Ethiopia: Recent Economic Developments

This paper reviews economic developments in Ethiopia during 1995–99. It provides an update on macroeconomic performance and structural reforms during FY96–FY99 (fiscal year ended July 7), when Ethiopia—as Africa’s second most populous country and one of the world’s poorest nations—continued to make strides in transitioning to a market-based economy and alleviating widespread poverty. The paper also highlights the major challenges in the areas of financial sector liberalization, civil service reform, and privatization.

Abstract

This paper reviews economic developments in Ethiopia during 1995–99. It provides an update on macroeconomic performance and structural reforms during FY96–FY99 (fiscal year ended July 7), when Ethiopia—as Africa’s second most populous country and one of the world’s poorest nations—continued to make strides in transitioning to a market-based economy and alleviating widespread poverty. The paper also highlights the major challenges in the areas of financial sector liberalization, civil service reform, and privatization.

I. recent economic developments

A. Background

1. This section gives a brief overview of recent economic developments in Ethiopia. It provides an update on macroeconomic performance and structural reforms during the period FY96-FY99 (fiscal year ended July 7), when Ethiopia—as Africa’s second most populous country and one of the world’s poorest nations—continued to make strides in transitioning to a market-based economy and alleviating widespread poverty.1 Over the past four years, the government has sought to consolidate gains made during the initial phase of structural adjustment, which followed the end to a protracted civil war, the collapse of the totalitarian Derg regime, and formation of a transitional government in 1991. Nonetheless, considerable work remains to be undertaken in some areas of structural reforms, and Sections II, III, and IV highlight the major challenges in the areas of financial sector liberalization, civil service reform, and privatization.

2. Starting in 1992, the new government began to implement an economic reform program with a view to reviving an economy in a country that had suffered from many years of civil war, food security crises, heavy central planning. Under a World Bank structural adjustment credit (SAC) and an Enhanced Structural Adjustment Facility (ESAF) arrangement (FY93-FY95) from the Fund, difficult steps were taken to liberalize the economy with an aim of rapidly accelerating economic growth, reduce inflationary pressures, correct large internal and external imbalances, and build up foreign exchange reserves, with generally favorable results (Table 1). Structural reforms concentrated on lifting most domestic price controls, introducing a system of foreign exchange auctions, and reducing import tariffs. Initial steps also were taken to liberalize the financial sector by opening it to private domestic banks in 1994 (now five of the seven commercial banks in Ethiopia) and establishing a treasury bill market in 1995. Moreover, with the establishment of the Ethiopian Privatization Agency in 1994, the government began to implement a privatization program concentrated so far on small- and medium scale state-owned enterprise, mainly in the wholesale and retail trade, light manufactures and agro-processing, and tourism sectors.

Table 1.

Ethiopia: Overview of Macroeconomic Performance, FY88-FY991

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Sources: Ethiopian authorities; and Fund staff estimates.

Beginning in FY98 (fiscal year ended July 7, 1998), all data pertain to the period July 8-July 7; prior to that, fiscal and monetary data cover the period July 8-July 7, and other data July 1-June 30.

Addis Ababa retail price index until 1996/97 and national consumer price index thereafter.

For 1987/88-1990/91, average for 1989/90-1990/91 only.

B. Macroeconomic Performance

3. An overall improvement in macroeconomic performance was achieved during the period FY96-FY99, notwithstanding some divergent trends. Performance can be characterized as follows:

  • Output growth performance has continued to improve, despite adverse weather conditions in FY98 and, more recently, in the second half of FY99, which resulted in large downturns in seasonal agricultural output, in particular vital cereal production. Growth in non-agricultural output has remained robust across most sectors, with distribution and other services leading the way;

  • Inflationary pressures have further abated, benefiting from mostly sound financial management by the government and liberalization of the trade regime;

  • The external current account deficit (excluding official transfers) has widened since FY97, which illustrates Ethiopia’s vulnerability to external and domestic shocks and highlights the need to maintain prudent macroeconomic policies and accelerate structural reforms; and

  • The coverage of gross official foreign reserves as a share of imports has declined to relatively low levels reflecting the widening current account deficit just mentioned, as well as the repayment of Ethiopian Airlines obligations in FY97 and, more recently, a drop in official foreign financing.

