Press Release No. 20/284

IMF Reaches a Staff-Level Agreement for the First Review of the Extended Credit Facility-Extended Fund Facility for Ethiopia

August 21, 2020

• The COVID-19 pandemic has created large health and social needs and had a significant negative impact on economic activity.
• Program performance under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) had gotten off to a good start, but the economic impact of, and policy response to, the pandemic has required a reprioritization of the near-term macroeconomic objectives.
• The IMF mission reached a staff-level agreement on measures needed to address the immediate impact of the crisis, thereby setting the stage for a strong and durable recovery, and formulating a path to achieving the authorities’ objectives under their Homegrown Economic Plan as supported by the program.
• Financial support from Ethiopia’s international partners, including through debt reprofiling, will be critical to addressing the economic and social impact of the pandemic and to support ongoing reform efforts.

Washington, DC: A staff team from the International Monetary Fund (IMF), led by Sonali Jain-Chandra, held discussions with the Ethiopian authorities during a virtual mission during June 5–9, June 15–19, and July 27–31, for the first review of Ethiopia’s economic program supported by the IMF’s ECF-EFF arrangements. ^[1]

At the conclusion of the mission, Ms. Jain-Chandra issued the following statement:

“The Ethiopian authorities and IMF team have reached a staff-level agreement on policy measures for the completion of the first review under the ECF-EFF arrangements.

“The COVID-19 pandemic has had a significant adverse impact on Ethiopia and created serious health and economic challenges. Economic growth is estimated to have slowed considerably in 2019/20, and projected to be subdued in 2020/21, with a gradual recovery expected to begin in late 2020. The main economic impact of the pandemic is expected to fall on air transport, travel and tourism, and industrial production, due to social distancing measures and weaker external demand. Risks to the economic outlook are tilted significantly to the downside, amid uncertainty regarding the magnitude and duration of the pandemic as well as other risks including the locust infestation experienced in some parts of the country.

“In the face of the unprecedented shock, the authorities have implemented a comprehensive response through measures to contain the spread of the virus and assist vulnerable households. On the fiscal front, the supplementary budget approved in May provided resources for additional healthcare and humanitarian spending and approved fiscal relief to businesses. The National Bank of Ethiopia (NBE) provided additional liquidity to support the banking system. In support of the authorities’ pandemic response, the IMF disbursed US $412 million of emergency financing in April through its Rapid Financing Instrument.

“While performance under the ECF-EFF program had gotten off to a good start with most end-December 2019 performance criteria met, the onset of the pandemic necessitated a reexamination of near-term macroeconomic policies.

“The program review focused on implementing an effective near-term policy response to the COVID-19 crisis, thereby setting the stage for a strong and durable recovery, and formulating a path to achieving the authorities’ development objectives supported under the program. While recognizing the need to provide support for the economy in the near term, the mission welcomes the authorities’ commitment to reverting to policies to ensure macroeconomic stability and a return to sustained inclusive growth once the pandemic abates. Reforms to strengthen domestic revenue mobilization will allow Ethiopia to meet its development objectives in a sustainable manner. The indexing of recipient benefits under existing social safety net programs will ensure an increase in support provided to the most vulnerable. The authorities’ efforts to control public sector borrowing and reform the public sector will support a continued decline of the external debt to GDP ratio. Additional debt reprofiling from external creditors would also help reduce debt vulnerabilities.

“After being allowed to rise as the pandemic struck, reserve money growth should be appropriately slowed in the second half of 2020/21 to address elevated inflation as conditions normalize. Important steps have been taken to develop the financial sector and build a modern monetary policy framework. The adoption of a roadmap to guide reforms in support of a transition over time to a market-clearing exchange rate will help address the existing foreign exchange shortage.

“Consistent with their Homegrown Economic Reform Program, the authorities are implementing reforms to boost the role of the private sector in the economy. Adoption of the new investment law earlier this year will facilitate private investment, while reforms in the telecom sector, including progress on the issuance of two new telecom licenses, will further strengthen the business environment.

During the virtual mission, the IMF team met with Minister of Finance, Ahmed Shide; Governor of the National Bank of Ethiopia, Dr. Yinager Dessie, Commissioner of the National Planning Commission, Dr. Fitsum Assefa, other government officials, representatives of the private sector, including banks, and the international donor community. The team extends its appreciation to the authorities for their cooperation and productive discussions."