Six month Report by H.E. Prime Minister Meles Zenawi to

the House of Peoples' Representatives

of the

Federal Democratic Republic of Ethiopia

29th March 2007, Addis Ababa



Honourable Speaker,

Honourable Members of the House,


Various officials of the Executive, in line with the procedures of the House, have been presenting performance reports to the pertinent Standing Committees of the Honourable House on the on-going political, economic and social progress in the country as well as with regard to foreign relations.  It is to be recalled that over the past six months, during the question and answer session in the House and again in December, I also presented reports regarding various issues in the political, economic and social processes in our country as well as on the directions that our country has pursued in connection with the spread of terrorism in Somalia. Moreover, a comprehensive report was presented to the House on measures taken pursuant to the decision of the Honourable House and the results achieved in defending the country from the threats posed by extremists in Somali on our national security.  Therefore, the report I will be presenting to the Honourable House today will not discuss the issues already covered on different occasions but will mainly focus on our economic growth, current economic issues, developments in Somalia and issues relating to Eritrea.


Honourable Speaker,

Honourable Members of the House


The achievements of the past six months show that our economy has been registering rapid growth over four consecutive years.  The economy is projected to grow by 10.1% whereas the International Monitory Fund (IMF) has put it at around 9.5%. The actual growth will be confirmed next September when all the data on the growth will have been collected.


Even though, in previous years, experts at the Ministry of Finance and Economic Development have had the tendency to produce lower forecast of the growth rate, the predictions in general have been confirmed by professionals from the IMF based on past experiences. Therefore, despite the minor discrepancy between projections about this year's growth by our experts and that of the IMF, we will take the forecast made by our own experts as the valid prediction.


In a situation where the economy has grown in aggregate by 10.1%, agriculture has shown a 10.9% growth the previous year. On the other hand, the manufacturing industry which had achieved 8.1% growth the previous year has registered a 12.5% growth. This shows that manufacturing has for the first time ever grown faster than agriculture. It is known that our development strategy is agriculture led industrialisation.  The strategy was designed to speed up growth in agriculture and in that regard to foster even higher growth in industry, better than what could otherwise be achieved on the basis of any other alternative strategy.  In the past three years, both agriculture and industry have scored rapid growth while growth in industry has been lower than that of agriculture. The fact that this year has witnessed faster growth in industry than agriculture indicates that our strategy has in a short period of time, in addition to accelerating agricultural growth, been speeding up growth in industry at a higher pace. It is expected that this trend will continue in the coming years. The figures indicate that the strategy is being successfully implemented.


Achievement of an accelerated growth over the past consecutive four years in rural areas where 85% of our population resides and where poverty has been rampant has greatly benefited the bulk of our people, the farmers.


Though growth is believed to reduce poverty, the trend in many countries indicates that poverty does not decrease proportional to the level of growth achieved. Countries which have achieved poverty reduction commensurate with their level of growth are few and the development of these countries could be described as relatively equitable. As our development is focused on rural areas where poverty is widespread, the result has been that poverty is being reduced at a rate faster than the rate of growth. Recent studies indicate that where the economy grows by 1%, the head count rate of poverty decreases up to 1.5%. Therefore, we have achieved development for the past four consecutive years which has not only been fast but which has also ensured benefits to the public better than any other alternative strategies. 


This year, though plans were drawn up to keep inflation below 10%, nonetheless, it has stood at 13.6% for the past six months. It, therefore, shows that inflation has increased beyond what was projected.  Even though inflation is higher than planned, in an economy growing by more 10% this could not be taken as uncommon or as an indication of macroeconomic instability.  However, beyond the macro-economic implications of keeping inflation below 10% as planned, due to the significant impact it will have on improving the livelihood of the people, in particular urban dwellers, the Government has given due attention to this matter and is diligently working to address it.


Honourable Speaker,

Honourable Members of the House


In order to address difficulties arising from inflation, it is critical to study and understand its root causes, based on empirical evidence. Food items account for about 50% of consumable goods used by urban dwellers. Therefore, crop price has a critical impact on inflation. Similarly, house-rent accounts for about 20% of expenditures of urban dwellers. In other words, in calculating inflation, food and house-rent constitute no less than 70% of expenditures. The contribution to inflation of other expenditures in aggregate do not account for more than 30%.


