The Federal Democratic Republic of Ethiopia
Request for a 14-Month Arrangement under the Exogenous Shocks Facility-Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Federal Democratic Republic of Ethiopia
Author:
International Monetary Fund
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Publication Date:
30 Sep 2009
eISBN:
9781451812855
Language:
English
Keywords:
ISCR; CR; price; real GDP; public enterprise; GDP; financial support; banking system; reform strategy; price level; inflation objective; Real exchange rates; Imports; Global; commodity price surge
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Facing declining reserves and high inflation, Ethiopian authorities have implemented an effective macroeconomic adjustment package supported by the IMF under the rapid-access component of the Exogenous Shocks Facility. The global recession is putting renewed pressure on the external position, via weaker export receipts and remittances and slowing inward direct investment. Supporting structural measures focus on tax reform, the control of public enterprise borrowing, and the control of liquidity through indirect instruments.

Abstract

Facing declining reserves and high inflation, Ethiopian authorities have implemented an effective macroeconomic adjustment package supported by the IMF under the rapid-access component of the Exogenous Shocks Facility. The global recession is putting renewed pressure on the external position, via weaker export receipts and remittances and slowing inward direct investment. Supporting structural measures focus on tax reform, the control of public enterprise borrowing, and the control of liquidity through indirect instruments.

I. Background

1. Ethiopia has faced a turbulent external economic environment of late, as commodity price movements and, later, global recession produced a series of shocks to the balance of payments. Rapid import growth, fueled in part by public spending, created pressure on reserve levels even prior to the surge in world food and fuel prices in 2007–08. The price surge then helped push reserves down to some $0.9 billion (1.2 months of imports) by mid-2008, while also contributing to an exceptional jump in consumer price inflation.

2. Concerns about declining reserve levels and rising inflation led the authorities to implement a macroeconomic adjustment package from late-2008, focused on fiscal and monetary tightening and the elimination of fuel subsidies. The package of policy adjustments was supported by a drawing in February 2009 under the rapid access component (RAC) of the Exogenous Shocks Facility (ESF), with ESF access based on the balance of payments impact of the commodity price surge.

3. The track record of both policy implementation and performance under the adjustment program has been strong:

  • Key policy targets—zero domestic borrowing by the general government, limits on public enterprise borrowings, elimination of fuel subsidies, exchange rate adjustment—are expected to have been met, although effective monetary control remains a challenge (see Box 1).

  • Key policy objectives—bringing inflation down sharply and partially rebuilding reserves—have been achieved, with inflation in the 12 months to June declining to 3 percent, aided by falling food price levels, and foreign reserves, helped by increased donor assistance, ending the year at some $1.5 billion (1.8 months of import cover).

uA01fig01

With good harvests and declining world food prices, inflation is subsiding.

Citation: IMF Staff Country Reports 2009, 296; 10.5089/9781451812855.002.A001

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International reserves picked up modestly with donor aid.

Citation: IMF Staff Country Reports 2009, 296; 10.5089/9781451812855.002.A001

4. The authorities anticipate that real GDP increased by some 10 percent in FY 2008/09, down only marginally from the 11.6 percent recorded in 2007/08: agricultural output is expected to have risen by some 6 percent, industrial output by some 9 percent, and tertiary sector output by 15 percent. Staff believe that underlying growth was on the order of 7–8 percent, with the recorded growth in tertiary output (averaging 15 percent over the past three years) likely overstating the true expansion of such activity.1

II. The Near-Term Outlook

5. The global recession is constraining export growth and limiting key external resource inflows, but the impact of these pressures on aggregate output is modest given the central role of subsistence agriculture. The authorities expect GDP to grow by at least 9 percent in 2009/10, with agriculture and industry, aided by weather conditions and progress with key infrastructure projects, growing at 6.2 and 8.7 percent, respectively. Staff believe that the underlying expansion in GDP is more likely to be around 7 percent: the financial program described below has been constructed around this more cautious growth assumption.

6. Following the dramatic movements in price indices over the past two years, single-digit inflation looks to be achievable over the current (fiscal) year, although high food price volatility and stubborn non-food price inflation (15 percent as of June 2009) are significant risk factors. The links between CPI movements and macroeconomic aggregates have not been stable (IMF Country Report No. 08/264, July 31, 2008), so further volatility cannot be ruled out—although the buildup of grain reserves should help to limit speculative price surges.

7. The balance of payments outlook for 2009/10 is troubling, as global recession takes a toll on remittances, exports, and direct foreign investment, oil prices move upward again, and the exceptional assistance provided by donors during 2008/09 falls away.2 Staff estimates suggest that, absent policy changes, reserves would decline by some $250 million this year, reversing about one-half of the rebuilding of reserves achieved in 2008/09.

III. The Authorities’ Program

8. The authorities are framing their macroeconomic program for FY 2009/10 around the twin objectives of maintaining price stability and building a stronger reserve position (Table 1).3 They have been encouraged by the results achieved with the FY 2008/09 adjustment program, but see important trade-offs between the two objectives, intensified by their intention to meet spending needs squeezed in last year’s adjustment program and to press ahead with their investment program. They see the appropriate resolution of these trade-offs as involving a combination of some easing of the fiscal stance, continued tight limits on public enterprise borrowing, maintenance of a cautious monetary policy, and gradual real depreciation of the birr.

Table 1.

Ethiopia: Selected Economic and Financial Indicators, 2005/06–2010/11 1/

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

Except for data on external sector which is based on July 1-June 30, data pertain to the period July 8-July 7.

Excluding aircraft and telecom purchases.

Including debt of major public enterprises.

After enhanced HIPC and MDRI relief.

9. The authorities’ program for FY 2009/10 is outlined in the attached Memorandum of Economic and Financial Policies (Attachment I of the Appendix) and summarized below. Key quantitative objectives are: a) GDP growth of at least 7 percent; b) 12-month consumer price inflation of not more than 10 percent; and c) raising international reserves, inclusive of the financial support requested here from the IMF, to some $1.85 billion, equivalent to 2.1 months of import coverage by end-2009/10.4 The authorities are seeking Fund financial support for this program in the form of an arrangement supported under the high-access component (HAC) of the ESF.

A. Policies for the Public Sector

10. A surge in public sector borrowing levels was an important factor in contributing to widening macroeconomic imbalances during 2005–08: the authorities’ policy framework of 2009/10 therefore envisages continued tight control of domestic borrowing levels, combined with careful scrutiny of external borrowing and its associated implications for debt sustainability (see below). Public sector domestic borrowing will be kept to 3 percent of GDP in 2009/10, up somewhat from the 2008/09 level, but considerably less than the levels of previous years (see Text Table 1).

Text Table 1.

Ethiopia: Public Sector Domestic Financing

(In percent of GDP)

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Note. ETC and EAL are not planning any domestic financing in coming years.

11. The general government budget for 2009/10 envisages some easing of the tight limits on public spending imposed last year (see Tables 2 and 3). Revenues should rise by some 0.5 percent of GDP, aided by the elimination of the temporary VAT exemption for foodstuffs and the delayed impact of the past high inflation on income taxes; domestically-funded capital outlays would rise while recurrent outlays are maintained under tight control. The authorities underscored that the budget was heavily pro-poor in its orientation and that the rise in Treasury-funded capital outlays would be focused on the provinces, benefiting mainly smaller population centers and the rural population. The budget deficit is set to rise from 2.3 percent to 3 percent of GDP, financed by a mix of external and domestic borrowing; if aid inflows, whether in the form of loans or grants, exceed budgetary projections, the authorities intend to reduce domestic borrowing levels.

