## cr1818 - 2017. The mission met with Prime Minister Hailemariam Desalegn, ## Source details **Canonical URL:** [cr1818 - 2017. The mission met with Prime Minister Hailemariam Desalegn,](https://www.imf.org/-/media/files/publications/cr/2018/cr1818.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1818.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1818.pdf.json) --- ### Background and recent developments - Mission meetings included: Prime Minister Hailemariam Desalegn; National Bank of Ethiopia Governor Teklewold Atnafu; Minister of Finance and Economic Cooperation Abraham Tekeste; officials of ministries and government agencies; representatives of public enterprises and the private sector; development partners. - IMF staff team: Mr. Escolano (head), Mr. Raman, Ms. Aivazova (all AFR), Ms. Marinkov (FAD), Mr. Pham (LEG), Mr. Ouedraogo (STA); Mr. Atingi Ego (AFR) joined for two days; Mr. Nakunyada (OED) attended meetings with the authorities. - Growth and sector performance (2016/17): - Real GDP growth: 9 percent. - Agriculture expanded by 8.8 percent (Meher season recovery). - Industry growth: 16 percent (power generation, construction). - Drought impacts: 8.5 million people requiring food assistance. - External sector and reserves: - Current account deficit: 8.2 percent of GDP in 2016/17 (narrowed by 1 percentage point of GDP). - Exports revenue growth: 2.9 percent. - Foreign Direct Investment (FDI) growth: 27.6 percent. - International reserves: US$3.2 billion, equivalent to 1.8 months of prospective imports of goods and services (2.5 months on the authorities’ preferred measure). - Monetary and exchange rate policy actions (October 2017): - Birr devaluation: 15 percent. - Interest rate floors on time and savings deposits: increased from 5 to 7 percent. - Planned base money growth lowered from 22 percent to 16 percent. - Exporters allowed to retain up to 30 percent of export proceeds in foreign currency (previously 10 percent). - Inflation: 13.6 percent in November 2017 (above authorities’ target of about 8 percent). - Fiscal stance and public borrowing (since October 2016): - 2016/17 general government budget deficit: 3.4 percent of GDP (including supplementary budget), slightly below budgeted 3.5 percent of GDP. - January 2017 supplementary budget: 1.1 percent of GDP; funded by privatization receipts and fuel price stabilization fund surpluses (no additional borrowing). - Strong controls on external borrowing by public enterprises implemented by MOFEC; resulted in stabilization of NPV of outstanding external obligations and substantial reduction in non-concessional commercial borrowing. - Political context: - Civil unrest since early-2015 led to a 9-month state of emergency introduced in October 2016 (now lifted). - Cabinet reshuffle in October 2016, including appointment of a new Minister of Finance and Economic Cooperation. - Intensified implementation of GTP II policies: increased privatization and private sector participation, modern PPP legal framework, SOE financial and governance reform. ### Outlook and risk assessment - Growth projections: - 2017/18 real GDP growth expected: 8.5 percent. - Medium-term convergence: 8 percent real GDP growth. - Inflation outlook: - Inflation likely to remain above the 8 percent target in the immediate term due to price momentum and devaluation pass-through. - Announcement: restrictive monetary and fiscal policy stances expected to bring inflation back to target in 2018/19. - External sector outlook: - Exports expected to pick up as key projects come online (electricity generation and transmission, railway to Djibouti, industrial parks), but time needed for testing, installation and training. - Import growth: moderate in 2017/18 due to public sector restraint; gradual acceleration over the medium term as manufacturing imports increase. - Current account deficit: projected to remain wide and decline only gradually. - Main risks (selected): - External debt and debt service burden: reclassification to high risk of debt distress in the DSA. - External public debt service due in 2017/18: about US$1.5 billion (estimate includes public enterprises). - Thin reserves and uncertainty in export pick-up timing increase debt servicing risk; adverse shocks could force abrupt import compression. - Vulnerability to climate-related risks, including droughts. - CBR reductions / "de-risking" risk: reduction in correspondent banking relationships could reduce availability of foreign exchange and raise transaction costs. - Risk Assessment Matrix (RAM) highlights (selected): - Insufficient reprofiling of public investment: Relative Likelihood: M/H; Impact if realized: H. Policy Response: maintain strict control over external borrowing; limit domestic credit; exchange rate flexibility. - Slow progress in reforms enhancing export competitiveness: Relative Likelihood: H; Impact: H. Policy Response: implement structural reforms; allow greater exchange rate flexibility; postpone some investment. - Reduced financial services by correspondent banks ("de-risking"): Relative Likelihood: M; Impact: H. Policy Response: address AML/CFT deficiencies; monitor CBR status; explore banking consolidation. ### Authorities’ views - Priority: highest priority placed on correcting external imbalances and curbing the debt burden. - Disagreement on DSA: authorities disagreed with staff change in DSA assessment to high risk of debt distress, viewing recent increase in debt burden relative to exports as temporary due to delayed export response. - Concerns about DSA reclassification: could hinder remedial policies by limiting access to concessional financing and negatively affecting investor sentiment and public perceptions. - Policy alignment: no substantive disagreement with staff on appropriate policy response; authorities are decisively implementing those policies. ### Policy discussions and staff recommendations - Transition to private-sector-led growth: - Agreement that lead needs to be transferred from the public sector to the private sector as envisaged in GTP II. - Recommendation: reprofile timing and sequence of public investment to pace with actual export revenue increases and progress in mobilizing domestic savings. - Macro policy stance: - Support for the authorities’ more restrictive macroeconomic stance, including actions after the birr devaluation. - Revenue and public resource mobilization: - Support for reforms in tax administration and financial management of SOEs to enhance domestic resources and their effective use. - Policy recommendations included: banking-intermediated payments; small-taxpayer presumptive taxation indexed to inflation; regular cost-effectiveness review of tax incentives (tax expenditure report). - Context: achieving target of 17.2 percent of GDP by 2019/20 will be challenging given current low collection. - Structural and private-sector reforms: - Accelerate financial market roll-out and business climate improvements. - Promote PPPs (with adequate safeguards), private concessions, and privatizations to preserve public resources and foster private sector development. - Debt and financing: - Maintain strong controls on external borrowing by public enterprises to stabilize NPV of external obligations and reduce non-concessional borrowing. ### Fiscal stance, budget implementation, and social protection - Budget implementation 2017/18: - Staff projects a below-budget government deficit outturn of 2.5 percent of GDP, based on strict borrowing policies announced in the budget speech. - Social needs remain large; staff supports authorities’ intention to protect pro-poor spending. - Continued progress on investment efficiency would create fiscal room; staff encouraged participation in a Fund-WB Public Investment Management Assessment (PIMA). - Social Safety Net programs: - Productive Safety Net Program (PSNP): - Operational since 2005 and now in its fourth phase. - Reaches about 8 million beneficiaries, about half in drought-affected areas. - Government pledged US$500 million for the fourth phase; of this US$285 million constitutes cash grants; remainder in-kind. - Payments transferred into individuals’ bank accounts; participants encouraged to save and may be referred to microfinance institutions upon graduation. - Urban Productive Safety Net Project (UPSNP): - 5-year project targeting some 604,000 people in 11 urban centers. - Total allocation US$450 million; government contributing US$150 million through cash and in-kind transfers. - After three years beneficiaries can graduate and receive a lump sum to establish small enterprises with microfinance assistance. ### Exchange rate, monetary policy, and financial sector - Exchange rate assessment: - Staff estimates real effective exchange rate overvalued by about 20 percent during 2016/17. - October 2017 devaluation: - Measured in USD per birr, the devaluation was 13.04 percent. - Devaluation eliminated on impact most of accumulated overvaluation, leaving it at about 7 percent. - Exchange rate pass-through (Box 3): - Historical: 1 percent movement in the NEER associated with cumulative 0.43 percent movement in CPI over 3 years (most impact within first 18 months). - 1 percent NEER depreciation expected to produce cumulative 0.23 percent increase in food prices over 3 years. - The recent 13-percent devaluation (measured in USD/birr) should raise domestic prices by approximately 5.6 percent over the next 18 months, or roughly 3.7 percent in the first year. These are upper bounds; restrictive policies by the NBE can be expected to result in substantially smaller pass-through. - Monetary policy framework and actions: - October devaluation and subsequent monetary tightening will help address overvaluation; substantial reductions in base and broad money growth targets for 2017/18 are appropriate. - As financial deepening proceeds, NBE should gradually move towards indirect monetary policy instruments and reduce direct budget financing. - Recent increase in interest rates seen as a positive step; over the medium term, a slower expansion of base money than currently targeted by the NBE would be consistent with a neutral monetary stance. - Development Bank of Ethiopia (DBE) funding and market instruments: - Banks obliged to purchase NBE bills equivalent to 27 percent of their loan issuance; proceeds fund the DBE. - Staff view: this system penalizes short-term working capital financing; bills’ low remuneration (3 percent) makes them unsuitable for secondary market trading. - Alternatives suggested: fund DBE expansion through retained profits; raise market financing or direct budgetary capitalization; increase competition via limited presence of international banks. - Financial stability and NPLs: - System-wide NPLs in June 2017: 2.59 percent (below statutory ceiling of 5 percent). - Banks overall appear profitable, well-capitalized, and liquid; rapid credit growth merits vigilance. - DBE NPLs increased substantially to well above statutory limit of 15 percent; constitutes a contingent fiscal liability. - Staff welcomed plans to address DBE NPLs, including recovery measures and objective assessment of loan viability. ### Correspondent banking relationships (CBRs) and AML/CFT - CBR losses by smaller non-systemic banks raise concerns; losses related to high compliance costs for correspondent banks and small business volume. - NBE and Financial Intelligence Center progressing in strengthening AML/CFT framework and implementing the FATF action plan, which could help forestall additional CBR losses. - Staff encouraged the NBE to examine options including encouraging bank consolidation and engaging home supervisors of correspondent banks. - Staff assessed foreign exchange system against Article VIII, Sections 2(a), 3 and 4: - One of four exchange restrictions from 2002 eliminated; scope of another expanded. - Recent bank regulations on foreign exchange prioritization and rationing give rise to a new exchange restriction. - Staff encouraged removal of these restrictions and recommended moving toward eventual acceptance of obligations under Article VIII; authorities view existing restrictions as affecting exclusively the capital account and do not intend to request approval. ### Debt sustainability analysis (DSA) — baseline and stress tests - Principal findings: - Risk of external debt distress assessed as “high” (up from “moderate” in 2016 DSA). - PV of external debt-to-exports (PVDE) breaches threshold: starts at 271.9 percent in 2017/18 (121.9 percentage points above threshold), declines gradually and falls below 150-percent threshold only in 2021/22 (a 5-year breach under baseline). - Debt service-to-exports (DSE) breaches 20 percent threshold in 2017/18–20/21; peaks at 22.7 percent in 2019/20 before declining below threshold in 2021/22. - PV of debt-to-GDP (PVDG) reaches 22.6 percent (below 40 percent threshold). - PV of debt-to-revenue (PVDR) reaches 141.7 percent (below 250 percent threshold). - DSA assumptions and projections (selected): - Real GDP growth projected to remain around 