Press Release No. 03/145

Press Release: IMF Completes Review Under Ethiopia's PRGF Arrangement and Approves US$14.3 Million Disbursement

August 28, 2003

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review of Ethiopia's performance under a Poverty Reduction and Growth Facility (PRGF) Arrangement. As a result, Ethiopia will be able to draw up to SDR 10.429 million (about US$14.3 million) under the arrangement immediately. It further extended the period of the arrangement, which was due to expire on March 20, 2004, through July 2004.

The Board also approved a request for additional interim HIPC assistance for SDR 2.111 million (about US$2.9 million) for the period November 8, 2003-May 31, 2004.

Ethiopia's PRGF arrangement was approved on March 22, 2001 (see Press Release No. 01/11) for SDR 86.9 million (about US$119 million). On March 18, 2002, the Board increased the PRGF arrangement by SDR 13.38 million (about US$18 million) to help mitigate the impact on the balance of payments of a continued deterioration of the terms of trade and the events of September 11. So far, Ethiopia has drawn SDR 68.99 million (about US$94.5 million).

The PRGF is the IMF's concessional facility for low income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period.

After the Executive Board's discussion on Ethiopia, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, stated:

"Recent economic performance has been seriously affected by a severe drought in 2002, the worst in many years. As a result of the drought and a sharp drop in cereal production, real GDP declined in 2002/03, and food prices rose markedly. An estimated 12.6 million people are in need of food assistance.

"Despite this shock, Ethiopia's performance during the second annual program was broadly satisfactory. All the quantitative performance criteria and benchmarks through December 2002, as well as the indicative targets for end-March 2003, were observed. In particular, the introduction of the value-added tax was carried out in January 2003, a performance contract was signed with the Commercial Bank of Ethiopia (CBE) in June 2002, and an audit of the CBE by independent auditors was completed in May 2003, after a delay of four months. The ongoing decentralization of fiscal powers to woredas (local districts), however, contributed to delays in the implementation of structural benchmarks (and HIPC Initiative completion point triggers) related to the improvement of public expenditure management.

"The overall fiscal deficit (including grants and emergency programs) is estimated to have declined slightly from preceding years. Several tax measures were implemented (including the introduction of the value-added tax and the reform of the import tariff regime). Defense expenditure was contained at 5.3 percent of GDP, while poverty-related expenditure rose to 17.7 percent in 2002/03. Further progress was made in improving the soundness of the financial sector, including the adoption of a directive to ensure provisioning for nonperforming loans in line with international best practices, while, interest and exchange rate policies remain appropriately flexible and market-determined.

"The policies to be implemented under the third annual program aim at maintaining macroeconomic stability and achieving rates of economic growth that are sufficient to reduce poverty. In 2003/2004, real GDP growth, spurred by a recovery in agricultural output, is projected to rise to 6.7 percent. With food supply conditions returning to a more normal level, consumer price inflation is projected to decline, while the external current account deficit is expected to increase slightly.

"Fiscal policy in the period ahead will focus on achieving and maintaining public debt sustainability, while maximizing the use of highly concessional resources for poverty reduction activities. The overall deficit (including grants and special program financing) is expected to narrow further to 7½ percent in 2003/04. Implementation of the tax reform program will continue, including measures to collect tax arrears and strengthen the large taxpayer unit. Defense spending will be reduced to 4.8 percent of GDP, while poverty-related spending will be increased further to about 18 percent of GDP. The ongoing decentralization of fiscal authority to local districts will be closely monitored.

"Attention will continue to focus on strengthening the financial sector. In particular, a detailed restructuring plan will be developed for the CBE to restore its profitability and sound management, and measures will be taken to strengthen the finances, independence, and supervisory capacity of the National Bank of Ethiopia. Other structural reforms to be pursued include initiatives to improve food security, promote microfinance institutions, and enhance the climate for private investment," Mr. Sugisaki stated.