Table 2.

Ethiopia: General Government Operations, 2005/06–2010/11

(Millions of birr)

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Sources: Ethiopian authorities; and IMF staff estimates and projections. The Ethiopian fiscal year ends July 7.

Including the disbursements under the PBS operations starting from 2005/06.

Debt relief from the IMF under the MDRI is recorded in 2005/06. Withdrawal from the special account at the NBE is assumed to take place from FY2006/07 and FY2007/08.

Excluding special programs (demobilization and reconstruction).

Poverty-reducing spending is defined to include total spending on health, education, agriculture, roads, and food security.

External interest and amortization are presented after HIPC debt relief from the World Bank and African Development Bank.

Demobilization and reconstruction.

Table 3.

Ethiopia: General Government Operations, 2005/06–2010/11

(In percent of GDP)

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Sources: Ethiopian authorities; and IMF staff estimates and projections. The Ethiopian fiscal year ends July 7.

Including the disbursements under the PBS operations starting from 2005/06.

Debt relief from the IMF under the MDRI is recorded in 2005/06. Withdrawal from the special account at the NBE is assumed to take place from FY2006/07 and FY2007/08.

Excluding special programs (demobilization and reconstruction).

Poverty-reducing spending is defined to include total spending on health, education, agriculture, roads, and food security.

External interest and amortization are presented after HIPC debt relief from the World Bank and African Development Bank.

Demobilization and reconstruction.

12. The gradual erosion of the tax-GDP ratio in recent years is placing significant constraints on the government’s ability to finance its spending objectives. The authorities attach central importance to boosting revenue collections and are set to receive, in the coming months, technical assistance from the Fund’s Fiscal Affairs Department in evaluating current tax policies and tax administration. They intend to use the outputs from these missions in developing a new tax strategy, and are committed to preparing a time-bound plan by the time of the first program review. Development of a tax reform strategy is a structural reform priority for the proposed arrangement.

13. Public enterprises play a key role in several sectors of the Ethiopian economy, notably the provision of infrastructure. Government policy is that enterprise pricing should be based on the principle of full cost-recovery: an exception to this policy, now eliminated, was the subsidy on petroleum products via the Oil Stabilization Fund in place through late-2008.5 Borrowing levels of public enterprises are now subject to regular scrutiny to evaluate their macroeconomic impact, via an interagency committee that reviews enterprise borrowing on a monthly basis. Large public enterprises submit annual investment and financing plans to the committee, which reviews plans and their implementation and, where warranted, brings proposed remedial policy actions to senior policy makers. The committee is working to extend coverage of its operations to all significant borrowing units and will soon issue a formal notification to that effect to all agencies. Effective working of this oversight mechanism is a structural reform priority for the proposed arrangement.

B. Monetary Policy

14. Monetary policy is to focus on achieving the inflation objective (see Table 4). The monetary program is framed around controlling broad money growth, with reserve money as the operational target. For 2009/10, money growth will be limited to 17 percent, equivalent in size to the combined increase in real economic activity and the (end-of-period) price level: given the public sector borrowing program and the foreign reserve targets, this would make room for real growth in credit to the private sector on the order of 6 percent. The policy settings for the first semester of FY 2009/10 have been calibrated tightly to help entrench single-digit inflation against a backdrop of exchange rate adjustment; the full-year targets will be reviewed at mid-fiscal year in light of the inflation experience in the coming months.

Table 4.

Ethiopia: Monetary Survey, 2005/06–2010/11 1/

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Sources: National Bank of Ethiopia; and IMF staff estimates and projections.

Year ending July 7. Including commercial bank claims and liabilities to Eritrea.

Claims on general government (federal and regional governments and other public agencies) by the banking system less deposits of the general government with the banking system.

Table 5(a).

Ethiopia: Balance of Payments, 2006/07–2010/11 1/

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Ethiopian authorities, and IMF staff estimates and projections.

Data pertain to the period July 1-June 30.

The 2009/10 PBS II disbursed by the World Bank in June 2009 is reflected in the 2008/09 balances.

Table 5(b).

Ethiopia: Balance of Payments, 2006/07–2013/14 1/

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Ethiopian authorities, and IMF staff estimates and projections.

Data pertain to the period July 1-June 30.

The 2009/10 PBS II disbursed by the World Bank in June 2009 is reflected in the 2008/09 balances.

Foreign reserves from 09/10 onward include IMF disbursements from the HAC ESF and SDR allocation.

15. Limiting the pace of monetary growth to the programmed level will require effective control of reserve money (see Box 2). The authorities intend to make systematic use of the regular auctions of Treasury bills to control liquidity, setting sales volumes on the basis of what is needed to meet reserve money targets. Effective liquidity forecasting will entail close cooperation and regular information-sharing between the National Bank of Ethiopia (NBE) and the Ministry of Finance and Economic Development (MoFED). These changes represent a significant break from past practice, and will require that interest rates on Treasury bills adjust to allow the target sales volumes to be realized. The authorities noted that excess liquidity has been a recurrent problem for them, only partially addressed through adjustments in reserve requirements; they therefore expected to face initial challenges in achieving smooth operation of the proposed approach. Assistance in support of this reform agenda is to be obtained from the World Bank’s financial sector capacity-building project.

C. Exchange Rate Policy

16. Ethiopia has a tightly managed exchange rate, classified by staff as a de facto crawl-like arrangement; the authorities describe their exchange rate regime as a managed float with no pre-determined path for the exchange rate. The pace of depreciation has been modest, partly to anchor price expectations, but there have been occasional discrete jumps in the exchange rate aimed at restoring tradable sector competitiveness. The most recent such move was on July 10th, when the birr was allowed to depreciate by some 9 percent.

uA01fig03

Exchange Rates

(In Birr per 1 U.S. Dollar)

Citation: IMF Staff Country Reports 2009, 296; 10.5089/9781451812855.002.A001

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Real and Nominal Effective Exchange Rates

(Index, 2007=100)

Citation: IMF Staff Country Reports 2009, 296; 10.5089/9781451812855.002.A001

17. High inflation in the past two years has been accompanied by significant real exchange rate appreciation, measured either in terms of the full consumer price index or the non-food price index (which may better track wage and other input costs, and hence competitiveness). Measured against the benchmark of average levels in 2003–07, the real effective exchange rate (all products) had appreciated by some 35 percent as of June 2009, having fallen from more elevated levels during the first 6 months of 2009; the corresponding net real appreciation based only on non-food prices was some 15 percent.6

18. The authorities agreed with staff that the exchange rate was overvalued at its June 2009 level; they viewed a real level closer to that observed in 2007 as being broadly appropriate from a medium-term perspective. Price competitiveness needed to be improved, but they argued that this could be achieved only gradually: they ruled out rapid adjustment via a large step devaluation on the grounds that it would revive inflation, only recently brought under control. They saw a step adjustment on the scale of that implemented on July 10th as an important move towards correcting overvaluation. They underscored their commitment to achieving, over the medium-term, an appropriate level for the real exchange rate and would not hesitate to adjust the nominal exchange rate for this purpose, if needed. Staff emphasized the overarching importance of boosting Ethiopia’s production of tradable goods and services, arguing that some further real exchange depreciation would likely be needed over time to achieve this objective.