The previous year inflation on food items was 14.4% out of which the price of crop had increased to 16.6%. According to data collected in the past six months, this year, the inflation rate of food items has reached 14.3 % while crop price has increased by 14.5%. The category that includes house rent and some other products has shown an increase of 16.5%. In other words, food items and house rent that account for 70% of the consumption demand of the urban population have been not only the major causes of inflation, but have also caused price increase beyond the overall level of inflation. 


For the purposes of achieving a feasible solution, the Government has conducted a detailed examination of the problem. The study has concluded that the reason for the increase in crop price is different from the increase in house rent. The main reason for higher house rent is scarcity of residential houses, particularly lack of affordable and decent houses at reasonable rent in urban centres.


To resolve this problem, the Government has devised urban housing construction programmes, which will speed up development of urban areas and reduce unemployment, to implement the programme firstly in Addis Ababa and this year in limited number of regional urban towns.  However, since the work could not be undertaken at the desired speed due to shortage of cement and other constraints, the problem has yet to be resolved.  It goes without saying that it will not be possible to reduce and stabilise house rent unless shortage of housing is addressed. 


Crop price has been rising despite the growth of agricultural productivity for four consecutive years. A detailed study of this anomaly shows this phenomenon is not so surprising. Firstly, it is confirmed that the lack of efficiency in our crop marketing system and its inadequate exposure to competition is considered a fundamental problem. Our plan to formulate and implement a modern agricultural production system is in its implementation phase. Moreover, the whole process takes an extended period of time. In the mean time, various actors in the marketing chain because they are not exposed to sufficient level of market competition have been contributing to the increase in prices.


On the other hand, it has been confirmed by a study that has been conducted that the major problem is related to the inability of farmers to supply their products to the market at competitive price. The situation which could have forced the farmers to make available products to the market at any price has changed owing to the high income they secured in 2004 and 2005. Because they have saved money for their daily expenditure, they would not be drawn in to selling their produce unless the price is attractive. As a result, the price of agricultural products has been increasing at a high rate since in 2006. Thus, a condition has been created whereby there is no substantial difference between the price of the product in the farms and the price it fetches in urban areas.  The fact that in many areas farmers have decided delaying harvesting the teff they have planted this year, indicates that because of increase in their income a change has taken place with respect to the process involved in the supply by farmers of their products to the market. Though it is appropriate that the farmers fetch good prices for their products, it is quite clear that the process, if left unchecked, could be detrimental not only to the urban consumer but also to the entire economy and thereby harming the farmers themselves.   


The increase in the price of goods does not by itself adversely affect the livelihood of consumers. The increase in the price of goods will only have a negative effect if the income of the consumers does not rise in the same proportion. Therefore, the price increase that has been witnessed in our country has not produced any negative impact on the farmers. Since the income of the farmers has increased substantially, there are currently no acute problems posed regarding the cost of living in rural areas.


The problem is felt, however, in urban areas and in particular on the low income earning urban population. This is due to the fact that the income of the population in this category has not increased in the same proportion as the increase in inflation. In order to resolve the problem created as a result of inflation, it is imperative that, as set out above, the root causes of the problem are identified on the basis of concrete information and study.


The long term solution to this problem is to ensure that the income of the urban low income earning population increases proportionally or higher than the inflation rate through the acceleration of urban development and the reduction of unemployment. Cognisant of this fact, the Government, in addition to the emphasis it is placing on urban industrial development, is paying special attention to and is actively engaged in the construction of urban housing and the development of small scale industries.


Accordingly, prior to 2005 the Government has endeavoured to implement this programme on a large scale in Addis Ababa. Based on this experience and after having made preparations in 2006, this year it has endeavoured to implement its plan in other urban areas. As the programme started late in urban areas outside Addis Ababa, and since minor delays were encountered during its implementation, it was not possible to raise the economic condition of the low income earning urban population to the desired level. Even though the programme began earlier and on a much better and larger scale in Addis Ababa, the implementation problems encountered in connection with the 2005 elections, the recent shortages of cement and other problems have caused severe delays and the programme has not produced the desired results.


