Press Release No. 19/486

IMF Executive Board Approves US$2.9 Billion ECF and EFF Arrangements for Ethiopia

December 20, 2019

• IMF Board approves SDR 2.1049 billion (about US$2.9 billion) ECF and EFF arrangements for Ethiopia.
• The three-year financing package will support the implementation of the authorities’ Homegrown Economic Reform Program.
• The Fund-supported program aims to help authorities reduce external imbalances, contain debt vulnerabilities, lift financial repression, increase domestic resource mobilization which will also help devote adequate resources to pro-poor spending.

On December 20, 2019, the Executive Board of the International Monetary Fund (IMF) approved three-year arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Ethiopia in an amount equivalent to SDR 2.1049 Billion (around 700 percent of quota or about US$2.9 billion) to help the country implement their `Homegrown Economic Reform Plan’ to maintain macroeconomic stability and improve living standards.

The program aims to support the authorities’ implementation of their ambitious reform agenda and catalyze concessional donor financing. The Executive Board’s decision will enable an immediate disbursement equivalent to SDR 223.85 million (about US$308.4 million). The Executive Board today also concluded the 2019 Article IV consultation with Ethiopia. A press release will be issued separately.

At the conclusion of the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, stated:

"A decade of rapid growth, underpinned by strong policies, has supported a reduction in poverty and improved living standards in Ethiopia. However, the public investment-driven growth model has reached its limits. The authorities have prepared a Homegrown Economic Reform Plan to address macroeconomic imbalances, reduce external and debt vulnerabilities, phase out financial repression, and lay the foundation for private sector-led growth.

“A financial arrangement with the Fund will support the authorities’ plan, helping to catalyze concessional financing from other development partners. The program aims to address foreign exchange shortages and external imbalances; reform state-owned enterprises (SOEs); safeguard financial stability; and strengthen domestic revenue mobilization.

“Monetary tightening and reforms will help rein in inflation, facilitate credit to the private sector, and strengthen competitiveness. Greater exchange rate flexibility, supported by tighter monetary policy, will durably address foreign exchange shortages and narrow the spread between the official and parallel market rates. Further efforts are needed to modernize the monetary policy framework and deepen financial inclusion.

“Fiscal consolidation and reforms aim to reduce debt vulnerabilities, increase revenue, and strengthen expenditure efficiency while protecting social and development spending. Improving the financial positions of SOEs and strengthening their governance and oversight will also be critical to ensuring debt and financial stability.

“With strong ownership and full implementation of reforms, the authorities’ economic plan should eventually improve macroeconomic outcomes and lower external vulnerabilities. High priority is placed on removing constraints to private investment and improving the business climate, setting the stage for an acceleration in private sector-led growth."

Annex

Recent Economic Developments

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, the performance of goods exports remained weak and foreign exchange shortages persisted. 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 (from 59.5 percent). 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.

Program Summary

The public investment-driven model of the past two decades has delivered impressive economic and social outcomes but has resulted in growing vulnerabilities. To tackle these vulnerabilities, the authorities have recently unveiled an ambitious Homegrown Economic Reform Plan, (HERP), for which they are seeking Fund financial support. The new Fund-supported program is well-aligned with the HERP and designed to address macroeconomic imbalances and implement structural reforms to upgrade policy frameworks and facilitate the shift from public sector to private sector-led growth.

The program will:

• Address the foreign exchange shortage and the transition to a more flexible exchange rate regime. A further rationalization of import-heavy public investment projects, combined with reforms to boost FDI and exports, will address external sector vulnerabilities. Greater exchange rate flexibility over time will eliminate the gap between the official and parallel market and boost competitiveness.

• Strengthen oversight and management of state-owned enterprises (SOE) to contain debt vulnerabilities. Maintaining strict control of SOE borrowing will contribute to continued reduction of debt vulnerabilities. Publication of a consolidated financial performance for SOEs based on financial statements will increase transparency and accountability.

• Boost domestic revenue mobilization and increase expenditure efficiency to create space for reducing poverty and infrastructure spending. Revenue reforms on both the policy and administration front are designed to increase the tax to GDP ratio. These reforms, combined with efforts to strengthen public financial management, including increasing the efficiency of public investment, will ensure that infrastructure and social spending needs are met without undermining debt sustainability.

• Reform the financial sector to support private investment and modernize the monetary policy framework. Reducing financial repression and developing the financial sector will increase private sector access to credit. A phasing out of central bank direct financing of the budget and development of short-term market-based instruments are essential to create a monetary policy framework that is well-equipped to consistently achieve inflation objectives.

• Reinforce the supervisory framework and financial safety nets. Progress towards strengthening regulatory and supervisory standards will contribute to continued financial stability. Approval and implementation of regulations for deposit insurance will be an important step to bolster financial safety nets.