D. External Debt Issues

19. Ethiopia’s external debt levels are rising significantly as major public enterprises borrow externally to finance infrastructure investment. The stock of debt (in NPV terms) is set to rise from $1.3 billion at end-June 2008 to $6.0 billion by end-June 2011, with almost 70 percent of the increase accounted for by the state-owned electric power (EEPCo) and telecom (ETC) companies. Given infrastructure weaknesses, the case for large-scale investment in these sectors is compelling but the sizeable and rapid build-up of debt underscores the need to ensure that borrowed funds are being put to effective use, that a supportive business environment is being put in place to ensure full take-up of infrastructure outputs, and that public enterprise pricing policy will ensure the full recovery of costs needed to facilitate debt service in the future.

Text Table 2.

Ethiopia: NPV of External Public Debt

(In billions of U.S. Dollars)

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based on 2008 DSA

20. An updated external debt sustainability analysis (DSA) yields similar conclusions to the DSA conducted as part of the 2008 Article IV Consultation process: Ethiopia is at moderate risk of debt distress: debt burden indicators are projected to remain below the policy-dependent thresholds but one threshold (the NPV of debt-to-exports ratio) is breached under four stress tests. While the conclusions are similar to those of the 2008 DSA, the debt profile shows significantly higher levels for debt indicators in the 2009/12 period, reflecting a combination of a) faster-than-projected disbursements on existing loans to ETC; b) additional new borrowings by EEPCo; and c) weaker export performance over the near term in light of weak global demand. Debt sustainability hinges on reaping strong returns, in the form of expanded output of tradables, from the large infrastructure investments.

21. The authorities currently envisage contracting, either directly or by providing a government guarantee, a number of new loans in 2009/10. Some of the loans under discussion may be extended on non-concessional terms—including a possible loan to Ethiopian Shipping Lines for the purchase of new ships and some further borrowing by EEPCo for investment projects. The authorities have indicated that the amount of nonconcessional loans contracted will not exceed $500 million during the program period; they have agreed to discuss in advance with staff the contracting of any sizeable new loans within this ceiling.

22. The authorities emphasized their commitment to carefully overseeing the evolution of public external debt, including that incurred by public enterprises. They indicated that they will keep debt levels under close review and will make every effort to ensure that new borrowings are contracted at concessional terms and that large foreign-financed projects are subject to rigorous economic appraisal before being approved. The mechanisms utilized to scrutinize the investment and external borrowing program of the public enterprises will be a topic covered, in coordination with the World Bank, as part of the first program review.

IV. Program Issues

A. Access and Capacity to Repay the Fund

23. Ethiopia is facing a difficult external environment. With low reserves and pressure on the balance of payments, there is a strong case for provision of Fund financial support under the Exogenous Shocks Facility (ESF). But Ethiopia also faces deep-rooted economic challenges as it pursues its development strategy and, while supporting the ESF request, staff advises the authorities to develop a medium-term reform program focusing on more entrenched balance of payments difficulties.

24. Staff calculations of the effects of the changing global environment on the balance of payments in 2009/10 yield an estimated adverse impact in the range of $260–300 million (125–140 percent of quota) (see Box 3). The estimates are based on comparisons of projected outturns in 2009/10 (on unchanged policies and a constant real exchange rate) with the 2008/09 outcome. The authorities argued that these estimates underestimate the net impact of the global crisis on Ethiopia, suggesting that a more appropriate measure would be to compare projected levels in 2009/10 with the levels that would have prevailed in the counterfactual where the global recession had not taken place.7

25. Staff is proposing access under the arrangement in the amount of 115 percent of quota (SDR 133.7 million), to be disbursed in three disbursements. Given the difficult external environment and the low levels of international reserves, it is proposed that 55 percent of quota be made available on approval of the arrangement, with two ensuing disbursements of 30 percent of quota. Front-loaded drawings under the ESF would support a more comfortable international reserve position for 2009/10 and enhance the credibility, and hence feasibility, of the authorities’ macroeconomic program.8 In conjunction with the proposed SDR allocation (totaling SDR 117 million, inclusive of both the general and special allocations), the provision of Fund support along these lines would raise import cover to some 2.1 months by June 2010 and to near 2.5 months of imports by June 2011.

26. The proposed financing from the Fund would complement substantial inflows from donors to Ethiopia. Donor aid flows jumped to $2.4 billion (7.2 percent of GDP) in 2008/09, as donors provided exceptional assistance to Ethiopia in responding to commodity price shocks. Aid flows are set to rise slightly in 2009/10, and would be up some 46 percent on 2007/08 levels. Proposed Fund assistance under the ESF, inclusive of the initial RAC-ESF drawing, would amount to some $290 million, equivalent to some 6 percent of donor aid flows during 2008/09 and 2009/10.

27. Ethiopia has adequate capacity to repay the Fund (see Table 6). Notwithstanding the high growth in public enterprise borrowings cited above, the DSA indicates that the various debt thresholds are observed in the baseline scenario and Ethiopia’s debt to the Fund would remain at modest levels throughout the projection period. The proposed access of 115 percent of quota would amount to about ½ percent of GDP; with full disbursement under the arrangement, debt to the IMF would amount to 2 percent of total public debt in 2010/11. Access under the proposed arrangement would raise the ratio of the NPV of debt to exports by 4 percentage points at its peak (from 135 percent to 139 percent), and does not affect the rating of moderate debt distress recorded in the DSA. Future repayments to the Fund would be modest in relation to exports of goods and services, peaking at some 0.6 percent of exports in 2016.

Table 6.

Ethiopia: Indicators of Capacity to Repay the Fund, 2009–20

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Source: IMF staff projections.

Assuming three semi-annual disbursements starting in September 2009, with access of 55, 30, and 30 percent of quota, respectively.

Data pertain to the period July 1 to June 30.

B. Risks to the Program

28. The immediate risks to the program stem from the uncertain external environment and from Ethiopia’s dependence on rain-fed agriculture; the election cycle, with national elections slated for mid-2010, could also affect developments. Weaker exports, remittances, and inward investment would put pressure on reserves or the exchange rate, the latter threatening the inflation objective. Any significant erosion of donor support would undermine both the external payments and budgetary positions. Ethiopia’s narrow export base and dependence on agriculture leave it vulnerable to weather shocks; the authorities are confident that near-term output goals will be achieved but a significant agricultural supply shock cannot be ruled out. Over the medium-term, output diversification and technical progress in agriculture will be key to limiting vulnerabilities: in the near-term, the authorities will need to move flexibly, supported by donors, to handle further adverse shocks.

C. Program Monitoring and Conditionality

29. Program implementation and its economic results will be subject to two reviews based on end-December 2009 and end-2009/10 performance criteria (Table 7). The program will be monitored on the basis of (a) quantitative performance criteria and benchmarks, set out in Table I.1 of the attached MEFP and defined in the technical memorandum of understanding; and (b) structural benchmarks, as specified in Table I.2 of the MEFP. The first review would be scheduled for completion by March 2010.

Table 7.

Ethiopia: Reviews and Disbursements Under the 14-Month ESF Arrangement

(In millions of SDR)

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Source: IMF staff projections.
Table I.1.

Ethiopia. Quantitative Performance Criteria and Benchmarks 1/

(In millions of birr, unless otherwise indicated)

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Cumulative flow from the start of Ethiopia's fiscal year (July 8).

Adjusted upward/downward for 100 percent of any non-project external assistance that exceeds/falls short of programmed amounts, subject to specified caps.

