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© 2007 International Monetary Fund
July 2007
IMF Country Report No. 07/247
The Federal Democratic Republic of Ethiopia: 2007 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Federal Democratic Republic of Ethiopia
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 2007 Article IV consultation with The Federal Democratic Republic of Ethiopia, the following documents have been released and are included in this package.
The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on March 9, 2007, with the officials of The Federal Democratic Republic of Ethiopia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 18, 2007. 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 supplement on the joint IMF/World Bank debt sustainability analysis.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its June 1, 2007 discussion of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for The Federal Democratic Republic of Ethiopia.
The document listed below has been or will be separately released.
Statistical Appendix
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.
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INTERNATIONAL MONETARY FUND
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
Staff Report for the 2007 Article IV Consultation
Prepared by the Staff Representatives for the 2007 Consultation with The Federal Democratic Republic of Ethiopia
Approved by Siddharth Tiwari and Carlo Cottarelli
May 18, 2007
Last Article IV consultation. The 2005 Article IV consultation pointed out the pressure building on Ethiopia’s balance of payments from persistently high world oil prices and increases in public sector investment. Executive Directors cautioned that scaling up domestically financed investments jeopardized macroeconomic stability. They therefore welcomed the expenditure cuts that were introduced and the authorities’ commitment to take additional measures to protect international reserves. Directors also noted that a tighter fiscal and monetary stance might be required to contain demand and to stabilize the balance of payments. The Ethiopian authorities have been broadly responsive to Fund advice, albeit with delay in some instances and somewhat tepid intensity.
Backdrop of mission. Uncertainty regarding donor assistance remains high. Because of concerns about political governance, donors had suspended their budget support when unrest erupted after the May 2005 elections. However, support has recently been increasing through the Protection of Basic Services operation (supported by the World Bank and other donors). In December 2006, the Ethiopian government dispatched its troops to Somalia to support the Somali transitional government. Though this action initially raised additional concerns, no major economic impact has so far been reported.
Exchange rate. The authorities describe their de jure exchange rate regime as a managed float with no predetermined path for the exchange rate. However, in light of the relative stability in the rate as well as the authorities’ intervention policy, the exchange rate regime has de facto been akin to a conventional peg, although recently exchange rate flexibility has increased somewhat.
Participants. Discussions were held February 23-March 9, 2007. The mission met with Prime Minister Meles Zenawi, Minister of Finance and Economic Development Sufian Ahmed, Central Bank Governor Teklewold Atnafu, senior officials, and representatives of civil society and the donor community. The mission team consisted of Messrs. Itam, Doré, and Honda, Ms. Lu (all AFR), and Mr. Thomas (PDR). Mr. Peraza (STA) joined the mission to work with the officials on the Statistical Appendix and Ms. Majaha-Jartby (MCM) joined it to help enhance financial surveillance. Mr. Schwidrowski (Senior Resident Representative) assisted the mission. Messrs. Kamara and Kanu (OED) attended most of the meetings. Messrs. Kato and Gerson (OMD) participated in the final round. The mission collaborated with the World Bank Resident Mission in Addis Ababa and was joined by a staff member from the African Development Bank (AfDB).
Contents
Executive Summary
I. Recent Developments
II. Policies to Address Macroeconomic Imbalances
III. Enhancing Growth
IV. Medium-term Outlook, Risks, and Challenges
V. Staff Appraisal
Tables
1. Selected Economic and Financial Indicators, 2003/04–2010/11
2. General Government Operations, 2003/04–2007/08
3. General Government Operations, 2003/04–2007/08
4. Monetary Survey, 2003/04–2007/08
5. Balance of Payments, 2003/04–2006/07
6. Millennium Development Goals
7. Medium-Term Balance of Payments Projections, 2006/07–2010/11
Boxes
1. Excess Reserves in Commercial Banks
2. Exchange Rate Assessment
3. Ease of Doing Business
Appendix
Ethiopia: Banking System Soundness
Executive Summary
Focus of the report: The discussions for the 2007 Article IV consultation focused on the policy requirement for (i) addressing current macroeconomic imbalances (rising inflation and low official international reserves); and (ii) preserving medium-term macroeconomic stability while fostering growth potential.
Background: The economy has been enjoying a buoyant expansion since the drought-related contraction in 2002/03.1 Real GDP rebounded to an annual average growth rate of 10.7 percent for 2003/04 through 2005/06—significantly above the average of 5.8 percent for sub-Saharan Africa. Although agriculture continues to be the mainstay of the economy, the recent expansion has been broad-based, with manufacturing, construction, and services making significant contributions. However, inflation has accelerated. It reached 19 percent in February 2007. Official international reserves have fallen below 2 months of import coverage. Expansion of domestic credit has continued to be brisk, reflecting a pick-up in private sector economic activity and increasingly negative real interest rates.
Challenges: While the economic outlook seems favorable with strong macro policy implementation, there are significant risks. There is very little margin for policy slippages if economic stability is to be maintained, adverse weather may recur, structural bottlenecks and constraints persist, and the environment is not yet fully conducive to private sector-led growth. A critical challenge for Ethiopia is to strike a judicious balance between demand-dampening measures and growth-enhancing structural reforms.
The authorities’ views: The authorities give macroeconomic stability a high priority, though they reiterate the need to maintain the current growth momentum. They shared staff concerns about inflation and low official international reserves and recognized the adverse impact they have, particularly on the urban poor and on business confidence, while the authorities favor a more gradual approach in some policy areas (in terms of monetary tightening and exchange rate flexibility) than the staff.
Staff views: Staff encouraged the authorities to make forceful fiscal adjustments (some new revenue measures and cuts in nonpriority expenditures) and support them with a tighter monetary policy and greater exchange rate flexibility to ease demand pressures and start to push inflation downward. They also stressed the importance of addressing emerging supply constraints and the limited implementation and absorptive capacities of the economy, and of establishing a sound, dynamic, and competitive financial sector.
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INTERNATIONAL MONETARY FUND
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
Staff Report for the 2007 Article IV Consultation—Informational Annex
Prepared by the African Department
(In consultation with other departments)
Approved by Siddharth Tiwari and Carlo Cottarelli
May 18, 2007
ANNEX
I. Relations with the Fund
II. Relations with the World Bank Group
III. Relations with the African Development Bank
IV. Statistical Issues
V. Table of Common Indicators Required for Surveillance
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INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
Joint IMF/World Bank Debt Sustainability Analysis 2007
Prepared by the staffs of the International Monetary Fund and the International Development Association
Approved by Carlo Cottarelli and Siddharth Tiwari (IMF) and Sudhir Shetty and Mark Thomas (IDA)
May 22, 2007
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Public Information Notice (PIN) No. 07/68
FOR IMMEDIATE RELEASE
June 15, 2007
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
