target of US$ 622.3 million. Third, the currency is overvalued, thus hindering the competitiveness of manufactured exports. Fourth, Ethiopia remains heavily dependent on foreign assistance as a source of budgetary revenue and to cover its large trade deficit. As a result, any sharp decline in foreign assistance could place a significant drag on the economy. Fifth, Ethiopia is prone to periodic droughts that have devastating economic impacts. Finally, as is the case with many African nations, Ethiopia will not be immune from the global economic slowdown nor can it shield itself from the impact of high oil and food prices. Inflation 294 Efforts at combating run-away inflation over the last couple of years seem to be paying off, in recent months. After a difficult three-year period during which the rate of inflation accelerated rapidly – peaking at 55.5 percent in the 12-month period to July 2008 – the rate began to decelerate considerably in the first half of 2009. Most recent price increases have been due to exogenous shocks: increases in the price of oil on the global market; a rapid increase in staple food prices (some of which have become export commodities) due to demand pressure brought about by the continued good economic performance; and, housing shortages in urban areas. The introduction of some drastic measures, such as a cap on government borrowings, a rise in bank reserves following a National Bank of Ethiopia (central bank) directive, importation of some food items that are being distributed to the people at reduced prices, and a ban on the export of some essential commodities, have played a key role in the steady decline in the inflation rate, expected to descend into single digits towards the end of 2009. Recent data indicate that inflation dropped sharply to 3 percent in the 12 months to June 2009, aided by falling food price levels. 295 IMF projections indicate that, following the dramatic movements in price indices over the past two years, single-digit inflation may be achievable over the current (fiscal) year, although high food price volatility and stubborn non-food price inflation (15 percent as of June 2009) are significant risk factors. The links between CPI movements and macroeconomic aggregates have not been stable (IMF Country Report No. 08/264, 31 July 2008), so further volatility cannot be ruled out - although the build-up of grain reserves should help to limit speculative price surges. Exchange rates 296 24 The Central Bank has a monopoly on all foreign exchange transactions and supervises all foreign exchange payments and remittances24. The country The duties of the National Bank of Ethiopia include, among others, formulating, implementing and monitoring the country’s exchange rate policy as well as supervising and regulating bank operations, and setting limits on gold and foreign exchange assets, net foreign exchange positions and terms. Source: National Bank of Ethiopia data, available on http://www.nbe.gov.et/aboutus/mandates.htm. - 129 -