IMF Executive Board Concludes 2016 Article IV Consultation with the Federal Democratic Republic of Ethiopia
IMF News, October 4, 2016
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- Published: October 4, 2016
Macroeconomic outturn 2015/16
- Output growth is estimated to have slowed down in 2015/16 to 6.5 percent.
- The slowdown was mitigated by effective and timely policy responses to the drought, and buoyant industrial and services sectors.
- Overall inflation receded to 6 percent in July 2016.
- The supplementary budget helped address the social costs of the drought, while keeping the general government deficit at 3 percent of GDP.
- Public and publicly-guaranteed debt is estimated to have been 54.2 percent of GDP in June 2016, of which 30.2 percent of GDP corresponds to external debt.
External sector and reserves
- External current account deficit estimated at 10.7 percent of GDP.
- Export revenue stagnated due to weak international commodity prices, despite increases in export volumes and diversification to new export markets.
- Savings on fuel imports were more than offset by increased drought-related food imports and other imports.
- Remittances and FDI posted strong growth, helping to limit the deterioration of the external position.
- The foreign reserve buffer is less than 2 months of import coverage.
- The 2015/16 foreign borrowing requirement of the non-financial public sector is estimated at 5 percent of GDP, a significant reduction compared to the recent past.
Fiscal developments and public finances
- General government deficit: 3 percent of GDP (2015/16, including grants, cash basis).
- Fiscal balance, excluding grants (cash basis): -4.0 percent (2015/16).
- Revenue: 16.3 percent of GDP (2015/16).
- Tax revenue: 13.5 percent of GDP (2015/16).
- Nontax revenue: 2.8 percent of GDP (2015/16).
- External grants: 1.0 percent of GDP (2014/15) and 1.1 percent (2013/14) — [note: grants shown in table].
- Expenditure and net lending: 20.2 percent of GDP (2015/16).
- Total financing (including residuals): 3.0 percent of GDP (2014/15) and 2.5 percent (2013/14) — 2015/16 figure in table shows External financing 1.5 percent and Domestic financing 1.3 percent for 2014/15; table entries should be read as presented.
Medium-term outlook and projections
- Growth is projected to recover to within the 7.3-7.5 percent range, reflecting growth-oriented reforms in the second Growth and Transformation Plan (GTP II).
- Public investment is projected to moderate.
- Private investment is projected to increase gradually, aided by better access to credit and anticipated improvements in competitiveness.
- Inflation is projected to remain at around 8 percent, consistent with the authorities’ price stability objective.
- The general government deficit is envisaged to hover at around 3 percent of GDP, with expenditure policies focused on capital and poverty-reducing programs.
- Export revenue is forecast to expand throughout the medium-term, underpinned by more stable commodity prices, competitiveness gains from logistic infrastructure projects, and greenfield FDI.
- Import growth is projected to remain robust and the current account deficit is projected to remain high, declining gradually over time.
Executive Board assessment and risks
- Directors noted Ethiopia’s track record of sustained rapid growth and poverty reduction.
- Directors commended authorities for effective policy responses to the severe drought, aimed at mitigating social costs and limiting spillovers.
- Downside risks noted: large external imbalance, public sector savings‑investment gap, and inadequate reserve buffers.
- External debt sustainability risks characterized as moderate, but external vulnerabilities had worsened due to the large external deficit and the recent pace of increase in external indebtedness, which were judged unsustainable over the medium term.
- Directors encouraged a macroeconomic policy mix to reduce imbalances and associated risks.
- Directors welcomed authorities’ priorities for structural reforms in GTP II, focusing on economic and social development and private sector development.
Policy recommendations and reform priorities
- Reduce the external imbalance through stepped‑up efforts; increase and diversify exports is an appropriate medium-term response.
- Contain imports and prioritize import‑intensive investment projects to substantially reduce the current account deficit in the short term.
- Adopt a tighter fiscal stance while protecting the vulnerable, and allow a more flexible exchange rate to facilitate reserve buildup and reduce external vulnerabilities.
- Refrain from new non‑concessional borrowing (authorities’ stated intention welcomed).
- Strengthen mobilization of domestic revenues:
- Introduce property taxes.
- Reduce exemptions.