8½ percent over the next two years before stabilizing at 8 percent by 2021/22; long-term convergence to 5-6 percent. - CPI inflation projected to converge to 8 percent in 2018/19. - Government primary deficit projected to decline to about 1½ percent of GDP. - Exports of goods and services projected to grow at an average of 13.7 percent between 2017/18–2021/22. - International reserves (Billions of U.S. dollars) projected: 3.2 (2017) 3.7 4.4 5.0 5.7 6.3 9.1 19.6 22.0 23.4 (as presented). - Characteristics of new medium- and long-term external disbursements: average interest rate 1.3 percent; maturity 30.3 years; grace period 5.7 years. - Role of remittances: - Remittances were 5.5 percent of GDP in 2016/17 and exceed exports of goods (3.6 percent of GDP). - Remittance-augmented PVDE still breaches threshold but by less and for shorter duration; DSE does not breach when remittances included. - Stress-test results: - Exports shocks have largest impact; PVDE exceeds threshold under all alternative scenarios for 9 years. - DSE under export shock: threshold breached in 2017/18–2022/23 and again in 2024/25. - Policy implications: - Main vulnerability: narrow export base and concentration in agricultural commodities and transport services with low export revenue (~7 percent of GDP). - Recommended actions: enhance competitiveness (including a more flexible exchange rate), pursue export diversification, mobilize domestic savings, curb import-intensive projects, and seek alternative funding (PPPs, privatizations, concessional finance). ### Capacity development, statistics, and TA - FAD, MCM, and STA expected to provide TA, supported by AFRITAC East; LEG support possible for AML/CFT strengthening depending on authorities’ readiness. - Fund TA intensified for data quality improvements, especially national accounts and balance of payments; national accounts rebasing is in train. - Main risks to TA impact: capacity constraints, lack of coordination between agencies, and variable ownership. - Mitigation measures: stronger selection of TA projects, earmarking dedicated staff in agencies, close coordination with Fund surveillance. - Statistical gaps and needs (selected): - National accounts: rebasing and expansion to include expenditure-side, sectoral and income accounts. - Government finance statistics: migrate to current GFSM standards (GFSM 2001/2014); consolidate extra-budgetary accounts. - Monetary statistics: adoption of Standardized Report Forms and reporting to STA urgently needed. - Balance of payments: full implementation of BPM6 recommended. - Staff encourages implementation of the enhanced General Data Dissemination System (e-GDDS). ### Financial sector and public enterprise governance - SOE governance, privatization, and fiscal reporting: - Recent National Tobacco Company privatization, divestment plans of non-strategic SOEs, and ongoing audit of Ethio-Telecom noted. - Recommendation: strengthen public oversight, require timely audited IFRS-compliant financial statements for public companies, and improve financial disclosure. - Fiscal reporting: adoption of current GFSM standards remains urgent (Annex IV); need for consolidated non-financial public sector summary accounts. - Financial stability indicators (selected): - System-wide NPLs (Jun-17): 2.6 percent (series: Jun-12 1.4; Jun-13 2.5; Jun-14 2.0; Jun-15 2.1; Jun-16 2.9; Jun-17 2.6). - Capital to Risk-Weighted Assets (Jun-17): 21.5. - Return on Assets (Jun-17): 2.4. - Total Loans and Bonds to Total Deposits (Jun-17): 107.3. ### Key macroeconomic indicators (selected series and projections) - Nominal GDP (2016, billions of U.S. dollars): 72.5 - GNI per capita, Atlas method (2015, current US$): 590 - Population total (2016, million): 91.2 - Poverty headcount ratio (2015/16, percent of population): 23.5 - Real GDP growth (annual percent): 2016/17 9.0; 2017/18 8.5; 2018/19 8.3; 2019/20 8.1; 2020/21 8.0; 2021/22 8.0 (Act./Est./Proj.) - Consumer prices (period average): 2016/17 7.2; 2017/18 11.5; 2018/19 8.5; 2019/20 8.0; 2020/21 8.0; 2021/22 8.0 - Current account balance (percent of GDP): 2016/17 -8.2; 2017/18 -7.7; 2018/19 -7.5; 2019/20 -6.8; 2020/21 -6.1; 2021/22 -5.5 - Gross official reserves (millions of U.S. dollars): 2016/17 3,197; projected 2017/18 3,673; 2018/19 4,361; 2019/20 4,963; 2020/21 5,705; 2021/22 6,286 - Public debt (percent of GDP): 2016/17 56.9; 2017/18 59.0; 2018/19 58.1; 2019/20 55.5; 2020/21 53.1; 2021/22 50.7 - Total revenue and grants (millions of birr): 2016/17 preliminary 269,151; 2017/18 336,421; 2018/19 405,367; 2019/20 481,630; 2020/21 571,150; 2021/22 686,268 - Total expenditure and net lending (cash basis, millions of birr): 2016/17 preliminary 329,658; 2017/18 389,800; 2018/19 468,195; 2019/20 550,625; 2020/21 648,365; 2021/22 773,662 ### Scenarios, stress tests, and electricity export projections (selected) - Baseline: steadfast implementation of policies and expected export take-off would reduce risks over time. - Stress tests: exports shock and one-time 30 percent nominal depreciation in 2019 (B6) among scenarios considered; exports shocks lead to largest breaches in export-based debt ratios. - Electricity exports (Box 2 projections): - Calendar-year export values (US$ millions): 2016 101; 2017 101; 2018 101; 2019 250; 2020 523; 2021 811; 2022 872; 2023 1,026; 2024 1,118; 2025 1,210. - Projected volumes (GWh): 2016 1,443; 2017 1,443; 2018 1,443; 2019 3,571; 2020 7,471; 2021 11,586; 2022 12,457; 2023 14,657; 2024 15,971; 2025 17,286. - Regional transmission to Kenya scheduled for first half of calendar year 2019; interconnection capacity over 2,000 MW. ### Staff appraisal and concluding policy messages - Preconditions for an export take-off and transition to private sector-led growth are largely in place (trade-enhancing infrastructure; positive private investor response). - Stagnant exports in 2016/17 raised debt sustainability risks; authorities have taken decisive actions (restrictive borrowing, devaluation, tighter monetary stance). - Staff advised steadfast implementation of ongoing policies, especially strong control of public external non-concessional borrowing. - Monetary policy may need further tightening if inflationary pressure does not abate; tight budget implementation targeting return of budget deficit to 2½ percent of GDP supported. - Structural reform priorities: improve revenue administration and policy; develop a secondary market for government securities; phase out compulsory purchase of low-yielding NBE bills to fund DBE; foster private sector participation in investment projects. - Data improvements and statistical rebasing present opportunity to enhance policymaking and transparency; adoption of Standardized Report Forms for monetary and financial statistics is urgent. *Source: IMF staff report (cr1818), mission meetings and staff analysis as presented in the provided chapter content.* ### 2017. The mission met with Prime Minister Hailemariam Desalegn, ### cr1818 - 2017. The mission met with Prime Minister Hailemariam Desalegn, ### BACKGROUND AND RECENT DEVELOPMENTS - Mission meetings: Prime Minister Hailemariam Desalegn; National Bank of Ethiopia Governor Teklewold Atnafu; Minister of Finance and Economic Cooperation Abraham Tekeste; officials of ministries and government agencies; representatives of public enterprises and the private sector; development partners. - IMF staff team: Mr. Escolano (head), Mr. Raman, Ms. Aivazova (all AFR), Ms. Marinkov (FAD), Mr. Pham (LEG), Mr. Ouedraogo (STA). Mr. Atingi Ego (AFR) joined for two days. Mr. Nakunyada (OED) attended meetings with the authorities. - Growth and sector performance (2016/17): - Real GDP growth: 9 percent. - Agriculture expanded by 8.8 percent (Meher season recovery). - Industry growth: 16 percent (power generation, construction). - Drought impacts: 8.5 million people requiring food assistance. - External sector and reserves: - Current account deficit: 8.2 percent of GDP in 2016/17 (narrowed by 1 percentage point of GDP). - Exports revenue growth: 2.9 percent. - Foreign Direct Investment (FDI) growth: 27.6 percent. - International reserves: US$3.2 billion, equivalent to 1.8 months of prospective imports of goods and services (2.5 months on the authorities’ preferred measure). - Monetary and exchange rate policy actions (October 2017): - Birr devaluation: 15 percent. - Interest rate floors on time and savings deposits: increased from 5 to 7 percent. - Planned base money growth lowered from 22 percent to 16 percent. - Exporters allowed to retain up to 30 percent of export proceeds in foreign currency (previously 10 percent). - Inflation: 13.6 percent in November 2017 (above authorities’ target of about 8 percent). - Fiscal stance and public borrowing (since October 2016): - 2016/17 general government budget deficit: 3.4 percent of GDP (including supplementary budget), slightly below budgeted 3.5 percent of GDP. - January 2017 supplementary budget: 1.1 percent of GDP; funded by privatization receipts and fuel price stabilization fund surpluses (no additional borrowing). - Strong controls on external borrowing by public enterprises implemented by MOFEC. - Result: stabilization of NPV of outstanding external obligations and substantial reduction in non-concessional commercial borrowing. - Fiscal table (selected figures, 2015/16–2016/17; Millions of birr): - Revenue and grants 2015/16: 244,819; 2016/17 preliminary: 269,151; Percent of budget 94.8. - Tax 2015/16: 190,520; 2016/17 preliminary: 210,173; Percent of budget 92.6. - Non-tax 2015/16: 41,285; 2016/17 preliminary: 46,502; Percent of budget 114.0. - Grants 2015/16: 13,014; 2016/17 preliminary: 12,477; Percent of budget 77.5. - Expenditure and transfers 2015/16: 280,893; 2016/17 preliminary: 329,658; Percent of budget 95.2. - Recurrent expenditure 2015/16: 136,709; 2016/17 preliminary: 176,635; Percent of budget 104.1. - Capital expenditure 2015/16: 144,184; 2016/17 preliminary: 153,023; Percent of budget 86.6. - Fiscal balance 2015/16: -36,073; 2016/17 preliminary: -60,507; Percent of GDP -2.4 (2015/16) and -3.4 (2016/17 preliminary). - Political context: - Civil unrest since early-2015 led to a 9-month state of emergency introduced in October 2016 (now lifted). - Cabinet reshuffle in October 2016, including appointment of a new Minister of Finance and Economic Cooperation. - Intensified implementation of GTP II policies: increased privatization and private sector participation, modern PPP legal framework, SOE financial and governance reform. ### OUTLOOK AND RISKS - Growth projections: - 2017/18 real GDP growth expected: 8.5 percent. - Medium-term convergence: 8 percent real GDP growth. - Inflation outlook: - Inflation likely to remain above the 8 percent target in the immediate term due to price momentum and devaluation pass-through. - Announcement: restrictive monetary and fiscal policy stances expected to bring inflation back to target in 2018/19. - External sector outlook: - Exports expected to pick up as key projects come online (electricity generation and transmission, railway to Djibouti, industrial parks), but time needed for testing, installation and training. - Import growth: moderate in 2017/18 due to public sector restraint; gradual acceleration over the medium term as manufacturing imports increase. - Current account deficit: projected to remain wide and decline only gradually. - Strategic framing: - Medium-term policies framed by GTP II, which emphasizes a major role for the public sector in public goods and anti-poverty programs while stressing private sector development and FDI in export-oriented manufacturing. - Main risks: - External debt and debt service burden: reclassification to high risk of debt distress in the DSA. - Under the baseline: NPV of public and publicly guaranteed external debt and debt service ratios relative to exports breach standard cross-country thresholds. - External public debt service due in 2017/18: about US$1.5 billion (estimate includes public enterprises). - Thin reserves and uncertainty in export pick-up timing increase debt servicing risk; adverse shocks could force abrupt import compression and undermine confidence. - Vulnerability to climate-related risks, including droughts. - Authorities’ mitigation actions: - Restrictive public sector external borrowing policies. - Birr devaluation. - Tight policy stance to increase domestic savings and contain demand spillovers. - Fast-track initiatives to mobilize private sector resources for infrastructure and public goods. - Strengthened safety net and humanitarian response mechanisms; development of preventive mitigation plans with World Bank assistance. ### AUTHORITIES' VIEWS - Priority: highest priority placed on correcting external imbalances and curbing the debt burden. - DSA disagreement: authorities disagreed with change in DSA assessment to high risk of debt distress, viewing recent increase in debt burden relative to exports as temporary due to delayed export response. - Concerns: reclassification to high risk could hinder remedial policies by limiting access to concessional financing and negatively affecting investor sentiment and public perceptions of reform efforts. - Policy alignment: no substantive disagreement with staff on appropriate policy response; authorities are decisively implementing those policies. ### POLICY DISCUSSIONS AND RECOMMENDATIONS - Transition to private-sector-led growth: - Agreement that the lead needs to be transferred from the public sector to the private sector as envisaged in GTP II. - Risk: continued broad public sector-led projects could aggravate short-term external imbalances and undermine private sector development objectives. - Recommendation: reprofile timing and sequence of public investment to pace with actual export revenue increases and progress in mobilizing domestic savings. - Macro policy stance: - Support for the authorities’ more restrictive macroeconomic stance, including actions after the birr devaluation. - Revenue and public resource mobilization: - Support for reforms in tax administration and financial management of SOEs to enhance domestic resources and their effective use. - Structural and private-sector reforms: - Accelerate private sector development reforms: roll-out of a financial market, improvements in the business climate. - Promote PPPs (with adequate safeguards), private concessions, and privatizations to preserve public resources and foster private sector development. - Debt and financing: - Maintain strong controls on external borrowing by public enterprises to stabilize NPV of external obligations and reduce non-concessional borrowing. *Source: IMF staff report (cr1818), mission meetings and staff analysis as presented in the provided chapter content.