The Federal Democratic Republic of Ethiopia
Second Review of the 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:
24 Nov 2010
eISBN:
9781455212637
Language:
English
Keywords:
ISCR; CR; ESF arrangement; fiscal policy; executive board's discussion; ESF-supported program; poverty-reducing expenditure; NBE board; ETC import; expenditure side; demonetization trend; sound fiscal policy
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Ethiopia has successfully implemented policies to reduce inflation and rebuild external reserves. Fiscal policy aims to continue the strong focus on physical and social infrastructure investment while raising the revenue effort. The recent reframing of monetary policy to adopt a reserve money nominal anchor holds out the prospect for the end of financial repression. While the External Shocks Facility-supported program has achieved its objectives of macroeconomic stabilization and a rebuilding of external reserves, much remains to be done to sustain and accelerate growth.

Abstract

Ethiopia has successfully implemented policies to reduce inflation and rebuild external reserves. Fiscal policy aims to continue the strong focus on physical and social infrastructure investment while raising the revenue effort. The recent reframing of monetary policy to adopt a reserve money nominal anchor holds out the prospect for the end of financial repression. While the External Shocks Facility-supported program has achieved its objectives of macroeconomic stabilization and a rebuilding of external reserves, much remains to be done to sustain and accelerate growth.

I. Recent Developments and Performance under the Program

1. Pressures on prices and international reserves have eased further, while strong growth momentum continues. Real GDP growth is estimated to have reached 8 percent in 2009/10 (Table 1). Overall CPI inflation eased to 5.3 percent in August 2010, but non-food inflation remains high at 15.6 percent. Helped by strong donor inflows (and Fund resources) and macroeconomic adjustment, international reserves rose to 2.1 months of imports by end-2009/10, significantly more than originally targeted under the program, as goods and services exports have been buoyant. The authorities devalued the Birr by 16.5 percent on September 1 to remove an estimated overvaluation of the currency and promote competitiveness (Figure 1).1 The size of the devaluation, which exceeded the parallel rate spread, surprised economic agents.

Table 1.

Ethiopia: Selected Economic and Financial Indicators, 2008/09–2014/151

article image
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.

Including debt of major public enterprises.

The programmed figure in 2009/10 does not include some public enterprise debt.

After enhanced HIPC and MDRI relief.

Figure 1.
Figure 1.

Ethiopia: Official and Parallel Exchange Rates

(Birr per US$)

Citation: IMF Staff Country Reports 2010, 339; 10.5089/9781455212637.002.A001

2. The ESF arrangement has remained on track. All quantitative targets for July 7, 2010, were met with margins, and all structural benchmarks were implemented (MEFP Tables 1 and 2).

  • The fiscal stance (MEFP ¶3) was tightened in 2009/10, with higher federal government revenues and much lower domestic financing than targeted (0.4 percent of GDP; Tables 2a, 2b, and 2c). This strong performance was made possible by the ongoing tax reform and strong economic growth.2 The tax collection of Addis Ababa City was merged with the Ethiopian Revenue and Customs Authority (ERCA; September 2010 structural benchmark). Through the July 7, 2010, test date, the government contracted US$470 million in non-concessional debt for infrastructure, within the US$500 million ceiling.

  • Reserve money (MEFP ¶4) was tightened considerably with growth reduced to the single digits, on lower credit to government (Table 3). As a result, excess liquidity in the banking system was significantly reduced. This performance reflects some strengthening of liquidity management (June 2010 structural benchmark). Concurrently treasury-bill yields have been rising modestly in recent auctions, although insufficiently to result in positive real rates (Figure 2). The bank-by-bank credit ceilings were relaxed significantly in early July, but remain binding for most private sector banks.

  • On the structural side (MEFP ¶6), a high-level joint committee of the National Bank of Ethiopia (NBE) and the Ministry of Finance and Economic Development (MoFED) has monitored borrowing by the public enterprises (continuous benchmark). US$296 million of borrowing by the public sector was contracted in September 2010 (compared with a program ceiling of $500 million) to finance public infrastructure in hydro power and a further US$700 million is planned later in the year for shipping and productive investments. These borrowings do not materially affect the public external debt outlook, which remains at low risk of distress. The government adopted an action plan to strengthen national account statistics (August 2010 structural benchmark).