- Implement administration reforms to enhance taxpayer coverage and compliance.
- Strengthen commercial profitability and governance of key state‑owned enterprises, and advance privatization of those with a less strategic role.
- Foster public sector oversight and transparency to enhance macroeconomic management and reduce fiscal risks.
- Financial sector measures:
- Encourage financial development and inclusion to bolster domestic savings.
- Maintain adequate supervisory vigilance and strict provisioning of NPLs given significant growth in financial intermediation.
- Develop a broader range of indirect monetary policy instruments and an active inter‑bank market.
- Replace the current funding mechanism of the national development bank with a less distortive system.
- Structural reforms:
- Strengthen competitiveness.
- Create an enabling environment for private sector development and foreign direct investment.
- Enhance public sector governance.
- Data and statistics:
- Strengthen efforts to address data weaknesses, gaps, and delays, particularly on national accounts and public sector financial reporting.
- Increase financial sector information.
Selected economic and financial indicators (2013/14–2015/16)
- GDP at constant prices (at factor cost): 10.3 (2013/14); 10.2 (2014/15); 6.5 (2015/16 Est.)
- GDP deflator: 11.0; 6.4; 10.6
- Consumer prices (period average): 8.1; 7.7; 9.7
- Consumer prices (end period): 8.5; 10.4; 7.5
- Exports (U.S. dollars, f.o.b) (annual percentage change): 8.4; -5.9; -1.7
- Imports (U.S. dollars, c.i.f) (annual percentage change): 17.7; 20.9; 5.7
- Export volume (annual percentage change): 2.9; -3.4; [no 2015/16 figure in table]
- Import volume (annual percentage change): 22.0; 27.9; 14.9
- Nominal effective exchange rate (end of period): -2.8; 2.6; -2.1
- Real effective exchange rate (end of period): 10.0; 3.1; [no 2015/16 figure in table]
- Net foreign assets (percent of beginning period stock of broad money): 0.5; -3.2; [no 2015/16 figure in table]
- Net domestic assets (including other items net): 26.4; 27.5; 24.4
- Broad money: 26.9; 24.2; 21.2
- Base money (annual percentage change): 18.7; 15.2; 16.1
- Velocity (GDP/broad money): 3.56; 3.34; 3.25
- Gross domestic savings (percent of GDP): 20.5; 21.8; 18.4
- Public savings: 5.0; 3.5; 2.3
- Private savings: 15.6; 18.3; 16.2
- Gross domestic investment: 38.0; 39.3; 39.7
- Public investment: 17.0; 17.6; 17.8
- Private investment: 21.0; 21.7; 21.9
- Resource gap: -17.5; -21.3; [no 2015/16 figure in table]
- External current account balance, including official transfers (percent of GDP): -7.9; -12.0; -10.7
- Revenue (percent of GDP): 13.8; 15.1; 16.3
- Tax revenue (percent of GDP): 12.5; 13.4; 13.5
- Nontax revenue (percent of GDP): 1.2; 1.7; 2.8
- Expenditure and net lending (percent of GDP): 17.5; 18.6; 20.2
- Fiscal balance, excluding grants (cash basis) (percent of GDP): -3.7; -3.6; -4.0
- Fiscal balance, including grants (cash basis) (percent of GDP): -2.6; -2.5; -3.0
- Total financing (including residuals) (percent of GDP): 2.5; 3.0; [2015/16 breakdown shows External financing 1.5 and Domestic financing 1.3 in 2014/15 column]
- Public debt (non-financial public sector, percent of GDP): 45.7; 55.3; 54.2
- Domestic debt (percent of GDP): 24.3; 24.0; [2015/16 table entry shows 24.0 for 2014/15 and 24.3 for 2013/14]
- External debt (including to the IMF) (percent of GDP): 25.2; 31.0; 30.2
- Overall balance (millions of U.S. dollars): -36; 148; 153
- Gross official reserves (millions of U.S. dollars): 2496; 3249; 3402
- (months of imports of goods and nonfactor services of following year) — NBE definition for import coverage excludes food-aid and franco-valuta imports.
- GDP at current market prices (billions of birr): 1061; 1237; 1458
IMF Communications Department, Press Release No. 16/443, October 4, 2016.