IMF Executive Board Concludes 2016 Article IV Consultation with the Federal Democratic Republic of Ethiopia
October 4, 2016
On September 26, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Ethiopia.
Ethiopia’s macroeconomic outturn during the past year 2015/16 has been adversely affected by a severe drought and the weak global environment. As a result, output growth is estimated to have slowed down in 2015/16 to 6.5 percent. The slowdown was mitigated by effective and timely policy responses to the drought, and buoyant industrial and services sectors. Stability-oriented macroeconomic policies, including drought-related food imports, curbed inflationary pressures, with overall inflation receding to 6 percent in July 2016. A supplementary budget helped address the social costs of the drought, while keeping the general government deficit at 3 percent of GDP. However, the external current account deficit, estimated at 10.7 percent of GDP, remained wide. Export revenue stagnated due to weak international commodity prices, despite increases in export volumes and diversification to new export markets. Savings on fuel imports were more than offset by increased drought-related food imports and other imports. Remittances and FDI posted strong growth, helping to limit the deterioration of the external position. The foreign reserve buffer is less than 2 months of import coverage. The 2015/16 foreign borrowing requirement of the non-financial public sector is estimated at 5 percent of GDP, a significant reduction compared to the recent past. Public and publicly-guaranteed debt is estimated to have been 54.2 percent of GDP in June 2016, of which 30.2 percent of GDP corresponds to external debt.
Over the medium-term, growth is projected to recover to within the 7.3-7.5 percent range, reflecting the growth-oriented reforms envisaged in the recently adopted second Growth and Transformation Plan (GTP II). Public investment is projected to moderate, while private investment is projected to increase gradually, aided by better access to credit and anticipated improvements in competitiveness. Inflation is projected to remain at around 8 percent, consistent with the authorities’ price stability objective, supported by supply expansion and the monetary policy stance. The general government deficit is envisaged to hover at around 3 percent of GDP, with expenditure policies focused on capital and poverty-reducing programs. Export revenue is forecast to expand throughout the medium-term, underpinned by more stable commodity prices, competitiveness gains on account of key ongoing projects in logistic infrastructure, and greenfield FDI. Import growth is projected to remain robust and the current account deficit is projected to remain high, declining gradually over time.
Executive Board Assessment [2]
Executive Directors noted Ethiopia’s track record of sustained rapid growth and poverty reduction. Directors commended the authorities for effective policy responses to the recent severe drought, aimed at mitigating social costs and limiting spillover effects. They concurred that, while the medium‑term outlook is generally positive, downside risks remain arising from a large external imbalance and public sector savings‑investment gap, and inadequate reserve buffers. Accordingly, they encouraged a macroeconomic policy mix to reduce the existing imbalances and their attendant risks. Directors welcomed the authorities’ priorities for structural reforms as outlined in the second Growth and Transformation Plan, with a focus on economic and social development, as well as on private sector development.
Directors noted that, while external debt sustainability risks remain moderate, external vulnerabilities had worsened, as the external deficit and the recent pace of increase in external indebtedness were not sustainable over the medium term. They called for stepped‑up efforts to reduce the external imbalance, and considered that the authorities’ objective of increasing and diversifying exports is an appropriate response that would yield the highest growth dividend over the medium term. However, while export‑oriented policies bear fruit, there is a need to contain imports and prioritize import‑intensive investment projects to substantially reduce the current account deficit in the short term. Directors stressed that a tighter fiscal stance, while protecting the vulnerable, and a more flexible exchange rate would facilitate reducing external vulnerabilities and the necessary buildup of foreign reserves. They also welcomed the authorities’ intention to refrain from new non‑concessional borrowing.
Directors supported the authorities' goal to strengthen mobilization of domestic revenues to finance the development strategy and reduce the savings‑investment imbalance. Fiscal revenues could be increased by introducing property taxes, reducing exemptions, and administration reforms to enhance taxpayer coverage and compliance. Directors also welcomed the remit of the new Ministry for Public Enterprises to strengthen the commercial profitability and governance of the key state‑owned enterprises, while advancing in the privatization of those with a less strategic role. Fostering public sector oversight and transparency would enhance macroeconomic management and reduce fiscal risks.
Directors supported the authorities' efforts toward financial development and inclusion as essential to bolster domestic savings. They stressed the importance of adequate supervisory vigilance and strict provisioning of NPLs given the ongoing significant growth in financial intermediation. Directors welcomed plans to develop a broader range of indirect monetary policy instruments and an active inter‑bank market. They encouraged the authorities to replace the current funding mechanism of the national development bank with a less distortive system.
Directors welcomed the authorities’ structural reform agenda. They underscored the importance of strengthening competitiveness, creating an enabling environment for private sector development and foreign direct investment, and enhancing public sector governance.
Directors emphasized the importance of accurate, timely, and comprehensive data for the assessment of macroeconomic developments and effective policy responses. They urged the authorities to strengthen efforts to address data weaknesses, gaps, and delays, particularly on national accounts and public sector financial reporting, as well as to increase financial sector information.
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Ethiopia: Selected Economic and Financial Indicators, 2013/14–2015/16 |
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[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.
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