Growth and inflation2

4. Ethiopia remains heavily dependent on agriculture as its main source of output, which continues to make overall economic performance highly vulnerable to shocks. Following real GDP growth of 10.6 percent in FY96 and 5.2 percent in FY97, output contracted by 0.5 percent in FY98 owing to the effects of the El Nino weather phenomenon on agriculture and transportation and despite an increase in non-agricultural output by 9.5 percent (Figure 1). With a rebound in the Meher (long season) harvest in FY99, total output rose by an estimated 6.7 percent. However, the recovery has been tempered by a drought in the second half of FY99, which has severely affected the Belg (short season) harvest and caused a food security crisis affecting approximately five millions persons. Moreover, the war with Eritrea, which started as a border skirmish in May 1998 and intensified into a full-fledged conflict in February 1999, has likely resulted in some slowing in nonagricultural activity, as evidenced by a slump in indirect tax collections, slowing in civilian imports, and reduction in tourist arrivals.3

Figure 1.
Figure 1.

Ethiopia: Real Agricultural and Nonagricultural GDP Growth, FY88-FY991

(Annual percentage change)

Citation: IMF Staff Country Reports 1999, 098; 10.5089/9781451812626.002.A001

Source: Ethiopian authorities; and Fund staff estimates.1For fiscal year ended July 7 of year indicated.

5. Underpinning Ethiopia’s recent growth performance have been rapid productivity gains in the agricultural sector following the dissemination of fertilizer use and other agricultural extension activities, as well as favorable trends in saving and investment (Table 2), which can be summarized as follows:

  • Foreign saving played an increasingly critical role in Ethiopia during the period FY96-FY99 filling a widening domestic resource gap brought on in part by the heavy import content of recent investment.

  • In addition, domestic saving rose from an average of 4½ percent of GDP a year (FY92-FY95) to 6 percent of GDP (FY96-FY99), reflecting exclusively higher public saving.4 However, starting in FY98, public saving (as well as total domestic saving) began to decline owing largely to a sharp pickup in military expenditure and a slight drop in tax revenue increases as a share of GDP. The trend continued in FY99.

  • Private saving continued to be constrained by the low level of per capita income, large number of urban unemployed, and lack of domestic savings instruments owing to the rudimentary development of the financial sector.

  • Gross domestic investment rose from an average of 13¾ GDP (FY92-FY95) to 18¾ percent (FY96-FY99), with around two-thirds of the increase coming from the nascent private sector. More than one-half of recent private investment was in agriculture and industry, including manufacturing, water supply, and power generation. Nearly one-half of public investment has been concentrated on agricultural and rural development and road construction; another one-third has gone toward electricity supply, education and health facilities, and other community services.

  • However, public investment began to taper off in FY98, and continued to do so in FY99, despite the start of World Bank and other donor supported sector development programs (SDPs), which now encompass more than half of the government’s total capital budget (in education, health, roads, and energy).5

Table 2.

Ethiopia: Trends in Financial Balances1

(In percent of GDP)

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Sources: Ethiopian authorities; and Fund staff estimates.

Beginning in FY98 (fiscal year ended July 7, 1998), all data pertain to the period July 8-July 7; prior to that, fiscal and monetary data cover the period July 8-July 7, and other data July 1-June 30.

Change in column [1] between FY92-FY95 and FY88-FY91 and in column [2] between FY96-FY99 and FY92-FY95.

6. Inflation has remained in the single digits since early 1996, owing to relatively tight financial policies and trade liberalization. Temporary price shocks, in particular those related to the drop in food production in FY98, have been smoothed by the availability of cereal imports and improvements in internal distribution. The exchange rate has undergone only a modest depreciation over the past four years—in nominal and real effective terms. Following the initial devaluation of the Ethiopian birr against the U.S. dollar in 1992 and gradual opening of the economy, the real effective depreciation of the currency continued through FY96. Since then, productivity gains resulting from improvements in basic infrastructure, availability of inputs (especially in agriculture), and transfer of technology, as well as sizable inflows of official financing have slowed the rate of real depreciation (see Box 1).