Bearing this in mind, due to the activities in construction and other development activities being undertaken by the private sector, the income of daily labourers is increasing in urban areas and the wage paid to a daily labourer has more than doubled over the last few years in Addis Ababa. Nevertheless, in a city where the income of a daily labourer has grown in such proportions, the fact that there is unemployment has become another anomaly. It has, therefore, become evident that a thorough study of this phenomenon and finding a solution to it is vital for urban development and to the improvement of the standard of living of urban dwellers.    


In the long run, as the basic solution is the acceleration of urban development and the reduction of unemployment, the Government is working tirelessly to resolve the problem related to inflation by speeding up development. In order to address the shortage of cement which has been gravely affecting construction work in urban areas, it was made possible to import a substantial amount of cement thus stabilising the price and improving the supply of cement. 


Concomitantly, significant efforts are being made by the Government and private investors to build additional cement factories. Hence, in the coming years, the shortage of cement will have a long term and sustainable solution. It is believed that the price of cement will not only stabilise but will also decrease. The Federal Government is strengthening its support for the construction programmes of government buildings in Addis Ababa and regional towns, as well as for the acceleration of the development of micro and small scale enterprises. As the programme has shown significant weaknesses, particularly in Addis Ababa, the preparation for the strengthening of the programme in cooperation with the City Administration is being finalised.


While awaiting the full implementation of the above stated main solution, the Government is fully aware of the need to endeavour to reduce the negative impact felt by the low income earning urban population and in particular to stabilise the price of crops. Thus, it has been pursuing two alternative approaches. On the one hand, it has designed and implemented, step by step, a programme aimed at making the agricultural market efficient and highly competitive, and on the other hand, it has been actively engaged in ensuring the continued rapid growth of agricultural production. As the active efforts to ensure the sustainable and continued rapid growth of the agricultural sector during the last winter season was crowned with success, it was thought that when this yield was gathered and brought to the market, prices would stabilise. Because farmers cannot indefinitely hold on to the constantly increasing volume of crop they were storing, it was assumed that during this year the farmers would bring a large amount of their products to the market and that prices would stabilise. Accordingly, it is to be recalled that the price of crops was beginning to stabilise in the month of December. However, this process instead of continuing is showing signs of reversal.   


The Government has designed a second option which can only be implemented if the first option does not produce a satisfactory result in time. This consists either in purchasing grain from abroad or in bringing to the market large quantities of crop from its reserve in order to stabilise prices. As this process has to be implemented in conformity with the rules of the market and will require significant expenditure, it cannot be the first option. However, as it was not possible to stabilise the price of crops in time by taking the first option, the Government, based on the preparations it has been undertaking, has decided to go with the second option.


Until such time as the price of crop is stabilised or until the produces of the following season are harvested, the Government has finalised preparations to make available in towns wheat in an uninterrupted manner, at an affordable price and in large quantities. Accordingly, a detailed programme that will enable the low income earning urban dwellers to obtain every month or every month and a half a minimum of 25 kilos of wheat at an affordable price has been designed.  This programme will be initially implemented in Addis Ababa and in due course in other regional urban areas. It will be pursued until such time as the price of crop is stabilised in a sufficient manner. In other words, when the farmers start bringing their products to the market in a sufficient quantity and prices stabilise, the program will be discontinued. However, if a sufficient quantity of crop does not enter the market and stabilise the price, there is enough wheat in reserve to keep the program running in a sustainable manner on monthly or on a month and half basis until next year.


It is believed that the implementation of this programme will require significant expenditure. It can be estimated that until such time as the programme designed to make the agriculture market efficient and sufficiently open to competition is fully implemented, the price of agricultural products will show substantial fluctuation. It has become clear that the Government has to intervene in accordance with the rules of the market when prices of agricultural outputs, as currently witnessed, increase in an inappropriate way, so as to reduce prices and stabilise them or when prices of agricultural products decrease in an unwarranted manner so as to have these prices stabilised.  For this purpose, it has become necessary to establish an agricultural products price stabilisation fund. As the Government has been making preparations to establish the fund, not just for the purpose of resolving the current situation but also in order to be able to stabilise the market of agricultural products in the future, the fund will soon be established by law.


