IMF Executive Board Concludes 2019 Article IV Consultation with The Federal Democratic Republic of Ethiopia
IMF News, January 28, 2020
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- Published: January 28, 2020
Summary Findings and Recent Developments
- On December 20, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with The Federal Democratic Republic of Ethiopia and approved three-year arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Ethiopia.
- Ethiopia sustained high economic growth over the last decade with substantial progress on reducing poverty and improving social indicators.
- In 2018/19, real gross domestic product (GDP) is estimated to have grown by 9 percent, driven by manufacturing and services.
- Goods export performance remained weak and foreign exchange shortages persist.
- Policies targeting public investment and debt contributed to a narrowing of the current account deficit to 4.5 percent of GDP and a reduction in public and publicly-guaranteed debt to 57 percent of GDP.
- Inflation remained elevated in double digits, largely due to higher food prices; non-food inflation has also been trending upward.
- Revenues came in below target, but expenditure cuts contained the fiscal deficit to 2.5 percent of GDP, below budget.
- The authorities announced a Homegrown Economic Reform Plan (macroeconomic, structural and sectoral policies) to address vulnerabilities and structural bottlenecks inhibiting private sector activity.
Near-term Outlook and Projections
- The macroeconomic measures under the Homegrown Economic Reform Plan are expected to contribute to slower real GDP growth of 6.2 percent in 2019/20.
- Public expenditure restraint and tighter monetary policy are expected to contribute to a gradual reduction in inflation.
- Reserves are expected to improve to around US$4 billion by end 2019/20, sufficient to cover 2 months of prospective imports, due to higher external financing flows, including from the Fund.
- Over the medium term, announced macroeconomic and structural reforms are expected to reduce public debt, lower external vulnerabilities, and strengthen growth, investment and exports.
- Outlook is subject to downside risks, particularly from domestic opposition to reforms ahead of upcoming elections, rising protectionism worldwide, weaker-than-expected global growth, and climate-related shocks.
Executive Board Assessment — Key Analysis and Recommendations
- Directors agreed that Ethiopia’s growth model, driven by public investment, supported rapid growth and improved living standards but led to a build-up of debt and external vulnerabilities.
- Directors highlighted urgency of fundamental reforms to:
- Correct macroeconomic imbalances.
- Ease structural bottlenecks.
- Lay foundation for sustainable, inclusive growth led by the private sector.
- Directors welcomed the Homegrown Economic Reform Plan and recommended Fund support to help catalyze private investment and donor financing.
- Given high implementation risks amid external vulnerabilities and political uncertainty, Directors stressed the importance of:
- Steadfast determination.
- Strong communication.
- Social protection to obtain broad-based public buy-in.
- Directors urged authorities to seek additional debt reprofiling from external creditors to improve debt dynamics.
Exchange Rate, Monetary Policy, and Financial Sector Recommendations
- Directors supported a comprehensive approach to address exchange rate overvaluation and foreign exchange shortages, prioritizing:
- Increasing exchange rate flexibility.
- Reducing inflation.
- Strengthening competitiveness.
- Rebuilding international reserves.
- Recommendation for a reform roadmap to transition to a market clearing exchange rate regime.
- Support for monetary tightening, complemented by:
- Spending restraint by state owned enterprises (SOEs).
- Phasing out of central bank financing of the government and the Development Bank of Ethiopia (DBE).
- Continued efforts needed to modernize the monetary policy framework and further develop financial markets to deepen inclusion.
- Financial sector priorities include:
- Reform SOEs to reduce public debt vulnerabilities and improve governance and transparency.
- Reduce SOEs’ borrowing, strengthen their financial positions, and prioritize investment activities.
- Immediate priorities: an asset quality review of the Commercial Bank of Ethiopia, and a strategy to address the DBE’s non-performing loans and develop a sustainable financing model.
Fiscal Policy, Revenue Mobilization, and Social Protection
- Directors agreed reforms are urgently needed to reverse the recent decline in domestic revenue mobilization and meet social and infrastructure needs.
- Directors welcomed planned extension of value added tax coverage.
- Emphasized need to:
- Protect high quality social assistance programs.
- Rationalize subsidies.
- Improve expenditure efficiency more broadly.
Governance, AML/CFT, and Data
- Directors called on the authorities to build on progress made in improving the AML/CFT framework, and further strengthen data quality.
