1. Title: Ethiopia’s First Review Under the Extended Credit Facility: Achievements and Challenges

Ethiopia, one of Africa’s most populous and fastest-growing economies, underwent its first review under the Extended Credit Facility (ECF) with the International Monetary Fund (IMF) in early 2021.

Background: Ethiopia’s Economic Context

The East African country joined the IMF in 1993 and has since then been implementing various economic reforms. With a population of over 115 million people, Ethiopia is known for its significant agricultural potential and a growing manufacturing sector.

Achievements: Policy Implementation and Macroeconomic Stability

During the review period, Ethiopia demonstrated commendable progress in implementing economic reforms and maintaining macroeconomic stability. The government successfully addressed some of the structural weaknesses in its economy, which had been identified during the Article IV Consultation in 2019.

Fiscal Adjustment and Debt Sustainability

Ethiopia implemented a fiscal adjustment plan, which included reducing its deficit from an estimated 12.5% of Gross Domestic Product (GDP) in the 2019/20 fiscal year to 7.8% in 2020/2This was achieved through measures such as revenue mobilization, expenditure containment, and public financial management reforms.

Inflation Control

The Central Bank of Ethiopia managed to keep inflation within the target range, averaging around 20.1% during the review period. This was accomplished through a combination of monetary policy tools and exchange rate adjustments.

Exchange Rate Flexibility

The country also made strides in improving its exchange rate flexibility. Ethiopia began to adjust the Birr’s exchange rate more frequently and in line with market conditions, which helped to improve its external position.

Challenges: External Shocks and Vulnerabilities

Despite these achievements, Ethiopia faced several challenges during the review period. The country was hit by external shocks, including the COVID-19 pandemic and a significant decline in global commodity prices.

COVID-19 Impact

Ethiopia’s economy was heavily affected by the COVID-19 pandemic, leading to a sharp decline in economic activity and rising unemployment. The government responded with various measures, including fiscal stimulus packages and targeted assistance for vulnerable populations.

Commodity Price Volatility

The decline in global commodity prices, particularly for coffee and oil, had a significant impact on Ethiopia’s economy. The country is heavily reliant on coffee exports, making it vulnerable to price fluctuations in this commodity.

Ethiopia’s Economic Development and the IMF: The Significance of the Extended Credit Facility (ECF) and the First Review

Ethiopia, one of Africa’s most populous countries with over 115 million inhabitants, is making strides in its economic development. The country has been experiencing robust growth rates, averaging around 10% between 2004 and 2019. International financial institutions, particularly the link, have played a crucial role in supporting Ethiopia’s economic transformation through various financial arrangements. Among these, the

Extended Credit Facility (ECF)

is of significant importance.

The Extended Credit Facility (ECF) is a flexible lending tool provided by the IMF to its member countries experiencing severe balance of payments problems. This facility offers extended repayment periods, longer maturities, and lower interest rates compared to the IMF’s Stand-By Arrangement (SBA). Ethiopia secured a three-year $2.9 billion ECF arrangement in March 2013, aimed at addressing external and domestic vulnerabilities, improving the business climate, and fostering sustainable growth. This

significant financial support

from the IMF is essential for Ethiopia as it seeks to maintain macroeconomic stability and continue its development journey.

The first

review

under Ethiopia’s ECF program, which took place in November 2013, was a critical milestone for the country. The review assessed Ethiopia’s progress towards implementing economic reforms outlined in its Letter of Intent (LOI) submitted to the IMF. These reforms focused on fiscal consolidation, monetary policy, and structural measures aimed at improving the business environment and increasing the efficiency of state-owned enterprises. A successful conclusion of the first review would unlock the next tranche of financial assistance, further supporting Ethiopia’s economic development objectives.

Background and Context

Ethiopia’s Economic Situation Before Joining the IMF

Overview: Prior to joining the International Monetary Fund (IMF), Ethiopia experienced a unique economic trajectory marked by robust growth and persistent challenges. The Ethiopian economy, the second-largest in the East African region, was characterized by a predominantly agrarian sector, accounting for about 85% of employment and 40% of Gross Domestic Product (GDP). Although the country had been registering annual economic growth rates above 10% since 2004, it continued to face significant development challenges.