Adjusted upward/downward for 100 percent of any non-project external assistance that falls short of/exceeds programmed amounts, subject to specified caps.

Excluding the Ethiopian Airlines.

This shall be a continuous performance criterion.

Table I.2.

Ethiopia: Structural Benchmarks

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30. A safeguards assessment update is currently underway, and a safeguards mission visited Addis Ababa during July 6–14.

V. Staff Appraisal

31. The Ethiopian authorities face a challenging immediate macroeconomic situation, notwithstanding the strong growth performance over several years and the important progress made in raising living standards and reducing poverty. The low level of foreign reserves constrains the room for maneuver in handling adverse shocks, underscoring the importance of building reserves towards their target level of 3 months import cover as soon as is feasible.

32. The adjustment package adopted in late-2008 has been implemented vigorously, providing key support for controlling inflation and rebuilding still-low reserves. The fiscal squeeze needed to halt domestic borrowing by general government and the elimination of fuel subsidies were important measures, helping to contain domestic monetary growth.

33. The authorities’ program for 2009/10 seeks a balance among conflicting objectives—maintaining low inflation, rebuilding reserves, allowing some easing of tight expenditure constraints, and unwinding some of the real exchange rate appreciation recorded during the past two years. The package chosen reflects national priorities and is adequate to achieve program targets, although implementation will need to be appropriately cautious with a bias towards tight control of discretionary fiscal outlays and of reserve money until the desired trajectories for inflation and the balance of payments are assured.

34. The authorities recognize the need to limit domestic borrowing by the public sector if inflation is to be contained and private sector growth to be fostered. The strong performance in containing borrowing levels in 2008/09 provides confidence that the limit set for 2009/10—some 3 percent of GDP—can be observed, but this will require careful monitoring and control of budget implementation and effective operation of the inter-agency committee established to monitor borrowing by the public enterprises. This oversight process has received high-level support from policy-makers to date, and it will be important that this support is maintained throughout the current fiscal year.

35. Budget revenue targets are achievable but ambitious, viewed against the backdrop of the poor trajectory of revenue collection over the past several years. The authorities are fully cognizant of the need both to achieve revenue targets in the near-term and to put in place the reforms needed to boost the revenue-GDP ratio over the medium-term. For this fiscal year, vigilance will be needed to monitor monthly revenue collections and to initiate a mix of remedial measures and/or expenditure tightening where needed. Looking ahead, it will be important that the authorities make effective use of the upcoming technical assistance from the Fiscal Affairs department to flesh out a medium-term reform strategy.

36. Controlling the monetary aggregates has been a challenge for the NBE, given the rudimentary state of the money markets and the lack of instruments to fine-tune control of liquidity. Building money markets and developing central bank open market operations are medium-term development objectives; in the near-term, liquidity control can be enhanced by focusing the regular fortnightly auctions of Treasury bills on achieving liquidity targets. This will require that interest rates be allowed to adjust to achieve the target auction volumes, implying likely upward movement in T-bill interest rates over time. Making effective use of technical assistance will be of importance in developing liquidity forecasting capabilities.

37. The authorities’ policy thinking envisages gradual real depreciation of the birr over an extended period to promote domestic production of tradables and ease external payments constraints. The step adjustments of the birr in January and again in July represent important steps in implementing this approach and in correcting currency overvaluation. The case for further adjustment over the fiscal year will depend on inflation performance and the extent of any erosion of depreciation-induced gains in competitiveness. Looking ahead, staff urge the authorities to rely more on domestic demand management tools and give less weight to the exchange rate in pursuing their inflation objectives.

38. The sharp growth in external debt levels underway during 2008–12 reflects heavy investment in public sector-provided infrastructure, notably electricity and telecommunications. Existing infrastructure is inadequate to sustain current levels of growth, with availability of power already a binding constraint on producers, but it is important that expansion of infrastructure be appropriately aligned to projected demand growth if public enterprise profitability is not to be undermined by excess capacity. Full cost recovery by public enterprises is an imperative if the debt build-up is not to be converted into public sector deficits; there is likely also a solid case for setting current prices at levels that allow greater contributions from enterprise resources to meet their investment financing needs.

39. Looking beyond the program period, Ethiopia’s macroeconomic policy context remains challenging, given the competing pressures on domestic credit availability from the public and private sectors, the need to build budgetary revenues to meet spending pressures, the large trade imbalance and the associated heavy dependence on aid flows and remittances, the modest level of foreign reserves, and the fast build-up of external debt levels. Staff will work closely with the authorities on fleshing out the issues and policy options available, using for this purpose the Article IV consultation, the regular visits to Addis between consultations, and, potentially, further program engagement with Ethiopia.

40. Staff support the authorities’ request for an arrangement under the HAC ESF. The authorities’ policy package represents a measured response to the adverse impact of global recession for the period ahead and the policies, if implemented vigorously, are appropriately calibrated to meet the program objectives. Addressing Ethiopia’s sizeable medium-term challenges will require the fleshing out of a comprehensive reform agenda, which could possibly be supported by a Fund program, and staff stand ready to work with the authorities on such an endeavor.

Ethiopia: The Status of the Policy Package Supported under the RAC ESF

Policy commitments under the RAC ESF have, in the main, been effectively implemented.

Status of Key Policy Commitments under the RAC ESF Policy Packag

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Ethiopia: Liquidity Control

The National Bank of Ethiopia (NBE) has faced significant challenges in maintaining effective control over the stock of reserve money, which has fluctuated significantly as a result of surges in NBE financing of the government (through an advances account) and the foreign exchange operations of the NBE. The NBE does not itself have instruments to conduct offsetting sterilization operations, and has instead relied on changes in reserve requirements and moral suasion to influence growth of the monetary aggregates.

uA01fig05

Contributions to Reserve Money Growth

(Annual changes in percent of beginning period stock)

Citation: IMF Staff Country Reports 2009, 296; 10.5089/9781451812855.002.A001

For the period ahead, the NBE, with support from the Treasury, will make use of the existing auctions of Treasury bills (held every two weeks) as the tool to control liquidity, setting sales volumes on the basis of the amounts needed to meet reserve money targets. The setting of auction volumes will require the development of a basic liquidity forecasting capability, in turn requiring close collaboration and information-sharing between the NBE and MoFED. Effective use of the mechanism will also require a willingness to allow interest rates adjust to the levels needed to achieve target sales volumes—rather than limiting sales volumes to achieve a specific “cost of funds” target of the government. Technical assistance in support of this reform agenda is being obtained under the World Bank’s financial sector capacity building project.

The medium-term challenge will be to develop NBE open market operations using government paper, but this will first require significant developments in both the instruments used for government finance and in money and financial markets.

Ethiopia: Balance of Payments Impact of the Global Slowdown

Ethiopia is facing a difficult external environment in 2009/10: the balance of payments position is being adversely affected by pressures on remittances, inward direct investment, and key export items, with resurgent oil prices an additional burden. As a corollary, the trajectory for foreign reserves is now substantially weaker than envisaged at the time of Board approval of the RAC-ESF drawing in January 2009 (IMF Country Report No. 09/34).

Staff have sought to quantify the effects of the changing global environment on the balance of payments in 2009/10, measured against the outturn in 2008/09, excluding the impact of the drop-off in donor flows (as exceptional financing ends), and under the assumption of a constant real exchange rate. The aggregate size of the shock is projected in the range of $260–297 million—equivalent to 125–143 percent of quota—with key components being declining remittances and direct foreign investment and higher oil prices.

