IMF Executive Board Concludes 2012 Article IV Consultation with Ethiopia

Public Information Notice (PIN) No. 12/117
October 1, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 12, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ethiopia.1


Ethiopia’s macroeconomic performance in 2011/12 has been mixed. Strong, broad-based growth continues at a pace of about 7 percent and poverty reduction measured by poverty head count declined from 38.7 to 29.6 percent during the six years to 2010/11. However, inflation surged to 40 percent in August 2011, largely reflecting a combination of factors including loose monetary policy, and high global food prices but has eased to about 21 percent in June 2012 supported by a slowdown in global food and fuel price inflation and the implementation of the base money nominal anchor. Despite the continued robust increases in goods exports and remittances, the current account deteriorated in the first half of 2011/12 contrasting the surplus recorded in 2010/11 attributed to a frontloading of import of capital goods the previous year. The developments in 2011/12 largely reflect a recovery of imports of capital goods, an increase in consumer goods imports, and a weakening of the services balance due to a surge in service imports.

The federal government budget execution in 2011/12 has been tight based on a strong tax revenue increase when compared to the previous fiscal year, and a slower-than-budgeted execution of recurrent expenditure. However, the public sector (including state-owned enterprises) as a whole has been providing strong fiscal impulse given the state-owned enterprise substantial capital expenditures financed by borrowing from external sources and the Commercial Bank of Ethiopia (CBE). A rise in regional government deposits at CBE contributed to the funding. The 2012/13 budget focuses on sustaining growth, lowering inflation further, mobilizing revenue, and spending on pro-poor projects. The revenue target is within reach with the continuation of administrative efforts. Total expenditure is projected to grow slower than nominal GDP, but poverty-related spending as a share of GDP will be maintained.

Monetary policy in 2011/12 has largely been geared toward lowering inflation with the implementation of the base money nominal anchor. Base money at end-May 2012 declined by 0.9 percent year-on-year as the central bank has ceased providing new direct credit to the government since July 2011 and has been selling foreign reserves in recent months to achieve a base money contraction target of 4 percent for the fiscal year. However, the lowering of the reserve requirement ratio in early January from 15 percent to 10 percent weakens the tightening effect of the base money contraction. Broad money at end-May 2012 grew by 29 percent year-on-year on account of strong credit growth to public enterprises. Despite the planned National Bank of Ethiopia (NBE) financing of the 2012/13 budget, which could affect inflation expectations, the 2012/13 monetary targets focus on lowering inflation.

The NBE directive that requires commercial banks (excluding CBE) to hold bills issued by NBE is impeding financial intermediation. By creating a significant maturity mismatch in the private banks balance sheets, it has a considerable negative impact on their capacity to play their conventional intermediation role. Financial sector soundness indicators do not point to immediate concerns. However, recent developments such as the increasingly dominant market share of CBE and its growing exposure to large public enterprises, and the adverse impact of NBE directive on private banks suggest a need for a closer scrutiny of the banking system.

Absent increased role of the private sector to leverage the large public infrastructure investment and efforts to improve the doing business conditions, IMF staff project that real GDP growth will slow down to 6.5 percent in 2012/13 and over the medium term. However, the authorities project the economy to grow at double digit rates.

Executive Board Assessment

Executive Directors welcomed Ethiopia’s strong economic growth and continued progress in poverty reduction. However, Directors noted that the authorities’ public sector-led development strategy is contributing to macroeconomic imbalances. To sustain robust growth and address the emerging risks, policies for the period ahead should focus on promoting disinflation, achieving an appropriate pace of public investment, reconstituting official reserves, and promoting greater financial sector stability.

Directors welcomed the authorities’ goal of reducing inflation. In this context, they urged the central bank to pursue a tighter monetary stance and avoid further deficit financing. Directors also underscored the importance of broadening the toolkit of monetary policy instruments, including by revamping the market for government securities, which could foster private saving and investment. Greater exchange rate flexibility would safeguard foreign exchange reserves, strengthen external competitiveness, and mitigate external vulnerabilities.