Table 2a.

Ethiopia: General Government Operations, 2008/09–2014/15

(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.

Excluding special programs (demobilization and reconstruction).

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

Table 2b.

Ethiopia: General Government Operations, 2008/09–2014/15

(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.

Excluding special programs (demobilization and reconstruction).

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

Table 2c.

Ethiopia: Federal Government Operations, 2008/09–2010/11

(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.

Excluding special programs (demobilization and reconstruction).

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

Table 3.

Ethiopia: Monetary Survey and Central Bank Accounts, 2008/09–2010/111

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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.

Figure 2.
Figure 2.

Ethiopia: Treasury Bill Outstanding and Yield

Citation: IMF Staff Country Reports 2010, 339; 10.5089/9781455212637.002.A001

II. Policy Discussions

3. Policy discussions focused on a monetary policy framework needed to absorb the excess liquidity in the banking system and abolish the bank-by-bank credit ceilings. While the credit ceilings have contained credit growth and helped re-establish single digit inflation, they have contributed to financial repression and intermediation has not been able to play its fundamental role in supporting sustainably higher growth (Figure 3). The key macroeconomic objectives for 2010/11 remain to keep inflation in the single digits, to maintain a competitive exchange rate, continue to build international reserves, implement a monetary policy consistent with financial deepening, and maintain fiscal sustainability. These objectives will require low reserve money growth, made possible by the phasing out of direct credit to government.

Figure 3.
Figure 3.

Selected Sub-Saharan African and Asian Countries: Broad Money-to-GDP

Citation: IMF Staff Country Reports 2010, 339; 10.5089/9781455212637.002.A001

4. The macroeconomic outlook for 2010/11 is broadly favorable (MEFP ¶7). Staff has raised somewhat the expected real GDP growth from that discussed in the 2010 Article IV consultation, to 8.5 percent, primarily reflecting an expected bumper harvest and higher exports, particularly of gold. Inflation may temporarily rise as a result of the large devaluation in September, but is expected to taper off to the single-digits. Broad money and credit to the economy are expected to rise strongly, once the credit ceilings are abolished, in a non-inflationary monetization and financial deepening driven by deposit mobilization.3 The external current account balance would deteriorate as imports pick up, including a major aircraft purchase, and official transfers return to their historic levels (Table 4).

Table 4.

Ethiopia: Balance of Payments, 2008/09-2014/151

(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.

For 2008/09 and 2009/10, other investment (net) includes a correction for the timing difference between entry of ETC imports and corresponding loan disbursements.

A. Reforming Monetary and Financial Policies to Promote Monetization

5. Monetary policy has recently been reframed to target reserve money and end-financial repression (MEFP ¶10). As noted at the time of the 2010 Article IV consultation, Ethiopia’s demonetization trend since 2001/02 can be traced to excessive injection caused by direct NBE credit to government, exacerbated by the bank-by-bank credit ceilings introduced in early 2009. The ceilings have, inter alia, resulted in excess demand for credit, heavy deadweight excess cash costs for banks, and are a constraint on competition. They also remove any incentive for banks to raise deposits. While staff recommended an early removal of the ceilings, the authorities were concerned about the cost of sterilization. Thus the program aims for near single digit reserve money growth, made possible by the phasing out of new credit to government that would permit the remaining excess liquidity to be absorbed by end-2010 (Figure 4). As the ceilings are associated with the fight against inflation in the public mind, the authorities argued that the ceilings be removed once single digit inflation has been entrenched. With a strong harvest expected in November, and the potential inflationary impact of the September devaluation contained by end 2010, the expectation is that the ceilings would be removed shortly after the excess liquidity has been absorbed (by end-2010), subject to confirmation that overall inflation remains in single digits.

Figure 4.
Figure 4.