Balance of payments6

7. The external current account deficit began to widen sharply starting in FY97 and further weakened in FY98 and FY99. A number of factors have contributed to this trend, including the following:

  • While exports and imports have risen steadily as a share of GDP, growth of noncoffee exports has been hampered by certain rigidities (e.g., excessive foreign exchange and trade regulations, poor basic infrastructure, and inadequate export promotion). Overall export performance remains heavily tied to coffee exports, which are highly susceptible to domestic and external shocks. At the same time external competitiveness has steadily improved (Box 1) owing largely to prudent macroeconomic policies.

  • In recent years, the sharp volatility in the terms of trade may have increased uncertainty in the tradables sectors and dampened growth in coffee and non-coffee exports volumes. In FY99, improvements in the external current account brought on by a sharp rebound in non-coffee export volumes (mainly leather goods and horticulture crops) were probably more than offset by a 17 percent drop in coffee export volumes. This drop was associated with poor growing conditions and a decline in world prices stemming from favorable weather in other major coffee-producing regions, the latter of which contributed to a deterioration in the terms of trade by 17 percent. Coffee exports declined from US$420 million in FY98 (6.4 percent of GDP) to an estimated US$280 million in FY99 (4.3 percent of GDP).

  • Nonetheless, coffee still accounted for nearly three-fourths of the growth in the value of total merchandise exports during the period 1995/96-1997/98. Coffee production has been aided by an increase in the number of washing stations from 165 to 480 over the past three years. Ethiopian coffee still commands a market premium due to the high quality of output—85 percent of which is organically grown.

  • The combination of a liberalization of the external current account transactions including lower import tariffs (Table 3) and greater availability of foreign resources has fueled import demand. More generally, relatively high output growth rates and increased investment have required a larger import bill, especially in capital goods. In FY98, and most likely in FY99, food-and defense-related imports were also much higher than in recent years.

  • Thus far, the shift in major trading activity in mid-1998 from the Eritrean ports of Assab and Massawa to the port of Djibouti does not appear to have materially affected the overall level of exports and imports. Higher port charges in Djibouti have at least been partially offset by lower overland transport costs into Ethiopia.

  • As shown earlier, the rise in net factor income (owing to a drop in official interest payments) and private transfers (because of increased receipts from of nongovernmental organizations and Ethiopians living abroad) in relation to GDP has been largely offset by a fall in official transfers during the period FY96-FY99, compared with the previous four years. The drop in official transfers is attributable to the large role that external grants played during the initial phase of structural adjustment (including for rehabilitation of neglected and war-damaged infrastructure), which allowed Ethiopia to undertake major stabilization efforts.

  • The uptake in capital inflows has tapered off, although some improvement in official disbursements in association with the SDPs is expected in FY99. Foreign direct investment has remained low, but it too is expected to pick up in FY99 owing to the repatriation of a large share of proceeds from the sale of a gold mine in the previous year.7 In recent years, FDI has accelerated sharply (Table 4); however, the demand for new licensing slowed in early FY99, possibly reflecting investor concerns about the war.

  • In recent years, debt relief has come primarily in the form of a 1997 Paris Club rescheduling. Nevertheless, after Ethiopia simultaneously recognized large outstanding claims due to Russia, the ratio of external debt to GDP doubled to 145 percent at end-FY98. Over the same period, the ratio of scheduled debt-service to exports of goods and nonfactor services increase from 37 percent to 60 percent.8

  • Despite Ethiopia’s improved economic prospects, the widening of the current account deficit has been accompanied by a drop in gross official foreign reserves, from the equivalent of 6.6 months of imports of goods and nonfactor services at end-FY95 to 2.7 months at end-FY98.

Table 3.

Ethiopia: Structure of Import Duties, FY93-FY991

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Sources: Ethiopian authorities; and Fund staff estimates and projections.

Beginning in FY98 (fiscal year ended July 7, 1998), all data pertain to the period July 8-July 7; prior to that, fiscal and monetary data cover the period July 8-July 7, and other data July 1-June 30.

