Press Release No. 15/286

Press Release: IMF Staff Completes 2015 Article IV Mission to Ethiopia

June 19, 2015

An International Monetary Fund (IMF) team led by Andrea Richter Hume visited Addis Ababa from June 3-17 to conduct discussions for the 2015 Article IV Consultation with Ethiopia.

At the conclusion of the mission, Ms. Richter Hume issued the following statement:

“Ethiopia’s state-led development model has delivered rapid and broad-based growth over many years. It has also reduced poverty significantly, while keeping inequality low. The outlook for Ethiopia remains highly favorable, reflecting its significant economic potential and productivity-enhancing investments and reforms. Ethiopia’s growth has so far been driven in large part by public investment. To sustain rapid and inclusive growth over the coming years, the private sector will need to play an increasing role as a driver of growth.

“This year, economic momentum has been strong, reflecting robust public investment in infrastructure and solid performance in agriculture. Exports were hit by lower commodity prices and the impact of Ebola on travel receipts, while imports increased sharply (especially for capital goods and construction-related services). However, a strong pick-up in foreign direct investment and foreign disbursements to state-owned enterprises allowed gross international reserves to increase modestly. For fiscal year 2014/15, the team projects real GDP growth of 8.7 percent, easing to about 8 percent in 2015/16.

“Inflation has remained in single digits—an important achievement for macroeconomic stability. With food prices pushing inflation close to 10 percent, the team recommends a continued cautious monetary policy stance, with particular attention paid to core inflation.

“Looking ahead, the mission identified two key factors to sustain rapid and broad-based growth over the medium term: boosting domestic and foreign resource mobilization, and reducing bottlenecks to doing business. These should allow for a growing role for the private sector, which holds the key to job-rich growth going forward.

“Increasing tax revenue collection—a more durable way of financing government expenditure—will play an important role in bolstering domestic resource mobilization. Ethiopia’s tax-to-GDP ratio remains below the regional average. Improved tax administration, combined with a more streamlined use of tax incentives, will be critical in this regard.

“On public investment, which is to a large extent executed by state-owned enterprises, the team advised that its pace should remain consistent with macroeconomic sustainability, and with allowing for more credit to flow to the private sector. Given the importance of maintaining debt sustainability, the team encourages the government to consider innovative forms of financing, such as private-public partnerships and other options that could help mobilize private non-debt financing. Enhancing oversight of public enterprises by the general government, and making information on their operations available on a more timely basis, is also critical for establishing a solid fiscal anchor.

“Boosting domestic savings is the other key part of resource mobilization. The significant expansion in bank branches in recent years has already done much to increase the depositor base. To promote the availability of longer-term investment resources, Ethiopia aims to develop capital markets. An important prerequisite will be raising interest rates on government securities and other key securities above inflation, and increasing the use of indirect tools for monetary management. These steps would help activate the interbank market—which would enhance liquidity management and promote financial intermediation—and also promote the establishment of a yield curve.

“The team stresses the importance of decisive structural reforms to foster export growth and export diversification. Public investment in infrastructure—notably power, rail, roads, and telecoms—is already helping alleviate constraints on private sector development. Increasing the efficiency of customs clearance and other administrative procedures, improving the quality of logistics, and increasing access to credit remain important. Greater flexibility of the exchange rate would enhance Ethiopia’s competitiveness and support foreign exchange reserve accumulation. The team supports the National Bank of Ethiopia’s medium-term objective of having foreign exchange reserves cover three months of the following year’s imports of goods and services.

“The team met with Prime Minister Hailemariam Desalegn, Governor of the National Bank of Ethiopia Teklewold Atnafu, Minister of Finance and Economic Development Sufian Ahmed, State Minister of Finance and Economic Development Abraham Tekeste, Economic Advisor to the Prime Minister Newai Gebre-ab, other senior officials, and representatives of the private sector, the international community, and civil society.

“The IMF Executive Board is expected to complete the 2015 Article IV consultation in September 2015.”