## Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with the Federal Democratic Republic of Ethiopia

_IMF News, October 3, 2014_

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## Bibliographic details
- Published: October 3, 2014

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### Overview
- On September 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ethiopia.
- Ethiopia’s recent macroeconomic performance described as strong, with robust economic growth supported by higher agricultural production, and large public sector and foreign direct investments.
- Inflation remained contained in single digits; the fiscal stance at the general government level is described as cautious, though public enterprises continue to provide an expansionary impulse.

### Fiscal developments and public sector financing
- General government budget execution in 2013/14 reflects conservative spending.
  - Recurrent spending is estimated to remain at 7.4 percent of Gross Domestic Product (GDP).
  - Capital spending-to-GDP ratio will increase by about 0.3 percentage points to 11.0 percent of GDP.
  - Overall revenue-to-GDP ratio estimated to fall from about 14.6 in 2012/13 to about 14.1 in 2013/14, mainly due to a decline in nontax revenue which more than offset tax revenue improvement.
  - General government budget deficit, including grants, estimated at 2.7 percent of GDP in 2013/14, compared to 2.0 percent of GDP a year ago.
- Public enterprises continued to borrow heavily from the banking system and externally to finance investments.
  - Financing of the overall public sector likely on the order of 10 percent of GDP in 2013/14.
  - Public and publicly guaranteed (PPG) external debt estimated to have increased to about 23 percent of GDP from 20.5 percent of GDP in 2012/13.
- Government finances (selected ratios, percent of GDP)
  - Revenue: 13.9 (2011/12); 14.6 (2012/13); 14.1 (2013/14 (Est.))
  - Tax revenue: 11.6; 12.5; 13.0
  - Nontax revenue: 2.3; 2.0; 1.1
  - External grants: 1.7; 1.5; 1.6
  - Expenditure and net lending: 16.8; 18.1; 18.4
  - Fiscal balance, excluding grants (cash basis): -2.9; -3.5; -4.3
  - Fiscal balance, including grants (cash basis): -1.2; -2.0; -2.7
  - Total financing (including residuals): 1.2; 2.7; (no value for 2013/14 provided)
  - External financing: 0.9; (no value for 2012/13 and 2013/14 provided)
  - Domestic financing (not including privatization): 0.5; 0.2; (no value for 2013/14 provided)
  - Public debt: 32.7; 37.4; 44.7
  - Domestic debt: 16.9; 22.2; (no value for 2013/14 provided)
  - External debt (including to the IMF): 17.9; 20.5; 22.6
  - Overall balance (in millions of U.S. dollars): -1,067; 338; -57
  - Gross official reserves (in millions of U.S. dollars): 2,262; 2,368; 2,761

### Monetary policy and inflation
- Tight monetary policy supported the NBE’s inflation objective in 2013/14.
  - Inflation remained in single digits throughout the year and was 8.5 percent in June 2014.
  - Food prices rose by 6.2 percent; non-food inflation in the double-digits.
- Base money increased by 17.5 percent in April 2014, driven mainly by:
  - Claims on government: 19.6 percent
  - Claims on non-government: 11.2 percent
- Money and credit (annual percentage change / percent of beginning period stock of broad money)
  - Net foreign assets: -11.6; 3.1; -0.5
  - Net domestic assets (including other items net): 44.5; 21.0; 25.6
  - Broad money: 32.9; 24.1; 25.1
  - Base money (annual percentage change): 0.4; 13.6; 16.7
  - Velocity (GDP/broad money): 3.91; 3.64; 3.39