As of August 1993.

As of January 1996.

As of January 1998.

As of January 1999.

Table 4.

Ethiopia: Foreign Direct Investment Projects Approved and In Operation, FY93-FY99

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Source: Ethiopian Investment Authority

FY99, data pertain to July 7-September 10 only. For FY98, data pertain to July 8-July 7; prior to that, data pertain to July 1-June 30.

External Competitiveness

Under the centrally planned system during the Derg regime, the exchange rate was fixed at Birr 2.07 per U.S. dollar from 1973 to 1992, with the parallel market discount vis-à-vis the official exchange rate having widened to over 100 percent by the end of the period. Pervasive macroeconomic imbalances and trade barriers eroded Ethiopia’s external competitiveness and undermined export performance. A major objective of the new government that took office in 1991 was to increase external competitiveness. After a large devaluation of the birr in October 1992, export license requirements and state trade monopolies on selected items were eliminated, and export price control was replaced with ex post export price verification. Since 1994, the official exchange rate has been determined in weekly auctions conducted by the central bank, and the spread between the official and parallel exchange rate has narrowed to less than 2 percent. All export taxes were removed in FY98, except on coffee. In August 1998, additional steps were taken to liberalize current account transactions and foreign exchange regulations (Box 2).

Since 1990, Ethiopia’s external price competitiveness, measured by the consumer price index-based real effective exchange rate (REER), has undergone two distinct phases. First, in FY92 external competitiveness eroded by about 40 percent, as the new government liberalized prices while keeping the exchange rate fixed. Second, between September 1992 and the first quarter of 1999 external competitiveness improved by 66 percent owing to tight macroeconomic and incomes policies and liberalization measures. Ethiopia has managed to preserve its competitiveness gains of 55 percent that came as a result of the October 1992 devaluation, and even made further small gains owing to improvements in its relative price performance. This has also been aided by the absence of major wage pressures due to i) maintenance of relatively tight financial policies, including containment by the government of civil service wages; and ii) existence of a large informal sector that has tended to dampen wage demands.

These developments contributed to a remarkable rebound in the production of tradables and exports. During the period FY92—FY98, total export volume grew at an annual average of 16 percent, including an 18 percent growth in coffee export volumes, but total export volume stagnated in FY99 owing to a sharp drop in coffee export volumes. Nevertheless, the high dependence of exports on one commodity leaves the country vulnerable to large terms of trade shocks. For example, in FY99, the terms of trade deteriorated by 17 percent due to a large fall in primary commodity prices, including coffee, leather, and pulses. These developments illustrate the need to promote further export diversification. The start-up of the operations of newly privatized gold mine and of leather factories is a step in the right direction. Furthermore, the Ethiopian Export Promotion and Investment Authority recently targeted horticulture, light manufacturing, and other minerals as promising sectors for exports.

A01ufig01

Ethiopia: Exchange Rate Developments, 1990 Q1-1999 Q1

(Index, 1990=100)

Citation: IMF Staff Country Reports 1999, 098; 10.5089/9781451812626.002.A001

Source: IMF, Information Notice System.

Fiscal performance9

8. Overall fiscal performance has improved moderately in recent years. The general government budget deficit (on a cash basis and excluding grants) declined from 8½ percent of GDP in FY96 to 6¾ percent in FY98, and an estimated 6½ percent in FY99. However, the domestic primary balance10 has weakened somewhat—shifting from a surplus of 1.2 percent of GDP in FY96 to a deficit of 0.3 percent in FY98 (and down from a peak in FY95 of 2.7 percent of GDP). Prior to FY98, fiscal consolidation was largely facilitated by the peace dividend. Defense spending declined from just under 10½ percent of GDP in FY90 to an average of 2¼ percent during the period FY92-FY97. After an initial sharp drop in nontax revenue following the collapse of the Derg regime, total revenue rose precipitously in FY95 owing to the sounder financial footing of the large (and now-commercially operated) public enterprises. Subsequently, though, the expected increases in tax revenue as a share of GDP did not materialize, owing to delays in implementing administrative improvements and broadening the tax base to capture new private sector activity. However, as long as defense spending remained low and external financing increased, the government was able to increase real spending in key sectors and achieve a measure of fiscal deficit reduction without a sustained upswing in tax revenue. The sustainability of this stance came into question in FY98 because of the sharp rise in military expenditure, and was made even more tenuous by the pronounced drop in external financing in FY99, with only modest improvements expected in tax collections.

