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© 2009 International Monetary Fund
January 2009
IMF Country Report No. 09/34
The Federal Democratic Republic of Ethiopia: Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia
In the context of Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility, the following documents have been released and are included in this package:
The staff report for Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility, prepared by a staff team of the IMF, following discussions that ended on December 11, 2008, 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 January 7, 2009. 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 January 23, 2009 updating information on recent developments.
A Press Release summarizing the views of the Executive Board as expressed during its January 23, 2009 discussion of the staff report that approved the disbursement.
A statement by the Executive Director for The Federal Democratic Republic of Ethiopia.
The document listed below has been or will be separately released.
Letter of Intent sent to the IMF by the authorities of The Federal Democratic Republic of Ethiopia*
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
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INTERNATIONAL MONETARY FUND
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility
(In consultation with the Finance, Fiscal Affairs, Legal, Monetary and Capital Markets, Strategy, Policy, and Review, and Statistics Departments)
Approved by Saul Lizondo and Tessa van der Willigen
January 7, 2009
Context: High global oil, fertilizer, and food prices have contributed to very low international reserves at a time when the economy faces intensified risks from the global economic slowdown. Additional external financing could help smooth the adjustment process and mitigate risks to poverty reduction gains in recent years.
Request for support under the Exogenous Shocks Facility (ESF): The authorities are requesting the rapid-access component of the ESF (SDR 33.425 million, 25 percent of quota) to help the economy adjust to the exogenous shocks. The full amount would become available upon Board approval.
Discussions: Discussions were held in Addis Ababa December 2–11, 2008. The mission met with Prime Minister Meles Zenawi, Minister of Finance and Economic Development Sufian Ahmed, Central Bank Governor Teklewold Atnafu, other senior officials, and representatives of the donor community. The mission team comprised Messrs. Corker (head), Honda, Zhan (all AFR), and Thomas (SPR). Mr. Plant and Mr. Singh, resident representative designate (both AFR), joined the concluding sessions. The mission collaborated closely with the World Bank and African Development Bank missions in Addis Ababa, as well as local representatives from the donor community.
IMF relations: The last PRGF arrangement (SDR 100.28 million) expired on October 31, 2004. Ethiopia reached the completion point under the enhanced HIPC Initiative in April 2004, and received further debt relief under the Multilateral Debt Relief Initiative in January 2006. In November 2006, the authorities requested closer engagement with the Fund and since then staff visits have been held between annual Article IV consultation missions. The Board concluded the 2008 Article IV Consultation on July 14, 2008. Ethiopia is still under the Article XIV regime and maintains several exchange restrictions that are inconsistent with Article VIII.
Contents
Executive Summary
I. Background
II. The Economic Impact of Commodity Price Shocks
III. Policies to Address the Shocks
IV. Macroeconomic Outlook and Risks
V. External Financing Needs and Donor Support
VI. Capacity to Repay the Fund
VII. Staff appraisal
Tables
1. Selected Economic and Financial Indicators, 2004/05–2009/10
2. General Government Operations, 2004/05–2009/10
3. General Government Operations, 2004/05–2009/10
4. Monetary Survey, 2004/05–2009/10
5. Balance of Payments, 2005/06–2009/10
6. Indicators of Capacity to Repay the Fund, 2007–18
Appendix
Letter of Intent
Executive Summary
Ethiopia’s pro-growth development policies have helped sustain average growth of 11.5 percent since 2003/04, consistent with the goal of reducing poverty. However, demand has been running ahead of the expansion in the capacity of the economy, contributing to high inflation and strong import growth.
Steep increases in international prices for key imports have exacerbated strains on the Ethiopian economy and pushed foreign exchange reserves to critically low levels—equivalent to just 1 month of imports of goods and services at end-November 2008.
The authorities have embarked upon a tightening of monetary and fiscal policies to facilitate necessary rebuilding of foreign exchange reserves. Wheat has been imported on an emergency basis to dampen domestic inflation expectations and alleviate the impact of high food prices on vulnerable groups.
The recent reversal of the international price hikes suggests that the exogenous shocks may prove temporary. However, with the high import bill yet to subside and the global economy entering a severe downswing, the envisioned adjustment path is subject to considerable risks and uncertainties, particularly given Ethiopia’s high dependence on external resource flows from remittances, aid, and FDI.
The rapid-access component of the ESF would contribute to the rebuilding of international reserves and catalyze financing from Ethiopia’s other international partners aimed at cushioning the impact of adjustment on the authorities’ efforts on growth and poverty reduction.
The staff supports the authorities’ request for the rapid-access component of the ESF. The shock has created an immediate balance of payments need. The authorities’ policy commitments, summarized in the attached letter, appropriately address the impact of the external shocks. However, forceful implementation of the planned fiscal and monetary tightening as well as increased exchange rate flexibility will be needed. Strengthened systems will need to be put in place to better monitor and control the domestic borrowing by public enterprises and other public institutions.
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Press Release No. 09/13
FOR IMMEDIATE RELEASE
January 23, 2009
International Monetary Fund
Washington, D.C. 20431 USA
Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org
