Ethiopia’s First Review Under the Extended Credit Facility: Achievements, Challenges, and Next Steps

Ethiopia’s First Review Under the Extended Credit Facility:

Ethiopia‘s first review under the Extended Credit Facility (ECF) with the IMF took place in November 202This review marked a significant milestone for Ethiopia, as it signified the country’s commitment to implementing necessary reforms aimed at restoring macroeconomic stability and promoting sustainable economic growth.

Achievements

During the review period, Ethiopia made considerable progress in several areas. For instance, the government successfully implemented a number of structural reforms, including measures to improve the business environment and enhance revenue mobilization. Moreover, Ethiopia was able to record a primary budget surplus, which is a key requirement under the ECF program.

Challenges

Despite these achievements, Ethiopia still faces significant challenges that threaten to undermine its economic progress. One of the most pressing challenges is the ongoing debt sustainability concerns. Ethiopia’s external debt has continued to rise, with the country’s debt-to-GDP ratio reaching 27.5% in the fiscal year 2020/2Additionally, Ethiopia’s economic growth remains vulnerable to shocks from various sources, including external shocks such as commodity price volatility and geopolitical risks.

Next Steps

Moving forward, Ethiopia needs to take several steps to address these challenges and build on its achievements. First, the government must continue to implement structural reforms aimed at improving the business environment, enhancing revenue mobilization, and promoting private sector-led growth. Second, Ethiopia needs to address its debt sustainability concerns by pursuing a comprehensive debt restructuring program that involves both domestic and external creditors. Finally, Ethiopia must prioritize measures to build resilience against external shocks by diversifying its economy, improving its risk management capabilities, and enhancing its financial sector stability.

Ethiopia’s Economy and the Extended Credit Facility (ECF)

Background of Ethiopia

Located in the Horn of Africa, Ethiopia is the second most populous country in the African continent. It has a rich history dating back thousands of years, with a distinct cultural heritage that sets it apart from its neighbors. The country is known for its rugged terrain, diverse ethnic groups, and significant economic progress in recent years.

Despite Ethiopia’s rapidly growing economy, it still faces several challenges. The country’s economic growth is driven by the agricultural sector, which accounts for about 45% of its Gross Domestic Product (GDP). However, Ethiopia remains one of the poorest countries in the world, with over 25 million people living below the international poverty line. Other significant challenges include a large informal sector, weak infrastructure, and a limited industrial base.

The Extended Credit Facility (ECF) and its Significance

The International Monetary Fund (IMF), an international organization that provides financial assistance and advice to its member countries, plays a crucial role in Ethiopia’s economy. The IMF’s primary objective is to ensure the stability of the international monetary system and promote international trade through a variety of financial tools.

Extended Credit Facility (ECF)

One such tool is the Extended Credit Facility (ECF), which is designed to provide financial assistance to low-income countries experiencing prolonged balance of payment problems. Ethiopia has been a member of the IMF since 1945 and has availed itself of various facilities, including the ECF. The ECF is significant for Ethiopia due to its large financing capacity, extended repayment period, and lower interest rates compared to commercial loans.

The ECF comes with conditions designed to help Ethiopia address its economic issues, including structural reforms and macroeconomic adjustments. Some of the key areas of focus include fiscal consolidation, monetary policy alignment with inflation targets, and structural reforms aimed at improving the business environment and promoting private sector growth.

Ethiopia’s First Review Under the Extended Credit Facility:

Achievements

During Ethiopia’s first review under the Extended Credit Facility (ECF), significant progress was made in various sectors. This section highlights three key areas: monetary policy, fiscal policy, and the external sector.

Monetary policy developments:

Inflation rate trends and targets: Ethiopia experienced a downward trend in inflation from 23.2% in October 2019 to 16.9% in June 2020. This achievement was attributed to the Central Bank of Ethiopia’s (CBE) commitment to maintaining price stability. The CBE set an inflation target of 12-15% for the fiscal year 2020/2021.

Central Bank of Ethiopia’s actions to maintain stability: The CBE took several steps to address inflationary pressures, including adjusting interest rates and implementing foreign exchange market interventions. The bank also adopted a new monetary policy framework that focuses on flexible inflation targeting and improved communication strategies to enhance transparency.

Fiscal policy improvements:

Revenue collection and expenditure management: Ethiopia improved its revenue mobilization efforts, with the domestic revenue collection increasing by 30% year-on-year in the first half of FY 2019/2020. Expenditure management was strengthened through better budget execution and increased control over off-budget spending.

Structural reforms to enhance fiscal sustainability: The Ethiopian government initiated structural reforms aimed at enhancing fiscal sustainability, such as public financial management reforms and measures to address the large wage bill. These reforms were expected to improve the fiscal balance and reduce Ethiopia’s dependence on external financing.

External sector performance:

Balance of payments and exchange rate developments: Ethiopia’s balance of payments showed a significant improvement, with the current account deficit declining from 5.2% in FY 2018/2019 to 3.6% in the first half of FY 2019/2020. The exchange rate remained stable, with the birr depreciating by only 0.4% against the US dollar over the review period.