Ethiopia: Estimated Impact of Exogenous Shocks on the Bop

(In millions of US$)

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Based on projections without real exchange rate change in 09/10

Changes in values for all items.

For commodity exports and imports, shock estimates represent impact from price changes only (using 2008/09 volumes).

Shock estimates assume 50 percent import content.

Based on projections without real exchange rate change in 09/10. Assuming no disbursements of IMF financial resources.

Based on projections with real exchange rate change in 09/10. Assuming disbursements of the ESF and new SDR allocations.

Appendix I The Federal Democratic Republic of Ethiopia Letter of Intent

Addis Ababa, August 7, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

The government of Ethiopia requests support from the International Monetary Fund (IMF) for its 2009/10 economic program through a 14-month arrangement under the High-Access Component of the Exogenous Shocks Facility (ESF). We request access of 115 percent of quota, the equivalent of SDR 153.755 million (about USD 240 million).

Macroeconomic performance has improved substantially under the policy package supported by the IMF with a drawing under the Rapid Access Component of the ESF, approved by the IMF Executive Board in January 2009. Given the still-low level of foreign exchange reserves, the requested arrangement will greatly assist with our efforts to steer the Ethiopian economy through the global economic crisis, sending a positive signal to domestic stakeholders and our development partners about our resolve to maintain a stable macroeconomic environment.

In the attached Memorandum of Economic and Financial Policies (MEFP), we describe policy implementation in 2008/09 and set out our macroeconomic objectives and policies for 2009/10. Our program focuses on entrenching low inflation and building international reserves through appropriately tight fiscal and monetary policies supported by the necessary exchange rate flexibility. We also intend to enhance monitoring and control of borrowings by the public enterprise sector, develop the central bank’s liquidity forecasting and control capacity, and flesh out, with IMF technical assistance, a comprehensive time-bound tax reform strategy to improve domestic revenue mobilization.

The MEFP and Technical Memorandum of Understanding (TMU) present quantitative performance criteria and indicative targets as well as structural benchmarks through the period of the arrangement. We believe that the policies set forth in the MEFP are adequate to achieve the objectives of the program, but we will take additional measures as needed to reach these goals. We will consult with IMF staff on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the agreed IMF policies on such consultation.

The government of Ethiopia authorizes the IMF to publish the contents of this letter, and the attached MEFP and TMU, on its website after consideration of our request by the Executive Board.

Sincerely yours,

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Attachments:

I. Memorandum of Economic and Financial Policies

II. Technical Memorandum of Understanding

Attachment I: The Federal Democratic Republic of Ethiopia Memorandum of Economic and Financial Policies for the Period July 8, 2009–October 25, 2010

Addis Ababa, August 7, 2009

1. Ethiopia has achieved strong economic growth in recent years. Supported by improved agricultural production and large-scale public investment in infrastructure, real GDP growth has averaged 11.5 percent in the past five years, among the highest levels recorded in the continent. Good growth performance has also contributed to significant poverty reduction and to favorable prospects for achieving the MDGs.

2. Strong economic growth coupled with the surge in world commodity prices put serious pressures on both domestic prices and international reserves during 2008, with CPI inflation peaking at 64 percent in July 2008 and international reserves dropping below one month of imports by the second half of that year.

3. Facing the twin challenges of high inflation and low reserves, we introduced significant adjustments to economic policies in late-2008, aimed at restoring macroeconomic stability: these included sizable fiscal tightening, the elimination of fuel subsidies, monetary policy tightening, and adjustments of the exchange rate. The IMF provided support to this policy package through a disbursement of some US$50 million under the rapid-access component of the Exogenous Shocks Facility (ESF) in February 2009. Our development partners also increased substantially their financial support to us during 2008/09.

4. The policy adjustments made last year have worked well, but our improved macroeconomic performance is now being threatened by the fallout from the difficult global economic environment. While the commodity price pressures have eased, receipts from merchandise exports, remittances, and direct foreign investment are coming under pressure, and there is some pullback in aid inflows from the elevated levels recorded in the 2008/09 fiscal year, just ended. We have adjusted our economic program for the year ahead, described below, to respond to the weak global economic environment and expect to achieve solid and sustainable macroeconomic outcomes over the period ahead.

5. We are seeking financial support for this program from the IMF under the high-access component of the ESF; the basis for this requested support is discussed below.

Policies and Economic Performance during 2008/09

6. We have achieved solid results under our economic program for 2008/09, aided by consistent implementation of policies. We anticipate that growth will approach 10 percent for the year. Inflation fell to single digits in June 2009, helped by the partial reversal of last year’s food and commodity price surges. International reserves have been rebuilt, helped by increased donor support, and exceeded $1.5 billion by the end of the fiscal year, equivalent to 1.8 months of the coming year’s imports of goods and services.

7. We have implemented the key policy measures identified in our December 15, 2008 letter to the Managing Director of the IMF (IMF Country Report No. 09/34) and believe that all quantitative targets for end-2008/09 will be met. The measures include:

  • Eliminating fuel subsidies: Domestic fuel prices have been adjusted monthly since October 2008, with prices now set somewhat higher than import costs to enable the Oil Stabilization Fund (OSF) to repay its accumulated debt to the banking system.

  • Tightening fiscal policy: Net domestic financing of the general government from the banking system during the first eleven months of the fiscal year stood at -2.8 billion birr and all indications are that the full year target of zero domestic financing will be achieved—a sharp improvement from the borrowing level of 2.7 percent of GDP recorded in 2007/08.

  • Reducing public enterprise domestic borrowing: An inter-agency monitoring committee was established (in January) and has been meeting regularly to review developments and identify control measures where warranted. Domestic borrowing during the first eleven months of 2008/09 was 7.5 billion birr, and the full year limit of 8.0 billion birr should be observed.

  • Containing money growth: Control of the money supply has proven to be a challenge, despite the support received from the drop in government financing needs. We expect the end-year target of 20 percent growth for broad money to be achieved, but will need to strengthen our framework for liquidity control in the year ahead.

  • Greater exchange rate flexibility: The birr fell by some 10 percent vis-à-vis the US dollar in January 2009, and by end-June had depreciated by some 16 percent since September 2008. This nominal depreciation, coupled with the easing of inflation, has reversed some of the accumulated real appreciation of recent years.

Economic Objectives and Policies for 2009/10

8. The global economic crisis has created sizeable challenges for Ethiopia, threatening the sustainability of the solid performance achieved in 2008/09. Favorable weather conditions should provide support for agricultural production in the coming year and key infrastructure projects are expected to move ahead, but drop-offs in selected exports, remittances, direct foreign investment, and donor inflows will place pressure on the balance of payments.

9. The over-arching objective of our economic program for 2009/10 is to maintain macroeconomic stability in the face of the difficult external environment. Program objectives include: a) maintenance of a high, if somewhat lower, level of economic growth than in 2008/09; b) locking in the sharp slowdown in inflation, keeping annual inflation below 10 percent; and c) increasing foreign reserves, inclusive of the financial support requested from the IMF, to some US$1.67 billion, equivalent to 1.9 months of import coverage. We anticipate that GDP growth will reach about 9 percent in 2009/10, but have adopted the conservative assumption of 7 percent in fleshing out the financial and economic program described here.

