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

IMF News, October 11, 1996

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

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Bibliographic details

• Published: October 11, 1996

Loan approval and financing details

• The IMF approved a new three-year loan under the enhanced structural adjustment facility (ESAF) for Ethiopia totaling the equivalent of SDR 88.5 million (about US$127 million).
• The first annual ESAF loan is equivalent to SDR 29.5 million (about US$42 million) and will be disbursed in two equal installments, the first of which is available immediately.
• ESAF lending terms: interest rate of 0.5 percent; repayable over 10 years with a 5 1/2-year grace period.

Recent economic performance (background)

• Ethiopia implemented an IMF-supported program in mid-1992 under the structural adjustment facility (SAF) to stabilize the economy and transition to a market-based system.
• 1995/96 outcomes cited:
  • Real GDP growth: 7.7 percent.
  • Inflation (period average): 1.2 percent.
  • Foreign exchange position: equivalent of eight months of imports.
  • External current account deficit widened to 9.6 percent of GDP from 5.3 percent in 1994/95, due partly to lower world market coffee prices and strong import growth.

Medium-term strategy and 1996/97 program objectives

• Main macroeconomic objectives for 1996-99 supported by the ESAF loan:
  • 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.
  • Maintain gross official foreign reserves at the equivalent of 7.5 months of imports.
• 1996/97 program targets:
  • Real GDP growth: 6 percent.
  • Inflation rate: 1.2 percent.
  • External current account deficit: about 10.5 percent of GDP.
  • Gross official foreign reserves: equivalent of eight months of imports.
• Policy stance and measures:
  • Sustain growth with price stability through increased domestic savings and investment and further liberalization of exchange and trade systems.
  • Rigorous fiscal policy: broaden tax base, strengthen tax administration, restrain expenditures, phase out fertilizer subsidies, compress the wage bill.
  • Tight monetary targets to be supported by a move toward market-determined interest rates, including more aggressive government sales of treasury bills to the nonbank public.
  • External measures: initial reduction in the export proceeds surrender requirement; introduction of foreign exchange bureaus within the banking system; near- and medium-term moves to lower tariff rates.

Structural reform policies

• Measures underway or planned:
  • Easing restrictions on foreign investment.
  • Adopting more realistic prices for commodities still subject to controls.
  • Increasing market-based allocation of land.
  • Accelerating privatization of public enterprises; remaining state enterprises to operate on a strictly commercial basis.
  • Revisions of the investment code to permit private domestic investment in the telephone system and allow joint ventures between foreign and domestic partners in selected activities (large-scale engineering and metallurgical industries, pharmaceutical and fertilizer production).
  • Accelerating public auctioning of urban land leases to support private investment.
  • Agricultural sector reforms: overhaul of extension and research services, liberalization of input marketing, privatization of state farms.

Addressing social needs

• Public investment priorities to emphasize roads, energy, water supply, primary education, and basic health care.
• Budget shares for primary education and basic health services to be increased; health care financing to be improved.
• Measures to enhance the status of women: revise laws and regulations to guarantee equal access to resources, property, and business activities.
• Population policy: promote education with a view to reducing the fertility rate.

Challenges and external financing

• Ethiopia will require strong adjustment efforts in coming years.
• To achieve debt sustainability, Ethiopia will 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.

IMF membership, quota, and outstanding use of credit

• Ethiopia joined the IMF on December 27, 1945.
• Ethiopia's quota 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).

Key economic indicators (selected)

• Real GDP (percent change): 1994/95 = 4.9; 1995/96* = 7.7; 1996/97 = 6.0; 1997/98 = 6.0; 1998/99** = 6.0.
• Consumer prices (period average): 1994/95 = 13.4; 1995/96* = 1.2; 1996/97 = 1.2; 1997/98 = 3.0; 1998/99** = 2.2.
• Overall fiscal balance, excluding grants (percent of GDP, deficit-): 1994/95 = -8.8; 1995/96* = -8.1; 1996/97 = -7.7; 1997/98 = -6.7; 1998/99** = -5.6.
• External current account balance, excluding grants (percent of GDP, deficit): 1994/95 = -5.3; 1995/96* = -9.6; 1996/97 = -10.5; 1997/98 = -9.1; 1998/99** = -8.2.
• International reserves (months of imports): 1994/95 = 6.8; 1995/96* = 8.7; 1996/97 = 7.9; 1997/98 = 7.6; 1998/99** = 7.0.
• Sources for indicators: Ethiopian authorities; and IMF staff estimates.
• * Estimate.
• ** Program.