IMF Executive Board Concludes 2014 Article IV Consultation with the Federal Democratic Republic of Ethiopia

Press Release No. 14/458
October 3, 2014

On September 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ethiopia.1

Ethiopia’s recent macroeconomic performance continues to be strong, with robust economic growth supported by higher agricultural production, and large public sector and foreign direct investments. Inflation remains contained in single digits and the fiscal stance at the general government level is cautious, although public enterprises continue to provide an expansionary impulse.

The general government budget execution in 2013/14 reflects conservative spending. Recurrent spending is estimated to remain at 7.4 percent of Gross Domestic Product (GDP), and the capital spending-to-GDP ratio will only increase by about 0.3 percentage points to 11.0 percent of GDP. The overall revenue-to-GDP ratio is estimated to fall from about 14.6 in 2012/13 to about 14.1 in 2013/14, mainly on account of decline in nontax revenue which more than offset the tax revenue improvement. The general government budget deficit, including grants, is estimated to be 2.7 percent of GDP in 2013/14, compared to 2.0 percent of GDP a year ago.

Public enterprises continue to borrow heavily from the banking system and externally to finance their investments. The financing of the overall public sector is likely to have been on the order of 10 percent of GDP in 2013/14. Public and publicly guaranteed (PPG) external debt is estimated to have increased to about 23 percent of GDP from 20.5 percent of GDP in 2012/13.

Tight monetary policy has supported achieving the National Bank of Ethiopia (NBE)’s inflation objective in 2013/14. Inflation remained in the single digits throughout the year and was 8.5 percent in June 2014, with food prices rising by 6.2 percent and non-food inflation in the double-digits. Base money, the nominal anchor of monetary policy, increased by 17.5 percent in April 2014, driven mainly by claims on government (by 19.6 percent) and to a lower degree by claims on non-government (by 11.2 percent).

Developments in the external sector have been mixed, with the deterioration in the trade balance offset by net inflows on services and transfers. The current account deficit is estimated to have widened from US$2.8 billion (6.0 percent of GDP) in 2012/13 to US$3.5 billion in 2013/14 (7.1 percent of GDP). It was financed largely by concessional and non-concessional inflows as well as by foreign direct investment (FDI). Substantial inflows on the capital account also facilitated a modest build up in the NBE’s reserves. The exchange rate adjusted only gradually, in line with the NBE’s managed float policy. While the premium in the parallel market remained modest, the gradual nominal depreciation was insufficient to prevent an appreciation of the real effective exchange rate.

The economic outlook remains encouraging. The 2014/15 budget plan targets the general government deficit at 3 percent of GDP and maintains a strong pro-poor focus. Monetary policy, anchored on base money, is geared toward maintaining inflation in single digits. The public debt to GDP ratio is expected to rise, reflecting large disbursements associated with implementation of investment projects under the Growth and Transformation Plan.

Executive Board Assessment2

Executive Directors commended the authorities for delivering robust and broad-based economic growth, maintaining inflation in single digits, expanding employment and improving social indicators, and welcomed the considerable progress toward the Millennium Development Goals. Looking ahead, Directors observed that the sustainability of the current public sector-led growth strategy was threatened by several downside risks–including, external financing of the public investment program, declining prices for export commodities, and weather-related shocks. Mitigating these risks will necessitate greater policy coherence and appropriate structural reforms going forward, to help shift the balance toward private sector-led, sustainable growth.

Directors underscored the need for continued fiscal prudence in order to achieve the goals of the Growth and Transformation Plan (GTP), while reducing crowding out of the private sector. They called for stepped-up efforts to increase domestic revenue—by broadening the tax base, improving customs and tax administration, and removing tax exemptions. On the expenditure side, Directors welcomed the planned implementation of a new high-level oversight mechanism designed to carefully monitor the operations and financial position of public enterprises and any contingent liabilities. They recommended the adoption of a consolidated fiscal position as a more robust fiscal anchor, and advised that borrowing be done within the context of a comprehensive debt strategy.