Progress in trade liberalization and debt sustainability: Ethiopia made progress towards trade liberalization, with the implementation of a National Single Window System that automated customs clearance processes. The country also took steps to improve debt sustainability by restructuring its external debt and extending the repayment period for some loans.

I Challenges Faced During the Review Period

Monetary Policy Implementation Challenges

1. Inflation pressures from external factors: Ethiopia faced significant inflationary pressures during the review period, primarily due to external factors such as rising global commodity prices, supply chain disruptions, and currency depreciation in major trading partners’ economies. These factors put upward pressure on the price level, making it challenging for monetary authorities to maintain price stability.
2. Maintaining exchange rate stability in a volatile global economy: Ethiopia’s currency, the Birr, has been under pressure due to external shocks and capital outflows, making it difficult for monetary authorities to keep the exchange rate stable. This instability adds to inflationary pressures and increases uncertainty in the economy.

Fiscal Policy Implementation Issues

1. Delays in structural reform implementation: Ethiopia’s economic reform agenda has faced significant delays, especially in areas such as privatization, trade liberalization, and public financial management. These delays hinder the government’s ability to improve the business environment and increase competitiveness, leading to slower economic growth.
2. Challenges in revenue collection and public expenditure management: Ethiopia’s revenue collection has been disappointing, with the government failing to meet its revenue targets. At the same time, public expenditure management has been a challenge, with concerns about off-budget spending and lack of transparency in budget execution.

External Sector Vulnerabilities

1. Geopolitical risks and their impact on Ethiopian economy: Geopolitical risks, such as tensions in the Horn of Africa and the ongoing conflict in Tigray, pose significant challenges to Ethiopia’s economy. These risks create uncertainty and can lead to capital outflows, undermining investor confidence and economic stability.
2. Climate shocks and food insecurity: Ethiopia is highly vulnerable to climate shocks, with agricultural productivity being a significant contributor to the economy. Droughts, floods, and other extreme weather events can lead to food insecurity and economic instability.

Next Steps: Ethiopia’s Economic Agenda

Monetary policy priorities:

Maintaining inflation within the target range of 9% (plus or minus 2.5%) is a top priority for Ethiopia’s monetary policy. This will help ensure price stability and foster macroeconomic stability.

Building resilience to external shocks

is another important objective of Ethiopia’s monetary policy. This involves strengthening the central bank’s foreign exchange reserves, improving risk management systems, and enhancing financial sector stability.

Fiscal policy priorities:

Completing structural reforms

is a crucial element of Ethiopia’s fiscal policy agenda. This includes measures to improve the business environment, streamline regulatory processes, and promote competition.

Improving revenue collection

and public expenditure management is another key objective of Ethiopia’s fiscal policy. This involves modernizing tax administration, enhancing revenue collection systems, and promoting transparency and accountability in public expenditures.

External sector strategies:

Enhancing trade competitiveness is a priority for Ethiopia’s external sector strategies. This includes measures to reduce trade barriers, improve infrastructure, and promote export diversification.

Diversifying the economy and reducing reliance on traditional sectors is another important objective of Ethiopia’s external sector strategies. This involves promoting industrialization, encouraging investment in non-traditional sectors, and enhancing agricultural productivity through modern farming practices.

Role of development partners:

Multilateral and bilateral assistance will play a critical role in supporting Ethiopia’s economic agenda. This includes technical assistance, capacity building, and financial support from organizations such as the World Bank, African Development Bank, and the International Monetary Fund.

Private sector engagement and financing for sustainable growth is another important area of cooperation between Ethiopia and its development partners. This involves promoting public-private partnerships, attracting foreign investment, and enhancing the enabling environment for private sector growth.

Conclusion

Ethiopia’s journey towards economic development, propelled by its membership in the Economic Community of Friends (ECF), has shown remarkable progress over the past few decades.

Summary of Ethiopia’s progress

With a focus on agriculture, industry, and infrastructure development, Ethiopia has managed to reduce poverty rates significantly, increase literacy levels, and improve access to healthcare services. The government’s commitment to implementing pro-poor policies and attracting foreign investments has contributed to a steady Gross Domestic Product (GDP) growth rate.

Key challenges and priorities

Despite these achievements, Ethiopia still faces considerable challenges that need to be addressed to ensure sustainable economic development.

I. Political instability

The political climate in Ethiopia remains volatile, with ongoing ethnic tensions and protests posing a significant threat to stability.

Infrastructure development

While progress has been made in infrastructure development, there is still a long way to go before Ethiopia’s roads, electricity, and water systems meet the needs of its growing population.

I Sustainable agricultural practices

A shift towards sustainable and climate-resilient agriculture is necessary to mitigate the impact of climate change on food production.

Significance of international cooperation

International cooperation plays a crucial role in supporting Ethiopia’s economic development efforts, particularly in the areas of

financial assistance

,

technical expertise

, and

capacity building

. By working together, the international community can help Ethiopia overcome its challenges and continue on its path towards sustainable economic growth.