Front Matter

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©2002 International Monetary Fund October 2002

October 2002

IMF Country Report No.02/220

Ethiopia: 2002 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility Arrangement—Staff Report; Staff Statement; and Public Information Notice and News Brief on the Executive Board Discussion

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the Article IV consultation with Ethiopia, the following documents have been released and are included in this package:

  • the staff report for the 2002 Article IV consultation and third review under the Poverty Reduction and Growth Facility arrangement, prepared by a staff team of the IMF. following discussions that ended on July 15, 2002, with the officials of Ethiopia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 20, 2002. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of September 23, 2002 updating information on recent developments.

  • a Public Information Notice (PIN) and a News Brief summarizing the views of the Executive Board as expressed during its September 23, 2002 discussion of the staff report that concluded the Article IV consultation.

The document(s) listed below have been or will be separately released.

  • Joint Staff Assessment of the Poverty Reduction Strategy Paper

  • Letter of Intent*

  • Poverty Reduction Strategy Paper

  • Statistical Appendix

  • *May also be included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

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Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

ETHIOPIA

Staff Report for the 2002 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility Arrangement

Prepared by the African Department

(In consultation with the Fiscal Affairs, Legal, Monetary and Exchange Affairs, Policy Development and Review, Statistics, and Treasurer’s Departments)

Approved by José Fajgenbaum and G. Russell Kincaid

August 20, 2002

Contents

  • Executive Summary

  • I. Introduction

  • II. Recent Developments and Performance Under the Program

  • III. Report on the Discussions

    • A. Overview of Key Challenges and Medium-Term Economic Strategy

    • B. Macroeconomic Objectives and Policies for 2002/03

      • Fiscal policy

      • Monetary and financial sector issues

      • External sector and balance of payments outlook

    • C. Social Policies and PRSP

    • D. Other Structural Reforms

    • E. Statistical Issues

    • F. PRGF Arrangement Monitoring

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Cereal and Coffee Producer Price Declines and Authorities’ Response

  • 2. The Issue of Competition in the Financial Sector

  • 3. Summary of Discussions on Fiscal Policy

  • 4. Public Expenditure Management

  • 5. Structural Conditionality

  • Figures

  • 1. Selected Economic Indicators, 1998/99-2004/05

  • 2. Exchange Rate Developments

  • Tables

  • 1. Schedule of Disbursements and Repayments Under the PRGF Arrangement, 2002-04

  • 2. Schedule of Remaining Disbursements Under the PRGF Arrangement, 2002-04

  • 3. Selected Economic and Financial Indicators, 1998/99-2004/05

  • 4. General Government Operations, 1999/2000-2004/05 (In millions of birr)

  • 5. General Government Operations, 1999/2000-2004/05 (In percentage of GDP)

  • 6. Monetary Survey, 1999/2000-2003/04

  • 7. Balance of Payments, 1999/2000-2005/06

  • 8. Projected Payments to the Fund, 2002/03-2012/13

  • 9. Social Indicators

  • Appendices

  • I. Letter of Intent

    • Table 1. Quantitative Benchmarks and Performance Criteria for the Second Annual Program Supported by the PRGF Arrangement, October 2001-March 2003

    • Table 2. Structural Benchmarks and Performance Criteria Under the Second Annual Program Supported by the Three-Year PRGF Arrangement

    • Table 3. Prior Actions for the Completion of the Third Review Under the Three-Year PRGF Arrangement

  • II. Relations with the Fund

  • III. Relations with the World Bank Group

  • IV. Statistical Issues

Executive Summary

Recent Economic Developments

  • Since 2000, the authorities have been implementing wide-ranging structural reforms and pursuing prudent macroeconomic policies supported by the PRGF arrangement. However, with per capita income still about US$100, Ethiopia remains one of the poorest countries in the World and continues to face major challenges.

