maintains a managed, floating exchange rate system, although in the absence of effective competition in the interbank foreign exchange market. The central bank being the major supplier of foreign exchange, exchange rate movements have been highly compromised. The currency, the Birr, is not convertible. Government carefully monitors and controls its movement and, as a result, it trades in a very narrow range. After depreciating 4.0 percent against the dollar in 2006, the Birr exchange rate dropped by 2.3 percent in 2007 and retreated an additional 1.3 percent in the year-to-date period ending March 5. The Birr is widely considered to be overvalued particularly given Ethiopia’s high inflation rate which was 18.4 percent in the year ending December 2007. This was slightly higher than the 17.2 percent rise in the year ending December 2006. Greater exchange rate flexibility is needed to better reflect demand for, and supply of, foreign exchange. 297 As the country considers it necessary to enhance foreign exchange inflows from its large Diaspora community, the CRM noted that the NBE, through Directive No. FXD/30/2006, introduced measures to encourage and facilitate these inflows. Available statistics indicate that these measures are achieving desired objectives; inflows of remittances increased over time; from US$ 53 million in 2000 to a high of USD$ 359 million in 2007. Interest Rates 298 The CRM learnt that, with the exception of the minimum savings deposit rate (MSDR) used by the NBE as a monetary policy instrument, all interest rates are now market-determined. The MSDR is currently set at 4.0 percent. There is, however, some concern that the government controls interest rates and sets them below the high inflation rate. Commercial banks are not given any interest rate spread limit, resulting in lending rates varying from bank to bank, with an average rate of 11.0 percent in recent times. Fiscal deficits 299 With continuing efforts at achieving fiscal sustainability, GoE’s fiscal policy has been targeted at reducing the fiscal deficit as a percentage of GDP, while at the same time focusing on expanding socio-economic service delivery and investing in critical infrastructure. To this end, several measures, including rationalising public expenditure, adjusting public sector salaries, limiting the number of zerotariff related items and import exemptions, and broadening the tax base, have led to gradual declines in the overall deficit as a percentage of GDP. Excluding grants, the overall fiscal deficit decreased from 16.4 percent in 2002/03 to about 13.0 percent in 2003/04; this declined further to 8.6 percent of GDP in 2007/08. The overall fiscal deficit, including grants, fell to 3.1 percent of GDP in 2007/08,