9. More specifically, the major trends underpinning recent fiscal performance are as follows:

  • Total revenue stayed in the range of 18½-19 percent of GDP during FY96-FY98, and probably in FY99 as well. At the same time, the share of tax revenue in total revenue declined from 12½ percent of GDP in FY96 to 11¾ percent in FY98.

  • Direct taxes and domestic sales tax and excises accounted for most of the decline in tax revenue during this period. Income tax collections fell, even though no changes were made to the marginal rates of taxation on business profits and employment income; likewise, the structure of these taxes has remained largely unchanged.11 As the taxation of non-agricultural business activity remains heavily dependent on the 25 or so largest state-owned enterprises (SOEs), the sluggish performance of the corporate income tax take points to the persistence of tax administration problems and weak profitability of some of these now-commercialized operations.

  • Both income tax and customs duty collections appear to have picked up slightly in FY99 owing to modest administrative improvements at the Federal Inland Revenue Authority and Customs Administration. However, the rise in import duty collections was partially offset by the latest round of tariff reductions in December 1998 and, more generally, a moderate decline in civilian imports.

  • Nontax revenue (including privatization receipts) continued to account for around one-third of total revenue during the period FY96-FY98, with surplus and dividends from the National Bank of Ethiopia (NBE) and SOEs remaining as the overwhelming source (nearly one-half of total nontax revenue in 1997/98).

  • Total expenditure and net lending declined from 27 percent of GDP in FY96 to 25½ percent in FY98, and probably stayed at the lower end of this range in FY99. However, the composition of expenditure has changed considerably, especially during the past two fiscal years.

  • Following a sharp drop in defense spending in relation to GDP from the early 1990s until FY97, when it bottomed out at around 2 percent of GDP, defense spending rose again to 4½ percent of GDP in FY98 and an estimated 6 percent in FY99 as a result of the war with Eritrea. The rise in defense spending has been more than offset by (i) reduced outlays for interest payments and general (non-military) and economic services, and (ii) lower capital expenditure (as discussed earlier). By contrast, social spending (recurrent and capital) rose by 0.8 percent of GDP from FY96 to FY98, to 6½ percent of GDP.

  • Starting in FY98, the share of the overall fiscal deficit financed by external grants and loans began to decline, as continued to be the case in FY99. As mentioned earlier, at least in FY99, some of the drop appears to be associated with the reduced donor support owing to concerns about the war and its impact on the government’s ability to execute the capital budget, in particular the SDPs. The result was a sharp increase in domestic financing from banks in FY98 and from the nonbank public in FY99, such that the stock of domestic debt has stayed at around 29 percent of GDP.

Monetary and exchange rate developments12

10. Since FY96, broad money growth has stayed generally in line with the rise in nominal GDP, with limited financial deepening in the country given the relatively limited number of financial institutions in operation. The overall increase in broad money has accommodated a further large expansion of domestic credit, but was accompanied by a drop in net foreign assets of the banking system. Owing to the relatively limited domestic government borrowing requirement until recently, much of the expansion has gone toward credit to the nongovernment sector13, which grew at an average rate of 23 percent a year over the period FY96-FY98. However, nongovernment sector credit growth has experienced a modest slowdown in FY99, even though commercial banks as a whole continue to hold large excess liquidity.14 Credit growth has tended to be concentrated in wholesale and retail trade and import activities. Long-term private borrowing—both domestically and from abroad—remains virtually nonexistent. In FY99, monetary trends can be summarized as follows:

  • Broad money grew by 5.3 percent for the year ending April 1999, down from 9.3 percent in the previous twelve-month period. Demand deposits remained flat, as public enterprises (which account for one-fourth of the total deposit base) tended to shift any new buildup in cash reserves from unremunerated bank deposits to treasury bills. Broad money excluding public enterprise deposits—a monetary aggregate that tends to reflect behavioral factors in Ethiopia more closely—increased by 7.8 percent for the year ending April 1999, from 3.6 percent in the previous twelve-month period.