  • Performance under the first annual PRGF-supported program (October 2000-September 2001) was good, and the second annual program remains on track in the context of Ethiopia’s steady progress toward peace with Eritrea. Real GDP growth for 2001/02 is estimated to have decelerated to 5 percent, while inflation remained negative, reflecting continued food surplus. The external current account deficit (including official transfers) widened to 6.6 percent of GDP in 2001/02 from 4.2 percent in 2000/01. All the quantitative and structural performance criteria and benchmarks for December 2001 and March 2002 were met, with the exception of the revised regulation for the provisioning by banks for nonperforming loans, which was adopted, but was not fully in line with international best practice, as had been envisaged.

  • The fiscal deficit (including grants and special programs) increased considerably in 2001/02, as a result of the accelerated implementation of special programs and capital and poverty-targeted expenditure, which reached 16.7 percent of GDP. Several tax policy measures were implemented. Defense outlays were cut to 5.9 percent of GDP. Broad money for the first nine months of 2001/02 increased by less than programmed. Several measures were taken to improve the soundness of the financial sector. The wholesale foreign exchange auction began to operate more efficiently and was replaced by an interbank foreign exchange market in October 2001. The exchange rate regime and policy remain adequate.

Ethiopia: Selected Economic and Financial Indicators, 2000/01-2004/05 1/

article image
Sources: Ethiopian authorities; and staff estimates and projections.

Year ending July 7.

Policies for the remainder of the second annual program and prospects for 2002/03

  • Under the updated macroeconomic framework, real GDP growth is projected at 6 percent in 2002/03. As food supply returns to a more normal level, average consumer price inflation is expected to rise to 4.5 percent. The external current account deficit is projected to increase to 6.9 percent of GDP in 2002/03, as official transfers would decline to a more normal level.

  • In the fiscal area, the overall deficit (including grants and special programs) is to be limited to 9.7 percent of GDP in 2002/03. The authorities are pursuing their tax reforms with the recent strengthening of the large taxpayer unit and the introduction of the value added tax in January 2003. On the spending side, a cautious stance will be pursued, with defense spending maintained at the nominal level of the previous year, while poverty-targeted outlays will be increased. Progress is being made in improving the planning, tracking, and reporting of public expenditure.

  • In the monetary and exchange areas, monetary policy will remain geared toward achieving the inflation and international reserve targets. Further reforms are to be implemented to strengthen the financial sector and improve its competitiveness, including the revision of the new regulation for the provisioning of nonperforming loans, to bring it more in line with international best practice, and the signing of a performance contract between the government and the new management of the Commercial Bank of Ethiopia (CBH), with a view to operating it on a commercial basis. A financial audit of the CBE will be conducted by an internationally reputable firm. A workshop was held with Fund and World Bank staffs and guest speakers from neighboring countries to discuss the competitiveness of the financial sector, and the role of entry of foreign banks in the sector. However, the authorities were not ready at this stage to take this measure.

  • On other structural reforms, the authorities, with the support of the World Bank, are implementing reforms in the areas of agriculture, private sector development, export promotion, the civil service, and public expenditure management and control.

Issues stressed in the staff appraisal

  • The authorities need to continue to implement the PRGF-supported program effectively, and to guard against slippages during the program period.

  • It is important to persevere with a prudent expenditure policy, to limit the recourse to bank financing, and to implement steadfastly tax reforms so as to achieve the revenue target. To avoid risking macroeconomic stability and debt sustainability, the macroeconomic framework described in the PRSP for 2003/04-2004/05 will need to be carefully assessed once additional external financing is identified.

  • The reforms agreed upon to strengthen the financial sector and improve its competitiveness need to be pursued vigorously. In particular, the authorities should continue their efforts to address the difficulties of the CBE, including carrying out an audit by an internationally reputable firm. It is regrettable that the authorities decided not to allow at this stage foreign bank entry in the financial sector to enhance competition.

  • The agenda of other structural reforms should be adhered to. The finalization of the full PRSP is welcome, after full participation by civil society and development partners.

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September 23, 2002

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Public Information Notice (PIN) No. 02/113

FOR IMMEDIATE RELEASE

October 3, 2002

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

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News Brief No. 02/99

FOR IMMEDIATE RELEASE

September 24, 2002

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

EXTERNAL RELATIONS DEPARTMENT

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org