Inflation Trends in Ethiopia: Third Quarter Analysis 2022/23

Inflation, a term that denotes the rate at which the general level of prices for goods and services rises, and, subsequently, purchasing power erodes, is a critical economic indicator. It's a measure that economies around the world monitor closely, and Ethiopia is no exception. This article delves into the inflationary trends in Ethiopia, based on the data from the National Bank of Ethiopia's Third Quarter Report for the fiscal year 2022/23.

During the third quarter of 2022/23, headline inflation in Ethiopia saw an increase, reaching 5.5%, up from 5% in the previous quarter. This was a marginal decline from the 5.6% inflation recorded during the same quarter the previous year. The rise in the quarterly headline inflation was primarily attributed to a 2.2 percentage point increase in food & non-alcoholic beverages and a 0.4 percentage point rise in non-food inflation.

• Food & Non-Alcoholic Beverages Inflation: Contributed 1.5% to the headline inflation.

• Non-Food Inflation: Contributed 3.9% to the headline inflation.

This data suggests that while there was a rise in inflation for both food and non-food items, the more significant contributor to the overall inflation was non-food items.

The broad money supply (M2) stood at Birr 2.06 trillion at the end of the third quarter, reflecting a 30.1% annual growth. This growth was primarily due to a 28.5% expansion in domestic credit. Meanwhile, net claims on the government grew by 46.9%, and credit to the non-government sector increased by 23.8%.

The banking sector in Ethiopia has been expanding. By the end of the third quarter of 2022/23, the number of banks in the country reached 30, with 28 being private and 2 state-owned. These banks opened 746 new branches during the review quarter, bringing the total number of bank branches to 10,967. This expansion indicates a growing financial sector and increased accessibility to banking services for the Ethiopian population.

Ethiopia's external sector saw a slowdown in total receipts from commodity exports by 17.1% over the previous year, amounting to USD 873.5 million. This decline was due to reduced revenues from various commodities such as coffee, gold, chat, and meat products, among others. However, there were improvements in export receipts from pulses, oilseeds, flowers, and electricity.

On the import front, merchandise imports reached USD 4.2 billion during the review quarter, marking a 9.7% year-on-year drop. This decline was attributed to lower import values of capital goods, consumer goods, and miscellaneous goods.

Ethiopia's energy sector witnessed significant developments during the third quarter of 2022/23. The volume of petroleum products imported during this period was approximately 1 billion metric tons, marking a 10.6% annual and 12.9% quarterly growth. This surge was attributed to increased imports across all petroleum categories.

• Gas Oil: 65.6% of the total imports

• Regular Gasoline: 18% of the total imports

• Jet Fuel: 14.4% of the total imports

• Fuel Oil: 1.9% of the total imports

The monetary value of these imports reached Birr 58.2 billion, indicating a 24.3% annual growth. This growth was primarily due to the higher volume of petroleum imports and the increased values of jet fuel (29.1%), gas oil (25.2%), and regular gasoline (19.7%). However, the value of fuel oil imports saw a decline of 3.4%.

The average FOB price of petroleum products decreased by 11.9% compared to the same quarter the previous year. This was due to lower FOB prices of fuel oil (31.1%), regular gasoline (11%), gas oil (10.3%), and jet fuel (3.8%). The average price of Brent crude oil, a benchmark for international oil prices, also decreased by 19.1% to USD 81.2 per barrel compared to USD 100.3 the previous year.

Electric power generation saw a boost with about 4.6 billion KWH being generated during the third quarter of 2022/23. This was a 20.4% increase from the previous year, primarily due to a 21.8% growth in electric production from hydropower sources. Of the total energy generated, a significant 96.6% was from hydropower, with the remaining 3.4% coming from wind sources.

During the third quarter of 2022/23, the headline inflation increased to 5.5%, up from 5% in the previous quarter. This increase was attributed to a 2.2 percentage point rise in food & non-alcoholic beverages inflation and a 0.4 percentage point increase in non-food inflation. On an annual basis, the headline inflation saw a slight decrease of 0.1 percentage points due to a 0.4 percentage point decline in food & non-alcoholic beverages inflation.

• Food & Non-Alcoholic Beverages: Contributed to 27.2% of the headline inflation.

• Non-Food Items: Contributed to 72.8% of the headline inflation.

The inflation in food & non-alcoholic beverages rose to 4.9% from 2.7% in the previous quarter. This was primarily due to higher inflation in prices of vegetables, sugar jam, honey, chocolate, milk, cheese, and eggs.

On the other hand, non-food inflation dropped to 6.4% from 8.5% in the previous quarter. This decline was mainly due to a slowdown in inflation in various sectors such as recreation and culture, education, transport, and miscellaneous goods.

The third quarter of 2022/23 witnessed a significant expansion in the broad money supply (M2) by 30.1% annually, reaching Birr 2.06 trillion. This growth was primarily attributed to a 28.5% increase in domestic credit. In contrast, there was a contraction in external asset (net) by 71.5% and other items net by 41.6%.

• Quasi-money supply: Grew by 30.7% annually and 5.3% quarterly.

• Narrow money supply: Exhibited a 29.0% annual and 6.3% quarterly increment.

The contribution of narrow money to the broad money growth was 32.4%, while that of quasi money was 67.6%. This reflects the significant growth in savings deposits in the banking system.

Reserve money reached Birr 448.9 billion at the end of the third quarter of 2022/23, indicating a 27.1% annual and 6.8% quarterly growth. This significant annual expansion in reserve money was due to a 28.5% rise in bank deposits at the National Bank of Ethiopia (NBE) and a 26.0% increase in currency in circulation.

The money multiplier, which is measured by the ratio of broad money to reserve money, increased to 4.6 from 4.5 a year ago.

Both the average savings deposit rate and lending rate remained consistent at 8.0% and 14.3% respectively. The weighted average time deposit rate stood at 7.7%. Despite these rates, the weighted average yield on T-bills for the quarter was 9.01%, which was slightly lower than the 9.23% recorded a year ago. Given the 32.8% headline inflation, real interest rates on deposits, lending, and T-bill yield remained negative during the review quarter.