IMF Executive Board Approves US$240.6 Million Arrangement for the Federal Democratic Republic of Ethiopia Under the Exogenous Shocks Facility

Press Release No. 09/289
August 26, 2009

The Executive Board of the International Monetary Fund (IMF) today approved a 14-month, SDR 153.755 million (about US$240.6 million) arrangement under the Exogenous Shocks Facility (ESF) to help Ethiopia cope with the effects of the global recession on its balance of payments. The arrangement (115 percent of Ethiopia’s quota) was approved under the high access component of the ESF, a facility designed to provide policy support and financial assistance on concessional terms to eligible low-income countries facing temporary exogenous shocks. A disbursement of SDR 73.535 million (about US$115.1 million) will become available following the Board’s decision.

Following the Executive Board discussion, Mr Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:

“Ethiopia’s economy has been adversely affected by a series of shocks, first from surging commodity prices in 2008, and most recently from the global recession. While the authorities have been successfully implementing a macroeconomic adjustment package since late 2008 to help lower inflation and build up international reserves, the global recession is now putting renewed pressure on the external position as export receipts and remittances weaken and inward direct investment slows.

“The authorities have adopted an appropriate program for 2009/10 to address the strains on the balance of payments and to keep inflation low. Seeking a balance among conflicting objectives—limiting inflation, rebuilding reserves, accommodating higher capital outlays, unwinding recent real exchange rate appreciation—their program calls for a continued tight fiscal stance (though eased somewhat from 2008/09), a slowing of the pace of monetary growth, and gradual real exchange rate adjustment, aided by a step depreciation of the birr on July 10, 2009.

“The general government budget for 2009/10 envisages some easing of the tight limits on public spending instituted last year, financed by a mix of external and domestic borrowing. Public sector domestic borrowing will be contained to 3 percent of GDP, with the government acting to improve controls over borrowing by public enterprises and monitoring carefully external debt levels to ensure debt sustainability. The authorities are committed to crafting a tax reform strategy, aimed at reversing the decline in the tax-to-GDP ratio recorded in recent years.

“Monetary policy focuses on entrenching single-digit inflation by providing a strong nominal anchor. The monetary program seeks to limit broad money growth to 17 percent for 2009/10, with the National Bank of Ethiopia seeking to enhance its control over reserve money by systematic use of the regular Treasury-bill auctions to manage liquidity.

“Prudent implementation of this program, accompanied by planned reform measures, will provide a sound macroeconomic environment for economic growth. The financial support being provided under the Exogenous Shocks Facility, coupled with the new allocation of SDRs, will further boost foreign reserves, thereby enhancing confidence in the sustainability of the government’s economic program.”

ANNEX

Recent Economic Developments

Ethiopia has faced a turbulent external economic environment in the past two years, stemming from sharp movements in import prices and then the global slowdown. Surging import prices helped push reserves down to some US$900 million (1.2 months of imports) by mid-2008 and contributed to an exceptional jump in consumer price inflation. The global recession is now putting renewed pressure on the external position via weaker export receipts and remittances and slowing inward direct investment.

The authorities implemented a macroeconomic adjustment package from late-2008, which was supported by the IMF’s January 2009 disbursement of SDR 33.425 million (about US$52.3 million) to Ethiopia under the rapid-access component (RAC) of the ESF (see Press Release No. 09/13). The adjustment program has met key policy targets. Inflation in the 12 months to June declined to 3 percent, aided by falling food price levels, while foreign reserves, helped by increased donor assistance, reached some US$1.5 billion (1.8 months of import cover) by end-June 2009.

Key Program Policies and Objectives

The authorities’ program for 2009/10 includes:

  • • Limits on domestic borrowing by the public sector, although the limits are eased slightly from 2008/09 levels

    • Some easing of the fiscal stance, tightened sharply under the 2008/09 adjustment program

    • Further slowing of the pace of monetary expansion

    • Judicious exchange rate adjustment in a manner that does not destabilize expectations or fuel consumer price inflation.

    • Supporting structural measures, focusing on tax reform, the control of public enterprise borrowing, and the control of liquidity through indirect instruments.

The policies supported under the arrangement, coupled with the Fund’s financial support and Ethiopia’s increased allocation of Special Drawing Rights (see Press Release No. 09/283), are expected to contribute to the rebuilding of international reserves to 2½ months of imports by 2010/11, while maintaining a sound macroeconomic environment for growth and poverty reduction.


Table. Ethiopia: Selected Economic and Financial Indicators, 2005/06–2010/111

 
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
      Est. Proj. Proj.
 
