## IMF Survey: For Sustained Growth, Ethiopia Needs to Promote Remonetization

_IMF News, June 22, 2010_

## Source details

**Canonical URL:** [IMF Survey: For Sustained Growth, Ethiopia Needs to Promote Remonetization](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar062210a)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/53/socar062210a/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/53/socar062210a/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/53/socar062210a/bundle-manifest.json)

## Bibliographic details
- Authors: Paul Mathieu IMF African Department June
- Published: June 22, 2010

---

### Overview
- Ethiopia made progress in restoring economic stability in 2009 while maintaining strong growth.
- Short-term priority: arrest a demonetization trend and promote financial deepening to support sustained growth.
- IMF 2010 Article IV discussions emphasized adjusting policies to reverse demonetization and reduce vulnerability to shocks.

### Macroeconomic developments and response to the 2007–2009 shocks
- Findings:
  - Consumer price inflation peaked at 64 percent in July 2008 and declined sharply to single digits by mid-2009.
  - International reserves fell to 1 month of imports at end-October 2008 and recovered to just over 2 months of imports at end-2009.
  - Ethiopia’s real GDP growth is estimated to have eased to 7 percent in 2009/10 from near double-digit growth recorded in 2008/09.
  - Following policy adjustments, excess liquidity in the banking system declined; bank credit to the private sector grew but was constrained by credit ceilings.
- Policy response:
  - Late 2008 policy package included substantial fiscal and monetary adjustments and elimination of fuel subsidies, with measures to protect vulnerable groups.
  - IMF support: initial low access disbursement under the Exogenous Shocks Facility (ESF) in February 2009, followed by a 14-month ESF arrangement under the high access component in August 2009.
  - First review of the government’s program was completed on June 11, allowing Ethiopia to draw $58.7 million.

### Remonetization and monetary/financial policy recommendations
- Core recommendation: urgently reform monetary and financial policy to remonetize the economy and foster financial deepening.
- Specific policy prescriptions:
  - Raise nominal interest rates on government securities in conjunction with active liquidity management by the central bank.
  - Ensure nominal interest rates are at least as high as the inflation rate.
  - Achieve positive real interest rates to support macroeconomic stability and financial system development.
  - Tighten control on the printing of money by the central bank to keep inflation low.
  - Lift credit controls (credit ceilings) on financial institutions once excess liquidity is mopped up.
  - Move toward an independent and active monetary policy focused on achieving low inflation.
- Rationale:
  - Monetization and financial deepening are engines of growth and development.
  - Removal of credit ceilings is needed for monetization and financial deepening to take root.
  - Fiscal support is required to relieve domestic financing pressures on central bank financing.

### Fiscal policy, financial supervision, and structural measures
- Fiscal measures:
  - Prudent budget management has led to stronger revenue collection and constrained expenditure in the first half of 2009/10; domestic financing repayment occurred.
  - For 2009/10 as a whole, the deficit will be reduced and domestic financing will be half the original program target.
  - A stepped-up tax collection effort is being introduced to sustain stronger revenue efforts.
- Financial sector supervision:
  - Enhance supervision, especially given the large number of new private bank entrants, to ensure financial stability.
- Supporting structural measures:
  - Tax reform strategy to raise government revenue from low levels.
  - More active liquidity management policy.
  - Enhanced monitoring of public enterprise financing.
  - Strengthening of national account statistics.
  - Over time, implement productivity-enhancing structural policies including financial sector competitiveness and improvements in the business climate.

### External sector and debt management
- Exchange rate and external policy:
  - The exchange rate was devalued twice: 9 percent in July 2009 and 5 percent at end-January 2010 vis-à-vis the U.S. dollar, on top of a modest ongoing crawl depreciation.
  - These actions, combined with the sharp fall in inflation, brought the real effective exchange rate broadly back into equilibrium and improved external competitiveness.
  - Further recommended steps: liberalization of the exchange regime, unification of the official and parallel foreign exchange markets, further accumulation of external reserves, and lower import tariffs.
- External borrowing and debt sustainability:
  - An updated debt sustainability analysis shows Ethiopia is in the low risk range of public external debt distress, providing room for more external borrowing.
  - External borrowing, especially on commercial terms, needs to be carefully managed and directed to projects that demonstrate a high rate of return.
- Medium-term growth drivers:
  - Sustained high export growth and import substitution will require vigorous implementation of productivity-enhancing structural policies.

*IMF Survey: For Sustained Growth, Ethiopia Needs to Promote Remonetization — By Paul Mathieu, IMF African Department, June 22, 2010.*

---


## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Read IMF health check report](https://www.imf.org/external/pubs/cat/longres.cfm?sk=23984.0)
- [Ethiopia and the IMF](https://www.imf.org/external/country/eth/index.htm)
- [Africa’s growth set to rebound](https://www.imf.org/external/pubs/ft/survey/so/2010/CAR042310A.htm)
- [Africa’s social spending](https://www.imf.org/external/pubs/ft/survey/so/2010/CAR042310B.htm)
- [Africa’s steady capital flows](https://www.imf.org/external/pubs/ft/survey/so/2010/CAR042310C.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar062210a_