the fiscal yearare expected to create job opportunities for about 3,936 permanent and 6,425 casual workers (Table 7.1) .

105 Annual Report 2013/14 Table 7.1: Number of Projects, Capital and Jobs Created by Operational Investment (Capital in millions of Birr) 2011/12 2012/13 2013/14 Percentage change A B C C/A C/B

1. Total Investment Number 68 55 163 139.7 196.4 Capital 648 1512 5636 770.1 272.8 Permanent Workers 2109 1861 3936 86.6 111.5 Temporary Workers 1746 1221 6425 268.0 426.2 1.1. Total Private Number 67 55 162 141.8 194.5 Capital 627 1512 3136 400.1 107.5 Permanent Workers 2045 1861 3911 91.2 110.2 Temporary Workers 1618 1221 6425 297.1 426.2 1.1.1. Domestic Number 10 3 128 1,180.0 4,166.7 Capital 22 4 628 2,751.1 14,037.9 Permanent Workers 119 11 2022 1,599.2 18,281.8 Temporary Workers 526 12 5942 1,029.7 49,416.7 1.1.2. Foreign Number 57 52 34 -40.4 -34.6 Capital 605 1507 2508 314.5 66.4 Permanent Workers 1926 1850 1889 -1.9 2.1 Temporary Workers 1092 1209 483 -55.8 -60.0 1.2.Public Number 1 - 1 - - Capital 21 - 2500 12,047.2 - Permanent Workers 64 - 25 -60.9 - Temporary Workers 128 - - -100.0 - Source: Ethiopian Investment Agency (EIA)

106 Annual Report 2013/14 Fig.VII.1: Number of Operational Investment Projects by Source 0 20 40 60 80 100 120 140 2011/12 2012/13 2013/14 Domestic Foreign Public Source: Ethiopian Investment Agency Fig.VII.2: Capital of Operational Investment Projects by Source Source: Ethiopian Investment Agency 0 500 1,000 1,500 2,000 2,500 3,000 2011/12 2012/13 2013/14 In millions of Birr Domestic Foreign Public

107 Annual Report 2013/14 7.1. Investment by Sector Of the total number of licensed investment projects during 2013/14, about 35.6 percent were in construction, 23.3 percent in manufacturing, 22.1 percent in real estate, renting and business activities, 8.0 percent in agriculture, hunting and forestry and about 11 percent in other sectors. In terms of investment capital, construction sector constituted 49.9 percent, real estate, renting and business activities 37.9 percent, manufacturing 9.2 percent and the remaining sectors constituted only 3.0 percent of the total investment capital of the year (Table 7.2). Fig.VII.3: Distribution of Operational Investment Projects by Sector in 2013/14 Source: Ethiopian Investment Agency Manufacturing 23% Agriculture, hunting and forestry 8% Real estate, renting and Business activities 22% Hotel and restaurants 4% Construction 36% Others 7%

108 Annual Report 2013/14 Table: 7.2: Number of Projects and Capital of Operational Investment by Sector (Capital in millions of Birr) Sectors 2011/12 2012/13 2013/14 Percentage share No. of projects Investmen t capital No. of projects Investmen t capital No. of projects Investme nt capital No. of projects Investme nt capital Manufacturing 18 146.1 24 1,370.5 38 516.8 23.3 9.2 Agriculture, hunting and forestry 6 16.4 - 0.0 13 70.1 8.0 1.2 Real estate, renting and Business activities 32 223.2 17 89.0 36 2,135.3 22.1 37.9 Hotel and restaurants - - 2 3.1 6 44.1 3.7 0.8 Education - - 2 4.8 2 25.4 1.2 0.5 Health and social work 2 6.6 2 3.7 1 0.2 0.6 0.0 Construction 4 244.2 3 21.6 58 2,811.2 35.6 49.9 Construction Machinery Leasing - - - - - - - - Wholesale, retail trade and repair service 1 0.1

• 0.0 1 10.9 0.6 0.2 Transport, storage and communication 5 11.2 3 5.2 4 12.1 2.5 0.2 Fishing

• 0.0 Mining and quarrying

• 0.0 1 1.1 0.6 0.0 Electricity, gas, steam and water supply

• 0.0

• 0.0

Public administration and defense; compulsory social security

• 0.0

• 0.0

Other community, social and personal service activities

• 2 13.8 3 9.1 1.8 0.2 Grand Total

68.0

647.7

55 1,511.7

163.0 5,636.2 100.0 100.0 Source: EIA

109 Annual Report 2013/14 7.2. Distribution by Region Out of the total 163 operational investment projectslicensed in 2013/14; about 101 (62 percent) with investment capital of Birr 5.3 billion were established in Addis Ababa.Other regions which attracted more investment projects were Amhara, Tigray, Oromiaand SNNPR.

