A Flow of Funds Account (FOFA) for Ethiopia

II.. IINNTTRROODDUUCCTTIIOONN

This paper presents a flow of funds account for the Ethiopian economy for the two fiscal

years of 2001/02 and 2002/03. The flow of funds account (FOFA) is an empirical construct

designed to show the direction of flows and measure of magnitude of interaction between

the various sectors in the economy in the course of production, distribution, and exchange.

The construction of FOFA for Ethiopia is important since it spells out the critical linkages

among sectors. It also helps to project the lending potential of the financial institutions.

Production activities in the real sector are driven by investment. Investment is not limited to

the savings of investors while savers do not necessarily invest. The financial sector plays a

necessary role of intermediating savers and investors. At the aggregate level, investment

depends on the volume of savings mobilized both from within and outside the country. The

surplus and deficit sectors interact through the medium of the financial sector. The flow of

funds account traces these financial flows within the economy and measures the volume of

resource requirement of the real sector and availability of funds at the disposal of the

financial institutions.

In the process of measuring and tracing resource flows within and among the different

sectors of the economy, the FOFA also helps to measure the resource balance in the form

of deficits and surpluses along with the source of their closure, including foreign sources.

The FOFA can serve as an essential aid to policy analysis, since it readily precipitates the

extent of interaction between the real and the financial sector as well as among the various

sectors. Such articulations help to assess and check whether the interactions are to the

tune of policy targets.

The rest of the paper is structured as follows. Section two provides the economic back

ground while section III outlines the modality of constructing the FOFA. Section IV presents

the FOFA for 2001/02 and 2002/03 fiscal years. Section V concludes the paper.

1

The paper is accompanied by appendices which provide the aggregate raw data, details of

the FOFA for the two fiscal years as well as the methodological matrix used to arrive at the

FOFA.

IIII.. TTHHEE EETTHHIIOOPPIIAANN EECCOONNOOMMYY

A) GROWTH AND SECTORAL PERFORMANCE The Ethiopian economy is dominated by traditional agriculture. This sector accounted for

about 48% of GDP during the 1991/92-2001/02 period. The service sector contributed 41%

while the share of industry sector averaged 11%.

The economy grew by 4.9% on average during the two years under review, resulting in a

per capita income growth of 1.9% per annum. The non-agricultural sector which is relatively

monetized registered per capita income growth of 2.7% while per capita income in the

agricultural sector declined by 0.3% during this period.

Table 1: GDP, Sectoral Contributions and Per Capita Income 1960-2002.

1991/92-01/02

1960/61-73/74

1974/75-90/91

1960/61-01/02

Agriculture & allied activities 2.4 2.1 0.6 1.4

Industry 5.8 7 3.6 3.3

Distributive services 6.8 7.8 2.5 3.5

Other services 8.3 6.9 4.8 5.6

GDP 4.9 3.7 1.9 2.6

Per capita GDP 1.9 1.5 -0.9 -0.1

Per capita GDP: Agrarian -0.3 -0.08 -2.2 -1.2

Per capita GDP: Non-

agriculture

2.7 4.3 0.2 0.8

Source: Ministry of Finance and Economic Development (MOFED).

B) SAVING AND INVESTMENT: RESOURCE GAP

One permanent feature of the Ethiopian economy is the persistent gap between saving and

investment. In recent years the resource gap has been widening from an average of 6% of

GDP during the Derg period (1974-1991) to 11.5% during the EPRDF period (1991/92-

2

2001/02). Gross domestic saving as per cent of GDP averaged 11.4, 6.3, and 4.6 during the

imperial (1960-74) , the Derg (1974-91), and EPRDF periods, respectively. The gross fixed

investment as percent of GDP was 12.6, 12.4, and 16.1 during the respective periods. As a

result, the resource gap (gross domestic savings less gross fixed investment) widened from

1.1% of GDP during the imperial period and 6% of GDP during the Derg regime to 11.5% of

GDP during the EPRDF period. The increasing gap during the current regime was due to

low domestic saving (4.6% of GDP) against an investment volume of 16%. There result of

the widening gap was to increase reliance on external resources to bridge the gap.

