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International Monetary Fund. External Relations Dept.

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International Monetary Fund. African Dept.

This 2015 Article IV Consultation highlights that Ethiopia's recent macroeconomic performance has continued to be strong overall, although with some rising domestic and external vulnerabilities. Economic growth in 2014/15 was buoyant, supported by booming manufacturing and construction sectors. However, inflation has been on the rise, with domestic food prices pushing it above 10 percent. External vulnerabilities have also increased as exports of goods and services slowed significantly, while imports continued growing fast. In the medium term, the IMF staff forecast strong growth at 7.5-8 percent. Public investment is expected to moderate, while private investment is projected to increase only gradually.

International Monetary Fund
This Selected Issues paper examines economic development in Ethiopia during the 1990s. In mid-1992, the government began implementing significant economic reforms aimed at stabilizing the economy and deregulating economic activity. Since that time, substantial progress has been made with respect to both objectives. Policy measures have aimed at correcting price distortions, lifting restrictions on the private sector, deregulating the labor market, reducing macroeconomic imbalances, realigning the exchange rate, and liberalizing the external exchange and trade system. Moreover, the decentralization of the political system and reform of the civil service have been initiated.
Daniel Gurara, Mr. Kangni R Kpodar, Mr. Andrea F Presbitero, and Dawit Tessema
While expanding public investment can help filling infrastructure bottlenecks, scaling up too much and too fast often leads to inefficient outcomes. This paper rationalizes this outcome looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries. Consistent with the presence of absorptive capacity constraints, our results show a non-linear U-shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10% of GDP. This threshold is lower (about 7% of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.
Juliana Dutra Araujo, Mr. Antonio David, Carlos van Hombeeck, and Mr. Chris Papageorgiou
Using a newly developed dataset this paper examines the cyclicality of private capital inflows to low-income developing countries (LIDCs) over the period 1990-2012. The empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably less procyclical than flows to more advanced economies. The analysis also suggests that flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also evidence that changes in risk aversion are a significant correlate of private capital inflows with the expected sign, but LIDCs seem to be less sensitive to changes in global risk aversion than EMs. A host of robustness checks to alternative estimation methods, samples, and control variables confirm the baseline results. In terms of policy implications, these findings suggest that private capital inflows are likely to become more procyclical as LIDCs move along the development path, which could in turn raise several associated policy challenges, not the least concerning the reform of traditional monetary policy frameworks.
Vito Amendolagine, Mr. Andrea F Presbitero, Roberta Rabellotti, Marco Sanfilippo, and Adnan Seric
The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets of 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.
Daniel Gurara, Mr. Giovanni Melina, and Luis-Felipe Zanna
Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.