1. Title: Ethiopia’s First Review Under the Extended Credit Facility: An In-Depth Analysis of the IMF Report

Ethiopia’s First Review Under the Extended Credit Facility: An In-Depth Analysis of the IMF Report

Ethiopia’s, the second most populous country in Africa, recently underwent its first review under the Extended Credit Facility (ECF) by the International Monetary Fund (IMF) in December 202The ECF, which is a lending facility designed to provide financial assistance to IMF member countries experiencing balance of payments problems that are judged to be due to exceptional and external causes, has been a vital tool for Ethiopia as it navigates its economic recovery from the COVID-19 pandemic and other external shocks.

Background

Before diving into the details of the IMF report, it is important to provide some context. Ethiopia’s economy, which was one of the fastest-growing in Africa before the pandemic, was severely hit by the crisis, with a projected growth rate of 3.2% in FY2020/21 compared to the pre-pandemic growth rate of 9.5%. The country’s economy was further challenged by drought, conflict, and other external shocks. In response to these challenges, Ethiopia sought financial assistance from the IMF in May 2021.

IMF Report

The IMF report, which was released in December 2021 following the completion of the first review, highlights several key areas where Ethiopia needs to focus its reform efforts. These include:

Fiscal Policy

The report calls for a more prudent fiscal policy, with a focus on reducing the fiscal deficit and controlling inflation. The IMF recommends that Ethiopia implement expenditure rationalization measures, including reducing public sector wages and improving budget execution. Additionally, the report emphasizes the importance of broadening the revenue base through tax reforms.

Monetary Policy

The report also calls for a more robust monetary policy framework, with a focus on containing inflation and maintaining exchange rate stability. The IMF recommends that Ethiopia improve its monetary policy implementation, including by strengthening the independence of the National Bank of Ethiopia and improving transparency in monetary policy decisions.

Structural Reforms

The report emphasizes the importance of structural reforms, particularly in the areas of trade policy and the business environment. The IMF recommends that Ethiopia implement measures to reduce trade restrictions, improve the business climate, and enhance competition.

Conclusion

Overall, Ethiopia’s first review under the ECF highlights the need for significant economic reforms in the areas of fiscal policy, monetary policy, and structural reforms. While these recommendations are not new, they are critical for Ethiopia as it works to recover from the COVID-19 pandemic and other external shocks. The IMF’s continued support and guidance will be crucial in helping Ethiopia implement these reforms effectively.

Ethiopia, one of the oldest civilizations in the world, is making strides in its economic development journey. Over the past decade, Ethiopia has registered an average growth rate of 10% per annum, making it Africa’s second-fastest growing economy. However, this economic success story is not without challenges, and the IMF has played a significant role in Ethiopia’s economic reforms. The IMF, an international organization that provides financial assistance and advice to member countries, has had a long-standing relationship with Ethiopia since the 1990s. The IMF’s engagement with Ethiopia is noteworthy due to its

Extended Credit Facility (ECF)

.

The ECF is a long-term loan facility

provided by the IMF to its member countries facing balance of payment problems with a structural adjustment program that allows for more time and greater degree of access to IMF resources. In Ethiopia’s context, the ECF signifies a critical step towards ensuring

fiscal sustainability

and enhancing economic stability. With a loan amount of SDR 1.2 billion (approximately USD 1.6 billion), Ethiopia’s ECF arrangement started in December 2019, and it will last until April 2024.

The first review under the ECF, which took place in July 2021, is of significant importance for Ethiopia’s economic future. This review assesses the country’s progress towards implementing the agreed-upon policies and reform measures under the ECF program. The

successful completion

of this review is essential for Ethiopia as it unlocks additional resources, allowing the country to continue its economic reform agenda. Furthermore, a successful first review demonstrates Ethiopia’s commitment to implementing necessary reforms, which can positively influence investor confidence and potentially lead to further international financial support.

Background to Ethiopia’s Economic Challenges

Overview of Ethiopia’s economy before joining the IMF

Before joining the International Monetary Fund (IMF) in 1993, Ethiopia’s economy was primarily agrarian with a few industries.