  (Annual percentage change)

National income and prices

           

GDP at constant prices (at factor cost)

11.5 11.5 11.6 7.5 7.0 8.0

GDP deflator

11.6 17.4 28.4 35.8 6.3 8.2

Consumer prices (period average )

12.3 15.8 25.3 36.4 5.1 8.6

Consumer prices (end period)

11.6 15.1 55.3 3.1 9.8 9.5

External sector

           

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

18.1 18.7 23.1 -1.1 11.8 11.0

Imports, (In U.S. dollars, c.i.f.) 2

25.9 13.4 22.6 17.3 19.3 6.2

Export volume

5.1 11.4 0.8 0.7 12.3 12.4

Import volume 2

21.8 6.9 9.6 16.9 26.3 4.6

Terms of trade (deterioration – )

3.5 -1.3 2.1 6.7 4.1 -4.2

Nominal effective exchange rate (end of period)

-1.8 -7.5 -13.0 ... ... ...

Real effective exchange rate (end of period)

6.0 3.8 24.2 ... ... ...
(Percent of beginning-period stock of broad money, unless otherwise indicated)

Money and credit

           

Net foreign assets

-1.6 1.4 -3.1 10.8 2.9 8.6

Net domestic assets (including other items)

19.0 18.3 26.0 9.1 14.2 8.9

Net claims on the government (net)

7.1 9.0 6.8 0.0 7.0 5.1

Claims on public enterprises

4.9 6.1 19.0 8.3 7.5 4.9

Claims on private sector

8.8 9.2 7.9 4.5 5.3 4.4

Broad money

17.4 19.7 22.9 19.9 17.1 17.5

Velocity (GDP/broad money)

2.77 3.02 3.52 4.22 4.11 4.09

Lending rates (maximum rate)

14.0 15.0 15.0

Treasury bill (91-day maturity)

0.04 0.79 0.58

 

(In percent of GDP, unless otherwise indicated)

Financial balances

           

Gross domestic saving

3.7 6.1 3.2 2.5 2.6 4.8

Government saving

2.7 1.4 1.5 2.1 2.5 2.7

Private saving

0.9 4.7 1.7 0.4 0.1 2.1

Gross domestic investment

24.2 24.8 21.2 20.8 22.6 22.9

Government investment

16.7 18.1 15.3 14.8 16.3 16.4

Private investment

7.6 6.7 5.9 6.0 6.3 6.5

Resource gap

-20.6 -18.7 -18.0 -18.3 -20.0 -18.1

External current account balance, including official transfers

-9.1 -4.5 -5.7 -5.6 -9.3 -6.5

Government finances

           

Revenue

14.8 12.7 12.1 11.7 12.2 12.5

Tax revenue

10.8 10.1 9.7 8.1 8.7 9.1

Nontax revenue

4.1 2.6 2.4 3.6 3.4 3.4

External grants

3.6 4.4 4.0 3.7 3.2 3.5

Expenditure and net lending

22.3 20.7 19.1 17.7 18.4 18.7

Fiscal balance, excluding grants (cash basis)

-7.4 -8.0 -7.0 -6.0 -6.3 -6.2

Fiscal balance, including grants (cash basis)

-3.9 -3.6 -2.9 -2.3 -3.0 -2.7

Total financing

3.9 3.6 2.9 2.3 3.0 2.7

External financing

1.1 1.1 1.0 2.2 1.6 1.7

Domestic financing (not including privatization)

2.1 3.6 2.7 0.0 1.4 1.1

Public debt

68.1 40.7 36.5 32.8 37.5 39.3

Domestic debt

30.9 28.9 24.6 18.0 18.0 16.6

External debt (including to Fund)

37.3 11.7 11.9 14.8 19.5 22.7

Net present value of external debt-to-exports ratio (including to Fund) 3

n.a. 48.5 57.3 84.8 136.7 138.9

External debt-service ratio 4

3.7 3.7 1.2 3.0 6.1 9.4

Overall balance of payments (in millions of U.S. dollars)

-316 -3 -263 476 -30 354

Gross official reserves (in millions of U.S. dollars)

1,158 1,326 906 1,523 1,493 1,847

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

2.2 1.9 1.2 1.8 1.7 2.0

GDP at current market prices (in billions of birr)

131.7 171.8 245.6 353.4 403.2 472.0
 

Sources: Ethiopian authorities; and IMF staff estimates and projections.
1 Except for data on external sector which is based on July 1-June 30, data pertain to the period July 8-July 7.
2 Excluding aircraft and telecom purchases.
3 Including debt of major public enterprises.
4 After enhanced HIPC and MDRI relief.



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