Ethiopian Economics Association (EEA), Seventh International Conference on the Ethiopian Economy, June 26, 2009

1. Foreign Exchange Rationing
and
Food Security in Ethiopia
Paul Dorosh
International Food Policy Research Institute (IFPRI)
(Ethiopia Strategy Support Program, ESSP-2)
Hashim Ahmed
Ethiopian Development Research Institute (EDRI)
Ethiopian Economics Association
Seventh International Conference on the Ethiopian Economy
26 June, 2009
The views expressed in this paper are those of the authors and do not represent the official positions
of their respective institutions.

2. Outline of Presentation
• Recent macro-economic developments
– Current account
– Nominal and real exchange rates
• Changing determinants of wheat prices over time
– Import parity and decomposition of nominal prices
• Implications of rationing of foreign exchange
• Government market interventions 2008
• Concluding observations

3. Ethiopia Trade and Current Account
Transfers, 2004/05 – 2008/09*
12
10
8
billion US$
6
4
2
0
2004/05 2005/06 2006/07 2007/08 2008/09*
Imports Exports + All Transfers Exports + Net Servs + Priv Transfers Exports
* Projected.

4. Ethiopia Trade and Current Account
Transfers, 2004/05 – 2008/09*
Nominal
Nominal Exchange Real
Exchange Rate (Birr/$) World Price World Price Exchange
(Birr/$) (Index) Index ($) Index (Birr) CPI Rate Index
July 2004 8.80 100.0 100.0 100.0 100.0 100.0
January 2005 8.83 100.3 102.7 103.0 102.9 100.1
July 2005 8.84 100.5 101.4 101.9 111.5 91.3
January 2006 8.86 100.6 104.1 104.7 112.8 92.8
July 2006 8.87 100.8 108.7 109.6 125.7 87.2
January 2007 8.99 102.1 110.4 112.7 131.6 85.7
July 2007 9.21 104.7 116.8 122.3 143.6 85.1
January 2008 9.40 106.9 127.0 135.7 157.5 86.1
July 2008 9.83 111.7 139.6 156.0 235.8 66.2
January 2009 11.06 125.7 120.0 150.8 217.0 69.5
March 2009 11.39 129.5 120.2 155.7 222.2 70.1
July 04 - Mar 09
(percent change) 29.5% 29.5% 20.2% 55.7% 122.2% -29.9%
Source: EDRI and authors’ calculations.

5. Ethiopia: Nominal and Real Exchange
Rate Indices, 2004/05 – 2008/09*
250
200
150
100
50
0
Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08
Real Exchange Rate Nominal Ex Rate CPI World Price Index

6. Determinants of Wheat Prices
Four Market Regimes
• January 2000-June 2005: Domestic wheat prices were generally between
import and export parity
– Given levels of official imports (including food aid), there was little incentive
for private sector imports of ordinary wheat
– Domestic prices were determined by domestic supply (including official
imports) and demand
• July 2005-March 2007: Domestic wheat prices were generally at import
parity levels
– Private sector imports adjusted to equate total supply and domestic demand
at the import parity price
• April 2007- May 2008: Domestic wheat prices were again below import
parity
– Given sharp increases in world prices, private sector imports were not
profitable
• June 2008 – May 2009: Domestic wheat prices were above import parity
– Restrictions on foreign exchange for imports prevented private imports from
taking advantage of profitable import opportunities

7. Wheat Domestic and Border Prices
(US$ / ton)
800
700
600
500
Price ($/ton)
400
300
200
100
0
Month/Year
Wholesale Price Addis Import Parity Addis Export Parity Addis

8. Domestic Wheat Prices and Import
Parity, 1998-99 to 2008-09*
White Wheat White Wheat Wheat Nominal
Wholesale Exchange Wholesale Import Parity Protection
Crop Year Addis Rate Addis Addis Coefficient
(October-September) (Birr/kg) (Birr/$) ($/ton) ($/ton) (percent)
1998-99 1.97 7.87 248.9 119.2 12.8%
1999-00 2.06 8.30 248.0 113.2 14.9%
2000-01 1.49 8.52 175.4 130.8 -25.0%
2001-02 1.28 8.69 147.5 137.1 -38.5%
2002-03 1.98 8.72 227.1 155.1 -11.9%
2003-04 1.72 8.78 195.8 161.9 -26.4%
2004-05 1.85 8.83 209.6 155.2 -20.1%
2005-06 2.42 8.86 272.5 187.5 -8.5%
2006-07 2.84 9.06 313.1 231.1 -10.3%
2007-08 4.77 9.60 493.3 371.5 -2.7%
2008-09* 5.58 10.76 522.3 246.7 30.4%
Average 2000-01 - 04-05 1.66 8.71 191.1 148.0 -24.4%
Average 2005/06 - 07-08 3.34 9.17 359.6 263.3 -7.2%
* October 2008 – April 2009.
Source: EGTE data and authors’ calculations.

