The International Monetary Fund (IMF) has approved the second annual loan for Ethiopia under the Enhanced Structural Adjustment Facility (ESAF),1 equivalent to SDR 29.5 million (about US$42 million) to support the government’s economic and financial program for the fiscal year 1998–99 (July 8-July 7). The loan will be disbursed in two equal semiannual installments, the first of which is available immediately.
Background
On October 11, 1996, the IMF approved a three-year ESAF arrangement for Ethiopia. However, the mid-term review under that arrangement could not be completed, and the first annual ESAF arrangement was allowed to expire on October 10, 1997.
The Ethiopian authorities have taken significant strides in deepening economic reforms. The economy slowed in 1997/98, with real GDP growth estimated at 0.5 percent compared with a robust 5.6 percent in the previous fiscal year. The slowdown can be mainly attributed to the adverse effects of the El Niño weather phenomenon on the agricultural sector. Average inflation was contained to 2.5 percent owing to a relatively tight monetary stance and abundant food availability. Ethiopia’s gross domestic savings is estimated to have remained at 7 percent of GDP in 1997/98, but at these levels the country remains extremely dependent on foreign savings. The overall government deficit was estimated at 6.4 percent of GDP, compared with 4.9 of GDP percent recorded in 1996/97. On the external front, Ethiopia’s export performance was stronger than anticipated owing mainly to a pickup in coffee prices. The growth prospects for fiscal year 1998/99 remains favorable. However, a timely and peaceful resolution of the unsettled border dispute with Eritrea is essential to bolster economic prospects.
Medium-Term Strategy and the Program for 1998-2001
The government’s medium-term economic strategy is geared at securing fast, broad-based and more equitable economic growth in the context of macroeconomic stability. The principal macroeconomic objectives for 1998–2001 are to achieve an average annual GDP growth of 7.75percent a year, contain inflation below 4 percent, and rebuild gross foreign reserves to a more comfortable level. The external current account deficit is projected to remain at 8-8.5 percent of GDP due to growing imports and weak prospects for coffee export prices. Private sector investment is slated to increase over the medium term as a result of a better regulatory environment and improvements in infrastructure.
Within this medium-term strategy, Ethiopia’s program for 1998–99, which will be supported by the second annual ESAF arrangement, a significant recovery in GDP growth is projected, possibly in the 8-9.5 percent range, keeping inflation under 4 percent, and containing the external current account deficit at about 8 percent of GDP. Preliminary data suggest that macroeconomic developments have been largely positive in the first quarter of 1998–99 and that most quantitative benchmarks for end-September 1998 under the second ESAF arrangement were likely met.
Structural Reforms
The government’s agenda in the structural area includes financial sector reforms, trade liberalization, strengthening the country’s legal and regulatory framework, and raising health and education standards. In the financial sector, the government’s immediate focus is on building the supervisory capacity of the central bank and on developing a sound legal framework. Capital requirements of the domestic commercial banks will be raised and new players will be allowed to enter the market to enhance competition in the banking system. In the external arena, remaining restrictions on payments and transfers for current international transactions will be eliminated. The maximum import tariffs will be reduced to 40 percent from 50 percent in the current fiscal year, the number of tariff bands from eight to seven, and the average tariff to 19.5 percent from 21.5 percent. And in the following two years the average tariff will be lowered further to 17.5 percent. Other structural reform initiatives, undertaken with the assistance of the World Bank and bilateral donors, are aimed at raising health and education standards from extremely low levels, protecting the environment, and alleviating poverty, through fostering rural development.
The Challenge Ahead
Ethiopia faces difficult challenges ahead in modernizing the economy, alleviating poverty and achieving external sector viability. The government needs to take strong and sustained action to eliminate structural weaknesses and consolidate the country’s macroeconomic situation. The ESAF program reflects the government’s strong sense of ownership.
Ethiopia joined the IMF on December 27, 1945. Its quota 2 is SDR 98.30 million (about US$139 million). As of end-September 1998, Ethiopia’s outstanding use of IMF resources totaled SDR 62.75 million (about US$89 million).