* ### 12. Budget implementation in 2017/18 is expected to remain appropriately restrictive. ### 12. Budget implementation in 2017/18 is expected to remain appropriately restrictive. ### Budget outturn and social spending - Staff projects a below-budget government deficit outturn of 2.5 percent of GDP, based on strict borrowing policies announced in the budget speech, particularly on capital projects financed by external loans. - Social needs remain large; staff supports the authorities’ intention to protect pro-poor spending. - Continued progress on investment efficiency would create fiscal room; staff encouraged participation in a Fund-WB Public Investment Management Assessment (PIMA). Box — The Social Safety Net in Ethiopia - The Productive Safety Net Program (PSNP): - Operational since 2005 and now in its fourth phase. - Reaches about 8 million beneficiaries, about half of whom are in drought-affected areas. - Government pledged US$500 million for the fourth phase; of this US$285 million constitutes cash grants, with the remainder offered as in-kind contributions (office space, employees, etc.). - Beneficiaries participate in productive activities; participation recorded in the Urban Payroll Attendance Sheet System (UPASS); payments transferred into individuals’ bank accounts. - Participants are encouraged to save and may be referred to microfinance institutions upon graduation. - The Urban Productive Safety Net Project (UPSNP): - A 5-year project targeting some 604,000 people in 11 urban centers. - Total allocation US$450 million, with the government contributing US$150 million through cash and in-kind transfers. - Applies PSNP mechanisms; beneficiaries registered in UPASS, receive payments through bank accounts, encouraged to save, and after three years can graduate and receive a lump sum to establish small enterprises with microfinance assistance. - The government mobilized reserve resources and donor pledges for the 2015/16 drought response, aiming to reduce dependence on donors over time. ### Revenue mobilization - Stepping up revenue mobilization is urgent. - Staff welcomed initiatives to expedite tax administration reforms with technical assistance, including from the Fund. - Staff encouraged reducing tax officials’ discretion and rent-seeking opportunities. - Policy recommendations included: - Banking-intermediated payments. - Small-taxpayer taxation based on standardized presumptive-income indicators (e.g., shop surface) indexed to inflation. - Establishing a regular cost-effectiveness review of existing tax incentives—a tax expenditure report—as part of the budget cycle. - Context and targets: - Ethiopia has a low tax ratio compared to other low-income countries. - Given current low collection, achieving the target of 17.2 percent of GDP by 2019/20 will be challenging. - Ongoing reforms and needs: - Income tax and tax administration laws approved in 2016 aimed at improving collection and broadening the base. - Ethiopian Revenue and Customs Authority implementing measures in human resources, data management, large-taxpayer compliance, tax auditing, arrears, automation, and public outreach. - Needed actions: clean up taxpayer register, strengthen monitoring and management of exemptions, update Integrated Tax Administration System software, and possibly further legal reforms and a review of the tax system to address poor VAT performance. ### SOE governance, privatization, and fiscal reporting - SOE governance and privatization: - Recent National Tobacco Company privatization, divestment plans of non-strategic SOEs, and ongoing audit of Ethio-Telecom are important steps. - Reforms should be accompanied by strengthened public oversight, timely audited IFRS-compliant financial statements for all public companies, and financial disclosure. - Fiscal reporting improvements: - Adoption of current Government Finance Statistics Manual (GFSM) standards remains urgent (Annex IV). - Public debt reporting is accurate and comprehensive; other public indicators from MOFEC and NBE are appropriate but differing methodologies cause integration difficulties and inconsistencies. - Recommendations: - More consistent and comprehensive fiscal reporting encompassing extra-budgetary accounts. - A budget annex with the non-financial public sector summary consolidated accounts to allow monitoring of broader financial and macroeconomic implications. ### Exchange rate, monetary policy, and financial sector - Exchange rate and pass-through: - The birr was managed toward a nominal depreciation path of 5–6 percent annually relative to the U.S. dollar, resulting in a real exchange rate overvaluation; staff estimates the real effective exchange rate was overvalued by about 20 percent during 2016/17. - The October 2017 devaluation: - Measured in USD per birr, the devaluation was 13.04 percent. - The devaluation eliminated on impact most of the accumulated overvaluation, leaving it at about 7 percent. - Exchange rate pass-through (Box 3): - A 1 percent movement in the NEER has historically been associated with a cumulative 0.43 percent movement in the CPI over 3 years, with most impact within the first 18 months. - A 1 percent NEER depreciation is expected to produce a cumulative increase of 0.23 percent in food prices over 3 years. - The recent 13-percent devaluation (measured in USD/birr) should raise domestic prices by approximately 5.6 percent over the next 18 months, or roughly 3.7 percent in the first year. These estimates are upper bounds; restrictive policies by the NBE can be expected to result in substantially smaller pass-through. - Staff advice: - Maintain a flexible exchange rate to preserve competitiveness and facilitate export diversification. - Avoid an excessively rigid birr-USD depreciation path; make it more responsive to USD evolution and inflation differentials with trading partners. - Monetary policy framework and financial deepening: - The October devaluation and subsequent monetary tightening will help address overvaluation; substantial reductions in base and broad money growth targets for 2017/18 are appropriate to contain second-round and pass-through inflationary effects. - As financial deepening proceeds, the NBE should gradually move towards indirect monetary policy instruments and reduce direct budget financing, letting financial agents and markets play a larger role. - The role of the market in setting interest rates will become important to promote secondary market trading; recent increase in interest rates is a positive step. - Over the medium term, a slower expansion of base money than currently targeted by the NBE would be more consistent with a neutral monetary stance. - Funding of the Development Bank of Ethiopia (DBE) and market instruments: - Banks are obliged to purchase NBE bills equivalent to 27 percent of their loan issuance; proceeds fund the DBE. - Staff argued the system penalizes short-term working capital financing; the bills’ low remuneration (3 percent) makes them unsuitable for secondary market trading. - Alternatives suggested: - Fund DBE expansion through retained profits. - If additional funding needed, raise market financing or direct budgetary capitalization for better governance, accountability, and transparency. - Increase competition through (possibly initially limited) presence of international banks to promote know-how and technological spillovers. - Financial stability and NPLs: - System-wide non-performing loans (NPLs) in June 2017 were 2.59 percent, below the statutory ceiling of 5 percent; banks overall appear profitable, well-capitalized, and liquid. - Rapid credit growth merits vigilance by banks and the NBE. - DBE NPLs have increased substantially to well above their separate statutory limit of 15 percent; this constitutes a contingent fiscal liability. - Staff welcomed plans to address DBE NPLs, including decisive recovery measures such as foreclosing and seizing collateral on non-viable projects; an objective assessment of future viability of affected loans is crucial to ensure only profitable projects are supported. *Source: cr1818 - 12. Budget implementation in 2017/18 is expected to remain appropriately restrictive.* ### 22. Difficulties in maintaining reliable correspondent banking relationships (CBRs) by ### 22. Difficulties in maintaining reliable correspondent banking relationships (CBRs) by ### CBR losses and AML/CFT framework - CBR losses by smaller non-systemic banks raise concerns. - CBR losses appear related to high compliance costs for the correspondent banks and small business volume. - The NBE, together with the Financial Intelligence Center, is making progress in strengthening Ethiopia’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, and implementing the action plan agreed with the Financial Action Task Force (FATF), which could help forestall additional CBR losses. - The NBE is encouraged to examine additional options, including encouraging banks to expand or consolidate, and engage home supervisors of the correspondent banks. ### Authorities’ views on monetary policy and exchange rate - The NBE largely agreed with staff’s assessment on the exchange rate and monetary policy stance, and has taken decisive actions consistent with Fund advice. - The authorities are considering staff’s advice on a more flexible depreciation path. - The authorities are taking actions to address bad loans in the DBE. - Regarding the banks’ obligatory purchase of NBE bills: - Authorities consider it has provided crucial incentives for banks to expand deposits and branches, without any detrimental effects on profitability. - It has provided the DBE with cost-effective funding and drained prior excess liquidity from the system. ### Supporting the emerging private sector and industrialization - Efforts to spur industrialization are showing positive results. - Strategic orientation focuses on labor intensive light manufacturing (leather, apparel, textiles, agro-processing and electricity) to capitalize on competitive advantages. - Promotion of industrial parks circumvents business climate impediments through simplified procedures, tax advantages, and easy access to financial services. - Wider reforms aim to address bottlenecks, most notably power supply and transport links. - Imminent start of operations of key projects such as the railway to Djibouti and transmission lines from Gibe III are welcome developments. - Staff encouraged the authorities to expedite the process of World Trade Organization (WTO) accession to enhance export prospects. - The Financial Inclusion Strategy has the potential to ease the cost of doing business and support domestic investment. - Authorities have intensified anti-corruption initiatives, resulting in high-profile arrests and legal prosecutions, contributing to improved investment environment. ### Business climate impediments and reforms - Main impediments to investment identified by businesses: - Foreign exchange shortages. - Onerous tax administration and licensing requirements. - The package of measures around the October 2017 birr devaluation will help address these impediments. - Authorities committed to improving key business environment rankings (e.g., WB’s Doing Business, World Economic Forum’s Competitiveness Index). ### Public-private partnerships (PPPs) and FDI - New PPP legislation, with appropriate fiscal