Statement by Samuel Itam, Executive Director for The Federal Democratic Republic of Ethiopia
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar
Close

Ethiopia’s request for disbursement under the rapid-access component of the Exogenous Shocks Facility is examined. 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. Steep increases in international prices for key imports have exacerbated strains on the Ethiopian economy and pushed foreign exchange reserves to critically low levels.

Abstract

Ethiopia’s request for disbursement under the rapid-access component of the Exogenous Shocks Facility is examined. 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. Steep increases in international prices for key imports have exacerbated strains on the Ethiopian economy and pushed foreign exchange reserves to critically low levels.

We thank staff for their concise and excellent paper and the quality of their dialogue with the authorities during the mission.

  • 1. Ethiopia’s committed drive to achieve socio-economic development under the Program for Accelerated and Sustainable Development (PASDEP) has achieved impressive results over the last five years. Growth has averaged 11 percent per year since 2003 bringing the Millennium Development Goals within reach and building a strong development momentum. However, the recent high price increases of imports of fuel, fertilizers, food and building materials coupled with an elevated import bill resulting from the development boom have diminished external reserves to critically low levels. The unfolding global economic and financial crisis will further exacerbate the pressure on the balance of payments. The authorities have therefore, requested disbursement from the Rapid Access Component of the Exogenous Shocks Facility to support their efforts to address the macroeconomic imbalances and to complement the assistance of other development partners in dealing with the shocks.

Recent Economic Developments (since Board discussions in July 2008)

  • 2. It will be recalled that the Board in completing the Article IV Consultation with Ethiopia in July welcomed the sustained strong and diversified economic growth in recent years and noted that this was consistent with the achievement of the MDGs. Real economic growth has maintained its impressive track and inflation, which was propelled by high cereal, fuel and other import prices peaked in September and has begun to decline. The current good harvest is also expected to further alleviate some of the inflationary pressure. However, the exogenous shocks have reduced the external reserves to six weeks of import cover. As staff have noted, the balance of payments is in a position of immediate and serious vulnerability.

  • 3. There have also been significant changes to the economic environment that Ethiopia has to confront. The serious global slowdown is expected to have substantial adverse impact on the local economy in regard to demand for the country’s exports and FDI inflows. It also poses downside risks in regard to donor support (although donors remain overwhelmingly well disposed to the country), and concessional aid as well as remittances on which the economy relies heavily.

  • 4. While the exogenous shock associated with the prices of most of the critical import commodities have passed, it has inflicted serious damage as it has forced the country to use a significant portion of its scarce reserves to absorb the shock. Moreover the lagged impact inherent in early locked supply tenders for example as in the case of fertilizers still continues to put pressure. Additionally it is difficult to recover or build the reserves under the current global environment. Coffee exports, which had seen a large increase in 2007/08 are expected to be impacted by the slowdown. A drop of over 20 percent in coffee prices are likely in the current year. However, it is expected that the trading of coffee on the Ethiopian Commodity Exchange (ECEX) that started in November 2008 may mitigate the drop slightly.

Policies to address imbalances

  • 5. The authorities are keenly aware of the seriousness of the current macroeconomic imbalances manifested in high inflation and low reserves as they are of the need to maintain their pro-growth policies and meet the long-term development challenges. They have thus continued to tackle the direct adverse impact of the exogenous shock while simultaneously undertaking a broad range of concerted fiscal, monetary and administrative policies and measures to address the vulnerabilities. They are committed to maintaining short term stability as they pursue long range structural transformation and reform. In this context they are committed to addressing inflationary overheating and building up of reserves as a matter of priority.

  • 6. In this regard, the authorities have eliminated the entire fuel subsidy program and are implementing a policy of monthly adjustment of pump prices since October. The domestic fuel price is, however, still higher than the current import price or full cost recovery in order to replenish the Oil Stabilization Fund, thus contributing to the reduction of the debt of the public sector. The Fund has already recorded some surpluses. On the other hand, they will continue to import cereals and distribute them at cost. At the same time, taxes on some food items have been removed and cash transfers to safety net programs have been increased to mitigate the effect of high prices on the poor in a more effective way while ensuring food security.

  • 7. The authorities have made a strong commitment to tighten fiscal policy by revising the budget targets so as to reduce domestic borrowing, contain expenditure and strengthen revenue collection. They have also resolved to rein in domestic borrowing by public enterprises and have established a high level committee of representatives of Ministry of Finance and National Bank of Ethiopia (NBE) to monitor implementation on a monthly basis. The authorities have indicated a willingness to cut lower priority expenditure, and in some instances even postpone investment spending if these do not compromise their commitment to the poor and achievement of the MDGs.

  • 8. In regard to monetary policy, the authorities are committed to reduce broad money growth to below 20 percent in the 2008/09 financial year so as to curb inflation and anchor inflation expectations. The NBE has also agreed to tightly manage the reserve money creation that arises from its lending to Government. Simultaneously, the authorities see the importance of addressing competitiveness concerns through ensuring exchange rate flexibility and have accordingly agreed to an increased pace of Birr (local currency) depreciation. In this regard, the Birr depreciated by 5 percent against the US Dollar on January 2.

Conclusion

  • 9. The authorities are committed to the implementation of their PASDEP which is succeeding in generating meaningful growth and reducing poverty. The growth strategy which focuses on developing agriculture and other productive sectors, building infrastructure, expanding the service sector and developing human resources has garnered solid support from Ethiopia’s development partners. These partners are, in addition to their support for the PASDEP, also ready to provide and in some instances have already extended supplemental assistance to help mitigate the impact of the exogenous shocks. The World Bank and the African Development Bank have reconfigured some of their support to address the shock and other bilateral and multilateral donors, according to staff estimates are ready to help contribute up to US$750 million dollars needed requiring the government to seek financing under the rapid access component of the ESF to cover the gap of about US$50 million.

  • 10. The authorities recognize that the immediate priority for the coming months is to address the impact of the exogenous shocks and address the associated vulnerabilities. The sudden and exogenous shock has had serious negative consequences on the Ethiopian economy and exacerbated existing weaknesses and vulnerabilities. They are convinced that the support of the Fund and the other development partners in bridging the balance of payments gap will put them in a better position to undertake the broad long term reforms that they believe necessary to sustain the robust growth in the face of complex and difficult challenges. They believe that the policies and measures they have instituted will mitigate the shock and its after effects and are committed to complement these with any other additional action that is necessary. They value the Fund’s financial support as well as the advice and appreciate the encouragement the institution provides to other development partners in their engagement with Ethiopia.

  • Collapse
  • Expand
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
Author:
International Monetary Fund