Press Release: IMF Approves New Three-Year ESAF Loan for Ethiopia

October 11, 1996

The International Monetary Fund (IMF) today approved a new three-year loan under the enhanced structural adjustment facility (ESAF) 1 for Ethiopia totaling the equivalent of SDR 88.5 million (about US$127 million) to support the Government's medium-term economic and reform program for 1996-99. The first annual ESAF loan, in an amount equivalent to SDR 29.5 million (about US$42 million), will be disbursed in two equal installments, the first of which is available immediately.


The transitional government of Ethiopia implemented an economic reform program in mid-1992, supported by a three-year loan under the IMF's structural adjustment facility (SAF), designed to stabilize the economy and replace the previous system of central control and planning with a market-based system to create a favorable environment for renewed growth. In 1995/96, Ethiopia built upon the progress it had achieved under the program, especially by maintaining a prudent fiscal policy stance and exerting more effective monetary restraint while making additional advances in external liberalization. As a result, the country experienced economic growth of 7.7 percent, accompanied by a sharp deceleration in the rate of inflation to 1.2 percent and a further strengthening of the foreign exchange position to the equivalent of eight months of imports. It achieved this growth in spite of lower world market coffee prices that affected its terms of trade, resulting in a widening of the current account deficit to 9.6 percent of GDP, from 5.3 percent in 1994/95, as receipts from exports tapered off, while imports continued to grow strongly.

Medium-Term Strategy and the 1996/97 Program

Under Ethiopia's medium-term strategy, the main macroeconomic objectives of the 1996-99 program, supported by the ESAF loan, are to achieve 6 percent growth in real GDP; limit the rate of inflation to 2 percent; contain the external current account deficit at about 9.2 percent of GDP; and maintain gross official foreign reserves at the equivalent of 7.5 months of imports.

The program aims to sustain economic growth with price stability through increased domestic savings and investment and a further substantial liberalization of the exchange and trade system. A rigorous fiscal policy stance is premised on the continued broadening of the tax base and strengthening of tax administration, as well as restraint in expenditures, including the phasing out of fertilizer subsidies and compression of the wage bill. The program includes appropriately tight monetary targets, which will require a move toward market-determined interest rates, particularly through more aggressive government sales of treasury bills to the nonbank public. In the external area, the program includes a number of actions, including an initial reduction in the export proceeds surrender requirement and the introduction of foreign exchange bureaus within the banking system, as well as near- and medium-term moves to lower tariff rates.

Within this medium-term strategy, the program for 1996/97 aims at real GDP growth of 6 percent, to limit the inflation rate to 1.2 percent, to contain the external current account deficit at about 10.5 percent of GDP, and to maintain gross official foreign reserves at the equivalent of eight months of imports.

Structural Reform Policies

In the area of structural reforms, Ethiopia has begun easing restrictions on foreign investment, adopting more realistic prices for the few commodities still subject to controls, and stepping up the market-based allocation of land. Privatization of public enterprises is being accelerated, and those enterprises remaining under government control will be operated on a strictly commercial basis. Revisions of the investment code have recently been enacted to permit private domestic investment in the telephone system, and to allow joint ventures between foreign and domestic partners in selected activities, including large-scale engineering and metallurgical industries, and pharmaceutical and fertilizer production. The public auctioning of urban land leases is to be accelerated to support increased private investment, while the agricultural sector will be improved through the overhaul of extension and research services, the liberalization of input marketing, and the privatization of state farms.

Addressing Social Needs

Public investment will continue to emphasize urgently required physical and social infrastructure. In particular, the government will continue to redirect investment toward roads, energy, water supply, primary education, and basic health care. Budget shares for primary education and basic health services are to be increased, and health care financing will be improved. To enhance the status of women, the government plans to revise laws and regulations to guarantee equal access by women to resources, property, and business activities. With respect to population, education will be promoted with a view to reducing the fertility rate.

The Challenge Ahead

Ethiopia will require strong adjustment efforts in the years to come. To achieve debt sustainability, Ethiopia will also need to rely on exceptional financing and foreign direct investment. The program aims to maintain gross official foreign reserves at a level to provide a cushion for servicing external debt, and to withstand unforeseen terms of trade shocks or droughts.

Ethiopia joined the IMF on December 27, 1945, and its quota 2 is SDR 98.3 million (about US$141 million). Ethiopia's outstanding use of IMF credit currently totals SDR 49.42 million (about US$71 million).

Ethiopia: Selected Economic Indicators

1994/95 1995/96* 1996/97** 1997/98** 1998/99**

(Percent change)
Real GDP 4.9 7.7 6.0 6.0 6.0

Consumer prices (period average) 13.4 1.2 1.2 3.0 2.2

(Percent of GDP)
Overall fiscal balance, excluding grants (deficit-) -8.8 -8.1 -7.7 -6.7 -5.6

External current account balance, excluding grants (deficit) -5.3 -9.6 -10.5 -9.1 -8.2

(Months of imports)
International reserves 6.8 8.7 7.9 7.6 7.0
Sources: Ethiopian authorities; and IMF staff estimates.
* Estimate.
** Program.

1 The ESAF is a concessional IMF lending facility for assisting low-income members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years with a 5 1/2-year grace period.

2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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