Honourable Speaker,

Honourable Members of the House,


The solution for the problem we have encountered in relation to the rapid growth we are registering and which has had significant adverse effect on the low income earning urban dwellers because of inflation, is not as some are stating, slowing down our growth. The problem related to the increase in house rent prices cannot be resolved by slowing down our growth. The solution lies in accelerating our programme in the construction sector and especially in building low cost housing. We cannot alleviate the problem encountered with regard to the increase in the price of crop by slowing down our growth. Instead, the solution lies in ensuring sustained growth of the agricultural sector at the current speed and the conditions for the supply of sufficient amount of products to the market. We cannot resolve the issue relating to the adverse effect of inflation on the low income earning urban population by slowing down our growth. On the contrary, the solution lies in accelerating our growth and urban development as well as reducing unemployment. The problem can only be alleviated by thoroughly studying and holding consultations with the public on the root causes of the condition in urban areas, where there is widespread unemployment, the wage of daily labourers has increased substantially while growth has not reduced unemployment in a satisfactory manner.


Accordingly, the Government does not intend nor desire to slow down the current rapid growth. In order to fully lift our country out of extreme poverty, our economy would need to grow at our current pace not just for four years but for several decades. Therefore, the Government is actively engaged in ensuring that this rapid growth is maintained. And through this process, the Government endeavours to resolve inflation related problems in a sustained manner. Until such time that this process produces the desired result and in order to solve short term problems, it shall make interventions in the manner set out above.


Honourable House Speaker,

Honourable Members of the House,


It is to be recalled that pursuant to the basic direction and decision laid down by the House and at the request of the Transitional Government of Somalia, our Defence Forces were deployed in Somalia in order to thwart the threat of extremism which had prevailed in Somalia. After having broken the backbone of the extremists, we have been withdrawing our Defence Forces out of Somalia as promptly as possible. In accordance our plan, this task is being accomplished in phases and in light of the situation prevailing in Somalia. Accordingly, two thirds of our Defence forces deployed in Somalia have returned home in two phases. We have, therefore, been able to demonstrate that Ethiopia’s involvement was solely intended to thwart the danger posed by the extremists and to support the desire of the people of Somalia for peace.


As the African Union not only supported the actions taken by Ethiopia but has also decided to send a peacekeeping mission to the country, it is necessary to harmonise the process of withdrawal of our Defence Forces with the decision and the plan of our Union. Hence, because of the need to harmonise the second phase of the withdrawal of our Defence Forces with the arrival and the stationing of the African Union peacekeepers in their assigned positions, the withdrawal of our forces is taking more time than originally planned. The level of our Defence Forces that remain in Somalia is not only limited, but it is also primarily engaged in the training and strengthening of the Transitional Government’s security forces.


The Transitional Government of Somalia is on the one hand actively engaged in finding a lasting political solution to the problem in the country through holding a reconciliation conference that embraces all segments of the society, including those sub-clans with grievances in connection with their representation in the Transitional Government. On the other hand, the Transitional Government is seriously working to strengthen its Defence Forces and law enforcement bodies and discharging its governmental responsibility without any foreign support. The strategy designed by the Transitional Government of Somalia to bring about lasting peace is an appropriate one and has received the backing of the entire international community.


Ethiopia does not intend to keep its Defence Forces in Somalia for too long, nor does it is its desire to participate in any peacekeeping activity. Hence, the reason why our Defence Forces have to return to their country as promptly as possible upon completion of their mission in combating the extremists. The main mission of our Defence Forces was to remove the grave danger posed by the extremists to the sovereignty and security of our country. Our troops have accomplished this mission with great success. Currently, the extremists have ceased to be a clear and present danger. It was also demonstrated to all those concerned that if in the future a similar situation were to arise, Ethiopia has the capability and the preparation to thwart such a danger. As our Defence Forces have accomplished their main goal successfully, it is appropriate to withdraw them from Somalia as rapidly as possible. I wish to thank our Defence Forces once again for they have carried out their mission in a successful manner making all the peoples of our country proud.  


On the other hand, as a member of the African Union, Ethiopia is expected to fulfil its obligation with regard to the programme the Union has designed to support the peace and stability of Somalia. More importantly, it should be underlined that as the Transitional Government and people of Somalia have fought on our side when we were battling against the extremists, we have an obligation to support their peace efforts to the extent of our capacity.


It is the people of Somalia who are the primary beneficiaries of peace and stability of their country. The next beneficiaries, more than any other, will be the people of Ethiopia. Similarly, if the instability in Somalia further deteriorates, next to the people of Somalia, we will be the ones who will suffer most. We will, therefore, stand by the people of Somalia and the Transitional Government so that the plan to bring about a peaceful and political solution to the problem in Somalia is implemented successfully.


