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IMF Executive Board Concludes 2019 Article IV Consultation with The Federal Democratic Republic of Ethiopia

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with The Federal Democratic Republic of Ethiopia







January 28, 2020















On December 20, 2019, the Executive Board of
the International Monetary Fund (IMF) concluded the Article IV
Consultation

[1]

with The Federal Democratic Republic of Ethiopia.
At the same time, the Board approved three-year arrangements under the
Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for
Ethiopia; a press release on this was issued separately.

Ethiopia has sustained high economic growth over the last decade.
Substantial progress on reducing poverty and improving social
indicators has also been noteworthy. In 2018/19, real gross domestic
product (GDP) is estimated to have grown by 9 percent, driven by
manufacturing and services. However, performance of goods exports
remained weak and foreign exchange shortages persist. Policies
appropriately targeted at containing public investment and debt
contributed to a further narrowing of the current account deficit to
4.5 percent of GDP and a reduction in public and publicly-guaranteed
debt to 57 percent of GDP. Inflation remained elevated in double
digits, largely due to higher food prices, though non-food inflation
has also been trending upward. While revenues came in below target,
cuts in expenditure contained the fiscal deficit to 2.5 percent of GDP,
below budget.

The authorities have announced a Homegrown Economic Reform Plan,
consisting of a mix of macroeconomic, structural and sectoral policies,
to address vulnerabilities and tackle structural bottlenecks inhibiting
private sector activity. The macroeconomic policy measures envisaged
under the Plan to address external imbalances, debt vulnerabilities,
and inflation are expected to contribute to a slower growth in real GDP
of 6.2 percent in 2019/20. Public expenditure restraint and tighter
monetary policy are expected to contribute to a gradual reduction in
inflation. Reserves are expected to improve to around US$4 billion by
end 2019/20, sufficient to cover 2 months of prospective imports, due
to higher external financing flows, including from the Fund.

Over the medium term, macroeconomic and structural reforms announced by
the authorities are expected to lead to a reduction in public debt,
lower external vulnerabilities, and stronger growth, investment and
exports. This outlook is subject to downside risks, in particular from
domestic opposition to reforms ahead of the upcoming elections, rising
protectionism worldwide, weaker-than-expected global growth, and
climate-related shocks.

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Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
noted that Ethiopia’s growth model, driven by public investment, had
supported rapid growth and remarkably improved living standards over
the past decade. At the same time, it has led to a build-up of debt and
external vulnerabilities. Directors highlighted the urgency of
fundamental reforms to correct macroeconomic imbalances, ease
structural bottlenecks, and lay the foundation for sustainable,
inclusive growth led by the private sector.

To this end, Directors welcomed the ambitious Homegrown Economic Reform
Plan, which is appropriately built around macroeconomic, structural,
and sectoral reforms. They considered that the plan, together with the
authorities’ strong ownership and commitment, deserves Fund support,
which would help catalyze private investment and donor financing.
Noting high implementation risks amid external vulnerabilities and
political uncertainty, Directors underscored that steadfast
determination, strong communication, and social protection would be key
to obtain a broad-based public buy in. They also urged the authorities
to seek additional debt reprofiling from external creditors to improve
debt dynamics.

Directors supported a comprehensive approach to addressing the exchange
rate overvaluation and foreign exchange shortages. They agreed with the
priority placed on increasing exchange rate flexibility, reducing
inflation, strengthening competitiveness, and rebuilding international
reserves. They recommended a reform roadmap to transition to a market
clearing exchange rate regime. Directors also supported monetary
tightening, complemented by spending restraint by state owned
enterprises (SOEs) and the phasing out of central bank financing of the
government and the Development Bank of Ethiopia (DBE). Continued
efforts are needed to modernize the monetary policy framework and
further develop financial markets to deepen inclusion.

Directors stressed the need to reform SOEs to reduce public debt
vulnerabilities and improve governance and transparency. In this
context, it would be important to reduce SOEs’ borrowing, strengthen
their financial positions, and prioritize investment activities.
Immediate priorities also include an asset quality review of the
Commercial Bank of Ethiopia, and a strategy to address the DBE’s
non-performing loans and develop a sustainable financing model.

Directors agreed that reforms are urgently needed to reverse the recent
decline in domestic revenue mobilization and to meet Ethiopia’s social
and infrastructure needs. They welcomed the planned extension of the
value added tax coverage. Directors also emphasized the need to protect
high quality social assistance programs, rationalize subsidies, and
improve expenditure efficiency more broadly.

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Directors called on the authorities to build on progress made in
improving the AML/CFT framework, and further strengthen data quality.

