The FINANCIAL– On January 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Federal Democratic Republic of Ethiopia.
Ethiopia has recorded annual average GDP growth of about ten percent in the last decade, driven by public investments in agriculture and infrastructure. The poverty rate has fallen from 44 percent in 2000 to 23.5 percent in 2015/16. In 2016/17 GDP growth is estimated at 9 percent, as agriculture rebounded from severe drought conditions in 2015/16. Industrial activity expanded, with continued investments in infrastructure and manufacturing. The current account deficit declined in 2016/17 to 8.2 percent of GDP from 9.1 percent the previous year, reflecting lower drought-related imports and lower public sector capital goods imports. However, export revenues were largely unchanged despite significant volume growth, as global agricultural commodity prices remained low. Foreign direct investment (FDI) growth, was 27.6 percent due to investments in the new industrial parks and privatization inflows. International reserves at end-2016/17 stood at US$3.2 billion (1.8 months of prospective imports cover).
In October 2017, the National Bank of Ethiopia (NBE) devalued the birr by 15 percent relative to the U.S. dollar, thereby reducing overvaluation and enhancing competitiveness. Simultaneously, the NBE increased interest rates and adopted a restrictive stance to minimize adverse effects on inflation—which was 13.6 percent in November 2017. Since October 2016, the Ministry of Finance and Economic Cooperation (MOFEC) implemented further cuts in external borrowing by the government and public enterprises (SOEs), and reduced outstanding non-concessional commercial debt. The general government deficit outturn in 2016/17 was 3.4 percent of GDP (including privatization) and the 2017/18 budget speech announced additional consolidation policies, with the budget deficit projected at 2.5 percent of GDP, according to IMF.
Growth is expected to stay high in 2017/18, at 8.5 percent, supported by continued recovery from droughts and export expansion as new manufacturing facilities and infrastructure come online—offsetting the potentially dampening impact of restrictive macroeconomic policies. Over the medium term, growth is expected to remain around 8 percent, supported by sustained expansion in exports and investment. The authorities’ policies envisaged under the second Growth and Transformation Plan (GTP II) are expected to underpin domestic private sector development and FDI. The GTP II also envisages allocating significant resources to poverty alleviation and the social safety net, while efforts to strengthen financial inclusion are underway.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They commended Ethiopia’s impressive record of human development improvements and output growth over the last decade, and the effective policy response to the recent drought. They noted that the preconditions for an export expansion and transition to private sector-led growth—including investments in trade-enhancing infrastructure—are in place, and private direct investment is growing strongly. However, they underlined that external imbalances and inadequate reserve buffers remain a key risk, and urged the authorities to maintain determined policy actions to control external borrowing.
Directors stressed the need to continue determined implementation of policies to reduce external imbalances. They commended the restrictive public sector borrowing policy to contain external debt and imports while protecting pro-poor spending, the devaluation of the currency to regain competitiveness, and the tight monetary policy to rein in inflation. They agreed that these policies should address most of the birr’s prior overvaluation, while ongoing reforms to strengthen the business environment will help preserve competitiveness gains. Directors welcomed the authorities’ readiness to tighten policies further if inflationary pressures do not abate in coming months. They noted that a more flexible exchange rate would help preserve competitiveness and foster export diversification, and recommended eliminating exchange restrictions.
Directors supported the authorities’ goal to strengthen domestic revenue mobilization and urged them to accelerate ongoing tax administration reforms. They welcomed plans to improve the management and oversight of public enterprises, including undertaking audits for some large state-owned enterprises (SOEs). Public-private partnerships (PPPs), long-term concessions, and privatization of SOEs could offer opportunities to fund critical infrastructure. Directors welcomed the progress in strengthening the legal framework for PPPs and urged the authorities to ensure that their use strikes the appropriate balance between boosting private sector participation and minimizing fiscal risks. Continued efforts to improve the business climate, promote financial inclusion, and improve governance will also be important.
Directors welcomed plans to develop a broader range of indirect monetary policy instruments and promote an active inter-bank market, which would deepen financial markets and improve savings allocation. They encouraged the authorities to continue to monitor the NPLs of the national development bank and to shift its current funding mechanism to a less distortive system. Directors also urged implementation of the action plan to further strengthen the AML/CFT framework.
Directors welcomed ongoing efforts to strengthen the compilation and dissemination of economic statistics. They urged the authorities to adopt international standards for budgetary, monetary, and financial statistics and decisively address remaining data weaknesses in national accounts and public sector financial reporting.