  • Since FY96, velocity has fluctuated within a generally small range. As noted above, the absence of any noticeable downward trend is consistent with a general lack of financial deepening, despite the advent of private banks (which still control less than 10 percent of total deposits).

  • Through April 1999, the annual rate of growth in nongovernment sector credit was around 12 percent (excluding public enterprises, it was 13 percent). The dominant, state-owned Commercial Bank of Ethiopia (CBE), which currently holds 85 percent of total commercial bank assets, accounted for slightly under three-fourths of this expansion.

  • Nonetheless, for the entire banking system, excess liquidity was 31 percent of net current deposits at end-April 1999.15 The CBE still held around 80-90 percent of total excess liquidity in the banking system. The excess reserve and liquidity holdings appear to arise from a lack of effective competition among banks and is exacerbated by the poor quality of banks’ loan portfolios, the lack of private land ownership and deficiencies in enforcement of property rights (which make it difficult for banks to assess the quality of, and enforce collection on, collateral), and absence of a secondary market for government securities.16 Partly as a result, the interbank money market established in September 1998 has to date been completely inactive.

  • Even though the government lifted most controls on lending and deposit rates in January 1998, interest rates have remained generally sticky.17 Banks still tend to differentiate credit risks on the basis of quality of collateral rather than by the rate of interest charged. As a result, lending rates continue to vary only slightly across banks and over time. Time deposit rates have show only slightly more variation. The capacity of banks besides the CBE to use interest rate differentiation to mobilize deposits (especially those of public enterprises) may be constrained by the public’s perception of the soundness of the banking system, in particular the private banks; the lack of “bankable” projects, especially for these smaller, less experienced institutions; and, more generally, the lack of competition in the financial system.

  • The official exchange rate is determined at a weekly wholesale auction conducted by the NBE and open to all banks and importers willing to submit a bid in excess of US$500,000 per auction. The wholesale auction replaced the retail auction (which was open to all licensed importers willing to submit a bid in excess of US$10,000 per auction) in September 1998; at the same time, an interbank foreign exchange market was established, which has seen limited action. Since that time, the exchange rate has come under some pressure, in part owing to a lifting in August 1998 of most restrictions on external current account transactions and, more generally, the terms of trade loss, the poor export volume performance, and war-related uncertainties. In FY99, the birr depreciated by around 14 percent against the U.S. dollar, compared with 12 percent during the whole of the preceding three-year period.

C. Financial Sector, Exchange and Trade System, and Structural Reforms

11. Over the past year, a number of reforms have been undertaken with a view to further removing structural impediments in the economy and stimulating broad-based private sector-led growth. Major reforms are summarized in Box 2. After a number of ambitious “first generation” reforms in the early years of the present regime, the structural reform effort slowed somewhat in subsequent years. An anti-export bias persisted in the trade regime, exchange and trade regulations remained burdensome, foreign direct investment was limited to a narrow range of activities, and capacity building in the government was constrained by slow implementation of the civil service reform.18 Moreover, despite the establishment of the Ethiopian Privatization Agency in 1994, the sale of SOEs continued to be undertaken at a slow pace.19 The rudimentary state of the financial sector and the outdated reach of the legal and regulatory framework also hindered private sector development.

12. The most recent policy framework paper (EBD/98/98; 9/29/98), which covered the period FY99-FY01 and was published by the government in September 1998, recognized the need to broaden and deepen structural reforms. To this end, efforts are underway to remove further exchange and trade restrictions, increase export promotion, expand opportunities for foreign investors, intensify agricultural and rural development, and strengthen public expenditure management, including improvements to budget planning and monitoring and acceleration of civil service reform. In the financial sector, considerable progress remains to be achieved in terms of generating greater competition (foreign banks and stand-alone foreign exchange bureaus are still banned in Ethiopia), improving bank supervision and prudential oversight, and increasing the availability of domestic savings instruments. The availability of microfinancing also needs to be expanded in order to relieve credit constraints faced by myriad small firms and households. Owing to the security situation, the conduct of a comprehensive financial and managerial audit of the CBE—an important step in the government’s financial sector reform strategy—has been delayed by six months, but is expected to commence shortly.

