IMF Executive Board Concludes 2017 Article IV Consultation with the Federal Democratic Republic of Ethiopia

January 17, 2018

On January 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1 with the Federal Democratic Republic of Ethiopia.

Ethiopia has recorded annual average GDP growth of about ten percent in the last decade, driven by public investments in agriculture and infrastructure. The poverty rate has fallen from 44 percent in 2000 to 23.5 percent in 2015/16. In 2016/17 GDP growth is estimated at 9 percent, as agriculture rebounded from severe drought conditions in 2015/16. Industrial activity expanded, with continued investments in infrastructure and manufacturing. The current account deficit declined in 2016/17 to 8.2 percent of GDP from 9.1 percent the previous year, reflecting lower drought-related imports and lower public sector capital goods imports. However, export revenues were largely unchanged despite significant volume growth, as global agricultural commodity prices remained low. Foreign direct investment (FDI) growth, was 27.6 percent due to investments in the new industrial parks and privatization inflows. International reserves at end-2016/17 stood at US$3.2 billion (1.8 months of prospective imports cover).

In October 2017, the National Bank of Ethiopia (NBE) devalued the birr by 15 percent relative to the U.S. dollar, thereby reducing overvaluation and enhancing competitiveness. Simultaneously, the NBE increased interest rates and adopted a restrictive stance to minimize adverse effects on inflation—which was 13.6 percent in November 2017. Since October 2016, the Ministry of Finance and Economic Cooperation (MOFEC) implemented further cuts in external borrowing by the government and public enterprises (SOEs), and reduced outstanding non-concessional commercial debt. The general government deficit outturn in 2016/17 was 3.4 percent of GDP (including privatization) and the 2017/18 budget speech announced additional consolidation policies, with the budget deficit projected at 2.5 percent of GDP.

Growth is expected to stay high in 2017/18, at 8.5 percent, supported by continued recovery from droughts and export expansion as new manufacturing facilities and infrastructure come online—offsetting the potentially dampening impact of restrictive macroeconomic policies. Over the medium term, growth is expected to remain around 8 percent, supported by sustained expansion in exports and investment. The authorities’ policies envisaged under the second Growth and Transformation Plan (GTP II) are expected to underpin domestic private sector development and FDI. The GTP II also envisages allocating significant resources to poverty alleviation and the social safety net, while efforts to strengthen financial inclusion are underway.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Ethiopia’s impressive record of human development improvements and output growth over the last decade, and the effective policy response to the recent drought. They noted that the preconditions for an export expansion and transition to private sector-led growth—including investments in trade-enhancing infrastructure—are in place, and private direct investment is growing strongly. However, they underlined that external imbalances and inadequate reserve buffers remain a key risk, and urged the authorities to maintain determined policy actions to control external borrowing.

Directors stressed the need to continue determined implementation of policies to reduce external imbalances. They commended the restrictive public sector borrowing policy to contain external debt and imports while protecting pro-poor spending, the devaluation of the currency to regain competitiveness, and the tight monetary policy to rein in inflation. They agreed that these policies should address most of the birr’s prior overvaluation, while ongoing reforms to strengthen the business environment will help preserve competitiveness gains. Directors welcomed the authorities’ readiness to tighten policies further if inflationary pressures do not abate in coming months. They noted that a more flexible exchange rate would help preserve competitiveness and foster export diversification, and recommended eliminating exchange restrictions.

Directors supported the authorities’ goal to strengthen domestic revenue mobilization and urged them to accelerate ongoing tax administration reforms. They welcomed plans to improve the management and oversight of public enterprises, including undertaking audits for some large state-owned enterprises (SOEs). Public-private partnerships (PPPs), long-term concessions, and privatization of SOEs could offer opportunities to fund critical infrastructure. Directors welcomed the progress in strengthening the legal framework for PPPs and urged the authorities to ensure that their use strikes the appropriate balance between boosting private sector participation and minimizing fiscal risks. Continued efforts to improve the business climate, promote financial inclusion, and improve governance will also be important.

Directors welcomed plans to develop a broader range of indirect monetary policy instruments and promote an active inter-bank market, which would deepen financial markets and improve savings allocation. They encouraged the authorities to continue to monitor the NPLs of the national development bank and to shift its current funding mechanism to a less distortive system. Directors also urged implementation of the action plan to further strengthen the AML/CFT framework.

Directors welcomed ongoing efforts to strengthen the compilation and dissemination of economic statistics. They urged the authorities to adopt international standards for budgetary, monetary, and financial statistics and decisively address remaining data weaknesses in national accounts and public sector financial reporting.

It is expected that the next Article IV consultation with The Federal Democratic Republic of Ethiopia will be held on the standard 12-month cycle.