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Ethiopia: Selected Economic and Financial Indicators, 1994/95-2000/20011
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1994/95
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1995/96
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1996/97
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1997/98
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1998/99
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1999/2000
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2000/01
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Program
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Estimated
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Projected
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Estimated
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Program
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(Annual percentage change, unless otherwise specified)
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National income and prices
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GDP at constant prices (at factor cost)
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6.2
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10.6
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6.0
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5.6
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2.8
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0.5
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8.0-9.4
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6.7
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7.0
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GDP deflator (at factor cost)
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12.7
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0.9
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2.4
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2.1
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4.8
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4.7
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2.3
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2.5
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2.9
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Consumer prices (period average)2
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13.4
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0.9
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1.2
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-6.4
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5.0
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2.5
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3.9
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3.7
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3.4
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External sector
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Exports, f.o.b. (in millions of U.S. dollars)
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454
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410
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458
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604
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518
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610
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576
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595
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636
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Coffee
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288
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273
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230
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355
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360
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410
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358
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335
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332
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Noncoffee
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166
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137
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228
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249
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159
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199
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218
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260
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304
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Imports, c.i.f. (in millions of U.S. dollars)
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1,063
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1,413
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1,474
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1,403
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1,483
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1,430
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1,484
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1,565
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1,646
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Export volume (noncoffee)3
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-9.2
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-16.6
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...
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109.5
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-8.6
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-11.0
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21.8
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11.4
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13.3
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Import volume
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8.6
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26.8
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10.0
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1.8
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8.8
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8.5
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5.4
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3.7
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4.1
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Terms of trade (deterioration - )
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32.0
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-18.5
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-12.4
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1.5
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-0.9
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18.5
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-11.4
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-7.1
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-2.8
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Nominal effective exchange rate (end of period)
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-7.9
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3.7
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...
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0.2
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...
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1.0
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...
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...
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...
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Money and credit
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Net foreign assets4
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17.8
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1.3
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0.0
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-3.9
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0.8
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0.8
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2.3
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2.4
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4.3
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Net domestic assets4
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6.5
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7.2
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9.1
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7.3
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8.2
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11.2
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8.7
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6.9
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6.0
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Net claims on the government
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-3.2
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-1.3
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-2.9
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-5.1
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-0.3
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3.5
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-1.0
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-0.3
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-1.0
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Credit to the nongovernment sector
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17.7
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16.0
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12.0
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5.6
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8.5
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6.7
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10.4
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8.1
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8.1
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Broad money
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24.3
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8.5
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9.1
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3.4
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9.0
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12.1
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11.0
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9.2
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10.3
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Velocity (GDP/broad money)
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2.6
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2.5
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2.5
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2.6
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2.6
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2.5
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2.5
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2.5
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2.5
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Interest rates (one-year maturity; in percent)
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Savings deposits (minimum)
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10.0
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11.0
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...
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7.0
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...
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6.0
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...
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...
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...
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Lending rates (maximum)
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15.0
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16.0
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...
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10.5
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...
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...
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...
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...
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...
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(In percent of GDP, unless otherwise specified)
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Financial balances
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Gross domestic saving
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7.4
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4.7
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6.2
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8.7
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6.3
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7.2
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9.1
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9.3
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10.2
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Government saving
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5.6
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6.6
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5.7
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7.8
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8.1
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4.5
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6.4
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6.4
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6.3
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Private saving
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1.8
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-1.9
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0.6
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0.8
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-1.8
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2.6
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2.7
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3.0
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3.9
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Gross domestic investment
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16.4
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19.1
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20.9
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19.1
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20.0
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18.2
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21.0
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21.6
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22.6
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Government investment
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7.5
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7.5
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7.1
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8.3
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8.6
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7.4
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9.2
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9.9
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10.5
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Private investment
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9.0
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11.6
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13.8
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10.8
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11.4
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10.8
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11.8
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11.8
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12.0
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Resource gap
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-9.0
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-14.4
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-14.7
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-10.4
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-13.7
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-11.0