For the period 1991/92 -2001/03, 73.3% of the resource gap was covered by net transfers

from the rest of the world over the (negative) net factor income from abroad. Resources from

this source have covered 65% and 74% of the gap in 2001/02 and 2002/03, respectively.

There are periods (usually drought years) where net transfers from the rest of the world fully

covered the resource gap. Share of external borrowing in the resource gap averaged 30%

for the period 1991/92 -2001/02.

Table 2 : Gross Domestic Saving, Gross Fixed Investment, and Resource Gap Year GDS GFI Resource

Gap 1960/61-73/74 12.6 11.4 -1.1 1974/75-90/91 12.4 6.3 -6.0 1991/92 9.2 3.0 -6.2 1992/93 14.2 5.6 -8.6 1993/94 15.2 5.0 -10.1 1994/95 16.4 7.4 -9.0 1995/96 16.9 7.0 -9.9 1996/97 17.0 7.7 -9.3 1997/98 17.2 7.7 -9.4 1998/99 16.9 2.1 -14.8 1999/00 15.9 0.9 -14.9 2000/01 17.8 2.6 -15.1 2001/02 20.5 1.8 -18.7 1991/92-01/02 16.1 4.6 -11.5

Source: National Bank of Ethiopia and MOFED.

There is no direct measure of private and public savings. One way is to consider the

difference between government general current expenditure and total revenue as public

saving. The private saving can be calculated as residual of gross domestic saving and

public savings. Calculated this way, the public saving for the EPRDF period averaged -

0.34% while the private saving averaged to about 5.0%. If aid is included, the public saving

rises to 2.9%. For the fiscal year 2001/02, the private and public saving rates were 4.1%,

3

and -2.3%, respectively. The lowest public saving rate was -6.8% recorded in the year

1999/00. It was a period when the Ethio-Eritrea war reached climax.

If one assumes that government capital expenditure approximates government investment,

then public investment and private investment averaged to 8.9 and 7.2% of GDP,

respectively, for the period 1991/92-2001/02. The resource gap amounts to 9.3% for the

public sector and 2.2% for the private sector. In 2001/02, public investment and private

investment as per cent of GDP were 13.9%, and 6.6%, respectively.

B) THE FOREIGN SECTOR The export of goods and non factor services averaged 13% of GDP for the period 1991/92-

2001/02 and the imports of goods and non factor services averaged 25.5% during the same

period. This resulted in an 11.5% resource gap which matched the saving – investment gap.

In 2001/02, the exports of goods and non factor services amounted to 8027.4 million Birr

(15.5% of GDP) and the imports of goods and non factor services amounted to 17709.5

million Birr (35.2% of GDP) resulting in an 18.7% resource gap.

C) THE GOVERNMENT SECTOR The government is the main source of deficit in the country. For the period 1991/92 -

2001/02, the total government deficit as percentage of general government expenditure

averaged to 35.9. This is equivalent to 118% of government capital expenditure as capital

expenditure was 33% of general government expenditure. That is, 2.9% of the deficit was

due to current expenditure.

4

Table 3: Financing the Government Deficit 1998/9

9 1999/00

2000/01

2001/02

1991/92-2001/02

Deficit as percent of general government expenditure

35.1 44.7 35.5 41.0 35.9

Deficit as percent of capital expenditure 115.2 223.3 112.1 118.2 118 Grants as percent of deficit 34.5 22.4 46.8 33.5 37.5 Grants as percent of general government expenditure

12.1 10.0 16.6 13.7 12.6

Grants as percent of capital expenditure 39.8 50.1 52.5 39.6 39.5 Net external borrowing as percent of deficit

26.4 11.3 36.6 67.7 36.5

Net external borrowing as percent of general expenditure

9.3 5.1 13.0 27.8 13.0

Net external borrowing as percent of capital expenditure

30.4 25.2 41.0 80.0 38.8

All foreign sources as percent of deficit 61.0 33.7 83.4 101.2 74.1 All foreign sources as percent of general government expenditure

21.4 15.1 29.6 41.5 25.6

All foreign sources as percent of capital expenditure

70.2 75.3 93.5 119.6 78.3

Net domestic borrowing as percent of deficit

29.7 64.7 0.96 4.3 24.4

Net domestic borrowing as percent of general government expenditure

10.4 28.9 0.34 1.8 10.2

Banking system as Percent of deficit 17.3 71.6 (3.8) 10.0 20.6 Banking system as percent of general government expenditure

6.1 32.0 (1.3) 4.1 9.3

Capital expenditure as percent of general government expenditure

30.4 20 31.7 34.7 33.1

Figures in parentheses show repayment instead of borrowing.