Key Economic Indicators and IMF Staff Projections (selected items)
- GDP at constant prices (at factor cost), annual percent change:
- 2017/18: 7.7
- 2018/19 (Prel.): 9.0
- 2019/20 (Program): 6.2
- 2020/21: 6.1
- 2021/22: 7.0
- 2022/23: 7.5
- 2023/24: 8.0
- GDP deflator:
- 2017/18: 12.4
- 2018/19 (Prel.): 13.2
- 2019/20 (Program): 19.4
- 2020/21: 12.3
- 2021/22: 8.8
- 2022/23: 8.1
- Consumer prices (period average):
- 2017/18: 14.5
- 2018/19 (Prel.): 12.6
- 2019/20 (Program): 11.1
- Consumer prices (end period):
- 2017/18: 16.8
- 2018/19 (Prel.): 15.3
- 2019/20 (Program): 18.1
- 2020/21: 9.4
- Current account and external:
- Exports of goods and services (U.S. dollars, f.o.b.), annual percent change: 13.1 (2017/18); 7.9 (2018/19); 12.8 (2019/20); 12.7 (2020/21); 14.0 (2021/22); 9.7 (2022/23)
- Imports of goods and services (U.S. dollars, c.i.f.), annual percent change: 0.2 (2017/18); 4.1 (2018/19); 11.3 (2019/20); 8.5 (2020/21); 6.6 (2021/22); 5.1 (2022/23)
- External current account balance, including official transfers (Percent of GDP): -6.2 (2017/18); -4.5 (2018/19); -5.5 (2019/20); -4.6 (2020/21); -4.0 (2021/22); -3.4 (2022/23)
- Money and credit:
- Change in net foreign assets: 3.5 (2017/18); -63.2 (2018/19); 83.9 (2019/20); 222.1 (2020/21); 95.2 (2021/22); 71.7 (2022/23); 42.5 (2023/24)
- Broad money, annual percent change: 29.2 (2017/18); 19.7 (2018/19); 18.0 (2019/20); 19.2 (2020/21); 19.9 (2021/22); 21.6 (2022/23); 22.0 (2023/24)
- Base money, annual percent change: 19.1 (2017/18); 12.5 (2018/19); 13.0 (2019/20); 13.5 (2020/21)
- Financial balances (Percent of GDP):
- Gross domestic savings: 24.1 (2017/18); 22.3 (2018/19); 25.2 (2019/20); 25.0 (2020/21); 26.7 (2021/22); 29.5 (2022/23); 31.8 (2023/24)
- Public savings: 2.1 (2017/18); 1.7 (2018/19); 2.6 (2019/20); 3.6 (2020/21); 4.7 (2021/22); 4.9 (2022/23); 5.0 (2023/24)
- Gross domestic investment: 34.2 (2017/18); 35.2 (2018/19); 34.3 (2019/20); 36.3 (2020/21); 38.1 (2021/22); 38.6 (2022/23); 40.8 (2023/24)
- Resource gap: -10.1 (2017/18); -12.9 (2018/19); -9.1 (2019/20); -11.4 (2020/21); -9.0 (2021/22)
- Government finances (Percent of GDP, unless otherwise indicated):
- Revenue: 11.5 (2017/18); 11.7 (2018/19); 14.2 (2019/20); 14.7 (2020/21)
- Tax revenue: 10.7 (2017/18); 10.1 (2018/19); 13.3 (2019/20)
- Nontax revenue: 1.6 (2017/18)
- External grants: 0.8 (2017/18); 1.2 (2018/19); 0.9 (2019/20); 0.6 (2020/21); 0.7 (2021/22)
- Expenditure and net lending: 16.1 (2017/18); 15.0 (2018/19); 16.0 (2019/20); 17.1 (2020/21); 17.4 (2021/22)
- Fiscal balance, excluding grants (cash basis): -3.8 (2017/18); -3.0 (2018/19); -2.6 (2019/20)
- Fiscal balance, including grants (cash basis): -2.5 (2017/18); -2.2 (2018/19)
- Total financing (including residuals): 3.0 (2017/18); 2.5 (2018/19); 2.2 (2019/20); 1.9 (2020/21)
- External financing: 1.3 (2017/18); 1.0 (2018/19)
- Domestic financing (including privatization): 2.7 (2017/18); 0.3 (2018/19); 0.4 (2019/20)
- Public debt (Public and publicly-guaranteed debt, including the National Bank of Ethiopia and Ethio Telecom), Percent of GDP:
- 59.5 (2017/18)
- 56.8 (2018/19)
- 53.4 (2019/20)
- 52.7 (2020/21)
- 52.0 (2021/22)
- 47.5 (2022/23)
- 43.3 (2023/24)
- Domestic debt: 28.6 (2017/18); 25.4 (2018/19); 16.6 (2019/20); 15.5 (2020/21)
- External debt (including to the IMF): 30.4 (2017/18); 28.2 (2018/19); 28.0 (2019/20); 30.1 (2020/21); 32.8 (2021/22); 30.9 (2022/23); 27.9 (2023/24)
- External and reserves (in millions of U.S. dollars):
- Overall balance of payments: -202 (2017/18); 58 (2018/19); -346 (2019/20); 22 (2020/21); -547 (2021/22); 184 (2022/23); 1,692 (2023/24)
- Gross official reserves: 2,848 (2017/18); 3,415 (2018/19); 4,031 (2019/20); 5,661 (2020/21); 7,441 (2021/22); 9,551 (2022/23); 11,232 (2023/24)
- Months of imports of goods and nonfactor services of the following year: 1.8 (2017/18); 2.0 (2018/19); 3.9 (2019/20); 4.3 (2020/21)
- GDP at current market prices (billions of birr): 2,200 (2017/18); 2,696 (2018/19); 3,391 (2019/20); 4,094 (2020/21); 4,828 (2021/22); 5,630 (2022/23); 6,594 (2023/24)
Source: IMF Communications Department, "IMF Executive Board Concludes 2019 Article IV Consultation with The Federal Democratic Republic of Ethiopia", January 28, 2020.