Fiscal Policies and Public Sector Management

10. We will maintain a tight fiscal stance in 2009/10, containing the overall public sector domestic borrowing level to 3.0 percent of GDP, up somewhat from the 2008/09 level, but down sharply from the 7 percent of GDP recorded in 2007/08. Specific targets are that domestic borrowing of the general government will not exceed 5.8 billion birr (1.4 percent of GDP) while domestic borrowing by public enterprises and public agencies will not exceed 6.3 billion birr (1.6 percent of GDP). Domestic borrowing of the federal government will involve a mix of credit extended by the NBE and sales of government paper to banks and non-banks: we are committed to active use of Treasury bill auctions to allow effective control of reserve money by the NBE (see below).

11. Our budgetary program for 2009/10 is predicated on the need to maintain close control on the government’s domestic borrowing requirement while partly easing some of the tight expenditure constraints imposed as part of our ambitious adjustment program during 2008/09. Balancing these conflicting objectives, we envisage a fiscal framework in which general government domestic revenues are at least 49.0 billion birr (12.2 percent of GDP); domestic borrowing levels do not exceed 5.8 billion birr (1.4 percent of GDP); and total domestically-funded outlays are not more than 54.9 billion birr (13.6 percent of GDP). To expand the resource envelope, we will be asking our development partners for additional financial assistance, over and above that assumed in the budget, ideally providing levels of support close to that extended to us in 2008/09. We are committed to cutting expenditure levels if domestic revenues fall below target.

12. The government is maintaining a careful prioritization of public expenditures, protecting poverty-reducing spending and strategic capital projects. Total expenditure and net lending of general government is expected to be 18.4 percent of GDP, up somewhat from the levels of 2008/09. Recurrent spending is projected to remain substantially unchanged at 8.3 percent of GDP, with little room for cuts in light of the tight controls, including salary freezes, maintained over the last two years; poverty-reducing spending is expected to increase slightly to 13.1 percent of GDP; while government-funded capital spending will rise somewhat to 7.2 percent of GDP. Non-priority investments will be postponed until public sector resource constraints are eased.

13. Gradual erosion of the tax-GDP ratio has been a troubling development in recent years, and we are committed to reversing this decline and boosting the fiscal resources available to finance our development needs. For 2009/10, we have opted, against the backdrop of falling food prices, to eliminate the temporary exemption from VAT for food and food-related items introduced last year, and we are intensifying our efforts to improve revenue collections. We expect tax revenues for the year to be around 8.7 percent of GDP, up somewhat from 2008/09 levels. Looking towards the medium term, we have sought technical assistance from the IMF’s Fiscal Affairs department to review both tax administration processes and tax policies, and expect to use the recommendations from this assistance (timed for the September-November period) in fleshing out a comprehensive tax reform strategy, to be finalized in January 2010. As initial input to this process, we intend to complete, by mid-August, a status review of the recommendations made by a 2006 IMF technical assistance mission. Development of a tax reform strategy with a time-bound action plan will be a structural benchmark for the first program review.

14. We have strengthened our control over financial operations of the public enterprises and agencies, with the aim of limiting their borrowing needs and ensuring a balanced distribution of credit between public and private enterprises. An inter-agency committee is now monitoring enterprise borrowing levels on a monthly basis. Large public enterprises are being called on to submit annual investment and financing plans to the committee, which is to review the potential macroeconomic impact of these plans and, where needed, bring proposed remedial policy actions to high-level policy makers in a timely manner. The committee is working to enhance coverage of its operations to include all significant borrowing enterprises and agencies, and a formal notification to all agencies in this regard will be issued shortly to improve information provision from these institutions. The aggregate domestic borrowing need of public enterprises and agencies fell from 4.4 percent of GDP in 2007/08 to 2.1 percent of GDP in 2008/09 and we expect to see some further decline in domestic borrowing needs in 2009/10. Effective working of this oversight process, including compliance with the indicative targets for public enterprise borrowing, will be a structural benchmark for the first program review.

15. Appropriate pricing of outputs is essential if public enterprises and agencies are to remain in solid financial health and not become a drain on scarce fiscal resources. Elimination of fuel subsidies was a key measure to cut public sector borrowing needs; we will continue the current practice of setting price levels above costs to allow repayment of the accumulated debts of the Oil Stabilization Fund. We shall maintain our policy of ensuring that electricity tariffs are set at levels that yield full recovery of costs by the state-owned electricity company. The large state-owned telecommunications and airline corporations are in solid financial health.

Monetary policy and operations

16. Monetary policy will be geared to constrain inflation and support the gradual rebuilding of reserves. Our monetary program is anchored around controlling broad money growth, with reserve money as the main operational target. For 2009/10, we are programming broad money growth at 17.1 percent; with real GDP set to rise by at least 7 percent and end-of-period inflation targeted below 10 percent, this would imply a broadly unchanged real stock of money (adjusted for economic growth) over the twelve months of the fiscal year. Given the public sector borrowing program and our foreign reserve targets, there would be room for some real growth in credit to the private sector (on the order of 6 percent), representing some easing in real credit availability from 2008/09. The monetary targets will be reviewed at mid-(fiscal) year to evaluate whether they are appropriately calibrated to achieve program objectives.

17. To improve monetary policy formulation and implementation, it is essential to provide the NBE with the means to manage liquidity through indirect instruments. The medium-term focus of our reform efforts will be on developing central bank open market operations using government paper, but full development of such a capability will require significant developments in the instruments used for government finance and in financial markets. Our immediate priority therefore will be to make use, on a systematic basis, of the existing auctions of Treasury bills (held every two weeks) as the tool to control liquidity, setting sales volumes on the basis of the amounts determined to be needed to meet reserve money targets. This approach will require significant volumes of t-bill sales, with yields being determined by the need to achieve sales volume targets. The setting of auction volumes will require the development of an effective liquidity forecasting capability, in turn entailing close cooperation and weekly information-sharing between the NBE and the MoFED. We are committed to making this arrangement work, deploying the appropriate staff and resources needed to ensure informed and effective decision-making by those tasked with determining auction volumes. Technical assistance in support of this reform agenda will be obtained under the World Bank’s financial sector capacity building project. Achieving substantial progress in implementing these institutional arrangements and capabilities will be a structural benchmark for the first program review.

Exchange rate and external debt policy

18. Enhanced exchange rate flexibility is an important component of our policy package, aimed at promoting a better allocation of scarce foreign exchange and enhancing the incentives for both exporters and domestic producers competing with imports. Real exchange rate depreciation earlier this year provided an important step in that direction, but there continues to be significant demand pressure in the foreign exchange market. This pressure will likely intensify as global recession impacts on our foreign currency receipts, and takes place in a context where the low level of foreign reserves limits our room for maneuver. Further adjustment of the exchange rate from June 2009 levels will therefore be needed to eliminate these pressures, but will have to be managed in a manner that does not destabilize expectations or consumer price inflation: the 9 percent depreciation of the birr on July 10th represented a judicious move to meet this objective.

19. The government is committed to maintaining effective oversight over the evolution of public sector external debt, including that incurred by public enterprises. While conventional debt sustainability analysis provides a broadly reassuring assessment of Ethiopia’s debt burden, we will continue to keep debt levels under close review and will make every effort to ensure that new borrowings are contracted at concessional terms and that large foreign-financed projects are subject to rigorous economic appraisal before being approved. The mechanisms utilized to scrutinize the investment and external borrowing program of the public enterprises will be a topic covered as part of the first program review.