110 Annual Report 2013/14 Table 7.3: Number of Projects and Capital of Operational Investment by Region (Capital in millions of Birr) Regions 2011/12 2012/13 2013/14 Percentage share No. of projects Investmen t Capital No. of projects Investme nt Capital No. of projects Investmen t Capital No. of projects Investment Capital Tigray 2 2.7 1 1.4 11 90.2 6.7 1.6 Afar 7 55.7 1 1.0 12 21.1 7.4 0.4 Amhara - - - - 31 112.7 19.0 2.0 Oromia 6 85.1 16 1,308.4 7 139.3 4.3 2.5 Somali

SNNPR

• 1 10.9 0.6 0.2 Gambella

Addis Ababa 52 498.2 37 200.8 101 5,262.0 62.0 93.4 Dire Dawa 1 6.0 -

Multiregional Projects

---

Grand Total 68 647.7 55 1,511.7 163 5,636.2 100.0 100.0 Source: EIA

111 Annual Report 2013/14 VIII. INTERNATIONAL DEVELOPMENTS 8.1 International Economic Developments 8.1.1 Overview of the World Economy5 Global activity strengthened during the second half of 2013 and is expected to improve further in 2014–15. The impulse has come mainly from advanced economies, although their recoveries remain uneven. With supportive monetary conditions and a smaller drag from fiscal consolidation, annual growth is projected to rise above trend in the United States and to be close to trend in the core euro area economies. In the stressed euro area economies, however, growth is projected to remain weak and fragile as high debt and financial fragmentation hold back domestic demand. Furthermore, in Japan, fiscal consolidation in 2014–15 is projected to result in some growth moderation. Growth in emerging market economies is projected to pick up only modestly. These economies are adjusting to a more difficult external financial environment in which international investors are more sensitive to policy weakness and vulnerabilities given prospects

5 Excerpted from European Central Bank annual report 2012, monthly reports through January to June, 2013 and World Economic Outlook, April 2013 for better growth and monetary policy normalization in some advanced economies. As a result, financial conditions in emerging market economies have tightened further compared with the October 2013 World Economic Outlook (WEO), while they have been broadly stable in advanced economies. Downside risks continue to dominate the global growth outlook, notwithstanding some upside risks in the United States, the United Kingdom, and Germany. In advanced economies, major concerns include downside risks from low inflation and the possibility of protracted low growth, especially in the euro area and Japan. While output gaps generally remain large, the monetary policy stance should stay accommodative, given continued fiscal consolidation. In emerging market economies, vulnerabilities appear mostly localized. Nevertheless, a still-greater general slowdown in these economies remains a risk, because capital inflows could slow or reverse. Emerging market and developing economies must therefore be ready to weather market turmoil and reduce external vulnerabilities.

112 Annual Report 2013/14 Table 8.1: Overview of World Economic Outlook and Projection (Annual Percentage Change) Particulars 2012 2013 Projection 2014 2015 World Output 3.2 3.0 3.6 3.9 Advanced Economies 1.4 1.3 2.2 2.3 United States 2.8 1.9 2.8 3.0 Euro Area -0.7 -0.5 1.2 1.5 Japan 1.4 1.5 1.4 1.0 Emerging Market & Developing Economies 5.0 4.7 4.9 5.3 World Trade Volume (goods & services) 2.8 3.0 4.3 5.3 Imports Advanced Economies 1.1 1.4 3.5 4.6 Emerging Market & Developing Economies 5.8 5.6 5.2 6.3 Exports Advanced Economies 2.1 2.3 4.2 4.8 Emerging Market & Developing Economies 4.2 4.4 5.0 6.2 Commodity Prices (U.S. dollars) Oil 1.0 -0.9 0.1 –6.0 Non- oil -10.0 -1.2 –3.5 –3.9 Consumer Prices Advanced Economies 2.0 1.4 1.5 1.6 Emerging Market & Developing Economies 6.0 5.8 5.5 5.2 Source: IMF, World Economic Outlook,April 2014 A major impulse to global growth has come from the United States, whose economy grew at 3.2 percent in the second half of 2013— stronger than expected in the October 2013 WEO. Some of the upside surprise was due to strong export growth and temporary increases in inventory demand. Recent indicators suggest some slowing in early 2014. Much of this seems related to unusually bad weather, although some payback from previous inventory demand increases may also be contributing. Nevertheless, annual growth in 2014–15 is projected to be above trend at about 2.8 percent. More moderate fiscal consolidation helps; it is estimated that the change in the primary structural balance will decline from slightly more than 2 percent of GDP in 2013 to about ½ percent in 2014–15. Support also comes from accommodative monetary