For the same period, foreign sources financed 74.1% of the deficit and 25.6% of general

government expenditure. It is equivalent to 78.3% of capital expenditure. Grants and net

external borrowings financed 37.5%, and 36.5% of total deficit, respectively.

Domestic borrowing financed 24.4 % of the total deficit and 10.2% of general government

expenditure. The major domestic financing mechanism is the banking system as 20.6% of the

total deficit and 9.3% of the general government expenditure is financed by this mechanism.

The balance is the share of the non-banking system. It is, therefore, apparent that the private

sector (including public enterprises) is a surplus sector as it is capable of indirectly financing the

public sector through the banking system. In addition to the financial resources they make

available to the banking institutions, public enterprises finance the public sector through non-

banking system as they buy government securities (treasury bills).

5

In general, both domestic and foreign means of financing accounted for 98.5% of the total deficit

while the balance (1.5%) is residual and other miscellaneous.

D) THE FINANCIAL SECTOR

Ethiopian economy is a subsistent economy in the sense that much of the output produced

in the rural sector is consumed in the sector. This is reflected in low level of monetization of

the economy. On the other hand, the financial sector, though small compared to what it

ought to be, is characterized by high liquidity. During the years when the resource gap and

reliance on the foreign resources were increasing, the financial institutions, and more so the

commercial banks have been underutilizing the deposits they mobilized as measured by

their liquidity ratio, defined as actual reserve plus foreign assets net of short term liabilities

divided by net demand deposits, which averaged 87% relative to the 15-20 % under normal

conditions. This implies a poor linkage between the real and financial sectors.

Of the financial instruments available to savers, demand deposit assumes a very high

proportion due to the imposition of directive issued by the Military regime requiring all public

enterprises to deposit their excess liquidity into the banking system in the form of demand

deposit, a non-interest carrying deposit. This regulation was designed to making resources

available at low interest rates to borrowers, which in the main were the government and the

socialized sectors of the economy. This practice persists despite extensive reform in the

financial sector.

The problem confronting the financial sector was more structural in nature. On the one

hand, banks are the only available channels to mobilize financial savings, and on the other,

they are not effectively intermediating the mobilized resources for investment.

Further to the weak financial market, banks have been burdened by the accumulation of non

performing loans which has aggravated the situation.

In the fiscal year 2001/02, loans to the private sector accounted for 56.1% of the total

outstanding balance. Central government and public enterprises accounted for about 32.2%

and 6.9% of the total respectively. Looking at the sectoral distribution, foreign trade and

industry took 11.5%, and 10.7%, respectively. Agriculture's share in this case was 5.9%.

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The lowest beneficiaries were the mines, power and water resource sectors with a total

outlay of only 0.1%.

CONCEPTS AND METHODOLOGY OF FOFA ANALYSIS IIIIII.. CONCEPTS AND METHODOLOGY OF FOFA ANALYSIS

The FOFA is derived from an interconnected network of macroeconomic accounts, namely,

the national income account, the balance of payments, government finance statistics and

the monetary account. The links between the saving and investment balance of a sector and

the associated financial transactions with other sectors are systematically described the

paradigm.

A sector’s non-financial transactions generate changes in financial assets and liabilities.

These changes are, in turn, are the sector’s financial transactions. Thus, a sector’s real or

non-financial transactions such as government revenues and expenditures and financial

transactions such as external and domestic borrowings involve other sectors in the

economy.

The identity between the economy wide resource gap and the current account balance may

be shown as:

. National saving - investment gap (S – I) = Current account balance (CAB) = Use of foreign

savings,--------------------------------------------------------------------------------------- (1)

The link between government budget and the balance of payments can be easily derived

from the above saving investment gap identity by decomposing savings (S) and investment (I)

into their private and government components.