Qualification for the ESF and financing needs

20. The difficult external environment has adversely affected the balance of payments outlook and the speed of reserve accumulation that we had envisaged when we requested support under the Rapid-Access Component of the ESF no longer looks achievable. With key exports, remittances, donor assistance, and foreign direct investment inflows all coming under pressure, we anticipate that, notwithstanding the substantive policy measures described above, foreign reserves would fall slightly during the fiscal year in the absence of Fund support, with the import coverage ratio likely to decline to 1.7 months of imports of goods and services by end-2009/10.

21. We are therefore requesting Fund support for our adjustment program in the amount of SDR 153.755 million, equivalent to 115 percent of quota, under the High-Access Component of the ESF. Our eligibility for access to the ESF in this case is based on the sizeable impact of the adverse external environment on our balance of payments position. The requested financial support, in combination with the policy package described here, would allow us to increase reserves to some $1.67 billion (1.9 months of import cover) by the end of 2009/10. Should the proposed allocation of SDRs be approved by the IMF’s Board of Governors, we would take advantage of the allocation to increase our gross foreign reserves by the full amount of the SDR allocation, bringing gross reserves to $1.85 billion (2.1 months of import cover) by the end of 2009/10.

Program Monitoring

22. The program will be monitored on the basis of (a) quantitative performance criteria and benchmarks, which are set out in Table 1, and described fully in the attached technical memorandum of understanding; and (b) structural benchmarks, as specified in Table 2. Government officials will meet regularly with the IMF’s resident representative to review the progress made in the implementation of the program. As indicated in the letter of intent addressed to the Managing Director of the IMF, two reviews are envisaged under the program: the first review will be based on economic performance at end-December 2009 and policy reforms inclusive of the tax reform initiatives anticipated for January 2010, and would be completed by March 2010; the second review will take place approximately six months thereafter, and will based on economic performance in the second half of the fiscal year (ending July 7, 2010).

Attachment II: The Federal Democratic Republic of Ethiopia Technical Memorandum of Understanding

Addis Ababa, August 7, 2009

I. Introduction

1. This memorandum sets out the understandings between the Ethiopian authorities and staff of the International Monetary Fund (IMF) regarding the definitions of quantitative performance criteria and indicative targets, for the program supported by the high-access component of the Exogenous Shocks Facility (ESF), as well as the mechanisms to monitor the program and related reporting requirements. To monitor the evolution of the economy during the program period, the Ethiopian authorities will provide the data listed in each section below to the African Department of the IMF, in accordance with the indicated timing (summarized in section IV.C.). The financial criteria will be monitored on the basis of the methodological classification of monetary and financial data that exists as of July 7, 2009.

2. For program purposes, the public sector consists of the general government (comprising the federal and regional governments) and public enterprises.

3. For program purposes, public enterprises refer to those entities under the term of “public enterprises” in the monetary survey provided by the National Bank of Ethiopia.

4. The quantitative targets for end-December 2009 and July 7, 2010 constitute performance criteria, and those at end-September, 2009 and end-March 2010 are quantitative benchmarks.

5. The program exchange rate of the Ethiopian birr to the U.S. dollar is set at 11.3145 birr = $1. The corresponding cross exchange rates and program gold price for the duration of the program are provided in table 1, which are the prevailing rates as of July 7, 2009.

Table 1.

Program Exchange Rate Assumptions

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II. Quantitative Performance Criteria and Benchmarks: Definitions and Reporting Standards

A. Floor for Net Foreign Assets (NFA) of the NBE

6. Definition. The NFA of the NBE are defined as the difference between gross foreign reserve assets and all foreign reserve liabilities of the NBE, including debts to the IMF and other long- and short-term liabilities of the NBE to nonresidents. For purposes of the program, foreign reserve assets shall be defined as monetary gold, holdings of SDRs, the reserve position in the IMF, and NBE holdings of foreign exchange in convertible currencies. Any such assets shall only be included as foreign reserve assets if they are under the effective control of, and readily available to, the NBE. Excluded from gross foreign reserve assets include capital participation in IFIs, any assets in nonconvertible currencies, holdings of precious metals other than monetary gold, encumbered foreign reserve assets, and foreign reserve assets pledged as collateral for loans and derivative contracts. Foreign reserve liabilities include any foreign currency denominated short-term loans or deposit (with a maturity of up to and including one year); NBE liabilities to residents and nonresidents associated with swaps (including any portion of the NBE gold that is collateralized) and forward contracts; IMF purchases; and loans contracted by the NBE from international capital markets, banks or other financial institutions located abroad, and foreign governments, irrespective of their maturity. Foreign reserve liabilities also include foreign-currency-denominated domestic liabilities of the NBE. For calculating the criteria, foreign reserve assets and liabilities shall be valued at the exchange rates prevailing on July 7, 2009 (see Table 1). It is understood that additional SDR allocation, if any during the program period, will have no impact on the NFA of the NBE.

7. Reporting. Data on gross foreign reserve assets and foreign reserve liabilities of the NBE will be transmitted to the African Department of the IMF on a monthly basis within 30 days of the end of each month. The NBE will also report the breakdown between liquid and unencumbered gross foreign reserve assets and those foreign reserve assets that are pledged, swapped, or encumbered.

B. Ceiling on Net Domestic Assets (NDA) of the NBE

8. Definition. The NDA of the NBE are defined to include net credit to the government, credit to enterprises and individuals, claims on banks, and other items net (see the monetary survey), but exclude foreign currency valuation adjustments.

9. Reporting. The monthly balance sheets of the NBE will be transmitted to the African Department of the IMF within 30 days of the end of each month.

C. Limit on the Net Domestic Financing of the General Government

10. Definition. The net domestic financing of the general government is defined as the sum of (i) the change in the net stock of claims of domestic banks and non-banks on the general government and (ii) any pending overdue bills. Net domestic bank claims consist of NBE and domestic commercial bank claims on the general government, including treasury bills and other general government liabilities, net of general government deposits with the NBE and domestic commercial banks. Non-bank claims comprise treasury bills, bonds, and other general government paper placed with non-bank institutions or with the public. For calculating the criteria, the bonds issued by regional housing agencies for condominium projects shall be excluded.

11. Reporting. Data on domestic financing (bank and non-bank) of the general government (including treasury bills and government bonds held by the nonbank public) will be transmitted on a monthly basis, within six weeks of the end of each month, except for the data on regional governments, which will be furnished within twelve weeks after the end of each quarter. Reporting on domestic and external arrears (i.e., overdue bills) will be monthly, within six weeks of the end of each month.

D. Ceiling on Net Domestic Credit to public enterprises

12. Definition. The net domestic credit to public enterprises is defined as the change in the net stock of domestic bank and non-bank claims on public enterprises. Net bank claims on public enterprises consist of NBE and domestic commercial bank claims on public enterprises, including loans, bonds, and other liabilities, net of public enterprise deposits with domestic commercial banks. Non-bank claims comprise loans, bonds, and other debt papers placed with nonbank institutions or with the public. For calculating the criteria, the bonds issued by regional housing agencies for condominium projects, and the loans extended by the Development Bank of Ethiopia to public enterprises shall be included.

13. Reporting. Data on credit (bank and nonbank) to public enterprises will be transmitted on a monthly basis, within six weeks of the end of each month

E. Ceiling on External Payment Arrears

14. Definition. External payment arrears are defined as debt service obligations incurred directly or guaranteed by the public sector to non-residents that have not been paid at the time they are falling due, as specified in contractual agreements, except on debt subject to rescheduling or restructuring. The program requires that no new external arrears be accumulated at any time under the arrangement.