Major Structural Reforms Since FY96

During the FY96-FY99 period, the government implemented major structural measures in a number of areas.

In the financial sector, the government:

  • decontrolled commercial bank lending rates, but maintained a minimum floor on bank deposit rates, currently 6 percent (January 1998);

  • reduced the minimum denomination of treasury bills offered for sale from Br 50,000 to Br 5,000 (September 1998);

  • established a framework for the conduct of interbank money market operations (September 1998);

  • finalized the terms of reference for a comprehensive audit of the Commercial Bank of Ethiopia (November 1998); and

  • selected an internationally reputable firm to conduct the audit (December 1998).

With respect to the exchange and trade system, the authorities:

  • narrowed significantly the negative list that limits the commodities for which foreign exchange may be purchased (FY95) and subsequently eliminated it (FY97);

  • allowed exporters to open foreign currency deposit accounts and retain 10 percent of export proceeds indefinitely (September 1996);

  • increased the frequency of foreign exchange auctions to weekly and eliminated the cover requirement for the auctions (September 1996);

  • authorized foreign exchange bureaus within commercial banks (September 1996);

  • reduced the export proceeds surrender requirement to 50 percent (September 1996) and subsequently eliminated it (September 1998);

  • lowered the maximum import tariff rate from 60 percent to 50 percent and reduced the number of tariff bands from nine to eight (December 1996); further lowered the maximum import tariff rate from 40 percent to 30 percent and the average tariff from 21.5 percent to 19.5 percent (December 1998);

  • simplified import licensing (FY97);

  • eliminated foreign exchange surrender and unremunerated bid bond requirements (which were replaced with a 90 percent conversion requirement to be met over a period expanded from three to four weeks), and transferred the responsibility from the National Bank of Ethiopia (NBE) to the commercial banks for determining compliance of foreign exchange buyers and sellers with import and export licensing requirements and foreign exchange regulations (August 1998);

  • replaced the weekly retail foreign exchange auction with a wholesale auction; introduced and made operational an interbank foreign exchange market; removed limits on external current account transactions for business travel, education, and health, and increased limit on holiday travel from US$300 to US$1,200 per person per trip (September 1998);

  • allowed foreign exchange bureaus to engage in all approved spot/cash external current account transactions (September 1998); and

  • ended parastatal monopoly on customs clearing and forwarding services (1998).

On export promotion and development, the government:

  • ceased price verification on all nonagricultural commodity exports (September 1998) and on noncoffee agricultural exports for which verifiable international prices are not readily available (December 1998);

  • revised the directive on foreign loans to allow manufacturing exporters (including agro-processors) to engage in foreign commercial borrowing, permit the use of suppliers’ credits and other implicit forms of credit not involving formal loan agreement, and ease debt/equity constraints on exporters (December 1998); and

  • replaced (i) ex ante price verification on other noncoffee agricultural exports with ex post audits (December 1998), and (ii) ex ante single-point price verification of coffee exports with verification within a restricted range of allowable prices (June 1999).

With respect to privatization, the authorities:

  • completed privatization of 175 enterprises (F Y98);

  • initiated privatization of the Construction and Business Bank (September 1998);

  • brought ten state farms, a brewery, and a cement factory to point of sale (December 1998); and

  • prepared amendments to privatization-related laws for parliamentary approval (December 1998).

In the area of private sector development, the government:

  • permitted private trade in fertilizers (1997);

  • abolished fertilizer subsidies (1997);

  • developed new legal and regulatory framework that allows domestic private participation and establishes a regulatory authority (1997);

  • enacted a foreclosure law (1997/98), and made it operational (September 1998); and

  • removed the minimum limit (US$20 million) on foreign investment in joint ventures and the maximum limit (US$20 million) on foreign investment in sole ventures in engineering, metallurgical, pharmaceutical, chemical and fertilizer industries (April 1999).