9. Wheat Domestic and Border Prices
(Birr(2006)/ quintal)
500
450
400
350
Price (Birr (2006)/quintal)
300
250
200
150
100
50
0
Month/Year
White Wheat Wholesale Addis Export parity (FOB Djibouti) Import Parity

10. Real Wheat Prices and Import Parity
1998-99 to 2008-09*
Real Real Real Real Real
Import Price Import Price Exchange Import Price Import Parity Wholesale
CIF Djibouti CIF Djibouti Rate CIF Djibouti Price Price
($/ton) ($2004/ton) (Jly 2004=100) (Birr 2004/qntl) (Birr 2004/qntl) (Birr 2004/qntl)
1998-99 161.8 186.2 94.3 149.1 204.4 228.9
1999-00 155.9 180.7 95.2 146.7 203.2 233.4
2000-01 173.5 209.1 95.8 181.9 244.8 182.8
2001-02 179.7 215.2 99.4 196.8 262.7 161.1
2002-03 197.7 220.4 94.7 185.2 241.2 211.5
2003-04 204.6 208.8 99.8 183.6 238.8 175.3
2004-05 195.2 190.9 96.4 161.0 216.3 172.0
2005-06 222.5 209.6 90.4 163.2 218.6 199.8
2006-07 262.4 232.4 84.2 167.0 222.1 199.9
2007-08 401.5 307.2 77.2 204.6 258.4 239.6
2008-09* 276.7 227.5 56.8 128.7 186.4 242.3
Ave 00-01 to 04-05 190.1 208.9 97.2 181.7 240.7 180.6
Ave 05/06 to 07-08 295.4 249.7 83.9 178.3 233.0 213.1
03/04-08/09 %change 55.4% 19.5% -13.7% -1.9% -3.2% 18.0%
* October 2008 – April 2009.
Source: EGTE data and authors’ calculations.

11. Wheat Domestic and Border Prices
(Birr/ quintal)
800
700
600
Price (Birr/quintal)
500
400
300
200
100
0
Month/Year
White wheat wholesale Addis Import Parity Import Sales Price

12. Price Determination with Free Trade
(Real) Demand Supply
Price
P0
Imports
S0 D0 Quantity

13. Price Determination with Quotas
(Real) Demand Supply
Price
Public Imports
P1
P0
Imports
S0 D0 Quantity

14. Impacts of Government Market
Interventions, July-October, 2008
Partial Equilibrium Simulations
Simulation 1 Simulation 2
(200,000 tons) (300,000 tons)
Wheat Supply (mn tons/month) 0.192 0.192
4 month wheat wheat supply 0.770 0.770
Government imports (mn tons) 0.200 0.300
% change in net supply 26% 39%
% change price ed = -0.35 -48.3% -61.0%
New price ed = -0.35 (Birr/quintal) 349 264
% change price ed = -0.80 -25.1% -33.7%
New price ed=-0.80 (Birr/quintal) 506 447
Actual real price decline: June-Oct -19.7% -19.7%
Expected seasonality 8.2% 8.2%
Actual real price relative to expected price -25.8% -25.8%

15. Wheat Domestic and Border Prices
(Birr(2006)/ quintal)
500
450
400
350
Price (Birr (2006)/quintal)
300
250
200
150
100
50
0
Month/Year
White Wheat Wholesale Addis Export parity (FOB Djibouti) Import Parity

16. Concluding Observations
• Wheat price formation regimes have changed several
times between 2000 and 2009:
– For most of this period, domestic prices have NOT been
determined by international border prices
• Given foreign exchange rationing starting in March
2008, private sector wheat importers have had
restricted access to foreign exchange
– Domestic wheat prices have been above wheat import
parity prices since May 2008
• Government sales of its wheat imports from July to
October 2008 successfully reduced domestic market
prices
– Sizeable rents accrued to those with access to wheat
imports at official prices

17. Concluding Observations (2)
• Rationing of foreign exchange has major implications
beyond the wheat market… on export competitiveness,
economic growth and income distribution
– Restricting effective demand for foreign exchange inhibits
the real exchange depreciation needed to restore
equilibrium in external accounts
– An appreciation of the real exchange rate leads to lower
prices of exportables and non-protected importables,
reducing incentives for production of tradable goods
– As in the case of wheat imports, rationing of foreign
exchange implies large rents for those with access to the
rationed foreign exchange
• Further analysis of these economy-wide effects of
foreign exchange rationing, using a Computable
General Equilibrium (CGE) model based on the 2004/05
EDRI SAM, is underway