15. Reporting. The accounting of nonreschedulable external arrears by creditor (if any), with detailed explanations, will be transmitted on a monthly basis within four weeks of the end of each month. This accounting would include, separately, arrears owed by the federal government and other public sector entities; and arrears owed to Paris Club creditors and non-Paris Club creditors. Data on the arrears that creditors have agreed to reschedule shall be provided separately.

F. Ceiling on Nonconcessional External Debt

16. Definition. External debt limits apply to the contracting or guaranteeing of nonconcessional external debt by the public sector. External debt includes debt as defined in the Annex (Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the IMF on August 24, 2000) as well as commitments contracted or guaranteed for which value has not been received. Excluded from this limit are short-term import credits and long-term financing operations of Ethiopian Airlines. Concessionality will be based on a currency-specific discount rate based on the ten-year average of the OECD’s commercial interest reference rates (CIRR) for loans or leases with maturities greater than 15 years and on the six-month average CIRR for loans or leases maturing in less than 15 years. Under this definition of concessionality, only debt with a grant element equivalent to 35 percent or more will be excluded from the debt limits. Excluded from this performance criterion are credits extended by the IMF and financing from the World Bank and African Development Bank (AfDB), and government counter guarantees on project loans from both the World Bank and AfDB. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract is entered into, or guarantee issued.

17. Reporting. A loan-by-loan accounting of all new concessional and nonconcessional loans contracted or guaranteed by the public sector, including detailed information on the amounts, currencies, and terms and conditions, as well as relevant supporting materials, will be transmitted on a monthly basis within four weeks of the end of each month.

G. Ceiling on reserve money (quantitative benchmark)

18. Definition. Reserve money is defined as the sum of currency issued by the NBE (including the vault cash of commercial banks and currency outside banking system) and balances of commercial banks on accounts with the NBE.

19. Reporting. The monthly balance sheets of the NBE will be transmitted within six weeks of the end of each month.

H. Floor on federal government revenue collection (quantitative benchmark)

20. Definition. Federal government revenue is defined as the sum of all tax revenue and non-tax revenue collected by the federal government.

21. Reporting. Data on federal government revenue collection will be transmitted on a quarterly basis, within six weeks of the end of each quarter.

III. Adjusters

I. Excess in Disbursed External Non-Project Financial Assistance

22. In case of an excess external non-project financing beyond the programmed amounts shown in Table 2 for the period July 8, 2009-July 7, 2010,

Table 2.

Non-Project External Financing, 2009/10

(Cumulative quarterly flows, in millions of U.S. dollars)

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  • The floor on net foreign assets of the NBE will be adjusted upward by 100 percent of the disbursed non-project external financing in excess of the programmed amounts (comprising non project related loans and grants) at the end of each quarter, valued at the average exchange rate of the quarter.

  • The ceiling on net domestic assets of the NBE will be adjusted downward by the amount of disbursed external financing in excess of the programmed amounts (comprising non project related loans and grants) at the end of each quarter, converted into birr at the average exchange rate of the quarter.

  • The ceiling on domestic financing of the general government will be adjusted downward by the amount of external financing disbursed to the budget in excess of the programmed amounts (comprising non project related loans and grants) at the end of each quarter, converted into birr at the average exchange rate of the quarter.

J. Shortfall in Disbursed External Non-Project Financial Assistance

23. In case of a shortfall in external non-project financing below the programmed amounts, (comprising non-project loans and grants) shown in Table 2 for the period July 8, 2009–July 7, 2010:

  • The floor on the NFA of the NBE will be adjusted downward by 100 percent of the amount of the shortfall below the programmed amount, up to a maximum adjustment of $150 million for the end-December test date and up to a maximum adjustment of $250 million for the July 7, 2010 test date The adjustment will be converted at the average exchange rate of the quarter.

  • The ceiling on the NDA of the NBE will be adjusted upward by 100 percent of the amount of the shortfall below the programmed amount, up to a maximum adjustment of $150 million for the end-December test date and up to a maximum adjustment of $250 million for the July 7, 2010 test date. The adjustment will be converted into birr at the average exchange rate of the quarter.

  • The ceiling on general government net domestic financing will be adjusted upward by 100 percent of the amount of the shortfall below the programmed amount, up to a maximum adjustment of $150 million for the end-December test date and up to a maximum adjustment of $250 million for the July 7, 2010 test date The adjustment will be converted into birr at the average exchange rate of the quarter.

IV. Other Reporting Requirements for Program Monitoring

K. Public Enterprise Monitoring Committee

24. The public enterprise monitoring committee, composed of senior officials from the Ministry of Finance and Economic Development, the NBE, and other relevant agencies, shall meet monthly and be responsible for monitoring public enterprises financing activities and recommending policy responses, if necessary. The committee shall provide the IMF with an update report on a monthly basis within six weeks of the end of each month.

L. Developments on Structural Performance Criteria and Benchmarks

25. The authorities will notify the African Department of the IMF of developments on structural benchmarks as soon as they occur. The authorities will provide the documentation, according to the dates in Table 2 annexed to the MEFP, elaborating on policy implementation.

C. Data Reporting

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International Monetary Fund

Executive Board Decision No. 6230-(79/140) (Guidelines on Performance Criteria with Respect to Foreign Debt) adopted August 3, 1979, as amended by Executive Board Decision No. 11096-(95/100) adopted October 25, 1995, and as amended on August 24, 2000 Point No. 9

(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

(i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

(ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and

(iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

(b) Under the definition of debt set out in point 9 (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. However, arrears arising from the failure to make payment at the time of delivery of assets or services are not debt.
1

GDP statistics are characterized by some weaknesses; there is also a paucity of high-frequency output indicators, making it difficult to assess current sectoral trends in a timely manner.

2

Data for the first six months of the year indicate that individual remittances are down 6 percent from the corresponding period of 2008, merchandise exports are down 11 percent. The number of foreign investment projects approved for the first quarter of the year is down by 9 percent.

3

The fiscal year runs from July 8 to July 7.

4

The projected reserve level is inclusive of the proposed general and special allocations of SDRs (which amount to about $180 million, equivalent to 0.2 months of import cover).

5

Prices of petroleum products are now set at levels that allow gradual repayment of the Oil Stabilization Fund’s debt to the banking system.

6

Staff analysis as part of the 2008 Article IV Consultation concluded that the real exchange rate was at a broadly appropriate level in late-2007—a level not significantly different from the average level for 2003–07.

7

Staff noted that the methodology employed in the case of Ethiopia was similar to that employed for other countries seeking assistance under the ESF.

8

The authorities expect a significant drop in the NBE’s NFA position during the first half of the fiscal year (see MEFP Table 1); frontloading of Fund support, combined with the SDR allocation, would ensure a gradual increase in the gross reserve position over the course of the year.

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Cover IMF Staff Country Reports
The Federal Democratic Republic of Ethiopia: Request for a 14-Month Arrangement under the Exogenous Shocks Facility-Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Federal Democratic Republic of Ethiopia
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 296
Publisher:
International Monetary Fund
ISBN:
9781451812855
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781451812855.002

With good harvests and declining world food prices, inflation is subsiding.

International reserves picked up modestly with donor aid.

Exchange Rates

(In Birr per 1 U.S. Dollar)

Real and Nominal Effective Exchange Rates

(Index, 2007=100)

Contributions to Reserve Money Growth

(Annual changes in percent of beginning period stock)