safeguards, can help private sector development and fund public infrastructure. - The Council of Ministers recently endorsed PPP legislation, soon to be approved by parliament. - Creation of a PPP Directorate within MOFEC for centralized management and oversight of PPPs is welcome. - Staff encouraged working with development partners on a PPP framework that balances private participation and fiscal risk minimization. - Ethiopia is leveraging participation in the G20’s Compact with Africa to make progress on reforms and attract FDI, integrating GTP II strategic goals with commitments on macroeconomic stability, domestic revenue mobilization, public investment management, and business climate improvement. ### Foreign exchange restrictions and Article VIII assessment - Staff assessed Ethiopia’s foreign exchange system, legal framework, and market practices against Article VIII, Sections 2(a), 3 and 4 of the IMF’s Articles of Agreement. - One of the four exchange restrictions in existence in 2002 has been eliminated, while the scope of another restriction has been expanded. - Recent bank regulations on foreign exchange prioritization and rationing give rise to a new exchange restriction. - Staff encouraged removal of these restrictions and recommended moving toward eventual acceptance of obligations under Article VIII. - Authorities’ view: all existing restrictions affect exclusively the capital account and there are no exchange restrictions on current account payments; therefore, they do not intend to request approval. ### NBE safeguards, governance, and financial reporting - The NBE continues to address recommendations in the 2009 Safeguards Assessment. - Following changes on the NBE board: - A new audit committee has been formed. - A Risk Management Unit has started operations. - A full set of audited financial statements has now been published on the NBE’s website, in accordance with the safeguards policy. - The NBE is soliciting bids from consultants to transition to IFRS. - Outstanding issues: recommendations focused on strengthening the external audit process, and legal amendments to address safeguards weakness in the Central Bank Law remain outstanding. - The NBE did not see full legal independence as a pressing issue, noting operational independence in practice. - The NBE stressed that its monetary policy goals inform operational decisions, including on the amount of credit extended to the government, and annual limits on the latter were strictly observed. - The NBE did not consider the distribution to the government of unrealized gains on foreign assets to be a significant risk in the context of predictable nominal birr depreciation (Informational Annex). ### Statistical and data gaps - Improvement of economic statistics would strengthen policymaking and support investors’ confidence. - Authorities are rebasing the national accounts, expected to yield a significant improvement in accuracy of estimates. - Current national accounts remain confined to the supply side complemented by a few expenditure-side aggregates; sectoral and income accounts or higher frequency indicators are not produced. - Ethiopia does not provide monetary and financial data in the Standardized Report Forms. - Improvements in economic statistics and upgrading to current international standards are urgent tasks. - Staff encourages implementation of the enhanced General Data Dissemination System (e-GDDS). ### Staff appraisal: growth, external position, and policy recommendations - Preconditions for an export take-off and transition to private sector-led growth are in place. - Ethiopia has invested in trade-enhancing infrastructure; private investors are responding positively. - With key projects coming online, a significant improvement in exports is expected over the medium term. - Ongoing shift from traditional activities to higher value added tradeable products can support continued strong growth, offsetting fiscal and monetary restraint. - Stagnant exports in 2016/17 have raised debt sustainability risks; authorities have taken decisive actions to address external imbalances. - DSA indicates that the risk of debt distress has increased from “moderate” to “high”. - Staff advised steadfast implementation of ongoing policies, especially strong control of public external non-concessional borrowing, to lessen the chance of adverse outcomes. - As the export take-off becomes entrenched, risks should subside, providing scope to revisit external financing of critical future projects. - Creating more room for private sector participation in investment projects is advised. - Staff assesses the external position to be moderately weaker than the level consistent with medium-term fundamentals and desirable policies. - The October devaluation and adoption of a tighter monetary policy stance will help reduce the external current account deficit and associated risks, while budget execution needs to be tightened this year. - Monetary policy may need further tightening if inflationary pressure does not abate over the next few months, including further interest rate hikes. - Tight budget implementation as announced in the budget speech, targeting a return of the budget deficit to 2½ percent of GDP, and stringent monetary targets will help contain import demand and inflation. - Staff supports the October devaluation of the birr which corrected a large part of its overvaluation. - Going forward, adopting a more flexible exchange rate policy that responds to movements in the U.S. dollar and actual inflation differentials with respect to trading partners will be key to retain competitiveness gains and ease foreign exchange shortages. - The authorities did not request and staff does not recommend approval of the exchange rate restrictions maintained inconsistently with Article VIII obligations. - Pressing ahead with key structural reforms is key to medium-term growth prospects: - Improve efficiency of revenue administration and policy to create fiscal room and improve business climate. - Roll out a secondary market for government securities to deepen financial intermediation and improve savings allocation; this will require higher real interest rates and public savings, and reforms to the compulsory purchase by banks of low-yielding NBE bills to fund the DBE. - Data are broadly adequate for surveillance, but further efforts to address gaps and delays would improve policymaking and transparency. - Upcoming national accounts rebasing is an opportunity to collaborate with international experts. - Adoption of Standardized Report Forms for monetary and financial statistics is an urgent task. - Greater transparency on granular financial stability indicators and SOEs financial reporting would enhance policymaking and transparency. *Source: cr1818 - 22. Difficulties in maintaining reliable correspondent banking relationships (CBRs) by* ### 37. Staff recommends that the next Article IV consultation with Ethiopia be held on the ### cr1818 - 37. Staff recommends that the next Article IV consultation with Ethiopia be held on the ### Recommendation - Staff recommends that the next Article IV consultation with Ethiopia be held on the standard 12-month consultation cycle. ### Key economic indicators (selected) - Nominal GDP (2016, billions of U.S. dollars): 72.5 - GNI per capita, Atlas method (2015, current US$): 590 - Population total (2016, million): 91.2 - Urban population (2015, percent): 19.5 - Life expectancy at birth (2014, years): 64.0 - Poverty headcount ratio (2015/16, percent of population): 23.5 - Food poverty (percent of population): 24.8 - GINI index: 30.0 - Income shared by highest 10 percent of population: 27.4 - Income shared by lowest 20 percent of population: 8.0 ### Real economy and prices (annual percentage change) - GDP at constant prices (at factor cost): 2013/14 10.3; 2014/15 10.4; 2015/16 8.0; 2016/17 9.0; 2017/18 8.5; 2018/19 8.3; 2019/20 8.1; 2020/21 8.0; 2021/22 8.0 (Act./Est./Proj.) - GDP deflator: 11.0; 10.8; 9.5; 8.9; 11.7; 8.6; 8.6; 8.3; 8.2 (2013/14–2021/22 sequence) - Consumer prices (period average): 8.1; 7.7; 9.7; 7.2; 11.5; 8.5; 8.0; 8.0; 8.0 - Consumer prices (end period): 8.5; 10.4; 7.5; 8.8; 12.0; 8.0; 8.0; 8.0; 8.0 ### External sector (levels and growth) - Exports of goods and services (U.S. dollars, f.o.b.) growth (%): 8.7; -2.6; -3.5; 2.9; 12.9; 13.4; 13.9; 14.2; 14.2 - Imports of goods and services (U.S. dollars, c.i.f.) growth (%): 14.0; 25.1; 2.9; -4.8; 7.4; 7.6; 7.9; 8.2; 8.6 - Export volume (goods) growth (%): 6.4; -2.7; 4.9; -1.4; 13.9; 12.0; 13.6; 14.6; 15.0 - Import volume (goods) growth (%): 17.9; 32.5; 12.9; -5.4; 3.9; 5.6; 6.2; 7.2; 7.6 - Nominal effective exchange rate (end of period) changes (%): -2.8; 2.7; -2.3; 0.8; ............... (data truncated) - Real effective exchange rate (end of period) changes (%): 2.6; 10.1; 2.6; .............. (data truncated) ### Money and credit (growth rates and levels) - Broad money (annual percentage change): 26.9; 24.2; 20.4; 28.8; 20.1; 18.9; 19.2; 20.7; 21.1 - Base money (annual percentage change): 18.7; 15.2; 16.3; 22.7; 16.5; 16.5; 16.5; 16.5; 16.5 - Velocity (GDP/broad money): 3.56; 3.51; 3.43; 3.12; 3.15; 3.12; 3.06; 2.97; 2.87 - Change in net foreign assets (percent of beginning-period stock of broad money): 0.5; -3.2; -3.7; 3.4; 1.2; 3.8; 3.2; 3.4; 2.5 - Change in net domestic assets (including other items net): 26.4; 27.5; 24.0; 25.3; 18.9; 15.1; 16.0; 17.3; 18.6 ### Financial balances and investment - Gross domestic savings (percent of GDP): 20.5; 21.9; 22.4; 20.4; 20.4; 21.5; 21.4; 22.7; 22.1 - Public savings (percent of GDP): 5.0; 3.8; 3.9; 1.8; 1.6; 1.6; 1.6; 1.6; 1.7 - Private savings (percent of GDP): 15.6; 18.1; 18.5; 18.6; 18.8; 19.9; 19.8; 21.1; 20.4 - Gross domestic investment (percent of GDP): 38.0; 39.4; 38.5; 36.6; 36.4; 37.7; 36.9; 37.5; 36.3 - Public investment (percent of GDP): 17.0; 17.6; 17.2; 14.9; 13.8; 14.4; 13.1; 11.9; 14.9 - Private investment (percent of GDP): 21.0; 21.8; 21.3; 21.7; 22.6; 23.3; 23.8; 25.7; 21.4 - Resource gap (percent of GDP): -17.5; -17.5; -16.1; -16.2; -16.0; -16.2; -15.4; -14.8; -14.2 - External current account balance, including official transfers (percent of GDP): -6.4; -10.2; -9.1; -8.2; -7.7; -7.5; -6.8; -6.1; -5.5 ### Government finances (selected fiscal aggregates) - Revenue (percent of GDP): 13.8; 14.4; 15.2; 14.4; 14.7; 15.1; 15.5; 15.8; 16.3 - Tax revenue (percent of GDP): 12.5; 12.7; 12.5; 11.8; 12.4; 13.0; 13.4; 13.9; 14.5 - Nontax revenue (percent of GDP): 1.2; 1.6; 2.7; 2.6; 2.3; 2.2; 2.0; 1.9; 1.8 - External grants (percent of GDP): 1.1; 1.0; 0.9; 0.7; 0.8; 0.7; 0.6; 0.5; 0.4 - Expenditure and net lending (percent of GDP): 17.5; 17.3; 18.4; 18.5; 18.0; 18.3; 18.4; 18.6; 18.9 - Fiscal balance, excluding grants (cash basis, percent of GDP): -3.7; -3.0; -3.2; -4.1; -3.3; -3.2; -2.9; -2.7; -2.6 - Fiscal balance, including grants (cash basis, percent of GDP): -2.6; -1.9; -2.4; -3.4; -2.5; -2.5; -2.3; -2.2; -2.1 - Total financing (including residuals, percent of GDP): 2.6; 1.9; 2.4; 3.4; 2.5; 2.5; 2.3; 2.2; 2.1 - External financing (percent of GDP): 1.9; 1.0; 1.7; 1.6; 0.7; 0.9; 0.7; 0.6; 0.5 - Domestic financing (percent of GDP): 1.3; 1.4; 1.6; 1.9; 1.7; 1.6; 1.6; 1.6; 1.6 ### Public debt (non-financial public sector) - Public debt (percent of GDP): 46.8; 54.0; 55.4; 56.9; 59.0; 58.1; 55.5; 53.1; 50.7 - Domestic debt (percent of GDP): 21.0; 23.8; 24.8; 26.5; 25.9; 26.1; 25.6; 25.1; 24.8 - External debt (including to the IMF) (percent of GDP): 25.8; 30.3; 30.7; 30.4; 33.1; 31.9; 29.9; 27.9; 26.0 ### External balances and reserves - Overall balance of payments (millions of U.S. dollars): -97; -521; -831; 658; 477; 688; 602; 742; 580 - Gross official reserves (millions of U.S. dollars): 2,496; 3,248; 3,402; 3,197; 3,673; 4,361; 4,963; 5,705; 6,286 - Months of imports of goods and nonfactor services of following year: 1.5; 1.9; 2.1; 1.9; 2.0; 2.2; 2.3; 2.4; 2.5 - GDP at current market prices (billions of birr): 1,061; 1,298; 1,528; 1,786; 2,167; 2,552; 2,990; 3,495; 4,090 ### General government operations (levels, selected, millions of birr) - Total revenue and grants: 158,078; 199,609; 244,819; 269,151; 336,421; 405,367; 481,630; 571,150; 686,268 (2013/14–2021/22) - Revenue: 146,174; 186,589; 231,805; 256,674; 318,144; 386,443; 462,992; 552,760; 668,098 - Tax revenue: 133,119; 165,277; 190,520; 210,173; 268,161; 331,127; 401,867; 485,209; 593,321 - Direct taxes: 47,021; 60,149; 71,844; 81,417; 106,117; 132,933; 165,363; 205,102; 254,778 - Indirect taxes: 86,098; 105,129; 118,676; 128,757; 162,045; 198,196; 236,505; 280,109; 338,545 - Domestic indirect taxes: 40,499; 52,339; 55,953; 62,553; 76,495; 92,800; 111,897; 136,469; 166,673 - Import duties and taxes: 45,599; 52,790; 62,723; 66,202; 85,549; 105,395; 124,607; 143,638; 171,870 - Nontax revenue: 13,055; 21,312; 41,285; 46,502; 49,983; 55,316; 61,125; 67,551; 74,777 - Grants: 11,904; 13,020; 13,014; 12,477; 18,277; 18,923; 18,637; 18,389; 18,170 - Total expenditure and net lending (cash basis): 185,472; 224,881; 