. (Sp + Sg) – (Ip + Ig) = CAB -------------------------------------------------------------------- (2)

The subscripts p and g stand for private and government respectively. Rearranging identity (2)

above obtains:

. (Sp - Ip ) + (Sg - Ig ) = CAB --------------------------------------------------------------------- (3)

Where (Sp - Ip ) and (Sg - Ig ) refer to private and government savings/investment balances

respectively.

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The depth and quality of FOFA depends on the availability of reliable data for each component

of the sectors. Values of some important variables for which data may not be available can be

determined as residual of other basic variables.

SOME METHODOLOGICAL ISSUES IN THE FOFA FOR ETHIOPIA

There are three major issues in the FOFA for Ethiopia. These are: discrepancies between

different statistical measures, the definition of government and desaggregation of monetary

statistics.

Discrepancies were noted between the current account balance of the balance of payments, on

the one hand, and the sum of the resource balance, net income from abroad and net transfers

obtained from the national income accounts, on the other. Although differences were observed

in all items, the major differences were observed in exports and imports of goods and non-factor

services. To reconcile these differences an item called ‘statistical discrepancies’ is introduced in

the non-financial transactions part to take care of the differences in real transactions that would

affect the level Gross National Disposable Income (see Appendix III and tables 1C & 2C for

details).

Government, in the FOFA for Ethiopian, refers only to transactions of federal and regional

governments. It excludes public enterprises and agencies because the government’s financial

statistics doesn’t include transactions these. Therefore, public enterprises and agencies are

taken care of as residuals along with the private sector.

The monetary statistics of the banking system is decomposed into central bank and commercial

banks. Therefore, apart from transactions that were conducted with sectors, the FOFA also

presents inter-bank transactions.

Details of the methodologies employed to prepare the FOFA for Ethiopia are presented in

Appendix III.

IV. FLOW OF FUNDS ANALYSIS FOR 2001/02 and 2002/03

1) The 2001/02 FOFA

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Gross National disposable income in 2001/02 amounted Birr 58,333 million which includes

adjustment for statistical discrepancies of Birr 247 million. On the other hand, total gross

domestic expenditure (GDE) amounted Birr 61,443 million of which 82.7 percent was spent on

consumption and the remaining on investment. The excess of Gross Domestic Expenditure

(GDE) over GNDI, therefore, resulted in a non-financial balance of Birr 3,110 million. This is

equal to the deficit registered in the current account of the BOPs, implying that, in 2001/02, the

economy consumed more than it earned.

Sources of Deficit

As shown in the upper half of the Table 4 below, general government operation was the sole

source of the deficit. In 2001/02, its expenditure amounted to Birr 14,881 million, of which Birr

8,516 million on purchases of goods and services and Birr 6,365 million on investment.

Therefore, compared with Birr 10,064 million of Gross National Disposable Income of the sector,

expenditure was in excess of income by Birr 4,817 million. Part of this deficit was financed by

the private sector, which produced a surplus of Birr 1,708 million in the fiscal year.

