Key Questions on Ethiopia
Last Updated: July 29, 2024
On July 29, 2024, the IMF Executive Board approved an SDR 2.556 billion (about US$3.4 billion) ECF arrangement for Ethiopia. This decision will enable an immediate disbursement equivalent to SDR 766.75 million (about US$1 billion).
Read the key questions regarding the IMF arrangement with Ethiopia.
- What are the objectives of the IMF-backed economic program?
- What will the program do to help ordinary Ethiopians?
- One of the program key objectives is to correct external imbalances by moving to a market clearing exchange rate. How will it benefit Ethiopia and affect vulnerable households?
- How will Ethiopia strengthen its fiscal sustainability? How will this impact the poor?
- What is the program doing to address high inflation?
- How is the program advancing the governance and anti-corruption agenda?
What are the objectives of the IMF-backed economic program?
The program supports the authorities’ Homegrown Economic Reform Agenda, a comprehensive policy package to stimulate private sector activity and increase economic openness to promote higher and more inclusive growth.
Other development partners—notably the World Bank—are also providing substantial external financing, and the program provides a framework for the successful completion of the ongoing debt restructuring.
What will the program do to help ordinary Ethiopians?
The program supports the authorities' policies to promote a robust, inclusive, and sustainable economy, through removing distortions that hold back investment and growth, and sustainable financing conditions for public spending priorities for example in health and education.
Strengthening social safety nets to mitigate the impact of reforms on vulnerable households is a critical component of the authorities’ reform program.
One of the program key objectives is to correct external imbalances by moving to a market clearing exchange rate. How will it benefit Ethiopia and affect vulnerable households?
Moving to a market-determined exchange rate will alleviate acute FX (foreign exchange) shortages as exporters, investors, and ordinary people sending money to their friends and families in Ethiopia, will know they can get a fair exchange for their dollars. It removes exchange rate overvaluation, the key relative price distortion holding back investment and development in Ethiopia and causing protracted balance of payment (BOP) vulnerabilities.
Adjusting the exchange rate will lead to some imported commodities becoming more expensive. To mitigate the impact of this effect, particularly on vulnerable people, a spending package of about 1½ percent of GDP in the first year of the Fund-supported program will pay for increases in the coverage and benefit amount of targeted pro-poor programs, and for temporary subsidies for key imported goods, such as fuel and fertilizers, affected by the FX reform. Increases in spending on targeted programs for vulnerable households will be permanent.
How will Ethiopia strengthen its fiscal sustainability? How will this impact the poor?
To sustainably meet their public spending goals, notably increasing pro-poor spending, the authorities' plan to raise tax revenues over time, to levels that are closer to the averages in other African countries.
The program supports strengthening fiscal sustainability through an introduction of an excise stamp and modernized VAT regimes, and there will be some tax revenue gains from exchange rate reforms.
Higher revenues will increase space for pro-poor, social, and capital expenditure.
What is the program doing to address high inflation?
The authorities have already taken important steps to reduce inflation before the program, which has been declining in recent months. These have included reducing the inflationary practice of financing the government deficit through monetary expansion—“direct advances”—from the National Bank, imposing caps on credit growth and restrained fiscal spending.
The program supports the authorities' modernization of the monetary policy framework, with the introduction of an interest-rate based framework focused on price stability. A new monetary policy interest rate—the National Bank rate—and the first monetary operations were introduced on July 11. 2024. In addition, the authorities will eliminate direct advances completely.
Exchange rate reform will lead to a one-off increase in prices for some imported commodities. The National Bank of Ethiopia (NBE) may have to take further policy action by raising interest rates to ensure inflation quickly returns to a downward path.
How is the program advancing the governance and anti-corruption agenda?
The authorities are taking steps to strengthen the institutional framework. Key steps supported by the program include:
- Improving fiscal transparency by bringing onto the budget quasi-fiscal—that is, implicit taxes and spending that happened through exchange rate and interest rate distortions—for example through explicit subsidies on fuel and fertilizers.
- Improving fiscal transparency through publishing regular Ministry of Finance reports: (i) monthly covering budget revenue, expense, and financing execution and (ii) comprehensive mid-year review analyzing performance and policy.
- Digitalization of the public sector financial management systems will allow for better tracking and control of spending, and better date collection.
- Continuing to strengthen the governance and transparency of state-owned enterprises (SOEs) through a new public enterprise law and regulations, stronger oversight institutions, and requirements to publish IFRS (International Financial Reporting Standards) audited accounts for key SOEs.
- Strengthening the National Bank of Ethiopia’s legal framework and independence, to ensure it can meet its mandate to lower inflation and ensure financial stability.