280,893; 329,658; 389,800; 468,195; 550,625; 648,365; 773,662 - Recurrent expenditure: 78,087; 107,198; 136,709; 176,635; 210,705; 245,905; 292,520; 343,899; 407,087 - Defense spending: 7,489; 8,814; 9,498; 11,940; 12,300; 15,000; 17,572; 20,541; 24,038 - Poverty-reducing expenditure: 38,141; 55,674; 71,690; 89,918; 109,829; 129,338; 155,780; 182,673; 216,497 - Interest payments: 3,794; 5,338; 7,232; 8,248; 11,391; 13,172; 15,613; 19,638; 24,897 - Domestic interest and charges: 2,290; 2,835; 3,639; 4,126; 6,546; 7,781; 9,457; 12,659; 17,030 - External interest payments: 1,504; 2,502; 3,593; 4,122; 4,845; 5,391; 6,156; 6,979; 7,866 - Other recurrent expenditure: 28,663; 37,373; 48,289; 66,529; 77,185; 88,396; 103,555; 121,047; 141,655 - Capital expenditure: 107,385; 117,683; 144,184; 153,023; 179,095; 222,290; 258,105; 304,466; 366,575 - Central treasury: 82,175; 92,424; 109,236; 115,772; 151,439; 185,860; 223,438; 271,059; 333,250 - External project grants: 9,394; 10,154; 12,724; 11,889; 16,137; 17,395; 16,847; 16,297; 15,721 - External project loans: 15,816; 15,105; 22,225; 25,362; 11,519; 19,036; 17,820; 17,110; 17,604 - Overall balance including grants (millions of birr): -27,394; -25,272; -36,073; -60,507; -53,379; -62,829; -68,995; -77,216; -87,394 - Overall balance excluding grants (millions of birr): -39,298; -38,293; -49,088; -72,984; -71,656; -81,752; -87,633; -95,605; -105,564 - Financing (millions of birr): 33,384; 32,106; 51,238; 73,140; 53,379; 62,829; 68,995; 77,216; 87,394 - Net external financing (millions of birr): 19,874; 13,155; 26,034; 28,953; 15,479; 22,761; 21,758; 21,300; 21,958 - Gross borrowing (millions of birr): 21,258; 15,105; 28,223; 31,621; 18,508; 26,716; 26,817; 27,627; 29,912 - Amortization (millions of birr): -1,424; -1,950; -2,190; -2,669; -3,029; -3,954; -5,059; -6,327; -7,954 - Domestic (net) financing (millions of birr): 13,510; 18,466; 24,704; 33,304; 37,900; 40,067; 47,238; 55,916; 65,436 - Total poverty-reducing expenditure (memorandum, millions of birr): 126,782; 148,493; 184,576; 204,284; 248,045; 291,597; 345,567; 404,268; 475,077 - Primary fiscal balance, including grants (millions of birr): -23,600; -19,934; -28,842; -52,259; -41,988; -49,657; -53,382; -57,578; -62,497 ### Monetary survey and central bank accounts (selected levels, millions of birr) - Monetary survey: Net foreign assets: 46,014; 36,410; 22,800; 38,035; 44,936; 71,419; 97,420; 130,492; 160,415 - Central bank net foreign assets: 26,821; 29,973; 10,506; 23,977; 27,848; 53,135; 77,856; 109,558; 138,016 - Commercial banks net foreign assets: 19,193; 6,436; 12,293; 14,058; 17,088; 18,284; 19,564; 20,934; 22,399 - Net domestic assets (monetary survey): 251,585; 333,337; 422,249; 535,022; 643,217; 747,110; 878,321; 1,047,290; 1,266,049 - Domestic credit: 300,472; 394,072; 491,375; 627,282; 698,733; 837,152; 977,197; 1,165,235; 1,411,285 - Claims on government (net): 26,630; 30,725; 47,638; 85,442; 103,572; 123,458; 146,927; 174,733; 207,299 - Claims on nongovernment: 273,842; 363,348; 443,736; 541,840; 595,161; 713,695; 830,271; 990,502; 1,203,986 - Public enterprises: 181,900; 242,927; 295,639; 348,672; 377,060; 446,024; 504,301; 591,290; 830,392 - Private sector: 91,942; 120,421; 148,097; 193,168; 218,101; 267,671; 325,969; 399,212; 373,594 - Broad money (millions of birr): 297,599; 369,747; 445,049; 573,057; 688,153; 818,529; 975,741; 1,177,782; 1,426,465 - Base money (millions of birr): 88,951; 102,468; 119,165; 146,258; 170,456; 198,581; 231,347; 269,519; 313,990 - Currency outside banks (millions of birr): 53,161; 60,496; 66,686; 73,918; 89,252; 104,871; 126,545; 148,944; 173,519 - Commercial bank reserves (millions of birr): 35,790; 41,971; 52,479; 72,340; 81,204; 93,710; 104,802; 120,576; 140,471 - Excess reserve deposit (billions of birr): 9,905; 8,615; 11,416; 25,456; 18,237; 24,110; 32,086; 34,756; 38,247 - Money multiplier (broad money/reserve money): 3.35; 3.61; 3.73; 3.92; 4.04; 4.12; 4.22; 4.37; 4.54 - Gross official foreign reserves (millions of U.S. dollars): 2,496; 3,248; 3,402; 3,197; 3,673; 4,361; 4,963; 5,705; 6,286 - Birr per U.S. dollar (end of period): 19.6; 20.6; 21.6; ................ (data truncated) ### Balance of payments (selected, millions of U.S. dollars) - Current account balance (millions of U.S. dollars): -3,576; -6,579; -6,574; -6,551; -6,497; -6,613; -6,526; -6,430; -6,367 - Current account balance (percent of GDP): -6.4; -10.2; -9.1; -8.2; -7.7; -7.5; -6.8; -6.1; -5.5 - Current account balance, excl. official transfers (millions of U.S. dollars): -5,255; -8,087; -7,965; -7,979; -8,023; -8,188; -8,148; -8,133; -8,142 - Current account balance, excl. official transfers (percent of GDP): -9.5; -12.5; -11.0; -10.0; -9.5; -9.3; -8.5; -7.7; -7.1 - Trade balance (millions of U.S. dollars): -9,929; -13,439; -13,857; -12,895; -13,582; -14,358; -15,174; -16,068; -17,062 - Exports of goods (millions of U.S. dollars): 3,277; 3,019; 2,868; 2,908; 3,343; 3,834; 4,455; 5,190; 6,045 - Coffee exports (millions of U.S. dollars): 714; 780; 723; 882; 973; 1,119; 1,273; 1,396; 1,484 - Oil seeds exports (millions of U.S. dollars): 652; 510; 477; 350; 404; 478; 525; 573; 600 - Gold exports (millions of U.S. dollars): 456; 319; 291; 209; 232; 271; 276; 281; 285 - Other exports (millions of U.S. dollars): 1,454; 1,410; 1,377; 1,465; 1,734; 1,966; 2,381; 2,941; 3,676 - Imports of goods (millions of U.S. dollars): -13,206; -16,459; -16,725; -15,803; -16,924; -18,192; -19,629; -21,258; -23,108 - Services (net, millions of U.S. dollars): 712; 124; -246; -611; 515; 832; 553; 677; 4 - Services exports: 3,174; 3,264; 3,196; 3,331; 3,703; 4,155; 4,645; 5,202; 5,821 - Services imports: -2,462; -3,140; -3,442; -3,393; -3,688; -3,997; -4,320; -4,666; -5,047 - Income (net, millions of U.S. dollars): -153; -262; -290; -508; -545; -625; -665; -705; -443 - Private transfers (net, millions of U.S. dollars): 4,115; 5,490; 6,429; 5,485; 6,089; 6,637; 7,367; 8,103; 8,590 - Official transfers (net, millions of U.S. dollars): 1,679; 1,508; 1,391; 1,428; 1,526; 1,575; 1,622; 1,703; 1,775 - Capital account balance (millions of U.S. dollars): 3,950; 7,381; 7,530; 6,688; 6,974; 7,301; 7,128; 7,172; 6,948 - Foreign direct investment (net, millions of U.S. dollars): 1,467; 2,202; 3,268; 4,171; 4,913; 5,446; 6,155; 6,829; 7,124 - Other investment (net, millions of U.S. dollars): 2,483; 5,179; 4,262; 2,517; 2,061; 1,855; 973; 344; -176 - Federal government (net, millions of U.S. dollars): 2,084; 2,567; 1,567; 1,388; 1,565; 1,567; 1,611; 1,600; 1,444 - Disbursements (millions of U.S. dollars): 2,214; 2,654; 1,675; 1,499; 1,353; 1,334; 1,354; 1,297; 1,111 - Amortization (millions of U.S. dollars): -130; -87; -108; -112; -212; -232; -257; -303; -333 - Other public sector long term (net, millions of U.S. dollars): 373; 2,228; 2,146; 626; 505; 75; -141; -485; -780 - Private sector borrowing (net, millions of U.S. dollars): 0; 35; 0; 45; 150; 348; 775; 0; -274; -309 (note: series includes zeros and negatives as reported) - Errors and omissions (millions of U.S. dollars): -471; -1,323; -1,787; 521; 0; 0; 0; 0; 0 - Overall balance (millions of U.S. dollars): -97; -521; -831; 658; 477; 688; 602; 742; 580 ### Financial stability (commercial banking sector, selected indicators, percent) - Capital to Risk-Weighted Assets: Jun-12 13.4; Jun-13 17.9; Jun-14 17.4; Jun-15 16.4; Jun-16 14.7; Jun-17 21.5 - NPLs to Total Loans: Jun-12 1.4; Jun-13 2.5; Jun-14 2.0; Jun-15 2.1; Jun-16 2.9; Jun-17 2.6 - Return on Assets: Jun-12 3.9; Jun-13 3.2; Jun-14 3.1; Jun-15 3.1; Jun-16 2.7; Jun-17 2.4 - Return on Equity (notes on calculation provided in source): Jun-12 55.7; Jun-13 48.0; Jun-14 44.9; Jun-15 47.4; Jun-16 43.0; Jun-17 29.6 - Liquid Assets to Total Assets: Jun-12 20.6; Jun-13 23.2; Jun-14 16.2; Jun-15 11.7; Jun-16 11.9; Jun-17 12.9 - Total Loans and Bonds to Total Deposits: Jun-12 94.0; Jun-13 93.9; Jun-14 100.6; Jun-15 105.0; Jun-16 107.2; Jun-17 107.3 *Sources: Ethiopian authorities, National Bank of Ethiopia (NBE), Central Statistical Agency (CSA), and IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix (RAM) ### Annex I. Risk Assessment Matrix (RAM) ### Domestic Risks - Insufficient progress in reprofiling public investment program in line with export outcomes or the availability of financing that does not increase public sector external debt. - Relative Likelihood: M/H - Impact if realized: H. With thin reserves, any shocks to debt service or meeting other financial obligations risks could result an undesirable import compression, withdrawal of private financing, including FDI, and a derailing of Ethiopia’s growth momentum. - Policy Response: Continue to maintain strict control over external borrowing of the public sector. Limit domestic credit to reduce pressures on the exchange rate. Exchange rate flexibility could also help alleviate pressures by reducing domestic demand for FX. - Slow progress in reforms enhancing export competitiveness. - Relative Likelihood: H - Impact if realized: H. Underperformance of exports, decreased foreign currency availability and lower capital goods imports. Slowdown in investment and growth. Weaker debt sustainability. - Policy Response: Implement structural reforms to enhance competitiveness, support export diversification, and address corruption. Allow greater exchange rate flexibility to support export competitiveness. Postpone some investment to reduce public sector borrowing and avoid deterioration in debt sustainability. - Slow implementation of tax administration and tax law reforms, hindering achieving targets in GTP II. - Relative Likelihood: H - Impact if realized: H. Fewer resources for investment, slower growth and less progress on poverty reduction. - Policy Response: Prioritize investment adequately to growing country's capacity to generate taxes. Accelerate tax administration and tax policy reforms to strengthen fiscal revenues. - Deterioration in asset quality in banks to due poor financial performance of SOEs. - Relative Likelihood: L - Impact if realized: H. Higher fiscal costs related to an increase in contingent liabilities, either directed at bailing out SOEs or recapitalizing banks, which could divert resources from investment. Loan write-offs could lead to credit curbs, further weakening growth. - Policy Response: Strengthen oversight of SOEs' performance. Prioritize large-scale investment to ensure efficient use of scarce domestic resources. Strengthen bank supervision and enforce prudential limits. - Climate change. Increased frequency of drought conditions. - Relative Likelihood: M - Impact if realized: H. Food price shock leading to a higher food inflation. Adverse social impact, and stalled progress in poverty reduction. Lower agricultural exports, higher social spending, higher spending in remedial measures (food and fertilizer imports, animal feed, etc.). Underperformance in hydro-power generation leading to lower supply for domestic consumption and lower exports. - Policy Response: Increase food assistance. Tighten monetary policy if second-round effects are significant. Slow SOE imports and increase fiscal expenditure for social and medical protection. Develop medium-term strategies to diversify energy mix. - Social/political unrest. - Relative Likelihood: L - Impact if realized: L/M. Further social unrest or prolonged maintenance of emergency security measures could impact growth, foreign direct investment, and the tourism sector. - Policy Response: Accelerate reforms to improve the business environment and private sector development, to reassure domestic and foreign investors. ### External Risks - Tighter global financial conditions (including leading to an appreciation of the U.S. dollar and euro). - Relative Likelihood: H - Impact if realized: H. Rising cost of external financing and higher risk premia on frontier markets like Ethiopia. If the birr is not allowed to adjust, further real appreciation, adversely affecting exports and the external deficit. Deterioration of the external debt position. - Policy Response: Reduce need for external financing by improving domestic revenue performance and prioritizing externally-financed capital projects. Accelerate reforms enhancing export competitiveness. Adopt a more flexible exchange rate policy. Prioritize investment projects to ensure debt levels remain manageable. - Retreat from cross-border integration. - Relative Likelihood: H - Impact if realized: H. Lower demand for Ethiopia's main exports leading to widening trade deficit and weaker debt sustainability. Reduction in remittances from diaspora. - Policy Response: Accelerate reforms enhancing export competitiveness. Adopt a more flexible exchange rate policy. - Reduced financial services by correspondent banks ("de-risking"). - Relative Likelihood: M - Impact if realized: H. Reduction in availability of foreign exchange to private banks, increase in cost of cross-border transactions, including remittances. Higher current account deficit and lower growth. Lower capacity of banks to finance economic activity. - Policy