Role of External Shocks: Ethiopia’s economic performance was frequently disrupted by external shocks, including droughts, which affected agricultural productivity, and political instability, leading to social unrest and insecurity. These factors contributed to volatile inflation rates and hindered the country’s ability to maintain macroeconomic stability.

Reasons for Ethiopia Joining the IMF and Opting for the ECF

Economic Reforms: With a growing recognition of the need to strengthen its economic institutions, Ethiopia sought external support from international financial organizations. The IMF emerged as a crucial partner due to its expertise in macroeconomic stabilization and structural reforms.

Commitment to Structural Reforms: Ethiopia’s decision to join the IMF was motivated by its commitment to implementing structural reforms under the Extended Credit Facility (ECF). The ECF is designed to provide longer-term financial assistance and policy advice to help member countries implement comprehensive economic reform programs.

Overview of the IMF-supported Extended Credit Facility (ECF) Program for Ethiopia

Key Objectives: The ECF program aims to address Ethiopia’s economic challenges by promoting macroeconomic stability, enhancing resilience, and supporting the country’s development objectives. The program focuses on three key areas: fiscal sustainability, monetary policy, and structural reforms.

Conditionalities, Reforms, and Policy Actions: In exchange for IMF financial support, Ethiopia is required to implement a set of policy reforms aimed at strengthening its economic institutions and enhancing the business environment. These reforms include measures to improve fiscal discipline, enhance the independence of the National Bank of Ethiopia, and streamline business regulations.

I Achievements under Ethiopia’s First Review under the Extended Credit Facility (ECF)

Fiscal policy developments and progress in key reform areas

1. Revenue mobilization, expenditure management, and public debt sustainability:
• Ethiopia made significant progress in improving revenue collection through tax reforms, broadening the tax base, and strengthening tax administration.
• Expenditure management was enhanced by controlling wage bills and implementing a prioritized public investment program.
• Public debt sustainability improved with the implementation of a medium-term debt management strategy and the successful completion of debt reprofiling.

Monetary policy developments and progress in stabilizing inflation

1. Central Bank of Ethiopia’s role, interest rates, and exchange rate policies:
• The Central Bank of Ethiopia played a crucial role in stabilizing inflation by implementing monetary policy measures, including setting interest rates and intervening in the foreign exchange market.
• Interest rates were adjusted to reflect market conditions and inflation expectations, while exchange rate policies aimed to maintain stability.

2. Balance of payments developments and external debt sustainability:
• Ethiopia experienced a significant improvement in its balance of payments position, with exports growing faster than imports.
• External debt sustainability was strengthened through successful negotiations with bilateral and multilateral creditors, resulting in debt reprofiling and debt relief.

Progress in structural reform areas (privatization, trade policy, business climate)

1. Updates on key reforms and their impact on the economy:
• Privatization efforts continued, with several large state-owned enterprises being sold to private investors.
• Trade policy reforms focused on reducing tariffs, increasing transparency, and improving border management.
• Business climate improvements included the implementation of a one-stop shop for business registrations and the simplification of tax procedures.

2. Challenges faced in implementation and ways to address them:
• Despite progress, challenges remained in the areas of revenue mobilization and expenditure management.
• To address these challenges, Ethiopia focused on improving tax administration, broadening the tax base, and strengthening fiscal discipline.

Social safety net programs and poverty reduction efforts

1. Overview of Ethiopia’s social safety net programs:
• Ethiopia implemented a range of social safety net programs to provide support to vulnerable populations, including cash transfers, food assistance, and employment opportunities.

2. Evaluation of their impact on poverty alleviation and food security:
• Social safety net programs had a positive impact on poverty alleviation and food security, with evidence showing reductions in poverty rates and improvements in nutrition levels.

E. Progress towards debt sustainability under the IMF program

1. Debt reprofiling, debt sustainability analysis, and external debt management:
• Ethiopia made progress towards debt sustainability under the IMF program, with successful debt reprofiling and improved debt transparency.
• Debt sustainability analysis identified areas where further reforms were needed, including the need to reduce public expenditure and improve revenue mobilization.

2. Ethiopia’s efforts to improve debt transparency and debt sustainability frameworks:
• Ethiopia continued to work on improving debt transparency and strengthening its debt sustainability framework, including the establishment of a Debt Sustainability Committee.