### External sector developments
- Developments mixed: deterioration in the trade balance offset by net inflows on services and transfers.
  - Current account deficit estimated to have widened from US$2.8 billion (6.0 percent of GDP) in 2012/13 to US$3.5 billion in 2013/14 (7.1 percent of GDP).
  - Deficit financed largely by concessional and non-concessional inflows and foreign direct investment (FDI).
  - Substantial capital account inflows facilitated a modest build up in the NBE’s reserves.
  - Exchange rate adjusted only gradually under the NBE’s managed float policy.
  - Premium in the parallel market remained modest; gradual nominal depreciation insufficient to prevent an appreciation of the real effective exchange rate.
- External sector indicators (annual percentage change / percent)
  - Exports (U.S. dollars, f.o.b): 14.8; -2.6; 9.1
  - Imports (U.S. dollars, c.i.f): 33.5; 4.1; 12.7
  - Export volume: -0.2; 9.4; 14.7
  - Import volume: 24.5; 4.3; 13.3
  - Terms of trade (deterioration -): 7.2; -11.9; -5.0
  - Nominal effective exchange rate (end of period): 2.8; -5.2; …
  - Real effective exchange rate (end of period): 19.7; -1.1; (no value for 2013/14 provided)
  - External current account balance, including official transfers (percent of GDP): -6.5; -6.0; -7.1
  - Gross domestic savings (percent of GDP): 15.0; 16.0; 12.8
  - Gross domestic investment (percent of GDP): 33.1; 33.0; 30.2
  - Public investment (percent of GDP): 25.0; 24.6; 21.7
  - Private investment (percent of GDP): 8.0; 8.4; (no value for 2013/14 provided)
  - Resource gap: -18.1; -17.0; -17.4

### Economic outlook and risks
- 2014/15 budget plan targets the general government deficit at 3 percent of GDP and maintains a strong pro-poor focus.
- Monetary policy anchored on base money geared toward maintaining inflation in single digits.
- Public debt-to-GDP ratio expected to rise, reflecting large disbursements associated with implementation of investment projects under the Growth and Transformation Plan (GTP).
- Downside risks identified by Executive Directors include:
  - External financing of the public investment program
  - Declining prices for export commodities
  - Weather-related shocks

### Executive Board Assessment — findings and policy recommendations
- Commendations and findings:
  - Directors commended authorities for delivering robust and broad-based economic growth, maintaining inflation in single digits, expanding employment, improving social indicators, and progress toward the Millennium Development Goals.
  - Sustainability of public sector-led growth strategy seen as threatened by identified downside risks; shift toward private sector-led, sustainable growth recommended.
- Fiscal policy recommendations:
  - Continue fiscal prudence to achieve GTP goals while reducing crowding out of the private sector.
  - Step up efforts to increase domestic revenue by broadening the tax base, improving customs and tax administration, and removing tax exemptions.
  - Welcome planned implementation of a new high-level oversight mechanism to monitor public enterprises and contingent liabilities.
  - Adopt a consolidated fiscal position as a more robust fiscal anchor and borrow within a comprehensive debt strategy.
- Monetary and financial sector recommendations:
  - Maintain monetary restraint in response to food and energy price shocks and domestic demand pressures from large public investments.
  - Eliminate recourse to National Bank of Ethiopia (NBE) budgetary financing to help curb inflationary pressures.
  - Strengthen liquidity management and monetary transmission through enhanced interest rate flexibility and adoption of a broader set of monetary policy instruments.
  - Strengthen financial supervisory and regulatory frameworks to promote inclusion and encourage greater competition.
  - Enhance private sector credit access by eliminating the requirement that commercial banks hold NBE bills.
- Exchange rate and external sector recommendations:
  - Improve export competitiveness by reducing overvaluation of the real effective exchange rate through enhanced exchange rate flexibility.
  - Adopt a more market-based exchange rate to facilitate accumulation of foreign exchange reserves as a buffer against external shocks.
- Structural reforms to support private investment:
  - Develop a proper legal framework for public-private partnerships.
  - Simplify requirements for opening a business.
  - Strengthen investor protections.
  - Improve trade logistics.
- Data and governance:
  - Continue improving data quality, including national accounts and financial sector statistics.
  - Directors welcomed Ethiopia’s removal from the FATF blacklist and looked forward to completion of the agreed action plan.

### Selected economic and financial indicators (highlights)
- GDP at constant prices (at factor cost), annual percent change: 8.8; 9.7; 8.2
- GDP deflator, annual percent change: 34.3; 4.6; 7.3
- Consumer prices (period average), annual percent change: 34.1; 13.5; 8.1
- Consumer prices (end period), annual percent change: 20.7; 7.4; 8.5
- Base money (annual percentage change): 0.4; 13.6; 16.7
- GDP at current market prices (billions of birr): 739; 853; 995

*Press Release No. 14/458 — IMF Executive Board Concludes 2014 Article IV Consultation with the Federal Democratic Republic of Ethiopia (October 3, 2014).*

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## References

- [The Federal Democratic Republic of Ethiopia and the IMF](http://www.imf.org/external/country/ETH/index.htm)
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- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](https://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr14458_