It is expected that the next Article IV consultation with the Federal
Democratic Republic of Ethiopia will be held in accordance with the
Executive Board decision on consultation cycles for members with Fund
arrangements.




The Federal Democratic Republic of Ethiopia:
Selected Economic Indicators

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

2023/24

Actual

Prel.

Program

IMF Staff Projections


(Annual percentage change, unless otherwise
indicated)

National income and prices

GDP at constant prices (at factor cost)

7.7

9.0

6.2

6.1

7.0

7.5

8.0

GDP deflator

12.4

13.2

19.4

12.3

8.8

8.1

8.1

Consumer prices (period average)

14.5

12.6

19.4

11.1

8.1

8.0

8.0

Consumer prices (end period)

16.8

15.3

18.1

9.4

8.0

8.0

8.0

External Sector

Exports of goods and services (U.S. dollars, f.o.b.)

13.1

7.9

12.8

12.7

14.0

12.4

9.7

Imports of goods and services (U.S. dollars, c.i.f.)

0.2

4.1

11.3

9.4

8.5

6.6

5.1

Terms of trade (goods, deterioration –)

-9.6

-1.9

4.1

5.6

3.2

1.5

1.4

Nominal effective exchange rate (end of period)

-16.3

-1.8

Real effective exchange rate (end of period)

-5.1

6.4

Money and Credit

Change in net foreign assets

3.5

-63.2

83.9

222.1

95.2

71.7

42.5

Change in net domestic assets (including other items,
net)

31.0

24.4

16.9

13.9

14.4

15.2

18.1

Broad money

29.2

19.7

18.0

19.2

19.9

21.6

22.0

Base money

19.1

15.3

12.5

13.0

13.0

13.5

13.5

Velocity (GDP/broad money)

2.97

3.04

3.24

3.28

3.23

3.10

2.97

(Percent of GDP, unless otherwise indicated)

Financial balances1

Gross domestic savings

24.1

22.3

25.2

25.0

26.7

29.5

31.8

Public savings

2.1

1.7

2.6

3.6

4.7

4.9

5.0

Private savings

22.0

20.6

22.6

21.4

22.0

24.6

26.8

Gross domestic investment

34.2

35.2

34.3

36.3

38.1

38.6

40.8

Public investment

12.6

11.0

10.0

10.3

10.3

9.4

9.7

Private investment

21.6

24.2

24.3

26.0

27.8

29.2

31.1

Resource gap

-10.1

-12.9

-9.1

-11.4

-11.4

-9.1

-9.0

External current account balance, including official
transfers

-6.2

-4.5

-5.5

-4.6

-4.6

-4.0

-3.4

Government finances

Revenue

12.3

11.5

11.7

13.0

14.2

14.5

14.7

Tax revenue

10.7

10.0

10.1

11.5

12.7

13.0

13.3

Nontax revenue

1.6

1.6

1.5

1.5

1.5

1.5

1.5

External grants

0.8

1.2

0.9

0.8

0.6

0.7

0.7

Expenditure and net lending

16.1

15.3

15.0

16.0

16.8

17.1

17.4

Fiscal balance, excluding grants (cash basis)

-3.8

-3.8

-3.4

-3.0

-2.6

-2.6

-2.6

Fiscal balance, including grants (cash basis)

-3.0

-2.5

-2.5

-2.2

-1.9

-1.9

-1.9

Total financing (including residuals)

3.0

2.5

2.5

2.2

1.9

1.9

1.9

External financing

1.3

1.3

1.2

1.0

1.7

1.5

0.7

Domestic financing (including privatization)

2.7

1.3

1.3

1.2

0.3

0.4

1.2

Public debt 2

59.5

56.8

53.4

52.7

52.0

47.5

43.3

Domestic debt

29.2

28.6

25.4

22.6

19.1

16.6

15.5

External debt (including to the IMF)

30.4

28.2

28.0

30.1

32.8

30.9

27.9

Overall balance of payments (in millions of U.S.
dollars)

-202

58

-346

22

-547

184

1,692

Gross official reserves (in millions of U.S. dollars)

2,848

3,415

4,031

5,661

7,441

9,551

11,232

(months of imports of goods and nonfactor services of
the following year)

1.7

1.8

2.0

2.6

3.2

3.9

4.3

GDP at current market prices (billions of birr)

2,200

2,696

3,391

4,094

4,828

5,630

6,594

Sources: Ethiopian authorities and IMF staff estimates
and projections.

1
Based on data from Central Statistical Agency (CSA),
except for the current account balance, which is based
on BOP data from National Bank of Ethiopia (NBE).

2
Public and publicly-guaranteed debt, including the
National Bank of Ethiopia and Ethio Telecom.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Meera Louis

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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