113 Annual Report 2013/14 conditions as well as from a real estate sector that is recovering after a long slump, higher household wealth, and easier bank lending conditions. In the euro area, growth has turned positive. In Germany, supportive monetary conditions, robust labor market conditions, and improving confidence have underpinned a pickup in domestic demand, reflected mainly in higher consumption and a tentative revival in investment but also in housing. Across the euro area, a strong reduction in the pace of fiscal tightening from about 1 percent of GDP in 2013 to ¼ percent of GDP is expected to help lift growth. Outside the core, contributions from net exports have helped the turn around, as has the stabilization of domestic demand. However, growth in demand is expected to remain sluggish, given continued financial fragmentation, tight credit, and a high corporate debt burden. Past credit supply shocks in some economies have not yet fully reversed and are still weighing on credit and growth. Credit demand is also weak, however, because of impaired corporate balance sheets. Overall, economic growth in the euro area is projected to reach only 1.2 percent in 2014 and 1.5 percent in 2015. In Japan, some underlying growth drivers are expected to strengthen, notably private investment and exports, given increased partner country growth and the substantialYen depreciation over the past 12 months. Nevertheless, activity overall is projected to slow moderately in response to a tightening fiscal policy stance in 2014–15. The tightening is the result of a two-step increase in the consumption tax rate—to 8 percent from 5 percent in the second quarter of 2014 and then to 10 percent in the fourth quarter Of 2015—and to the unwinding of reconstruction spending and the first stimulus package Of the Abenomics program. However, at about 1 percent of GDP, the tightening of the Fiscal policy stance in 2014 will be more moderate than was expected in the October 2013 WEO, as a result of new fiscal stimulus amounting to about 1 percent of GDP. This stimulus is projected to lower the negative growth impact of the tightening by 0.4 percentage point to 0.3 percent of GDP in 2014. In 2015, the negative growth effect of the fiscal stance is projected to increase to 0.5 percent of GDP. Overall, growth is projected to be 1.4 percent in 2014 and 1.0 percent in 2015. The forecast for China is that growth will remain broadly unchanged at about 7.5

114 Annual Report 2013/14 percent in 2014–15, only a modest decline from 2012–13. This projection is predicated on the assumption that the authorities gradually rein in rapid credit growth and make progress in implementing their reform blue- print so as to put the economy on a more balanced and sustainable growth path. For India, real GDP growth is projected to strengthen to 5.4 percent in 2014 and 6.4 percent in 2015, assuming that government efforts to revive investment growth succeed and export growth strengthens after the recent rupee depreciation. Elsewhere in emerging and developing Asia, growth is expected to remain at 5.3 percent in 2014 because of tighter domestic and external financial conditions before rising to 5.7 percent in 2015, helped by stronger external demand and weaker currencies. Only a modest acceleration in activity is expected for regional growth in Latin America, with growth rising from 2.5 percent in 2014 to 3 percent in 2015 some economies have recently faced strong market pressure, and tighter financial conditions will weigh on growth. Important differences are evident across the major economies in the region. In Mexico, growth is expected to strengthen to 3 percent in 2014, resulting from a more expansionary macroeconomic policy stance, a reversal of the special factors behind low growth in 2013, and spillovers from higher U.S. growth. It is expected to increase to 3½ percent in 2015, as the effect of major structural reforms takes hold. Activity in Brazil remains subdued. Demand is supported by the recent depreciation of the real and still- buoyant wage and consumption growth, but private investment continues to be weak, partly reflecting low business confidence. Near-term prospects in Argentina and Venezuela have deteriorated further. Both economies continue to grapple with difficult external funding conditions and the negative impact on output from pervasive exchange and administrative controls. In emerging market and developing economies, growth picked up slightly in the second half of 2013. The weaker cyclical momentum in comparison with that in the advanced economies reflects the opposite effects of two forces on growth. On one hand, export growth increased, lifted by stronger activity in advanced economies and by currency depreciation. Other hand, investment weakness continued, and external funding and domestic financial