Federal Democratic Republic of Ethiopia: Selected Economic and Financial Indicators, 2013/14–2021/22

Social Indicators

GDP Nominal GDP (2016, billions of U.S. dollars)	72.5	Poverty indicators in 2015/16 (national definitions) Poverty headcount ratio (percent of population)	23.5
GNI per capita, Atlas method (2015, current US$)	590	Food poverty (percent of population)	24.8
Population characteristics Total (2016, million)	91.2	Income distribution, 2010 Income shared by highest 10 percent of population	27.4
Urban population (2015)	19.5	Income shared by lowest 20 percent of population	8.0
Life expectancy at birth (2014, years)	64.0	GINI index	30.0

Economic Indicators

	2013/14	2014/15	2015/16	2016/17 2017/18 2018/19			2019/20	2020/21	2021/22
	Act.	Act.	Act.	IMF Staff IMF Staff IMF Staff			IMF Staff	IMF Staff	IMF Staff
				Est. Proj. Proj.			Proj.	Proj.	Proj.
				(Annual percentage change)
National income and prices
GDP at constant prices (at factor cost)	10.3	10.4	8.0	9.0 8.5 8.3			8.1	8.0	8.0
GDP deflator	11.0	10.8	9.5	8.9 11.7 8.6			8.6	8.3	8.2
Consumer prices (period average)	8.1	7.7	9.7	7.2 11.5 8.1			8.0	8.0	8.0
Consumer prices (end period)	8.5	10.4	7.5	8.8 12.0 8.0			8.0	8.0	8.0
External sector
Exports of goods and services (U.S. dollars, f.o.b.)	8.7	-2.6	-3.5	2.9	12.9	13.4	13.9	14.2	14.2
Imports of goods and services (U.S. dollars, c.i.f.)	14.0	25.1	2.9	-4.8	7.4	7.6	7.9	8.2	8.6
Export volume (goods)	6.4	-2.7	4.9	-1.4	13.9	12.0	13.6	14.6	15.0
Import volume (goods)	17.9	32.5	12.9	-5.4	3.9	5.6	6.2	7.2	7.6
Nominal effective exchange rate (end of period)	-2.8	2.7	-2.3	0.8	…	…	…	…	…
Real effective exchange rate (end of period)	2.6	10.1	2.6	…	…	…	…	…	…
	(Percent of beginning-period stock of broad money, unless otherwise indicated)
Money and credit
Change in net foreign assets	0.5	-3.2	-3.7	3.4	1.2	3.8	3.2	3.4	2.5
Change in net domestic assets (including other items net)	26.4	27.5	24.0	25.3	18.9	15.1	16.0	17.3	18.6
Broad money	26.9	24.2	20.4	28.8	20.1	18.9	19.2	20.7	21.1
Base money (annual percentage change)	18.7	15.2	16.3	22.7	16.5	16.5	16.5	16.5	16.5
Velocity (GDP/broad money)	3.56	3.51	3.43	3.12	3.15	3.12	3.06	2.97	2.87
	(Percent of GDP, unless otherwise indicated)
Financial balances ¹
Gross domestic savings	20.5	21.9	22.4	20.4	20.4	21.5	21.4	22.7	22.1
Public savings	5.0	3.8	3.9	1.8	1.6	1.6	1.6	1.6	1.7
Private savings	15.6	18.1	18.5	18.6	18.8	19.9	19.8	21.1	20.4
Gross domestic investment	38.0	39.4	38.5	36.6	36.4	37.7	36.9	37.5	36.3
Public investment	17.0	17.6	17.2	14.9	13.8	14.4	13.1	11.9	14.9
Private investment	21.0	21.8	21.3	21.7	22.6	23.3	23.8	25.7	21.4
Resource gap	-17.5	-17.5	-16.1	-16.2	-16.0	-16.2	-15.4	-14.8	-14.2
External current account balance, including official transfers	-6.4	-10.2	-9.1	-8.2	-7.7	-7.5	-6.8	-6.1	-5.5
Government finances
Revenue	13.8	14.4	15.2	14.4	14.7	15.1	15.5	15.8	16.3
Tax revenue	12.5	12.7	12.5	11.8	12.4	13.0	13.4	13.9	14.5
Nontax revenue	1.2	1.6	2.7	2.6	2.3	2.2	2.0	1.9	1.8
External grants	1.1	1.0	0.9	0.7	0.8	0.7	0.6	0.5	0.4
Expenditure and net lending	17.5	17.3	18.4	18.5	18.0	18.3	18.4	18.6	18.9
Fiscal balance, excluding grants (cash basis)	-3.7	-3.0	-3.2	-4.1	-3.3	-3.2	-2.9	-2.7	-2.6
Fiscal balance, including grants (cash basis)	-2.6	-1.9	-2.4	-3.4	-2.5	-2.5	-2.3	-2.2	-2.1
Total financing (including residuals)	2.6	1.9	2.4	3.4	2.5	2.5	2.3	2.2	2.1
External financing	1.9	1.0	1.7	1.6	0.7	0.9	0.7	0.6	0.5
Domestic financing	1.3	1.4	1.6	1.9	1.7	1.6	1.6	1.6	1.6
Public debt ²	46.8	54.0	55.4	56.9	59.0	58.1	55.5	53.1	50.7
Domestic debt	21.0	23.8	24.8	26.5	25.9	26.1	25.6	25.1	24.8
External debt (including to the IMF)	25.8	30.3	30.7	30.4	33.1	31.9	29.9	27.9	26.0
Overall balance of payments (in millions of U.S. dollars)	-97	-521	-831	658	477	688	602	742	580
Gross official reserves (in millions of U.S. dollars)	2,496	3,248	3,402	3,197	3,673	4,361	4,963	5,705	6,286
(months of imports of goods and nonfactor services of following year)	1.5	1.9	2.1	1.9	2.0	2.2	2.3	2.4	2.5
GDP at current market prices (billions of birr)	1,061	1,298	1,528	1,786	2,167
Sources: Ethiopian authorities and IMF staff estimates and projections.
1 Based on data from Central Statistical Agency (CSA), except for the current account balance, which is based on BOP data from National Bank of Ethiopia (NBE). 2 Non-financial public sector debt.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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