Article

Ethiopia: Inflation and Balance of Payments Pressures on the Rise

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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In 2004/05, Ethiopia experienced a second successive year of rapid economic growth, at close to 9 percent; growth of 5 percent is projected for 2005/06. But the country continues to face political uncertainties including unresolved tensions stemming from the May 2005 national elections, which have adversely affected donor support. Ethiopia’s largely agricultural economy also remains vulnerable to variations in weather, which have resulted in wide swings in output that have had severe effects on the poor, the IMF said in its most recent annual economic review.

As a result of a shortfall in revenues and aid inflows, the government’s domestic borrowing in 2004/05 was higher than budgeted by 2 percent of GDP. The stock of government domestic debt remained high, the external current account deficit widened as imports rose by 40 percent, and the year-end rate of inflation rose.

Ethiopia
Est.Proj.
2002/032003/042004/052005/06
(annual percent change, unless otherwise indicated)
GDP (at constant factor cost)–3.311.18.85.2
Consumer prices
(period average)15.18.66.810.8
External debt
(including to Fund, percent of GDP)85.475.753.947.4
Overall balance of payments
(million dollars)275.0227.0–101.0–357.0
Note: Data pertain to the period July 8-July 7.Data: Ethiopian authorities and IMF staff estimates and projections.
Note: Data pertain to the period July 8-July 7.Data: Ethiopian authorities and IMF staff estimates and projections.

Executive Directors welcomed the recent strong growth performance but emphasized the importance of containing inflation and emerging pressures on the balance of payments. They agreed that improving Ethiopia’s infrastructure would enhance growth prospects, but cautioned that scaling up domestically financed investment could jeopardize macroeconomic stability. The Directors also stressed the importance of accelerating structural reforms, particularly to raise agricultural productivity and boost private sector growth.

Significantly larger external assistance will be required to sustain growth at rates that would reduce widespread poverty and meet the Millennium Development Goals. The Directors stressed the need to complement donor efforts with a sound development strategy and strong governance systems, and to strengthen public expenditure management to ensure that aid and resources freed up by debt relief under the Multilateral Debt Relief Initiative are used efficiently.

The Directors said that fiscal policy should support monetary policy in containing inflation and be focused on limiting domestic bank financing and ensuring debt sustainability. A tighter fiscal stance might be required to contain demand and to stabilize the balance of payments. The Directors also saw a need to better prioritize expenditures to strengthen pro-poor spending and establish an effective social safety net, while improving public expenditure management.

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