9

TABLE 4. FLOW OF FUNDS ACCOUNT (FOFA) FOR ETHIOPIA FOR THE F.Y. 2001/02

PRIVATE SECTOR AND GOV'T FINANCIAL SECTOR FOREIGN HORIZ. NONBUDG. & TRANSACTIONS/SECTORS NONBNK PUB. NBE COM.BNKS SECTOR CKECK SECTORS GR. NAT. DISP. INCOME (GNDI) 58,333 48,269 10,064 FINAL CONSUMPTION (C) -50,829 - PRIVATE -39,229 -39,229 - GOVERNMENT1 -11,600 -3,084 -8,516 GROSS INVESTMENT -10,614 - PRIVATE -4,248 -4,248 - GOVERNMENT -6,365 -6,365 EXPORTS OF GS & N. F.SERVICES -8,027 IMPORTS OF GS & N.F.SERVICES 17,710 STATISTICAL DISCRIPANCIES 247 -247 NET FACTOR INCOME 438 NET TRANSFERS -6,764 NON FINANCIAL BALANCES -3,110 1,708 -4,817 0 0 3,110 DOMESTIC FINANCING 0 - MONETARY 0 . BANK BORROWING (NET) 0 - PRIVATE -871 871 0 - GOVERNMENT 724 844 -1,568 0 . BROAD MONEY 0 - CURR. OUTSIDE BNKS -606 606 - DEPOSITS IN COM. BNKS -2,418 2,418 . CURRENCY HELD BY BNKS 74 -74 . RES. OF COMM. BNKS 814 -814 - NON MONETARY 0 . SECURITIES 0 - GOV'T SEC.(NON BANK) 414 -414 0 - CORP.BONDS (NON BNK) 0 . PRIVATIZATION PROCEEDS -68 68 0 . UNIDENTIFIED GOV'T FIN. FOREIGN FINANCING 0 - NON MONETARY 0 . DIRECT INVESTMENT 0 0 . NET FOREING BORROWING 0 - PRIVATE 162 162 -162 0 - GOVERNMENT 4,476 4,476 -4,476 0 . HIPC & DEBT RELIEF 429 429 -429 0 - MONETARY 0 . CHANGE IN NBE'S NFAs -2,008 -2,008 2,008 0 . CHANGE IN C0M.BNKS' NFAs -880 -880 880 0OTHER ITEMS NET & UNCLASSIFIED ITEMS 930 1,676 -464 -330 48 -930 0VERTICAL CHECKS 0 -2 1 0 1 0 01/ INCLUDES NON BUDGETARY PUBLIC SECTOR WHICH , IN THIS FOFA, IS TREATED AS PRIVATE SECTOR.

10

Financing

A) External Financing

In the fiscal year, government concessional borrowing amounted to Birr 4,476 million, in addition

to Birr 429 million obtained in debt relief. On the other hand, net foreign borrowing by the

private sector amounted only Birr 169 million. After financing the current account deficit, the

excess went into reserves. As a result, net foreign assets of the National Bank of Ethiopia and

commercial banks increased by Birr 2,008 million and Birr 880 million, respectively.

B. Domestic Financing

In 2001/02 banks were the major sources of internal financing for the government whose main

sources of fund, in turn, was the private sector. In the fiscal year, government borrowed Birr

724 million from commercial banks while it repaid Birr 414 million to the private sector by

redeeming part of its treasury bills liabilities. On the other hand, the surplus in the private sector

was reflected in increases of its financial assets as deposit with banks grew by Birr 2,418

million, currency holdings by Birr 606 million. Moreover, it repaid Birr 871 million out of the total

outstanding bank loans.

The huge increase in commercial banks’ liabilities was partly reflected in a reserve build up of

Birr 814 million with the NBE which includes both the required and excess reserves. Its currency

holding went up by Birr 74 million. The remaining balance was used to purchase foreign

currencies and T-bills.

Government mobilized external resources amounting to Birr 4,905 million. The remaining Birr

792 million was obtained internally in the form of bank borrowing (Birr 724 million) and

privatization proceed (Birr 68 million). These resources were used to finance its deficit and to

repay its outstanding loan to the private sector (Birr 878 million). Of the latter, Birr 414 million

was used to redeem T-bills owed to the private sector and the other Birr 464 million was

unclassified.

C. Interbank Financing

11

Commercial banks remained excessively liquid. Despite its purchases of government securities

to the tune of Birr 1,568 million, its reserves with the NBE increased by Birr 814 million.

Therefore, there was no need for any recourse to the central bank discount window.

2) The FOFA for 2002/03 In 2002/03, GNDI was estimated at Birr 66,180 million, after deducting a statistical discrepancy

of Birr 8 million identified in the reconciliation process. On the other hand, final consumption

amounted to Birr 57,494 million, of which Birr 45,892 million was the consumption of the private

and non-budgeted – non-bank public sectors. On the other hand, Gross investment expenditure

amounted Birr 12,093 million. Of the latter, Birr 5,760 million was invested by the private and

non-budgetary – non-bank public sector and the remaining Birr 6,333 million by the general

government. Therefore, gross domestic expenditure amounted Birr 69,587 million, exceeding

GNDI by Birr 3,407 million. This was equivalent to the deficit recorded in the current account of

the balance of payment.