On capacity building, governance, and civil service reform, the authorities:

  • issued directives on financial and debt management, procurement, and other budgetary responsibilities, and prepared budget management and control manuals (December 1998).

1

The basic data table presented at the beginning of this paper updates economic performance through FY99. However, the data for FY99 are mainly preliminary estimates made by Fund staff in consultation with the authorities. Most other statistical tables at the end of this paper are updated through FY98 only, or the year of most recently available data. More recent data are provided on consumer prices, exchange and interest rate developments, and the monetary accounts.

2

See Tables 1-10 at end of this report on the real sector and prices.

3

An unofficial cease fire, which had been observed by both sides since mid-June 1998, ended in February 1999 when hostilities flared up again in the disputed Badme region. To date, attempts at peace mediation by the United Nations, the Organization for African Unity, and several third countries have been unsuccessful. Current estimates place the number of causalities on both sides at 50,000 (with 15,000 fatalities). In addition, around 400,000 people have been displaced in Ethiopia by the conflict. Furthermore, a number of Eritrean nationals or Ethiopians of Eritrean descent have been expelled from the country.

4

In Ethiopia, public saving and investment refer to the general government only, which comprises the federal and regional governments.

5

In view of the SDPs and the government’s effort to reorient capital expenditure toward areas with higher social rates of return, the drop in public investment in FY98 is partially related to lingering shortcomings in implementation capacity (i.e., poor budget planning, including accounting for recurrent costs over the medium term; lack of coordination both between donors and the Ministry of Economic Development and Cooperation, and between the ministry and regional and zonal agencies, which now implement more than one-half of the total capital budget). Moreover, heavy rains in the first half of the that year affected the government’s ability to undertake new spending. In FY99, problems related to implementation capacity have persisted. Furthermore, donor concerns about the security situation have arisen, which has led to shortfalls in external financing.

6

See Tables 23-30 at end of this report on the external sector.

7

Foreign direct investment is likely being understated in the balance of payments, as the National Bank of Ethiopia has only recently launched an annual survey of this activity.

8

All arrears and maturities due to Russia and non-Paris Club creditors between 1997 and 1999 are expected to be subject to restructuring in 1999/2000.

9

See Tables 11-15 at the end of this report on the Fiscal accounts.

10

Defined as total revenue (excluding privatization receipts) less total expenditure and net lending (excluding cash interest payments and foreign-financed expenditure).

11

The highest marginal tax rate on income from agricultural activities was lowered from 89 percent to 45 percent, but the tax bracket subject to the highest marginal rate was raised from Br 6,001 a year to Br 50,001 a year. Similarly, the annual income threshold subject to the lowest marginal rate (10 percent) was raised from Br 600 to Br 1,200.

12

See Tables 16-22 at the end of this report on monetary accounts and interest rate and exchange rate developments.

13

The nongovernment sector is defined as credit to the public enterprises (financial and nonfinancial), cooperatives, and private firms and households.

14

For further details, see Section II of this paper.

15

Excess liquidity is defined as the ratio of liquid assets (cash on hand, reserves at the NBE, and demand deposits with other banks) to net current deposits (demand, savings, and time deposits less uncleared checks paid, uncleared foreign effects, and deposits at notice (i.e., that can be withdrawn after 30 days’ notice)) in excess of 15 percent of net current deposits. For a discussion of the factors contributing to the highly liquid balance sheets of Ethiopian banks, see Section II below.

16

As of end-April 1999, commercial banks held only 2 percent of total assets in the form of treasury bills. Excluding the CBE, the ratio of treasury bills to total bank assets was 0.7 percent.

17

The exception is a floor on the savings deposit rate—currently 6 percent—which continues to be set by the National Bank of Ethiopia.

18

On civil service reform, see Section III of this paper.

19

On privatization, see Section IV of this paper.

Ethiopia: Recent Economic Developments
Author: International Monetary Fund
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    Ethiopia: Real Agricultural and Nonagricultural GDP Growth, FY88-FY991

    (Annual percentage change)

  • View in gallery

    Ethiopia: Exchange Rate Developments, 1990 Q1-1999 Q1

    (Index, 1990=100)