Challenges Faced in the Implementation of Ethiopia’s ECF Program

External shocks and their impact on Ethiopian economy

1. Droughts:

Ethiopia’s economy is highly vulnerable to weather-related shocks, with droughts being a major concern. Droughts can result in crop failures and water shortages, leading to food insecurity and increased poverty.

2. Political instability:

Ethiopia has faced political instability, including protests and ethnic conflicts, which can disrupt economic activities and undermine development efforts.

3. Regional conflicts:

Ethiopia’s proximity to conflict-prone regions, such as South Sudan and Somalia, can also pose a significant threat to its stability and economic development.

Coping mechanisms and external financing options to mitigate the impacts

Ethiopia has employed various coping mechanisms to mitigate the impacts of external shocks. These include:

• Safety nets:

Ethiopia has implemented various safety net programs to provide support to the most vulnerable populations during times of crisis.

• External financing:

Ethiopia has also sought external financing to support its development efforts and mitigate the impacts of external shocks. This includes loans from multilateral institutions such as the World Bank and the African Development Bank.

Domestic challenges in implementing reforms under the ECF

1. Political instability:

Ethiopia’s efforts to implement reforms under the ECF have been hampered by political instability, including protests and public unrest.

2. Institutional weaknesses:

Ethiopia’s institutional framework is weak, with bureaucratic inefficiencies and corruption being major concerns. These issues can undermine the effectiveness of development programs and hinder progress towards economic and social development goals.

Addressing the challenges: Ethiopia’s response to external shocks and implementation difficulties

Ethiopia has taken various steps to address the challenges it faces in implementing reforms under the ECF:

1. Policy measures:

Ethiopia has implemented various policy measures to strengthen institutions and address institutional weaknesses. This includes initiatives to improve public financial management, streamline bureaucratic processes, and combat corruption.

2. International cooperation:

Ethiopia has sought international cooperation to address external shocks and support its development efforts. This includes partnerships with multilateral institutions, regional organizations, and bilateral donors.

E. Ethiopia’s progress in building resilience to external shocks and implementing reforms under the ECF

Ethiopia has made significant progress in building resilience to external shocks and implementing reforms under the ECF:

1. Successes:

Ethiopia has made progress in reducing poverty and improving access to education and health services. The country has also implemented various reforms aimed at strengthening institutions and improving governance.

2. Lessons learned:

Ethiopia has learned valuable lessons from its initial implementation efforts, including the importance of community engagement in development programs and the need for greater transparency and accountability.

3. Challenges moving forward:

Ethiopia faces challenges moving forward, including the need to address persistent institutional weaknesses and ensure that development programs are sustainable and inclusive.

4. Strategies to address challenges:

Ethiopia is implementing various strategies to address these challenges, including initiatives to improve public financial management, strengthen institutions, and promote private sector development.

Conclusion

A. Ethiopia’s participation in the IMF’s Extended Credit Facility (ECF) has yielded significant achievements for the country. With the implementation of structural reforms, Ethiopia’s economy has seen a remarkable turnaround in recent years. Key accomplishments include the restoration of macroeconomic stability, progress towards debt sustainability, and improvements in the business environment. However, challenges remain, such as the need to address structural weaknesses, increase productivity, and diversify the economy.

B.

Importance of continued support from international partners, including the IMF, is essential for Ethiopia’s sustainable economic growth. The ongoing support will help the country maintain macroeconomic stability and provide resources to address pressing development needs. This collaboration is vital, particularly in the face of external shocks, such as the COVID-19 pandemic, which may impact Ethiopia’s economic recovery.

C.

Future prospects and potential risks for the Ethiopian economy under the ECF program are promising, with the country poised to build on its achievements. However, there are also risks that need to be addressed. For instance, Ethiopia must ensure the successful implementation of structural reforms and maintain a favorable business environment to attract foreign investment and foster economic growth. Moreover, external factors such as global economic instability and geopolitical tensions could pose challenges.

D.

Ethiopia’s experience offers valuable insights for other low-income countries seeking IMF support and structural reforms. By demonstrating the importance of a strong partnership between governments, international organizations, and donors in implementing reforms, Ethiopia’s success story can serve as an inspiration for other nations aiming to overcome economic challenges and foster sustainable development.