115 Annual Report 2013/14 conditions increasingly tightened. Supply￾side and other structural constraints on investment and potential output (for example, infrastructure Bottlenecks) are issues in some economies. These offsetting forces are expected to remain in effect through much of 2014. Overall, however, emerging market and developing economies continue to contribute more than two-thirds of global growth, and their growth is projected to increase from 4.7 percent in 2013 to 4.9 percent in 2014 and 5.3 percent in 2015. 8.1.2 World Trade Global trade volume growth slowed substantially in the adjustment after the global financial crisis of 2007–09 and the euro area crisis of 2011–12. This slowing has fueled questions about whether international trade will remain an engine of global growth, which are motivated by concerns about stalling or declining globalization. However, data on world trade growth since 2008 seem to be in line with global output and investment growth. Moreover, recent forecast errors for world trade growth are strongly and positively correlated with those for global GDP growth, as in the past. These factors suggest that the recent trade weakness has simply mirrored stronger-than-expected declines in growth across the globe. Indeed, world trade growth picked up strongly with the strengthening in global activity in the second half of 2013. Global current account imbalances narrowed further in 2013. The narrowing was partly driven by external adjustment in stressed economies in the euro area— which increasingly reflects not only import compression, but also some adjustment in relative prices and rising exports—although balances in euro area surplus economies did not decline materially. The narrowing also reflects larger energy imports in Japan since the2011 earthquake and tsunami, a decline in net energy imports in the United States, and a combination of falling oil export revenues and increased expenditures in fuel exporters. A modest further narrowing of imbalances is projected for the medium term, resulting mostly from lower surpluses of oil

116 Annual Report 2013/14 exporters. 8.1.3 Inflation and CommodityPrices In the United States, all relevant inflation measures decreased in the course of 2013, with core inflation running at rates of less than 1.5 percent, notwithstanding continued declines in the unemployment rate. The lower unemployment rates partly reflect reductions in labor force participation due to demographic trends as well as discouraged workers dropping out of the labor force. A portion of the decline in labor force participation is expected to be reversed, because some of these workers are likely to seek employment as labor market conditions improve. In addition, the long-term unemployment rate remains high compared with historical standards. As a result, wage growth is expected to be sluggish even as unemployment declines toward the natural rate in 2014–15. In the euro area, inflation has steadily declined since late 2011. Both headline and underlying inflation have fallen below 1 percent since the fourth quarter in 2013. Several economies with particularly high unemployment have seen either inflation close to zero or outright deflation during the same period. For 2013 as a whole, inflation was 1.3 percent, which is closer to the lower end of the range forecast provided by the European Central Bank (ECB) staff at the end of 2012 and below the lowest value provided by Consensus Forecast survey participants at the time. Inflation is projected to increase slightly as the recovery strengthens and output gaps slowly decrease. Under the current baseline projections, inflation is expected to remain below the ECB’s price stability objective until at least 2016. In Japan, inflation started to increase with stronger growth and the depreciation of the yen during the past year or so. In 2014–15, it is projected to accelerate temporarily in response to increases in the consumption tax. Indications are, however, that labor market conditions have started to tighten. Nominal wages have also begun to increase, and underlying inflation is projected to converge gradually toward the 2 percent target. In emerging market and developing economies, inflation is expected to decline