Likewise, we will give all the support to the Transitional Government within our means in order to build its defence capabilities. The withdrawal of our remaining Defence Forces in Somalia will be pursued in accordance with our plan. However, as long as the people and Government of Somalia seek our assistance, we will continue to give our support whether politically or in the training and strengthening of their Defence Forces.


Honourable Speaker,

Honourable Members of the House,


The decisive measure that we have taken against the extremist forces that were ensconced in Somalia, has not only broken their backbone, but has seriously weakened the strategy designed by the power behind them - the Eritrean regime - which is bent on wreaking havoc in Ethiopia. The Eritrean regime, which supported the extremist forces in Somalia and which it hoped would be its main instrument in causing mayhem in Ethiopia, has been forced to face a humiliating defeat. Nonetheless, the Eritrean regime has not taken sufficient lessons from its defeat in Somalia and has not changed its strategy of destruction and destabilisation.


The Eritrean Government is continuing its effort of using various anti-peace Ethiopian elements as its main instrument to cause insecurity and unrest in various parts of our country, including Addis Ababa. The plot to carry out successive bombing during the recently held African Union Summit, though aborted in time by the combined effort of the people and the security forces, is a proof that terrorist activities coordinated and led by the Eritrean Government are still continuing. Even though those elements who are given the missions to cause havoc in Ethiopia are continuing with their effort throughout the country, our people living in the border area have been the most affected and have been the main victims. The recent abduction of civilians in the Afar region, which was coordinated and led by the Eritrean regime through its agents of destabilisation, is a clear evidence of the gravity of the problem in the border areas. Though the foreign nationals were released due to the unrelenting international pressure on the Government of Eritrea, the Ethiopian nationals abducted with them have not been released. The responsibility for the safety of the abducted Ethiopians lies with the Government of Eritrea. In the meantime, I would like to assure the House that the Ethiopian Government will intensify its on-going efforts for the peaceful return of our abducted nationals.


The Eritrean regime has proven beyond any doubt that it has become the centre for international terrorism and the main backer of terrorists ensconced in Somalia. It has continued to give them sanctuary and to try to reorganise them after their debacle. The fact that it deployed and coordinated its own spies and its Ethiopian agents to carry out a terrorist act in Addis Ababa has been exposed and that the terrorists assigned by the Eritrean Government were apprehended flagrante delicto is another clear testimony to the fact that the Eritrean Government is not only a sponsor of international terrorism, but an active participant in terror. The Eritrean Government was the one which coordinated and led the recent criminal abduction of Ethiopians and foreigners in the Afar region.  By doing so and by giving shelter to the abductors, it has shown itself to be a terrorist government engaged in the abduction of peaceful civilians.


The terrorist activities conducted and coordinated by the Government of Eritrea, though primarily aimed at Ethiopia, also concerns the international community and particularly the United Nations Security Council. The International Community, which has expressed its commitment to conduct an all out war against terrorism can not be indifferent when a Government of a member State of the United Nations is found engaged in carrying out continuous acts of terrorism.


At a time when we are focused on our economic and social development endeavours and achieving tremendous results, we should be able to make every effort to withstand the provocations of the Eritrean Government, which is desperate and unable to pull itself out of the economic and social crisis it is mired in. In order to effectively address this challenge our response should not be emotional and instinctive, but as it has been the case in the past, it should be based on objective analysis and study. Therefore, we have to devise the right response based on the correct understanding of the root causes of the problem.


Some people say that the source of the problem is Ethiopia's failure to accept the decision of the Boundary Commission. The Eritrean Government is continuously trying to promote this position. It is to be recalled that, Ethiopia did present to the United Nations Security Council and to the Boundary Commission its objections as well as its request for correction of the errors committed by the Boundary Commission on the basis of concrete evidence. However, upon the refusal of the Boundary Commission to consider Ethiopia's objection, the Government of Ethiopia decided to declare unequivocally that it will accept the decision regardless of the errors. When the Government of Ethiopia presented the Five-Point Peace Plan [Nov 2004], it made it clear that it would accept the decision of the Boundary Commission, and also came up with a proposal to implement the decision in accordance with international practice and in a way that would ensure sustainable peace in the region. Accordingly, we proposed that the decision should be implemented through dialogue, in line with the experience of Cameroon and Nigeria, to ensure durable peace and to start negotiations that will lead to good neighbourly relations and sustainable peace between the two countries. We have presented detailed implementation proposals with a view to resolving the boundary dispute in accordance with the decision of the Boundary Commission and in a manner that will ensure lasting peace. Therefore, the boundary dispute could not be the basis for any problem and tension between the two countries. The assertion that Ethiopia has not accepted the decision of the Boundary Commission is wrong and without foundation. I would like to take this opportunity to reiterate and underline once again that the Ethiopian Government has accepted the decision of the Boundary Commission and has presented detailed proposal for its implementation.


