Press Release No. 04/194

Press Release: IMF Completes Sixth Review Under Ethiopia's Poverty Reduction and Growth Facility Arrangement

September 13, 2004

The Executive Board of the International Monetary Fund (IMF) has completed the sixth and final review of Ethiopia's performance under an SDR 100.28 million (about US$147 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/11 and News Brief No.02/23). This decision enables Ethiopia to receive the final disbursement of SDR 10.4 (about US$15 million).

After the Executive Board's discussion on Ethiopia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:

"Ethiopia's performance under the three-year PRGF-supported program has been good. Real GDP growth has rebounded strongly, price stability has been maintained, and progress has been made with key structural reforms. However, Ethiopia remains highly vulnerable to external shocks, notably drought and export prices, while poverty indicators continue to be among the highest in the world.

"The main challenges going forward are to achieve faster growth and the Millennium Development Goals (MDGs), to increase the economy's resilience to shocks, and to ensure debt sustainability. This will require both higher levels of external aid and improvements in Ethiopia's capacity to absorb and use such assistance more effectively. Continued prudent macroeconomic policies and more ambitious structural reforms in key areas, especially in the agricultural, fiscal, and financial sectors, will be essential for reaching these objectives.

"Fiscal policy is expected to continue to focus on strengthening expenditure management and enhancing revenues, while containing inflationary domestic financing and reducing the public debt burden. Improving public expenditure management also remains a critical priority for the government, especially for bolstering the capacity of local governments, given their new expenditure mandates following fiscal decentralization.

"A significant increase in external assistance to Ethiopia would need to be largely in the form of grants if public debt sustainability is to be maintained. The authorities are developing a comprehensive and prudent public debt management strategy to clarify the rules for containing future domestic and external borrowing to sustainable levels. The plans to develop their own fiscal scenarios aimed at achieving the MDGs are also welcome. In this context, it will be important to work with realistic assumptions, identify challenges early, and mitigate any potential adverse effects on the broader macroeconomic framework.

"Monetary and exchange rate policies will continue to focus on achieving the inflation and international reserve targets. Safeguarding external competitiveness requires implementing structural reforms that improve productivity and efficiency, while the exchange rate should be fully market-determined.

"In order to lay firm foundations for achieving a significant and sustained increase in long-term growth, it is essential to press ahead with structural reforms, focusing on agriculture, food security, capacity building, export promotion, privatization, and strengthening the legal and regulatory framework. Attention will also need to be paid to strengthening the financial sector and promoting competition within that sector. In this regard, full implementation of the restructuring plan for the Commercial Bank of Ethiopia and enhancement of the central bank's independence and its supervisory capacity remain high priorities," Mr. Kato said.

The PRGF is the IMF's concessional facility for qualifying low-income countries. The purpose of the PRGF is to support programs to strengthen substantially and in a sustainable manner a country's balance of payments position and to foster durable growth, leading to higher living standards and a reduction in poverty. 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). PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period.