IMF Executive Board Concludes 2017 Article IV Consultation with the Federal Democratic Republic of Ethiopia

IMF News, January 17, 2018

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Executive Board concluded the Article IV consultation on January 12, 2018.
Ethiopia recorded annual average GDP growth of about ten percent in the last decade.
Poverty rate fell from 44 percent in 2000 to 23.5 percent in 2015/16.
Executive Directors commended human development improvements and output growth, and the effective policy response to the recent drought.
Directors highlighted external imbalances and inadequate reserve buffers as a key risk and urged determined policy actions to control external borrowing.

GDP growth in 2016/17 is estimated at 9 percent, driven by agriculture rebound and expanded industrial activity.
Current account deficit declined to 8.2 percent of GDP in 2016/17 from 9.1 percent the previous year.
Export revenues were largely unchanged despite significant volume growth due to low global agricultural commodity prices.
Foreign direct investment (FDI) growth was 27.6 percent due to investments in new industrial parks and privatization inflows.
International reserves at end-2016/17 stood at US$3.2 billion (1.8 months of prospective imports cover).
Inflation was 13.6 percent in November 2017.

In October 2017, the National Bank of Ethiopia (NBE) devalued the birr by 15 percent relative to the U.S. dollar.
NBE simultaneously increased interest rates and adopted a restrictive stance to minimize adverse effects on inflation.
Since October 2016, the Ministry of Finance and Economic Cooperation (MOFEC) implemented cuts in external borrowing by the government and public enterprises (SOEs), and reduced outstanding non-concessional commercial debt.
General government deficit outturn in 2016/17 was 3.4 percent of GDP (including privatization).
The 2017/18 budget speech announced additional consolidation policies, with the budget deficit projected at 2.5 percent of GDP.

Directors commended:
- Restrictive public sector borrowing policy to contain external debt and imports while protecting pro-poor spending.
- Devaluation of the currency to regain competitiveness.
- Tight monetary policy to rein in inflation.
Directors recommended:
- Continue determined implementation of policies to reduce external imbalances.
- Maintain controls on external borrowing.
- Consider a more flexible exchange rate to preserve competitiveness and foster export diversification.
- Eliminate exchange restrictions.
- Strengthen domestic revenue mobilization and accelerate ongoing tax administration reforms.
- Improve management and oversight of public enterprises, including audits for some large SOEs.
- Use public-private partnerships (PPPs), long-term concessions, and privatization with attention to minimizing fiscal risks.
- Develop a broader range of indirect monetary policy instruments and promote an active inter-bank market.
- Monitor NPLs of the national development bank and shift its funding mechanism to a less distortive system.
- Implement the action plan to further strengthen the AML/CFT framework.
- Adopt international standards for budgetary, monetary, and financial statistics and address data weaknesses in national accounts and public sector financial reporting.

Near-term growth:
- Growth is expected to stay high in 2017/18, at 8.5 percent, supported by drought recovery and export expansion as new manufacturing facilities and infrastructure come online.
Medium-term growth:
- Growth is expected to remain around 8 percent, supported by sustained expansion in exports and investment under GTP II.
Risks:
- External imbalances and inadequate reserve buffers remain a key risk.
- Inflationary pressures that could necessitate further policy tightening.
- Need for continued reforms to strengthen the business environment and preserve competitiveness gains.

Months of imports cover (goods and nonfactor services of following year): 1.5 (2013/14)

International reserves at end-2016/17: US$3.2 billion (1.8 months of prospective imports cover).

General government deficit outturn in 2016/17 (including privatization): 3.4 percent of GDP.
2017/18 budget deficit projected at: 2.5 percent of GDP.
FDI growth in 2016/17: 27.6 percent.
Inflation in November 2017: 13.6 percent.
Birr devaluation in October 2017: 15 percent relative to the U.S. dollar.

IMF Press Release No. 18/06, January 17, 2018.