Directors concurred that monetary restraint is required in the wake of food and energy price shocks and domestic demand pressures stemming from large public investments. Eliminating recourse to National Bank of Ethiopia (NBE) budgetary financing would also help curb inflationary pressures. Directors also recommended strengthening liquidity management and monetary transmission through enhanced interest rate flexibility and the adoption of a broader set of monetary policy instruments. They noted that a broadened set of monetary instruments would also facilitate further money market development.

Directors called for a strengthening of financial supervisory and regulatory frameworks, to promote inclusion and encourage greater competition. They recommended enhancing private sector credit access by eliminating the requirement that commercial banks hold NBE bills.

Directors encouraged the authorities to improve export competitiveness by reducing overvaluation of the real effective exchange rate through enhanced exchange rate flexibility. A more market-based exchange rate would also facilitate the accumulation of foreign exchange reserves, as a buffer against external shocks.

Directors supported structural reforms designed to create a more enabling environment for private sector investment. In this regard, they recommended developing a proper legal framework for public-private partnerships; simplifying requirements for opening a business; strengthening investor protections; and improving trade logistics.

Directors underscored the need for continued improvement in data quality, including national accounts and financial sector statistics. They welcomed Ethiopia’s removal from the FATF blacklist, and looked forward to the completion of the agreed action plan.

Ethiopia: Selected Economic and Financial Indicators 1
  2011/12 2012/13 2013/14
  (Annual percentage change)

National income and prices


GDP at constant prices (at factor cost)

8.8 9.7 8.2

GDP deflator

34.3 4.6 7.3

Consumer prices (period average)

34.1 13.5 8.1

Consumer prices (end period)

20.7 7.4 8.5

External sector


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

14.8 -2.6 9.1

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

33.5 4.1 12.7

Export volume

-0.2 9.4 14.7

Import volume

24.5 4.3 13.3

Terms of trade (deterioration -)

7.2 -11.9 -5.0

Nominal effective exchange rate (end of period)

2.8 -5.2

Real effective exchange rate (end of period)

19.7 -1.1

(Percent of beginning period stock of broad money, unless otherwise indicated)

Money and credit


Net foreign assets

-11.6 3.1 -0.5

Net domestic assets (including other items net)

44.5 21.0 25.6

Broad money

32.9 24.1 25.1

Base money (annual percentage change)

0.4 13.6 16.7

Velocity (GDP/broad money)

3.91 3.64 3.39
(Percent of GDP, unless otherwise indicated)

Financial balances


Gross domestic savings

15.0 16.0 12.8

Public savings

5.7 5.8 3.3

Private savings

9.3 10.2 9.5

Gross domestic investment

33.1 33.0 30.2

Public investment

25.0 24.6 21.7

Private investment

8.0 8.4 8.5

Resource gap

-18.1 -17.0 -17.4

External current account balance, including official transfers

-6.5 -6.0 -7.1

Government finances



13.9 14.6 14.1

Tax revenue

11.6 12.5 13.0

Nontax revenue

2.3 2.0 1.1

External grants

1.7 1.5 1.6

Expenditure and net lending

16.8 18.1 18.4

Fiscal balance, excluding grants (cash basis)

-2.9 -3.5 -4.3

Fiscal balance, including grants (cash basis)

-1.2 -2.0 -2.7

Total financing (including residuals)

1.2 2.0 2.7

External financing

0.9 2.0 1.5

Domestic financing (not including privatization)

0.5 0.2 1.2

Public debt 2

32.7 37.4 44.7

Domestic debt

Sticvstic stic debt

14.8 16.9 22.2

External debt (including to the IMF)

17.9 20.5 22.6

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

-1,067 338 -57

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

2,262 2,368 2,761

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

2.0 1.9 1.9

GDP at current market prices (billions of birr)

739 853 995

Sources: Ethiopian authorities and IMF staff estimates and projections.

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

2 Public debt includes general government and state own enterprises (Excluding Ethiopian Airlines).

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.

2 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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