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-11.9
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-12.3
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-12.3
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External current account balance, including official transfers
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3.5
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-3.4
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-4.4
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-3.5
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-4.7
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-3.7
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-4.3
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-4.5
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-4.0
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Saving-investment (government)
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5.3
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4.8
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6.2
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2.4
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7.2
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0.5
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0.1
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-0.6
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-0.9
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Saving-investment (private)
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-1.8
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-8.2
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-10.6
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-5.9
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-11.9
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-4.2
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-4.5
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-3.9
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-3.1
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External current account balance, excluding official transfers
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-4.4
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-9.9
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-10.5
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-7.1
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-10.7
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-7.6
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-8.2
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-8.6
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-8.4
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Government finances
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Revenue 5
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17.4
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18.4
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17.8
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19.2
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20.1
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19.2
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19.2
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19.4
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19.5
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Expenditure and net lending
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24.8
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27.0
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25.5
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24.3
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27.0
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26.4
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25.1
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26.2
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26.7
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Current
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15.5
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14.9
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16.7
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13.9
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15.5
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17.0
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13.7
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13.9
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13.6
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Capital
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9.3
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9.4
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8.8
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10.4
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11.5
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9.2
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11.5
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12.3
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13.1
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Net lending
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0.0
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2.8
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0.0
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0.0
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0.0
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0.2
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0.0
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0.0
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0.0
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Overall fiscal balance, excluding grants (commitment basis)
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-7.4
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-8.7
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-7.7
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-5.1
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-6.9
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-7.3
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-5.9
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-6.8
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-7.2
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Overall fiscal balance, including grants (cash basis) 6
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-3.9
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-5.6
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-2.9
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-1.3
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-2.9
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-3.5
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-2.6
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-3.2
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-3.2
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Overall fiscal balance, excluding grants (cash basis) 6
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-7.3
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-8.5
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-9.0
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-4.9
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-6.9
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-6.4
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-5.9
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-6.8
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-7.2
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Total financing
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3.9
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5.6
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2.9
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1.3
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2.9
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3.5
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2.6
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3.2
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3.2
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External financing
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3.7
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3.7
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2.2
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1.8
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2.1
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1.6
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2.9
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3.3
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3.6
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Domestic financing (including residual)
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0.2
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2.0
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0.7
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-0.5
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0.7
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1.9
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-0.4
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-0.1
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-0.4
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Stock of domestic debt
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37.6
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33.6
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28.0
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29.8
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27.5
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29.7
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26.1
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23.7
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21.1
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External debt (including to Fund) 7
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80.3
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71.6
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73.5
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64.4
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74.0
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157.0
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144.6
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144.1
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142.5
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Debt-service ratio 7, 8
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35.1
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35.2
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32.6
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42.4
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29.2
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45.0
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60.0
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55.0
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36.5
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(In millions of U.S. dollars, unless otherwise specified)
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Overall balance of payments
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128
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-36
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-174
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-272
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-188
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-368
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-418
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-379
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-229
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Gross official reserves
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616
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905
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893
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584
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607
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412
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505
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626
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755
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(in months of imports of goods and nonfactor services)
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5.8
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6.6
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6.2
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4.2
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4.1
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2.9
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3.4
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4.1
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4.7
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Stock of external arrears 9
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691
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558
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0
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649
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5,177
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4,897
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0
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0
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0
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GDP at current market prices (in millions of birr)
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33,885
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37,938
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39,780
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41,465
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44,422
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43,624
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48,928
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53,654
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59,128
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Exchange rate (birr per US$, period average auction rate)
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6.25
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6.33
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...
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6.50
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...
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6.86
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...
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...
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...
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| Sources: Ethiopian authorities; and IMF staff estimates and projections. |
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1 Beginning in 1997/98, all data pertain to the period July 8-July 7; prior to that, fiscal and monetary data cover the period July 8-July 7, and other data July 1-June 30.
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2 Addis Ababa retail price index until 1996/97 and national consumer price index thereafter.
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3 In 1996/97 includes onetime export of gold stocks.
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4 Changes expressed in percent of broad money at beginning of period.
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5 Contains new fiscal measures for 1998/99 and beyond.
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6 Includes change in arrears on external interest payments.
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7 Before debt relief and including ruble-denominated debt and debt service to Russia beginning in 1997/98; evaluated at US$1 = SUR 0.6, where "SUR" denotes the former Soviet Union ruble.
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8 On a commitment basis; expressed in percent of exports of goods and nonfactor services.
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9 All arrears and maturities due to Russia and non-Paris Club creditors between 1997 and 1999 are subject to restructuring in 1998/99. A stock-of-debt operation with all creditors is assumed at end-1999/2000 (on Naples terms with a 67 percent net present value reduction).
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1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 ½-year grace period.
2 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
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