Major economic sectors

included agriculture, which accounted for over 45% of the Gross Domestic Product (GDP) and employed about 80% of the labor force. Industry contributed around 21% to GDP, with textiles, food processing, and beverages being the major sub-sectors. Services, including construction, commerce, and finance, accounted for about 34% of GDP.

Economic growth rates and trends

showed significant progress, with an average annual real Gross Domestic Product (GDP) growth rate of 12% between 2003 and 2012, making Ethiopia one of the fastest-growing economies in Africa. However, this growth was unevenly distributed across sectors and regions, with agriculture remaining stagnant and poverty rates high.

Reasons for Ethiopia’s economic downturn and the need for external assistance

Despite initial progress, Ethiopia faced significant

external shocks

that negatively impacted its economy. Prolonged droughts in the late 1980s and early 1990s led to food shortages, and political instability following the overthrow of the Derg regime in 1991 further disrupted economic activities. The country was also affected by regional conflicts, such as the ongoing conflict in Eritrea and the Ethio-Somali border disputes. Additionally,

structural issues

continued to hinder economic growth. Productivity remained low due to a lack of investment in research and development, while the country’s debt burden was high, with external debt constituting more than 50% of total public debt. Ethiopia also had limited fiscal space due to a large public sector wage bill and recurring donor fatigue.

Role of the IMF and Ethiopia’s decision to seek financial assistance

To address these challenges, Ethiopia turned to international financial institutions like the IMF for financial aid. In 1993, Ethiopia signed a three-year Extended Structural Adjustment Facility (ESAF) arrangement with the IMF, which provided about US$360 million in loans. The

conditions for IMF financial aid

included fiscal consolidation, structural reforms, and monetary policy measures. The benefits of these programs included macroeconomic stabilization, improved public financial management, and increased private sector investment. However, there were also risks associated with IMF programs, such as the potential for social unrest due to adjustment measures and the impact on Ethiopia’s sovereignty.

I Ethiopia’s Economic Reforms under the Extended Credit Facility

Overview of the IMF’s recommended reforms and their rationale

The International Monetary Fund (IMF) has recommended a series of economic reforms for Ethiopia under the Extended Credit Facility (ECF). These reforms aim to strengthen fiscal sustainability, stabilize the macroeconomic environment, and improve governance and transparency.

• Fiscal measures:

The IMF encourages Ethiopia to implement spending cuts and revenue mobilization efforts. This includes reducing subsidies, increasing taxes, and improving public financial management.

• Monetary policies:

The IMF also recommends exchange rate management and inflation targeting. This means Ethiopia should allow its currency to fluctuate based on market forces, while keeping inflation below a certain level.

Progress and challenges in implementing the reforms

Specific policy actions taken by Ethiopia’s government:

Ethiopia has made some progress in implementing the reforms. It has started to reduce fuel and electricity subsidies, introduced a new value-added tax, and taken steps to improve public financial management.

Stakeholder reactions:

Civil society, political parties, and the international community have reacted with mixed feelings to these reforms. Some view them as necessary for long-term economic stability, while others argue they will harm the most vulnerable populations.

Impact assessment of the reforms on Ethiopia’s economy

Short-term effects:

In the short term, the reforms could lead to higher inflation and a depreciating currency. However, they may also help improve debt sustainability by reducing fiscal deficits.

Long-term prospects:

In the long term, the reforms could lead to structural changes that support private sector development and economic growth. However, their success will depend on effective implementation and strong political commitment.

Key Findings and Recommendations

Summary of the IMF Report’s Main Findings and Their Implications for Ethiopia’s Economic Policy

According to the IMF’s Article IV Consultation Report released in [Year], Ethiopia’s economy registered a robust growth of around 9.6% in the fiscal year 2019/20, driven primarily by agriculture and services sectors. However, inflation remains a concern, averaging at 18.7% in FY20/21, while external vulnerabilities persist due to large financing needs and a substantial current account deficit. The Report praises Ethiopia’s efforts in structural reforms, but highlights the need for further progress in areas like fiscal sustainability, monetary policy, and financial sector development to ensure long-term economic growth.

