The Federal Democratic Republic of Ethiopia and the IMF

Press Release: IMF Completes Sixth Review Under Ethiopia's Poverty Reduction and Growth Facility Arrangement
September 13, 2004


Country's Policy Intentions Documents

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The Federal Democratic Republic of Ethiopia—Letter of Intent

August 12, 2004


The following item is a Letter of Intent of the government of the Federal Democratic Republic of Ethiopia, which describes the policies that the Federal Democratic Republic of Ethiopia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of the Federal Democratic Republic of Ethiopia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. de Rato:

In accordance with the provisions of the three-year arrangement (approved on March 22, 2001), under the Poverty Reduction and Growth Facility (PRGF), the Government of Ethiopia, in cooperation with staff of the IMF, has evaluated the implementation of the third annual program (July 8, 2003-July 7, 2004); performance is to be measured through end-March 2004. Following the completion of the sixth review under the PRGF arrangement by the Executive Board, the government requests the seventh disbursement in an amount equivalent to SDR 10.429 million under the arrangement.

In 2003/04, real GDP is provisionally estimated to have increased by 11.6 percent, mainly reflecting a sharp recovery in agricultural output, which grew by 18.9 percent. Inflation is estimated to have fallen to 12.1 percent in the 12 months to April 2004. All the quantitative performance criteria for end-March 2004 and the structural performance criteria for end-June 2004 have been met (Tables 1 and  2), and we believe that the current stance of macroeconomic policies remains fully consistent with achieving all the quantitative and structural benchmarks for end-June 2004. We will be reporting to you on the performance relating to the benchmarks for April-June of fiscal year 2003/04 by end-August, 2004.

The government wishes in particular to stress that it is continuing in its efforts to maintain budget discipline, to develop a public debt strategy which will set public debt on to a sustainable path, and to continue to reorient public spending in favor of poverty-related expenditures as envisaged in the PRSP.

The government believes that its policies are adequate to achieve the objectives of its program, but it will take any further measures that may become appropriate for this purpose. Ethiopia will consult with the Fund on the adoption of these measures, and in advance of revisions to its policies, in accordance with the Fund's policies on such consultation.

Sincerely yours,

/s/
Sufian Ahmed
Minister of Finance and
Economic Development
   /s/
Teklewold Atnafu
Governor
National Bank of Ethiopia

Table 1. Ethiopia: Quantitative Benchmarks and Performance Criteria for the Third Annual Program Supported by the PRGF Arrangement, July 2003—July 20041
(In millions of birr, unless otherwise indicated)
      2003
  2004
July 7
Actual
(Stock)
  September
  December
  March
  July 7
Bench-
mark
  Perf.
Crit.
Adjusted
Perf.
Crit.2
Actual   Revised
Bench-
mark
Adjusted
Bench-
mark
Actual    Perf.
Crit.
Adjusted
Perf.
Crit.
Actual  
       

I.  Quantitative benchmarks and performance criteria                              
  Floor on net foreign assets of the National Bank of Ethiopia3,4 6,267   -136 -68 266   128 230  874   820 1,194 2,238      831
                                 
  Ceiling on net domestic assets of the National Bank of Ethiopia5,6 6,972   319 251 -799   370 268 -723   -336   -710 -2,206      991
                                 
  Ceiling on net domestic financing of the general government (incl. privatization receipts)6,7,8 19,211   269 201 -327   460 358 -124   -236   -610 -1,590   1,262
                                 
  Ceiling on outstanding external payments arrears of the public sector
(in million of US$)9
0   0     0 0       0     0      0   0       0 0          0
                                 
  Ceiling on new nonconcessional external debtcontracted or guaranteed by the public sector10 0    0     0 0        0     0      0    0       0 0          0
                                   
II.  Indicative target                              
  Floor on net foreign liquid reserves of the National Bank of Ethiopia 3,4 5,748   -136 -68 374   128 230  945   820 1,194 2,281      831
                                   
III.  Triggers for adjustment of quantitative benchmark and performance criteria                              
  Disbursed nonproject external funding (in million of U.S. dollars)11 271   37   45 45     95 107 107   282    326 326   355

Source: Ethiopian authorities.
1For 2003/04, cumulative flows from July 8, 2003. Program exchange rate of 8.5937 Birr/USD used.
2Nonproject disbursements have been revised by the authorities. Nonetheless, the observance of performance criteria for end-September 2003 remains.
3Adjusted upward for external assistance (nonproject, excluding enhanced HIPC interim assistance) that exceeds programmed amounts (paragraph 12 of the Technical Memorandum (TM) dated July 2003).
4Adjusted downward for 50 percent of any shortfall in programmed external assistance (nonproject, excluding enhanced HIPC interim assistance) up to a maximum of US$50 million (paragraph 15 of the TM dated July 2003).
5Adjusted downward for external assistance (nonproject, excluding enhanced HIPC interim assistance) that exceeds programmed amounts (paragraph 13 of the TM dated July 2003).
6Adjusted upward for 50 percent of any shortfall in programmed external assistance (nonproject, excluding enhanced HIPC interim assistance) up to a maximum of US$50 million (paragraph 15 of the TM dated July 2003).
7Adjusted downward for external assistance (nonproject, excluding enhanced HIPC interim assistance) that exceeds programmed amounts (paragraph 14 of the TM dated July 2003).
8Stocks at July 7, 2003 reflect domestic government borrowing but exclude privatization receipts.
9There shall be a continuous performance criterion on the nonaccumulation of new external arrears.
10This limit applies not only to debt as defined in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted by the IMF on August 24, 2000, but also to commitments contracted or guaranteed for which the value has not been received. Excluded from this limit are short-term import credits and long-term financing operations of Ethiopian Airlines.
11Excluding fertilizer projects.


Table 2. Ethiopia: Structural Benchmarks, and Performance Criteria Under the Third Annual Program Supported by the Three-Year PRGF Arrangement
Prior Actions, Structural Benchmarks, and Performance Criteria   Timing

Finalization and adoption of a financial restructuring plan by the government for the CBE that includes (i) ensuring that the CBE complies fully with the NBE provisioning directives by January 2004; (ii) a time bound plan for reducing NPLs to 20 percent of total loans; (iii) ensuring that the capital adequacy ratio will not fall below the minimum required ratio of 8 percent, and promptly recapitalizing the bank should the ratio fall below 8 percent; and (iv) not paying annual dividends until the capital adequacy ratio reaches at least 10 percent.   end-November, 2003 (done)
(performance criterion)
     
Consolidate federal and regional budgets for both the past year and the budget year--including all extrabudgetary funds and accounts.   end-November 2003 (done)
(performance criterion)
     
Reconcile monetary and fiscal accounts.   end-December 2003 (done)
(structural benchmark)
     
Finalization of a restructuring plan for the NBE, based on the recent KPMG study, and beginning of its implementation.   end-December, 2003 (done)
(structural benchmark)
     
Full provisioning by all commercial banks for nonperforming loans and other doubtful assets in line with the existing NBE directive.   end-January 2004 (done)
(structural benchmark)
     
As part of the CBE restructuring plan, instituting a policy to limit the renewal or restructuring of any delinquent loan to two iterations.   January 1, 2004 (done)
(prior action)
     
As part of the CBE restructuring plan, (i) transferring cofinanced loans (Birr 1.03 billion) from the CBE to the DBE in exchange for a government guaranteed bond with discount factor equivalent to the amount of the provisions already constituted on these loans; and (ii) eliminating the maximum annual write-off limit.   end-June 2004 (done)
(performance criterion)

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