Response: Swiftly address AML/CFT deficiencies and avoid further action by the FATF. Closely monitor status of CBR and effectively communicate respondent banks’ AML/CFT compliance efforts to correspondent banks. Explore opportunities for banking sector consolidation. - Weaker-than-expected global growth. - Relative Likelihood: L/M - Impact if realized: H. Lower demand for Ethiopia's main exports leading to widening trade deficit and weaker debt sustainability. - Policy Response: Accelerate reforms enhancing export competitiveness. Adopt a more flexible exchange rate policy. ### RAM Note - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of Fund staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. *Annex I. Risk Assessment Matrix (RAM) — IMF staff compilation* ### 4. To achieve these objectives, it is expected that FAD, MCM, and STA will provide TA, ### cr1818 - 4. To achieve these objectives, it is expected that FAD, MCM, and STA will provide TA, ### Capacity development and technical assistance (TA) - FAD, MCM, and STA are expected to provide TA, supported by AFRITAC East. - LEG support in strengthening the AML/CFT framework could be provided in the context of pressures on CBRs, depending on the authorities’ readiness and availability of resources. - Fund TA has intensified for data quality improvements, especially for the compilation of the national accounts and balance of payments; work to re-base the national accounts is in train. - TA experts have had limited access to both the primary data and methodological tools used in the compilation of the data. ### Main risks to TA impact and mitigation measures - Main risks to the impact of TA in FY18: - Capacity constraints, including the insufficient number of staff working on key capacity development issues in the various agencies. - Lack of coordination between agencies involved in various TA interventions. - Commitment and ownership of the authorities in implementing TA recommendations. - Proposed mitigation measures: - Stronger selection of TA projects to ensure greater ownership by the authorities. - Earmarking dedicated staff in government agencies to implement the reforms. - Close coordination with Fund surveillance activity to ensure macro-critical projects are given priority. ### Authorities’ engagement - The authorities reviewed the Capacity Development Summary and provided suggestions and comments to clarify their strategy; these comments have been incorporated. ### Annex IV — Authorities’ response to past IMF policy recommendations (selected findings and actions) - Addressing external imbalances: - Staff advised aligning import and borrowing plans to actual export performance. - Actions taken since 2016 consultations included deferring or canceling low priority fiscal expenditure, resulting in a lower-than-budgeted fiscal deficit. - A directive to strictly control external borrowing by public enterprises, especially non-concessional borrowing, was issued in October 2016. - Consequently, both imports and the pace of accumulation of external non-concessional borrowing were curtailed significantly. - Exchange rate flexibility and competitiveness: - The birr depreciated steadily by around 6 percent over the course of 2016/17; appreciation of the U.S. dollar until end-2016 largely eroded those gains. - Uptick in domestic inflation resulted in upward pressure on the real exchange rate, offsetting nominal gains. - A devaluation of the birr relative to the U.S. dollar was announced in October 2017; NBE’s tighter monetary stance aims to contain inflationary impact and preserve competitiveness gains. - Domestic resource mobilization: - Revenue ratio declined from 15.2 to 14.4 percent of GDP between 2015/16 and 2016/17. - Progress on PPP framework reform: a new PPP law expected to be passed by Parliament in its next session. - Authorities have not yet acted on the recommendation to participate in a joint WB-IMF Public Investment Management Assessment (PIMA). - Monetary framework and financial system modernization: - Staff recommended: (i) allowing flexible determination of interest rates, (ii) improving market functioning and price setting mechanism for the exchange rate, and (iii) phasing out the requirement that private banks invest in NBE bonds a 27 percent of their credit (to finance the Development Bank of Ethiopia, DBE). - Decision to raise the floor on the deposit interest rate from 5 to 7 percent announced in October 2017. - NBE announced intention to allow secondary trading of government-issued securities during 2017/18. - Non-performing loan (NPL) levels in the DBE have increased since the last consultations and may call for more aggressive regulatory actions. - Data and statistics: - Little progress on migrating to more recent GFSM fiscal reporting standards. - Summary consolidated accounts of public enterprises are not produced. ### Debt sustainability and external sector (selected findings and projections) - Stagnant exports in 2016/17 and maturing non-concessional borrowing contracted in the last 5 years resulted in deterioration of 2017 Debt Sustainability Analysis (DSA) indicators relative to 2016. - In the 2017 DSA baseline: - Net present value of external debt-to-exports (PVDE) breaches the threshold. - There is a breach of the debt service-to-exports (DSE) indicator. - No breach of the debt service-to-exports-plus-remittances indicator. - Reserve and FX conditions: - In 2016/17 there was a decline in external reserves and widespread foreign exchange shortages. - Risk of external debt distress assessed as “high”. - Policy responses and outcomes: - Authorities curtailed import-intensive public projects and strictly controlled NCB by government and state-owned enterprises, stabilizing PV of external debt. - 2017/18 budget reaffirmed restrictive fiscal stance. - Policies narrowed the external current account deficit by one percentage point of GDP to 8.2 percent in 2016/17 (from 9.1 percent in 2015/16). - In October 2017, the birr was devalued by 15 percent and a restrictive monetary stance adopted. - Financing and debt stock: - By end-2016/17 PPG external debt stood at 30.7 percent of GDP and total public debt (including domestic) was 57 percent. - IDA set NCB ceilings: US$1 billion in FY13–FY15; ceilings adjusted downward to 1.1 and 0.5 percent of GDP for FY16 and FY17; NCB ceiling for FY18 set at $400 million or 0.5 percent of GDP. - Net FDI increased from US$4.2 billion in 2015/16 to US$4.9 billion in 2016/17. - New public external loans signed in 2016/17 amounted to US$2.8 billion; new loan commitments from private commercial creditors were US$97.3 million. - Growth and external accounts: - Growth in 2016/17 estimated at 9 percent. - Exports of goods and services rose by 2.9 percent in 2016/17; merchandise exports were nearly flat. - Imports fell by 4.8 percent in 2016/17. - Current account deficit narrowed to 8.2 percent of GDP in 2016/17. ### Scenarios and risk outlook - With steadfast implementation of announced policies and expected export take-off, risks are projected to diminish. - Policy slippages or further delays in export supply would keep risks elevated for an extended period. - Faster-than-projected ramp up of exports—driven by recently completed projects—would strengthen debt sustainability. - The projected baseline path of total public sector debt (external plus domestic) does not result in additional risks beyond those discussed for external debt. *Source: cr1818 - 4. To achieve these objectives, it is expected that FAD, MCM, and STA will provide TA,* ### 7. Ethiopia has adhered to the US$400 million ceiling on contracting new NCB in 2016/17 set by ### 7. Ethiopia has adhered to the US$400 million ceiling on contracting new NCB in 2016/17 set by ### Adherence to NCB ceiling and recent disbursement composition - Ethiopia adhered to the US$400 million ceiling on contracting new non-concessional borrowing (NCB) in 2016/17 set by IDA. - Based on end-2016/17 debt stock data, the stock of external loans from commercial lenders declined by US$261 million. - The decline suggests the bulk of NCB disbursements were from official lenders at below-market rates. - The government pursued a deliberate policy to avoid further deterioration in debt sustainability. ### Outlook and key macroeconomic assumptions - Exports: revised downward for the immediate term to reflect lower-than-expected export performance in 2016/17. - Positive export influences incorporated: - New industrial parks (notably Hawassa Industrial Park) with activities started. - Addis–Djibouti railway line completed and pending finalization of operational and safety test runs. - Hydropower facilities and electricity transmission lines gradually coming online in 2017 and over subsequent years. - Devaluation of the birr in October 2017 improving competitiveness. - Downside risks: - Potential further delays in export-supporting infrastructure. - Slower-than-expected progress in implementing structural reforms to elicit investment. - External market shocks affecting Ethiopia’s exports. - Upside risks: - Faster-than-projected recovery in exports driven by faster ramp-up in industrial parks. - Early completion of power transmission lines facilitating electricity exports to Kenya. ### Box 1 — Macroeconomic assumptions for the baseline scenario (selected projections and levels) - Real GDP growth: - Projected to remain around 8½ percent over the next two years before gradually stabilizing at 8 percent by 2021/22. - Over the long term, growth expected to converge to 5-6 percent. - CPI inflation: - Elevated in the near term; projected to converge to 8 percent in 2018/19 and remain at that level in the long run. - Government primary deficit: - Projected to decline to about 1½ percent of GDP. - External current account deficit (including official transfers): - Was 8.2 percent of GDP in 2016/17; gradual improvement expected over the longer term. - Exports of goods and services: - Estimated to have grown by 2.9 percent in 2016/17. - Projected to grow at an average of 13.7 percent between 2017/18–2021/22. - Imports of goods and services: - Declined by 4.8 percent in 2016/17. - Import growth expected to gradually increase over the longer term due to demand for imported capital goods. - Private transfers and remittances: - Private transfers declined by 14.7 percent in 2016/17. - Projections assume remittances will amount to about 3 percent of GDP by 2037/38. - FDI: - Projected to increase from US$4.9 billion in 2016/17 (5.2 percent of GDP) to US$7.1 billion by 2021/22, averaging 6.2 percent of GDP over this period. ### Assumptions on NCB, concessional lending, and borrowing terms - Actual NCB disbursed in 2016/17 (including disbursements to EAL) was around US$1.3 billion. - DSA assumptions for 2017/18–2021/22: - Non-concessional financing (mainly from official bilateral lenders at below-market rates) will amount to between US$300-650 million annually until 2021/22. - Concessional lending incorporated at US$1.8 billion in 2017/18, with US$1.3 billion from IDA. - Concessional lending projected to remain stable at US$1.5-1.8 billion annually until 2021/22 before declining gradually. - Characteristics of new disbursements of medium- and long-term external borrowing: - Average interest rate: 1.3 percent. - Maturity: 30.3 years. - Grace period: 5.7 years. - Stress-test assumption: - Marginal debt required under stress would be evenly split between domestic and external borrowing, maintaining the current split for debt outstanding. ### Debt-carrying capacity - Ethiopia’s capacity to carry debt assessed as “medium”. - CPIA 3-year average for 2014-16: 3.48 (within the 3.25–3.75 range for medium capacity). - CPIA score for 2016: 3.47. ### Selected projected indicators (from Text Table 1 — selected rows) - Grant Element of New External Borrowing (2017DSA row samples): 29.8 29.8 46.3 48.6 50.3 50.2 58.9 31.8 31.6 31.4 - New Commercial Loan Disbursements (billions of U.S. dollars) (2017DSA row samples): 2.6 1.2 1.2 30.6 54.0 45.2 0.3 88.0 0.2 92.0 0.0 01.250 1.250 1.250 - Real GDP Growth (annual percent change) (2017DSA): 9.0 9.0 8.5 8.3 8.1 8.0 6.5 5.5 5.0 5.0 - Current Account Balance (percent of GDP) (2017DSA): -8.2 -7.7 -7.5 -6.8 -6.1 -5.5 -5.1 -3.7 -3.3 -3.0 - Exports of goods and services (percent of GDP) (2017DSA): 8.3 8.3 9.1 9.5 9.9 10.3 11.4 12.9 13.3 13.5 - Exports of goods and services (annual percent change) (2017DSA): 2.9 12.9 13.4 13.9 14.2 14.2 10.4 8.8 8.9 8.7 - Fiscal balance (percent of GDP) (2017DSA): -3.0 -2.5 -2.5 -2.3 -2.2 -2.1 -2.4 -1.9 -1.9 -1.9 - International reserves (Billions of U.S. dollars) (2017DSA): 3.2 3.7 4.4 5.0 5.7 6.3 9.1 19.6 22.0 23.4 (Note: entries are presented as in the source table.) ### Box 2 — Electricity exports: capacity and projections - Installed capacity: - World Bank estimates: over 9,000 MW of installed capacity by 2020. - This could provide over 25,000 GWh of renewable energy. - Electricity export projections: - Exports set to double in 2019 to US$250 million and reach US$1 billion by 