Directors encouraged the authorities to persevere with their fiscal reforms. In particular, they saw scope for further improvements in tax administration and revenue mobilization. Additional public financial management reforms and development of a medium-term debt management strategy encompassing both domestic and external debt would help achieve the fiscal objectives under the Growth and Transformation Plan and maintain fiscal sustainability. Any non-concessional borrowing should be consistent with maintaining a low risk of debt distress.

Directors stressed that effective financial sector supervision and regulation remain crucial for macroeconomic stability. In this regard they advised the authorities to consider participation in the Financial Sector Assessment Program which would help identify vulnerabilities in the financial system and suggest corrective actions as appropriate. Directors encouraged the authorities to address the remaining deficiencies in Ethiopia’s AML/CFT regime.

Directors agreed that deeper structural reforms are essential for promoting growth. Accordingly, they underscored the importance of creating a more favorable business environment and enhancing the role of private sector in the economy. Directors also called for further efforts to improve data quality and supported Fund technical assistance in this area.

Ethiopia: Selected Economic and Financial Indicators, 2009/10–2011/12 1
  2009/10 2010/11 2011/12
(Annual percentage change)
  • National income and prices

  • GDP at constant prices (at factor cost)

8.0 7.5 7.0
  • Consumer prices (period average)

2.8 18.1 33.4
  • Consumer prices (end period)

7.3 38.1 20.8
  • External sector

  • Exports, (In U.S. dollars, f.o.b.)

38.3 37.1 16.9
  • Imports, (In U.S. dollars, c.i.f.)

7.7 -0.9 35.5
  • Export volume

10.3 8.6 1.1
  • Import volume

14.1 -8.5 29.5
  • Terms of trade (deterioration - )

29.6 18.7 10.6
(Percent of beginning-period stock of broad money, unless otherwise indicated)
  • Money and credit

  • Net foreign assets

9.6 29.1 -14.5
  • Net domestic assets

14.7 10.1 48.0
  • Net claims on the government

1.7 -2.9 1.3
  • Net claims on public enterprises

6.8 25.1 32.8
  • Net claims on private sector

10.5 9.8 13.9
  • Broad money

24.3 39.2 33.5
  • Velocity (GDP/broad money)

3.68 3.53 3.76
(In percent of GDP, unless otherwise indicated)
  • Financial balances

  • Gross domestic saving

5.2 8.8 7.8
  • Government saving

4.5 4.3 4.8
  • Private saving

0.7 4.5 2.7
  • Gross domestic investment

24.7 25.5 26.1
  • Public investment

16.0 18.6 19.7
  • Private investment

8.7 6.9 6.5
  • Resource gap

-19.5 -16.7 -18.6
  • External current account balance, including official transfers

-4.4 0.7 -6.1
  • Government finances

  • Revenue

14.1 13.5 13.6
  • External grants

3.2 3.2 1.8
  • Expenditure and net lending

18.6 18.4 17.8
  • Fiscal balance, excluding grants (cash basis)

-4.6 -4.8 -4.1
  • Fiscal balance, including grants (cash basis)

-1.3 -1.6 -2.3
  • Total financing

1.3 1.6 2.3
  • External financing

1.1 1.5 0.8
  • Domestic financing (not including privatization)

0.5 0.0 1.2
  • Public debt 2

39.0 37.4 34.2
  • Domestic debt

20.9 15.4 15.7
  • External debt (including to IMF)

18.1 22.0 18.5
  • Present value of external public and publicly guaranteed (PPG) debt-to-exports ratio (including to Fund) 2

97.0 100.2 96.6
  • External PPG debt-service-to-exports ratio 3

2.2 2.9 5.5
  • Overall balance of payments (in millions of U.S. dollars)

685 1446 -1215
  • Gross official reserves (in millions of U.S. dollars)

1979 3044 2114

(in months of imports of goods and nonfactor services of following year)

2.4 2.8 1.7
  • GDP at current market prices (in billions of birr)

382.9 511.2 726.5

Sources: Ethiopian authorities; and IMF staff estimates and projections

1Data pertain to the Ethiopian fiscal year from July 8 to July 7.

2Including debt of major public enterprises

3After enhanced HIPC and MDRI relief.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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