117 Annual Report 2013/14 from about 6 percent currently to about 5.2 percent by 2015 Softer world commodity prices in U.S. dollar terms should help reduce price pressures, although in some economies, this reduction will be more than offset by recent exchange rate depreciation. In addition, activity- related price pressures will ease with the recent growth declines in many emerging market economies. Thatsaid, this relief will be limited in some emerging market economies, given evidence of domestic demand pressures and capacity constraints in some. 8.1.4 Exchange Rate Foreign exchange markets experienced two distinctive episodes during 2013: the early part of the year was highlighted by a dramatic depreciation of the Japanese yen, and in May-June, a number of emerging and developing countries saw the sharp devaluation of their currencies. In the outlook for 2014-2015, major uncertainties and volatility in foreign exchange markets will still be associated with the currencies of emerging economies. Among major currencies, the yen devalued significantly vis-à-vis the United States dollar, from 80 yen per dollar by the end of 2012 to about 100 yen per dollar in March 2013, partly reflecting a set of drastically expansionary policies adopted by the new Japanese Administration. The euro-to-dollar exchange rate saw some fairly wide swings, between 1.28 and 1.34, but with no clear direction during the first half of 2013, and followed by a period of appreciation in the third quarter (reaching 1.38 before dropping to 1.34 during November). Changes in relative risk perceptions were an important driving force. For the last few years these have been evenly balanced between eruptions of the euro area debt crisis and United States fiscal impasses. As the year progressed, however, risks stemming from the European debtcrisis subsided significantly, while those in the United States remained in play. In addition, the euro area current-account surplus began to widen notably, but stronger growth in the United States provided some

118 Annual Report 2013/14 counterbalance. Going forward, however, the shifting balance of monetary policies is expected to play an important role. The European Central Bank (ECB) cut its policy rates in November (the second time in 2013)leading to a sharp drop in the euro. In terms of unconventional policies, the United States is expected to taper its QE program soon, while the ECB is still entertaining new forms of stimulus. The balance of expected policies in the three areas, coupled with the stronger growth outlook in the United States, leads to an expectation of the dollar appreciating moderately against both the yen and the euro. Currencies in many developing countries and economies in transition have depreciated vis-à-vis the United States Dollar and other major currencies in 2013. Currencies in a number of emerging economies depreciated by the greatest amountIn May-June 2013, particularly in Brazil, India, Indonesia, South Africa and Turkey, at the same time that capital inflows to these economies declined. In contrast, the renminbi of China continued to appreciate gradually against the United States dollar and other major currencies. The difference between the trends in the exchange rates of China and other large emerging economies can be counted for by a number of factors, including much larger foreign reserves, a less open capital account, higher domestic savings, and more concentration of FDI in the capital inflows to China (when compared with the other emerging economies). Given the remaining current-account surplus of China vis-à-vis the UnitedStates, the renminbi is expected to further appreciate slightly against the dollar in 20142015, unless China liberalizes its capital and financial accounts soon, which could trigger more capital outflows and renminbi depreciation. The currencies of other emerging economies are likely to remain under depreciation pressures. 8.1.5 Capital Flow Longer-term U.S. interest rates rose immediately after the May 2013 tapering￾related announcement by the Federal Reserve but have broadly stabilized since. Rates in the core euro area economies and Japan have increased by a fraction. Equity markets have been buoyant, with price-to￾earnings ratios back to precise levels.

119 Annual Report 2013/14 Spreads on Italian and Spanish bonds have continued to decrease. Financial conditions in emerging market economies have tightened recently in response to a more difficult external financial environment. Bond rates and spreads have increased, and equity markets have moved sideways. Gross capital in￾flows have declined, and exchange rates have depreciated. Overall, the cost of capital in emerging market economies has increased, which will dampen investment and growth, although increased exports to advanced economies are expected to provide some offset. 8.2.Implications for Ethiopia The global economy remains on a gradual recovery path, although the growth momentum moderated somewhat in 2014 as a result of temporary factors. As the adverse effects of these factors are gradually waning, global activity should gather pace in the period ahead. The slow growth in global economic activity has affected Ethiopia’s external sector to certain extent. Earnings from export of goods during 2013/14 rose by 5.6 percent owing to improvements in global commodity prices and/or increased in volume of exports of the country. Furthermore, net receipts from service exports went up by 21.9 percent while private transfers and FDI inflows showed a moderate growth of 13percent and 19.1 percent, respectively, during the review year. The declining international oil price has positively contributedto the country’s current account balance despite high fuel import bill, which constituted 17.5 percent of the total import bill of the country in 2013 /14.