2023. - Exports could reach US$1.2 billion in 2025. - Projected volume growth from 1,443 GWh in 2016 to 14,657 GWh in 2023. - Negotiated average price under PPAs: US$0.07/kWh. - Projected electricity export values (calendar year basis) from source table: - 2016: 101 (US$ millions) - 2017: 101 - 2018: 101 - 2019: 250 - 2020: 523 - 2021: 811 - 2022: 872 - 2023: 1,026 - 2024: 1,118 - 2025: 1,210 - Projected volumes (GWh) from source table: - 2016: 1,443 - 2017: 1,443 - 2018: 1,443 - 2019: 3,571 - 2020: 7,471 - 2021: 11,586 - 2022: 12,457 - 2023: 14,657 - 2024: 15,971 - 2025: 17,286 - Regional integration: - Power transmission interconnection to Kenya scheduled to be commissioned in the first half of calendar year 2019. - Interconnection capable of over 2,000 MW transfer capacity. - Potential expansion to Tanzania and other EAPP countries; planned additional connections to Sudan and Egypt. ### External Debt Sustainability Analysis — Baseline scenario (key findings) - Debt stock: baseline shows debt stock declining gradually from 2017/18. - PV of debt-to-GDP (PVDG): reaches 22.6 percent (below threshold of 40 percent). - PV of debt-to-revenue (PVDR): reaches 141.7 percent (below threshold of 250 percent). - PV of debt-to-exports (PVDE): - Starts at 271.9 percent in 2017/18 (121.9 percentage points above the threshold). - Declines gradually and falls below the 150-percent threshold only in 2021/22, resulting in a 5-year breach under the baseline. - Magnitude and duration consistent with a “high” risk of debt distress in a cross-country context. - Debt service indicators: - Debt service-to-exports (DSE) ratio breaches its 20 percent threshold in 2017/18–20/21. - DSE peaks at 22.7 percent in 2019/20 before declining below the threshold in 2021/22. - Debt service-to-revenue (DSR) ratio remains well below its threshold throughout the projection window. ### Stress tests and additional analysis - Exports-based ratios are the only indicators to exceed thresholds under stress-test scenarios. - PVDE: - Already above threshold in baseline; exceeds threshold under all alternative scenarios for 9 years. - Shock to exports has the largest impact. - DSE under export shock: - Threshold breached in 2017/18–2022/23 and again in 2024/25. - Largest breach in 2019/20. ### Role of remittances in debt sustainability - Remittances: - Were 5.5 percent of GDP in 2016/17. - Exceed exports of goods (3.6 percent of GDP) in 2016/17. - Remittance-augmented scenario: - Augmented PV of debt-to-exports-plus-remittances indicator still breaches threshold but by a smaller amount (41.6 percentage points of total exports plus remittances) and for a shorter duration (3 years) than the standard approach. - Debt service-to-exports-plus-remittances indicator does not breach its threshold when remittances are included. - Probability approach: - Solvency indicators and debt service-to-exports ratio do not appear to raise concerns under the probability approach, remaining well below relevant thresholds throughout the projection period. ### Assessment, vulnerabilities, and policy recommendations - Main vulnerability: narrow export base and export concentration (agricultural commodities, air passenger transportation) with low export revenue from goods and services (about 7 percent of GDP). - Although external debt as percent of GDP is moderate (about 30 percent), debt represents a high proportion of exports. - Policy directions to reduce external vulnerabilities and debt risks: - Enhance competitiveness (including through a more flexible exchange rate). - Pursue export diversification. - Mobilize domestic savings. - Curb import-intensive projects. - Seek alternative funding sources for public goods (concessions to private investors, PPPs with adequate fiscal safeguards, and privatization proceeds). - Recent changes and implications: - Trajectories of debt stock ratios not materially changed from last year, but debt service indicators have deteriorated. - PVDE at its maximum is about 17 percentage points higher than in the 2016 DSA, though length of breach declined from 7 to 5 years. - Deterioration in DSE suggests increased liquidity risks. - Staffs assess the risk of debt distress in Ethiopia as “high” (up from “moderate risk” in the 2016 DSA). - Authorities’ actions: - Recognize risks from export underperformance. - Under IDA’s NCBP and staff advice, have implemented strong policies to restrain NCB and reduce external imbalances. - If implemented steadfastly, these policies could mitigate the risk of an external debt distress episode. - Structural features mitigating acute distress: - Debt structure largely made up of concessional credit. - Few marketable instruments. - Existing exchange controls on birr convertibility and capital account minimize occurrence of debt distress episode. - The Eurobond in the portfolio has eight years to maturity as of the report. *Source: IMF staff report text (cr1818).* ### 17. The authorities did not concur with staffs’ assessment that the risk of debt distress is “high”. ### 17. The authorities did not concur with staffs’ assessment that the risk of debt distress is “high”. ### Authorities' view and policy response - Authorities disagreed with staff assessment that the risk of debt distress is “high”. - Rationale cited: - Concerns stem from the small export base, which the authorities consider a temporary feature and a biasing factor in the DSA results. - None of the other indicators in the DSA breached their respective thresholds, either in the baseline or in the stress tests. - Policy actions underway or planned: - Redouble efforts to expand the export base through a broad scope of policy initiatives, including provision of export-supporting infrastructure. - Private sector response has been positive; exports from the new industrial zones are commencing. - Interim policies to curb external borrowing going forward and reduce external imbalances. - Authorities’ confidence: - Confident these actions will safeguard debt sustainability until the export take-off becomes entrenched. ### Composition of external creditors and public debt (exact figures as reported) - External liabilities (USD, million): - Total: 22,643 (As at end-June 2016) — Percent of Total: 100.0 — Percent of GDP: 31.2 - Total: 24,492 (As at end-June 2017) — Percent of Total: 100.0 — Percent of GDP: 30.6 - Official Creditors: - 15,950 — 70.4 percent of Total — 22.0 percent of GDP (As at end-June 2016) - 18,061 — 73.7 percent of Total — 22.6 percent of GDP (As at end-June 2017) - Multilaterals: - 7,720 — 34.1 percent of Total — 10.6 percent of GDP (As at end-June 2016) - 9,067 — 37.0 percent of Total — 11.3 percent of GDP (As at end-June 2017) - IDA: 5,560 — 24.6 percent of Total — 7.7 percent of GDP (As at end-June 2016) - IDA: 6,564 — 26.8 percent of Total — 8.2 percent of GDP (As at end-June 2017) - IMF: 195 — 0.9 percent of Total — 0.3 percent of GDP (As at end-June 2016) - IMF: 152 — 0.6 percent of Total — 0.2 percent of GDP (As at end-June 2017) - AfDF: 1,495 — 6.6 percent of Total — 2.1 percent of GDP (As at end-June 2016) - AfDF: 1,684 — 6.9 percent of Total — 2.1 percent of GDP (As at end-June 2017) - Other multilateral creditors: 470 — 2.1 percent of Total — 0.6 percent of GDP (As at end-June 2016) - Other multilateral creditors: 667 — 2.7 percent of Total — 0.8 percent of GDP (As at end-June 2017) - Bilaterals: - 8,231 — 36.3 percent of Total — 11.3 percent of GDP (As at end-June 2016) - 8,994 — 36.7 percent of Total — 11.2 percent of GDP (As at end-June 2017) - Paris Club: 390 — 1.7 percent of Total — 0.5 percent of GDP (As at end-June 2016) - Paris Club: 380 — 1.6 percent of Total — 0.5 percent of GDP (As at end-June 2017) - Non-Paris Club: - 7,840 — 34.6 percent of Total — 10.8 percent of GDP (As at end-June 2016) - 8,614 — 35.2 percent of Total — 10.8 percent of GDP (As at end-June 2017) - Private Creditors: - 6,692 — 29.6 percent of Total — 9.2 percent of GDP (As at end-June 2016) - 6,431 — 26.3 percent of Total — 8.0 percent of GDP (As at end-June 2017) - Of which: Bond and Notes Holders: 1,000 — 4.4 percent of Total — 1.4 percent of GDP (As at end-June 2016) - Of which: Bond and Notes Holders: 1,000 — 4.1 percent of Total — 1.2 percent of GDP (As at end-June 2017) - Note: Sources: Ethiopian authorities and IMF staff calculations. Includes external liabilities of the National Bank of Ethiopia. ### Public and PPG debt composition in birr (exact figures) - Total (billions of birr): - 871.9 — Percent of Total: 100.0 — Percent of GDP: 56.0 (As at end-June 2016) - 1,038.9 — Percent of Total: 100.0 — Percent of GDP: 57.0 (As at end-June 2017) - External: - 493.6 — 56.6 percent of Total — 31.2 percent of GDP (As at end-June 2016) - 566.0 — 54.5 percent of Total — 30.6 percent of GDP (As at end-June 2017) - Domestic: - 378.2 — 43.4 percent of Total — 24.8 percent of GDP (As at end-June 2016) - 472.9 — 45.5 percent of Total — 26.4 percent of GDP (As at end-June 2017) - Central government domestic debt: - 167.2 — 19.2 percent of Total — 10.9 percent of GDP (As at end-June 2016) - 238.5 — 23.0 percent of Total — 13.3 percent of GDP (As at end-June 2017) - Banks: - 123.2 — 14.1 percent of Total — 8.1 percent of GDP (As at end-June 2016) - 178.4 — 17.2 percent of Total — 10.0 percent of GDP (As at end-June 2017) - Of which NBE: 109.1 — 12.5 percent of Total — 7.1 percent of GDP (As at end-June 2016) - Of which NBE: 135.6 — 13.1 percent of Total — 7.6 percent of GDP (As at end-June 2017) - Other banks: 14.1 — 1.6 percent of Total — 0.9 percent of GDP (As at end-June 2016) - Other banks: 42.8 — 4.1 percent of Total — 2.4 percent of GDP (As at end-June 2017) - Non-banks: - 44.0 — 5.1 percent of Total — 2.9 percent of GDP (As at end-June 2016) - 60.1 — 5.8 percent of Total — 3.4 percent of GDP (As at end-June 2017) - SOEs: - 211.0 — 24.2 percent of Total — 13.8 percent of GDP (As at end-June 2016) - 234.4 — 22.6 percent of Total — 13.1 percent of GDP (As at end-June 2017) - Note: Source: Ethiopian authorities, IMF staff calculations. Includes external liabilities of the National Bank of Ethiopia. ### Public Debt Sustainability Analysis (key findings and scenarios) - External debt accounts for about 55 percent of total public and publicly guaranteed (PPG) debt. - As at end-June 2017: - Total PPG debt amounted to 57 percent of GDP (up from 56 percent in 2015/16). - Domestic debt of the central government accounts for 23 percent of total debt. - The remainder (22.6 percent) is the domestic debt of SOEs. - Debt dynamics and thresholds: - The present value of total public debt stays well below the indicative threshold of 56 percent of GDP in the baseline and under most scenarios considered throughout the projection period. - The only alternative scenario where a breach occurs is under the assumption of a primary fiscal balance throughout the simulation horizon fixed at its 2017/18 level. - Baseline vs. fixed primary balance scenario: - Baseline assumes a gradual increase in domestic interest rates to achieve positive real interest rates by the end of the DSA projection window. - In the baseline, the primary balance increases gradually over time as fiscal policy accommodates increased financing costs. - The fixed primary balance scenario implies a gradual widening of the fiscal deficit, contrary to the authorities’ policy intentions and past record of prudent budgetary policy. - Longer-term outlook: - All indicators show a declining trend after 2025/26 as public investment tapers off with the completion of the large projects planned under the GTP II, reducing the need for new borrowing. *Source: Ethiopian authorities and IMF staff calculations (as presented in the chapter).