12

TABLE 5. FLOW OF FUNDS ACCOUNT (FOFA) FOR ETHIOPIA FOR THE F.Y. 2002/03

PRIVATE SECTOR AND NONBUDG. & GOV'T

FINANCIAL SECTOR FOREIGN HORIZ.

NONBNK PUB. TRANSACTIONS/SECTORS SECTORS NBE COM. BNKS SECTOR CKECK GR. NAT. DISP. INCOME (GNDI) 66,180 55,041 11,139 FINAL CONSUMPTION (C) -57,494 - PRIVATE -45,176 -45,176 - GOVERNMENT1 -12,318 -2,716 -9,602 GROSS INVESTMENT -12,093 - PRIVATE -5,760 -5,760 - GOVERNMENT -6,333 -6,333 EXPORTS OF GS & N. F.SERVICES -8,161 IMPORTS OF GS & N.F.SERVICES 21,147 STATISTICAL DISCRIPANCIES -8 8 NET FACTOR INCOME 451 NET TRANSFERS -10,039 NON FINANCIAL BALANCES -3,407 1,389 -4,796 0 0 3,407 DOMESTIC FINANCING 0 - MONETARY 0 . BANK BORROWING (NET) 0 - PRIVATE 547 -547 0 - GOVERNMENT 500 -500 0 0 . BROAD MONEY 0 - CURR. OUTSIDE BNKS -756 756 - DEPOSITS IN COM. BNKS -2,361 2,361 . CURRENCY HELD BY BNKS 349 -349 . RES. OF COMM. BNKS 1,366 -1,366 - NON MONETARY 0 . SECURITIES 0 - GOV'T SEC.(NON BANK) 0 0 0 - CORP.BONDS (NON BNK) 0 . PRIVATIZATION PROCEEDS -13 13 0 . UNIDENTIFIED GOV'T FIN. FOREIGN FINANCING 0 - NON MONETARY 0 . DIRECT INVESTMENT 172 172 -172 0 . NET FOREING BORROWING 0 - PRIVATE -146 -146 146 0 - GOVERNMENT 3,836 3,836 -3,836 0 . HIPC & DEBT RELIEF 1,287 1,287 -1,287 0 - MONETARY 0 . CHANGE IN NBE'S NFAs -1,802 -1,802 1,802 0 . CHANGE IN C0M.BNKS' NFA -515 -515 515 0OTHER ITEMS NET & UNCLASSIFIED ITEMS 575 1,169 -840 -169 415 -575 0VERTICAL CHECKS 0 1 0 0 -1 0 0 13

Sources of the Deficit

In 2002/03, as in the other years, general government operation was the sole source of the

deficit in economy. The deficit amounted to Birr 4,896 million, slightly lower than the 2001/02

level by Birr 21 million or 0.4 percent. In the fiscal year, gross government investment declined

by Birr 32 million while final government consumption increase d by Birr 2,086 million (12.8 percent).

This is mainly be attributed to the increased expenditure on drought related activities.

Private sector surplus declined significantly by Birr 319 million (18.7 percent) from Birr 1,708

million to Birr 1,389 million. This was due to an increases both in consumption and investment

expenditures of the sector. While consumption increased by Birr 5,579 million (13.2 percent),

investment increased by Birr 1,512 million. Despite the prevalence of a serious drought, such

an increase in investment expenditure signified improvement in the domestic and international

environment.

Financing

A) External Financing

Similar to 2001/02, government concessional borrowing from multilateral sources such as the

World Bank and EU accounted for the bulk of external financing in 2002/03 fiscal year. Total

net government external borrowing amounted to Birr 3,836 million whereas private sector

borrowing from abroad showed a net repayment of Birr 146 million. Therefore, compared to the

previous fiscal year, net foreign borrowing declined significantly by Birr 948 million (20.4

percent) relative to the previous year. On the other hand, foreign assistance in the form of HIPC

and debt relief increased to Birr 1,287 million (200 percent increase) offsetting part of the

decline. In this fiscal year, foreign direct investment of Birr 172 million was registered which

mainly accounted for receipts from privatized enterprises.