The reason for the Government of Eritrea to intensify its campaign of destabilisation of Ethiopia is not because Ethiopia has not accepted the decision of the Boundary Commission, nor because it has not presented proposals for implementation of the decision. It is rather the Eritrean Government is not interested to live in peace with an Ethiopia which is achieving fast economic growth and strengthening itself in the process. The Eritrean Government knows very well that when it comes to the independence and sovereignty of Eritrea, no government in Ethiopia could adopt a more favourable position than the current government. At the same time, the Eritrean Government knows full well that, although committed to the unequivocal recognition of Eritrean independence, the current Government of Ethiopia would not countenance the predatory agenda of the Eritrean Government and it would not allow such an agenda to be realised. Therefore, the Eritrean Government appears to be convinced that in order to be able to implement its parasitic agenda, it has either to dismantle Ethiopia or seriously weaken it. This is what it trying to achieve at present. Obviously, the Government of Eritrea does not have the capacity to carry out a direct invasion of Ethiopia to realise its destructive agenda. The reason why it is now organising Ethiopian anti-peace elements is to achieve its objective. Its deployment of extremist forces in Somalia was designed to achieve this same objective through the same strategy. 


The Eritrean Government has demonstrated through its actions that it will use any force to implement its destructive designs against Ethiopia. Accordingly, while on the one hand it has employed the extremists in Somalia and international terrorists for its destabilisation of Ethiopia, on the other hand, it has also been intimately working with the destructive remnants of the Derg regime that in fact do not accept Eritrea's independence. Thus, the Eritrean Government is determined to coordinate and lead these forces of destruction. As such, it has organised and brought together in one front, forces with diametrically opposed objectives - one of which opposed to the right peoples to self-determination peoples while the other committed to be working for secession of different nationalities. As the objective of the Eritrean Government is the weakening and disintegration of Ethiopia, it has gone to the extent of spearheading the efforts of its cohorts that have contradictory objectives. The interest of Eritrea does not lie in advancing the objectives of these instruments of destruction.  Its objective is one and only one - to cause chaos and mayhem in Ethiopia.    


The fact that the main objective and strategy of the Eritrean Government is to destabilise Ethiopia, operating through its instruments of destruction is not only a well established fact but it is also repeatedly and publicly confirmed by its own high officials. Our response aimed at neutralising the conspiracy designed by the Eritrean Government has to be based on the full understanding of Eritrea's strategy and objectives.


The basic objective of the Eritrean Government is to weaken and facilitate the disintegration of Ethiopia.  Given this situation, what we should be able to create conditions that would help us remove this destructive design from its root by strengthening the rapid economic development we have started and by further strengthening the fraternal ties among our people. As the Eritrean Government is implementing its destructive objective through the anti-peace Ethiopian forces, we should intensify the coordination of the efforts of the law enforcement agencies and our people in order to control and eliminate these elements.


We must always be prepared and keep strengthening our defence capacity to deter the Eritrean Government from attempting a suicidal invasion as it realises the futility of its destructive agenda. This has been the position we have adopted up to now and we shall continue in this path as it has proved its effectiveness so far. The Eritrean Government has desperately failed to extricate itself from the general economic, political and social crisis it finds itself in. It should not make us react emotionally and distract us from our correct path. Its provocations should not push us into following it into a quagmire it is mired in.  Nor should we allow ourselves to be drawn closer to that kind of situation. Therefore, I would like to assure this Honourable House that the Government as usual will endeavour to address and resolve this matter based on this fundamental assumption and in accordance with our plan and what is dictated by the national interest and security of our country.  


I thank you.


March 2007