* ### 20. The deterioration in debt sustainability indicators results in Ethiopia’s risk of external debt ### cr1818 - 20. The deterioration in debt sustainability indicators results in Ethiopia’s risk of external debt ### Risk rating and main conclusion - The deterioration in debt sustainability indicators results in Ethiopia’s risk of external debt distress being raised to “high”. - Authorities have taken strong measures to limit further build-up of risks and to reduce them over time. - Preconditions for export take-off are largely in place with completion of key trade-enhancing infrastructure: the railway line to Djibouti, industrial parks, and power generation and transmission facilities. - The private sector response has been positive and FDI has increased substantially. - The structure of external debt (mainly official credit, often concessional), limited marketable debt instruments, existing controls on birr convertibility and capital account reduce the risk of an external debt distress episode. - Key policy message: maintain and build on current implementation of prudent policies. ### Policy recommendations and government actions - Encourage private sector participation in the provision of public projects through PPPs, privatizations, and concessions to reduce public borrowing requirements while ensuring investment in critical projects. - Passage of the new PPP law will support the authorities’ agenda; authorities are encouraged to work with development partners on implementing the PPP framework to strike the appropriate balance between eliciting private participation and minimizing fiscal risks. ### Stress tests and scenario parameters (as presented) - The most extreme stress test is the test that yields the highest ratio on or before 2025; in various figures/tests it corresponds to: - One-time depreciation shock (appears as the most extreme in multiple panels). - An Exports shock (used in some panels). - Specific scenario parameter preserved from source: - B6. One-time 30 percent nominal depreciation relative to the baseline in 2019. - Alternative scenario assumption preserved from source: - A2. New public sector loans on less favorable terms in 2018-2038: "Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline." ### Selected quantitative indicators and fiscal-macroeconomic assumptions (exact figures from source tables and notes) - Exchange rate (transaction-weighted average interbank market exchange rate as of November 29, 2017): Br 27.1657 = US$1. - Grant element assumed on residual financing (i.e., financing required above baseline) 6/: 4141414141414141 - Table footnote definitions preserved exactly: - Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. - Debt service is defined as the sum of interest and amortization of medium and long-term debt. - Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. - Public sector debt indicators (selected lines from Table 3, preserving numeric precision and formatting from source): - Public sector debt 1/: 61.2 59.6 53.8 55.7 55.2 53.4 51.7 50.0 48.6 43.8 33.9 - of which: foreign-currency denominated: 31.4 32.5 29.4 31.3 30.2 28.6 27.0 25.3 23.5 16.8 8.9 - PV of public sector debt: ......46.3 47.0 46.3 44.4 42.7 41.2 40.1 36.5 30.1 - PV of public sector debt-to-revenue and grants ratio (in percent): ......272.4 269.4 259.9 246.5 234.3 220.5 208.5 181.8 136.1 - Debt service-to-revenue and grants ratio (in percent) 4/: 13.4 16.5 18.5 19.0 19.1 19.7 18.2 15.5 15.4 15.3 14.9 - Primary deficit that stabilizes the debt-to-GDP ratio: -0.5 7.5 11.0 2.6 4.8 5.4 5.2 5.0 4.7 2.9 1.3 - Real GDP growth (in percent) historical and projections: 10.3 10.4 8.0 10.2 1.2 9.0 8.5 8.3 8.1 8.0 8.0 8.3 6.0 5.0 6.0 - Inflation rate (GDP deflator, in percent): 10.9 10.8 27.5 18.1 10.4 11.3 8.5 8.2 8.1 8.3 8.7 8.9 8.2 9.1 8.1 - PV of public sector debt-to-revenue ratio (in percent) (alternative line): ......304.3 300.4 289.0 272.0 257.2 240.4 225.9 194.4 136.1 - Sensitivity analysis snapshots (selected figures preserved as presented): - Table 2 entries (examples): Baseline 2017/18 - 2018/19 - 2019/20 - 2020/21 - 2021/22 - 2022/23 - 2027/28 - 2037/38: Baseline23212018171595 (as presented in table header block). - Table 4 selected baseline projections (PV of Debt-to-GDP Ratio): Baseline47 46 44 43 41 40 37 30 (as presented). ### Data, statistical, and surveillance context (selected factual points) - The de-facto exchange rate arrangement is classified as a crawl-like arrangement; authorities describe their exchange rate regime as a managed float with no predetermined path for the exchange rate. - Article IV consultation: Ethiopia is on the standard 12-month consultation cycle. The last consultation was concluded on September 26, 2016. - Data and statistical weaknesses noted in source (areas targeted for TA): - National accounts: deficiencies in source data and compilation, particularly agricultural production, private consumption, saving, investment, and fixed capital formation; significant statistical discrepancies remain. - Government finance statistics: coverage shortcomings; data based on GFSM 1986; need to establish GFSM 2001 framework and consolidate extra-budgetary funds. - Monetary statistics: MFS not reported to STA since 2010; deviations from recommended methodology; Other Financial Corporations data not reported; Financial Access Survey data not reported since 2012. - Balance of payments: improvements needed in coverage, valuation, timing, and classification; full implementation of BPM6 recommended. - Technical assistance (examples from the joint TA list and timing preserved in source): Balance of Payments Statistics (January 2016); National Accounts and Price Statistics (April 2016); Domestic Debt Market Development (June 2016); External Sector Statistics (September 2016, October 2017); Revenue Administration (multiple entries 2016–2017). *Prepared by the African Department (in collaboration with other departments); Staff Report for the 2017 Article IV Consultation — Informational Annex (December 12, 2017).* ### Introduction ### Introduction ### Overview - Ethiopian authorities appreciate the constructive engagement with staff during the recent Article IV mission. - Authorities broadly agree with staff’s assessment of underlying challenges and key policy recommendations, but raise concerns regarding the DSA assessment. - The authorities are committed to implement sound macroeconomic policies to support rapid growth and poverty reduction, while intensifying measures to mitigate drought, tighten monetary policy, maintain a strict fiscal policy, and curtail public borrowing. - The second Growth and Transformation Plan (GTP II) covers the period 2015/16 to 2019/20 and guides efforts to promote rapid industrialization, structural transformation, unleash export potential, foster economic diversification and ensure debt sustainability. ### Recent Economic Developments and Outlook - GDP growth rebounded to 10.9 percent in 2016/17 from 8 percent recorded in FY2015/16 (according to actual data recently released by the authorities). - Growth drivers in 2016/17: recovery in agriculture; expansion in construction, tourism, and manufacturing; increased power generation; and substantial increase in foreign direct investment (FDI) inflows. - Key flagship investment projects expected to strengthen future performance: electricity generation and transmission, the railway line to Djibouti, and the development of industrial parks. - Potential upside risks: recovery in international commodity prices and improved export performance. - Inflation and external balances: - Recent rise in inflation spurred by firming food prices. - Tightening of monetary policy in October 2017 is expected to dampen inflation towards the authorities’ 8 percent target. - Decline in food imports in FY2016/17 and slowdown in public sector capital imports compressed the import bill. - External current account deficit improved in FY2016/17. ### Fiscal Policy and Debt Sustainability - Authorities maintain a tight fiscal policy stance. - Budget deficit for 2016/17 remained below the 3.5 percent of GDP target. - Fiscal stance characterized by elevated capital expenditures while protecting priority social spending; a robust safety net system has benefitted poor families in both rural and urban areas. - Revenue mobilization and public financial management measures: - Strengthening tax administration and public financial management, including automation. - Broadening the tax base, intensifying tax education and enforcement measures. - Promoting use of the banking system for all government payments. - Finalizing the establishment of a Treasury Single Account. - Undertaking a cost - benefit analysis on the tax incentive structure in collaboration with the Word Bank and the IMF to ascertain scope for rationalization. - Measures to improve debt sustainability: - Imposed stringent controls on non-concessional borrowing by state owned enterprises (SOEs) and the government, consistent with the new centralized external debt directive. - Finalizing the legal framework for Public Private Partnership (PPP) arrangements to reduce the burden of project financing from the public sector. - Authorities remain current in settlement of all external debt obligations. - Policies to boost exports and reduce debt risks: - New investments in industrial parks, cluster developments, and power generation expected to unlock additional export revenues. - Current power exports to Sudan and Djibouti; supply to Kenya expected once transmission line construction is finalized. - Commencement of operations on the Addis Ababa-Djibouti railway line on January 3, 2018 expected to significantly reduce transportation and logistics costs and enhance export competitiveness. - Authorities consider the debt situation temporary and attribute concerns to delayed export take-off; they expected greater weight to country specifics in the DSA assessment. ### Monetary and Financial Sector Policy Measures - Reserve money targeting framework maintained to contain inflation at low and stable levels; National Bank of Ethiopia (NBE) confines advances to the government within strict reserve money targets and ensures congruency between fiscal and monetary policies. - Progress toward establishing a secondary market for government securities; Fund Technical Assistance (TA) expected to help operationalize the secondary market and pave the way for gradual adoption of indirect monetary policy instruments. - Exchange rate and interest rate measures: - Devalued the Ethiopian birr by 15 percent in October 2017 to address underlying current account imbalances. - Raised minimum deposit rates from 5 to 7 percent to dampen incipient inflationary pressures. - Lowered planned base money growth from 22 to 16 percent. - NBE committed to ensure the exchange rate remains supportive of export competitiveness and stands ready to further tighten monetary policy to counter inflationary effects of the devaluation. - Banking sector soundness and challenges: - Banking sector characterized by well capitalized and profitable institutions with low non-performing loans (NPLs) estimated at 2.6 percent in June 2017. - NBE vigilantly monitors the Development Bank of Ethiopia’s (DBE) asset quality following a rise in the DBE’s NPLs due to slow up-tick in manufactured exports. - Expected increase in export earnings from industrial park projects financed by the DBE is expected to improve loan collection and reduce NPLs. - DBE has made adequate provisioning for impaired loans and is intensifying loan recovery efforts; authorities view DBE’s NPLs as a short-term phenomenon. - Financial inclusion and infrastructure: - Branch network expanded by 33 percent in FY2016/17 to 44,257 branches. - Increased use of electronic money, mobile and agent banking services. - NBE strengthened surveillance and monitoring toolkit to mitigate risks from new products. - Launch of the National Financial Inclusion Strategy (NFS) in October 2017 expected to provide further impetus. - AML/CFT improvements: - Development of a National Action Plan (NAP) in line with FATF recommendations and accepted by the Africa/Middle East Joint Group (JG). - Establishment of committees to operationalize the NAP and complete key time bound activities. ### Structural Reforms - Infrastructure investments: substantial resources deployed to develop road, rail, dry ports, air transport, energy, telecommunications, water, and irrigation infrastructure to reduce cost of doing business and improve productivity. - Resulting inflows: country recorded over US$4 billion in FDI inflows in 2017. - Private sector engagement: joint venture and PPP arrangements between government and private sector for industrial parks and supportive infrastructure to exploit comparative advantages. - SOE reforms: - Comprehensive public enterprise reforms to enhance commercial viability and strengthen governance. - Privatization of ten out of the remaining twenty SOEs under the Ministry of Public Enterprises (MPE). - Privatization expected to lessen government burden and create additional fiscal head-room. - Reforms include improving corporate governance, upgrading financial systems, and developing capacity in business leadership among SOEs. - Significant strides in finalization of audited financial statements of SOEs to align with international standards; remaining SOEs on course to meet set deadlines. - Data and statistical capacity: authorities seek continued TA to improve quality and reliability of macroeconomic statistics; planned rebasing of national accounts to refine statistics in line with best international standards. ### Conclusion - Authorities remain steadfast in implementing prudent macroeconomic policies to sustain robust economic performance and ensure debt sustainability. - They view the current debt situation as temporary and are taking bold measures to boost investment and exports, and contain public borrowing. - Authorities remain concerned with the DSA assessment given unique country circumstances, but optimistic that private sector and export-oriented industrialization will reduce debt sustainability risks and propel Ethiopia into lower middle income status by 2025. - Authorities remain committed to engagement with the IMF and appreciate Fund advice and technical assistance. *Source: cr1818 - Introduction.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1818.pdf_