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Addis Fortune (Addis Ababa)

Ethiopia: Oil Price Widens Balance of Trade Gap

Michael Chebud

27 May 2008

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Addis Ababa — Ethiopia's import bill will shoot up by one billion dollars annually, claiming over a fifth of the Federal government budget, due to the soaring prices of oil in the global market, the International Monetary Fund (IMF) has projected.

The price of oil climbed to an all-time high of above 135 dollars a barrel on Thursday, May 22, 2008. Despite the slide back on Friday - driven higher by a combination of long-term production worries and a near-term focus on tight fuel stocks - the price of oil is projected to reach 200 dollars per barrel in the near future.

This will put a painful burden on Ethiopia's already negative balance of trade, IMF delegates said last week, after concluding a two-week consultation with Ethiopian authorities. The five-member delegation, led by Robert Corker, together with Sufian Ahmed, minister of Finance and Economic Development (MoFED), gave a joint press conference on May 19, 2008, at the Ministry's office on King George Street.

The delegates strongly believe that the unabated increase in oil price will exacerbate the negative trade balance that the IMF earlier forecasted to be 20.6pc of the Gross Domestic Product (GDP) in the current budget year, even higher than the 12.6pc five-year average between 1997-2002.

An unsympathetic international audience, at a time when the economy has registered an impressive growth, is costing Ethiopia dearly. Nothing explains the implications of this cost better than the minimal international reserves the country has in the National Bank of Ethiopia (NBE).

THE NUMBERS

$180m

An average monthly spending by the federal government to import oil.

4.1pc

Ethiopia's balance of payment deficit in the year 2007.

20.6pc

Ethiopia's trade balance deficit forecasted by the IMF for 2008.

The oil bill is costing Ethiopia a tremendous amount of money, according to Mr. Corker. This is a view assertively reflected in the press statement issued by the IMF subsequent to the end of the consultation.

"Foreign exchange reserves are below two months of imports," read the statement.

Authorities at the central bank agree that the cost is becoming unsustainable.

"Ethiopia now spends close to 180 million dollars monthly for the procurement of oil," Elias Loha, Reserve Management and Foreign Exchange Market Department manager at the NBE, told Fortune.

"No one knows when it will stop," said Sufian Ahmed, expressing his dismay with the swelling spending of the country on oil.

Not only does this worsen Ethiopia's negative trade balance with the world, for it buys goods and services worth over five billion dollars and sells primary goods worth only 1.5 billion dollars. It also exacerbates the deficit on the balance of payment, which for the year 2007/08 was 4.1pc of the GDP. Although it is much lower than the 4.5pc of the previous year, or the peak of 9.1pc registered in 2006, or even compared to the largest deficit of 43.4pc held by Liberia, what was recorded last year was higher than the three per cent projected by the IMF last year, or the Sub-Saharan average of 1.2pc.

IMF officials are worried that the increase in the oil bill has also become one of the forces pushing inflation higher, increasing the budget deficit to 9.5pc in 2007, larger by five percentage points when compared to the five-year average of 1997-2002. Nevertheless, the highest budget deficit of 13.6pc was recorded in 2003, a year the country's was hit by the worst form of drought that put the life of over 13 million people at risk as a result of food insecurity.

IMF sees an increase in budget deficit from the projected nine per cent for 2008 as inevitable with the increase in what the country is spending to fill its gas stations across the country. This will undoubtedly become inflationary; in April 2008, headline inflation was 19.9pc, while core inflation (on food) was even worse at 26.6pc, significantly rising from 16.9pc at the same time last year.

The IMF has, once again, made a prescription for Ethiopia to reduce the money supply in the economy, although not drastically. The central bank, however, does not seem to be too keen to embark on such a measure too soon.

"We have yet to see the outcomes of the measures we took recently," a source at the Research Department of the central bank, told Fortune. "We are not planning to take on another round of monetary tightening measures now."

The NBE has taken restrictive measures twice in seven months in a bid to reduce the money in circulation, which is growing by 20pc. Last February, the regulator increased reserves banks were required to hold from 10pc to 15pc, while it also decided the liquidity requirement ratio should be 25pc, in an attempt to fend off inflation.

These measures by the central bank - coupled with the other measures taken by the Federal Government in providing cheap and subsidized fuel - did not have the slightest effect on easing inflation, let alone taking it down to a single digit as was initially intended, as Prime Minister, Meles Zenawi, admitted to Parliament on Wednesday, May 22, 2008.

Despite these quandaries troubling Ethiopia, the 185-member IMF sees an economy that is promising if the current growth momentum is kept in motion. For a non-oil producing economy, Ethiopia's real GDP growth of 11.4pc in 2007 (for the current year's projection it is at 8.4pc) is very impressive when compared to Sub-Saharan average of 7.7pc, excluding Nigeria and South Africa. No other African country in the category of a non-oil producing economy has registered such growth in real GDP; the nearest was Liberia with 9.4pc.

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