Assessment of Ethiopia’s Progress in Implementing the Recommended Reforms and Areas Requiring Improvement

The Report acknowledges Ethiopia’s progress in implementing some reforms, such as the privatization program and the reform of state-owned enterprises (SOEs). However, it underlines that more needs to be done in areas like fiscal consolidation, monetary policy alignment, and the

strengthening of institutions

for effective implementation and oversight. The Report also emphasizes the importance of addressing arrears to external creditors and improving the business environment to boost private sector participation and attract foreign investment.

Suggestions for Further Steps to Strengthen Ethiopia’s Economy and Ensure Long-term Sustainability

To further strengthen Ethiopia’s economy, the Report recommends fiscal consolidation through reducing expenditures and increasing revenue, as well as addressing arrears to external creditors. It also suggests the need for

monetary policy alignment

with the fiscal stance and maintaining inflation expectations, while advocating for a more flexible exchange rate regime to mitigate external vulnerabilities. Furthermore, the Report proposes

institutional improvements

, such as enhancing transparency and accountability in public finance management, strengthening the role of the National Bank of Ethiopia, and improving governance structures.

Additionally, based on best practices from other developing countries, the following measures could be considered:

• Structural reforms in agriculture: Investing in irrigation, mechanization, and rural electrification to boost productivity and increase farm income.
• Promoting trade: Reducing trade barriers, increasing infrastructure investments, and diversifying exports.
• Improving education: Expanding access to quality education to enhance human capital development and increase the labor force’s productivity.
• Enhancing financial sector development: Implementing reforms to improve access to credit, increase competition, and strengthen regulatory oversight.

Conclusion

Before Ethiopia joined the International Monetary Fund’s (IMF) Extended Credit Facility (ECF) in 2019, the country was facing significant economic challenges. Inflation was high, averaging above 20% from 2015 to 2018. The economy was growing at a slow pace, and external debt was increasing rapidly. The Ethiopian Birr was depreciating against major currencies, leading to concerns about macroeconomic instability and potential debt distress.

Recap of Ethiopia’s economic situation before and after joining the IMF’s Extended Credit Facility

With the support of the IMF, Ethiopia embarked on a bold economic reform program aimed at addressing these challenges. The first review under the ECF, completed in December 2020, provided significant progress towards stabilizing the economy and laying the foundation for long-term growth. Fiscal policy was adjusted to reduce the budget deficit, and monetary policy was tightened to curb inflation. Structural reforms were initiated in areas such as trade, finance, and public sector management.

Significance of the first review under ECF for Ethiopia’s economic future

The successful completion of the first review under the ECF is a crucial milestone for Ethiopia’s economic future. It demonstrates the government’s commitment to implementing reforms and engaging with international partners to address the country’s economic challenges. The IMF’s support will provide much-needed financing and policy guidance, helping Ethiopia to stabilize its economy, reduce inflation, and promote sustainable growth.

Call to action for all stakeholders (government, international community, civil society) in supporting Ethiopia’s economic recovery and long-term development.

However, the challenges are not over yet. Ethiopia still faces significant economic vulnerabilities, including high debt levels, low foreign exchange reserves, and ongoing social unrest. To ensure the success of the reform program, it is essential that all stakeholders – the government, international community, and civil society – play their part in supporting Ethiopia’s economic recovery and long-term development.

The government must:

– Implement the agreed reform measures, including fiscal consolidation, structural reforms, and monetary policy adjustments.
– Maintain a focus on transparency and accountability in economic management.
– Engage with civil society and the international community to build trust and support for the reform program.

The international community must:

– Provide continued support to Ethiopia’s economic recovery, including through the IMF and other multilateral organizations.
– Encourage private sector investment in key sectors of the economy.
– Support capacity building efforts to help Ethiopia implement reforms effectively.

Civil society must:

– Engage constructively in the policy debate and hold the government accountable for its actions.
– Advocate for transparency and good governance in economic management.
– Provide input on the design and implementation of reforms to ensure they meet the needs of all Ethiopian people.