The excess of external financing over the current account deficit was reflected in the net

external reserve position, increasing by Birr 1,802 million for the NBE and Birr 515 million for

commercial banks.

B) Domestic Financing

14

Of the total general government deficit, Birr 500 million was financed through borrowing from the

NBE and Birr 13 million through privatization proceeds. On the other hand, private and non-budgetary

– non bank public sectors borrowed Birr 547 million from commercial banks. The sector, in turn,

deposited an additional Birr 2,361 million with banks and held additional Birr 726 million in the

form of currency.

C) Interbank borrowing

Commercial banks remained liquid. During the fiscal year, it held an additional Birr 1,366 million

as reserves with the NBE.

VV.. CCOONNCCLLUUSSIIOONN

• The purpose of this paper was to elicit the FOFA for the two fiscal years of 2001/02 and

2002/03 fiscal years. A number of interesting findings emerge from the FOFA. The first is

that the resource gaps are purely the results government operations while the private

sector is in a surplus position.

• Secondly, the monetary outcome is driven by the fiscal position of the government,

forcing the private secor to adjust their portfolios accordingly.

•• Thirdly, the Ethiopian economy, and more the government is very much dependant on

foreign resources that come in as transfers and borrowing.

15

AAPPPPEENNDDIIXX

I. NON-FINANCIAL TRANSACTIONS

1. REAL SECTOR

Gross National disposable income is obtained from the national accounts table. It is computed as:

Final consumption (C)

+ Gross Fixed Capital Formation (I)

+ Exports of Goods and Non-factor Services (X)

- Imports of Goods and Non-factor Services (M)

= Gross Domestic product (GDP)

+ Net Factor Income (YF)

= Gross National Product (GNP)

+ Net transfers (TRF)

= Gross National Disposable Income (GNDI)

2. GENERAL GOVERNMENT SECTOR

2.1 Gross National Disposable Income of General Government (GNDIG) is

Computed as

Total Revenue and Grants

- Government Transfers (TRG)

- Interest Payments on Government Debt

- Subsidies

- Pension contribution

- Other transfers

= GNDIG

2.2 Government Consumption Proper (CGP)

Wages and Salaries

+ Government Purchases of Goods and Services

+ 10 – 12% of Capital Expenditure

= CGP

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2.3 Government Gross Capital Formation (IG)

IG = GNDIG - CG - Overall Balance (SG - IG)

3. FOREIGN SECTOR

+ Exports of Goods and Non-factor Services (X)

- Imports of Goods and Non-factor Services (M)

+ Net Factor Income (YF)

+ Net transfers (TRF)

= Current Account Balance ( CAB)

4. PRIVATE SECTOR

The sector’s balances are derived as residuals of the respective items.

4.1 GNDIP = GNDI - GNDIG

4.2 Cp = C - CG

4.3 IP = I - IG

However, since non-budgetary public enterprises are included in the private sector, we have to deduct

CGP from CG to arrive at the consumption balance of the non-budgetary public (CGPUB).

II. FINANCIAL BALANCES

1. FOREIGN FINANCING

Foreign financing is divided into monetary financing, non-monetary financing and

errors and omission. All the entries are obtained from the Balance of Payments table.

However, differences could arise between the monetary data obtained from the BOPs

17

and those that are found in the monetary surveys. Usually, they arise due to valuation.

Therefore, they have to be added to OINs of the respective banks. The items in the

FOFA include:

A. Non-monetary Financing

1.1 Direct Foreign Investment (DFI)

1.2 Government Net Foreign Borrowing (GFB)

1.3 Private (Public) Net Foreign Borrowing (PFB)

1.4 HIPC & Debt Relief (H&DRF)

B. Monetary Financing

1.5 Change in Net Foreign Assets of the NBE (NFANBE)

1.6 Change in Net Foreign Assets of the CBs (NFACBS)

C. Errors and Omissions (E&R)

2. DOMESTIC FINANCING

Domestic financing figures are obtained from the monetary surveys of the National Bank

of Ethiopia (NBE) and Commercial Banks (CBs). Since they are stock figures, one has

to deduct last year’s balance form the current year to arrive at the flows. The items we

take from those surveys include:

A. Monetary Financing

2.1 Government Bank Borrowing Net (GBB)

2.2 Private Bank Borrowing Net (PBB)

2.3 Currency Outside Banks (COB)

18

2.4 Deposits in Commercial Banks (DCB)

2.5 Currency Held by Banks (CHB)

2.6 Reserves of Commercial Banks (RCB)

B. Non-monetary Financing

2.7 Government Securities

. Treasury Bills & Government Bonds held by non-bank public (TBNBP)

. Corporate Bonds held by non-bank public (CORBNBP)

2.8 Privatization Proceeds (PP)

19

Tab

le A

1: F

low

of F

unds

Acc

ount

(FO

FA) f

or E

thio

pia:

(200

102)

-by

econ

omic

sect

or

Fina

ncia

l Sec

tor

Priv

ate

Sect

or

Gov

ernm

ent

Com

mer

cial

Ban

ks

Oth

er F

inan

cial

In

stitu

tions

Rea

l Sec

tor

Hou

seho

lds

Bus

ines

s

Fe

dera

l R

egio

nal

NB

E

Priv

ate

Publ

icPr

ivat

e

Publ

ic

Fore

ign

Sect

or

Hor

izon

tal

Che

ck

Con

sum

ptio

n (C

)

Pr

ivat

e

Gov

ernm

ent

Inve

stm

ent (

I)

P

rivat

e

Gov

ernm

ent

Exp

orts

of G

oods

and

non

-

fac

tor

Serv

ices

(X)

Impo

rts o

f Goo

ds a

nd N

on-

fac

tor

Serv

ices

(M)

Net

Fac

tor

Inco

me

Tra

nsfe

rs

GD

P (Y

)

Net

Fin

anci

al B

alan

ces

D

omes

tic B

orro

win

g

Ban

k B

orro

win

g

Publ

ic

Pr

ivat

e

Bro

ad M

oney

N

on-b

ank

borr

owin

g

G

ov’t

Secu

ritie

s

C

orpo

rate

bon

ds

Fore

ign

Fina

ncin

g

Non

-mon

etar

y

D

irec

t Inv

estm

ent

Net

For

eign

Bor

row

ing

Mon

etar

y

Cha

nge

in c

entr

al b

ank

net

for

eign

ass

ets (

NFA

s)

Cha

nge

in c

omm

erci

al

b

anks

net

fore

ign

asse

ts

(N

FAs)

21

Tab

le A

2: F

low

of F

unds

Acc

ount

(FO

FA) f

or E

thio

pia:

(200

102)

-Tra

nsac

tion

App

roac

h Fi

nanc

ial S

ecto

r Pr

ivat

e Se

ctor

Gov

ernm

ent

Com

mer

cial

B

anks

O

ther

Fin

anci

al

Inst

itutio

ns

Rea

l Sec

tor

Hhs

B

usin

ess

Fede

ral

Reg

iona

l

NB

E

Priv

ate

Publ

icPr

ivat

e

Publ

ic

Fore

ign

Sect

or

Hor

izon

tal

Che

ck

Con

sum

ptio

n (C

)

Pr

ivat

e

Gov

ernm

ent

Inve

stm

ent (

I)

P

rivat

e

Gov

ernm

ent

Exp

orts

of G

oods

and

non

-

fac

tor

Serv

ices

(X)

Impo

rts o

f Goo

ds a

nd N

on-

fac

tor

Serv

ices

(M)

Net

Fac

tor

Inco

me

Tra

nsfe

rs

GD

P (Y

)

Net

Fin

anci

al B

alan

ces

C

hang

e in

the

Fore

ign

Ass

ets o

f the

Ban

king

Sy

stem

N

BE

Com

mer

cial

Ban

ks

Pub

lic

Pri

vate

B

road

Mon

ey

Cur

renc

y an

d co

ins

Dem

and

depo

sit

Sav

ing

depo

sit

Tim

e de

posi

t D

omes

tic C

redi

t by

the

Ban

king

Sys

tem

Gov

ernm

ent

P

ublic

Non

-fin

anci

al

ente

rpris

es

P

rivat

e no

n-fin

anci

al

ente

rpris

es

22

23