Ethiopia: Reserve Money Growth and Excess Reserves

Citation: IMF Staff Country Reports 2010, 339; 10.5089/9781455212637.002.A001

6. To ensure that the expected monetization is accompanied by financial stability an upgrading of the NBE’s supervision and regulation capacity is urgently needed. Staff urged the authorities to enhance the ability of the NBE to recruit and retain qualified staff to ensure the institutional absorption of the technical assistance provided by the Fund and other partners in this area. The NBE is committed to modernizing reserve and liquidity requirements regulations by early 2011, and extending the maturity structure and the frequency of auctions for treasury securities. An FSAP would provide a useful guide for financial sector reforms and development.

B. Maintaining Fiscal Sustainability

7. Fiscal policy in 2010/11 aims to continue the strong focus on physical and social infrastructure investment, while raising the revenue effort (MEFP ¶8). The tax reform measures, combined with the positive impact of the exchange rate depreciation on custom duties and other taxes, are expected to raise general government tax revenue to at least 11.3 percent of GDP. The measures include the repeal of VAT exemptions on cement and some foods, the reduction in open-ended tax holidays and concessions, and the consolidation of the revenue administration at ERCA. On the expenditure side, capital outlays and social spending would rise while other outlays are maintained in relation to GDP. The general government budget deficit would rise to 2.5 percent of GDP, financed by a mix of external and domestic borrowing. If aid inflows or revenues exceed budgetary projections, the authorities intend to reduce domestic borrowing levels commensurately, as in 2009/10.

8. The fiscal stance is compatible with maintaining the low risk of public external debt distress (MEFP ¶9 and 12). While the external public debt to GDP ratio will jump to 25 percent of GDP in 2010/11, the risk of debt distress remains low on account of the outlook for continued strong (double digit) export growth and sustained high remittance (8-9 percent of GDP) levels. In addition to fiscal prudence, the authorities intend to continue effective control of public enterprise borrowing through their monitoring committee. The authorities are fully committed to keeping debt levels under close review, to ensuring that new borrowing is predominantly contracted on concessional terms, and that large foreign-financed projects are subject to rigorous economic appraisals. The authorities are also making progress in implementing the medium-term fiscal framework (MTFF) and preparing to introduce program-based budgeting (PBB) from 2011/12 with FAD technical support. A planned update of the debt management strategy is a welcome step to strengthen debt management.

C. Sustaining Growth Momentum over the Medium Term

9. The medium-term growth outlook appears somewhat stronger than envisaged during the 2010 Article IV consultation. Based on a much stronger performance in 2009/10 than anticipated, the medium-term export outlook has been raised on higher gold and service exports, and the growth profile had been raised to center around 8 percent with a recovery in private savings from recent historically low levels. A new 5-year development plan—the Growth and Transformation Plan (GTP)—is being finalized. It includes ambitious real growth objectives of at least 11 percent, with an aim of placing Ethiopia in the ranks of middle-income countries by 2025 (MEFP ¶13).4 Staff encouraged the authorities to flesh out the structural reform priorities that would unleash a private sector growth response—encompassing financial sector, foreign exchange, and trade liberalization, as laid out in the 2010 Article IV consultation—needed to achieve the ambitious growth objectives. Much of the recent high growth experience has been based on public sector led infrastructure investment. Going forward the growth impact of this investment should be leveraged by allowing greater room for private sector activity. Staff underscored the need to have achievable macroeconomic objectives to frame fiscal and financial policies going forward.

III. Safeguards

10. Some priority recommendations from the updated safeguards assessment, finalized in December 2009, have been implemented. The assessment identified some issues relating to the oversight of the external and internal audit functions, and the review of program data. In response, the NBE established an Audit Committee; it will become fully functional once its charter is approved by the NBE board. The NBE also set up an independent review of monetary data submitted for program monitoring purposes by the NBE’s internal auditors. All quantitative performance criteria data for this review submitted by the NBE have been verified by the internal auditors. A follow-up audit procedure has been developed, and internal and external auditors’ findings and recommendations were addressed.

IV. Staff Appraisal

11. Ethiopia has successfully implemented policies to reduce inflation and rebuild external reserves under the ESF-supported program. Public sector domestic borrowing was dramatically reduced in 2010 compared to program targets, and the nominal exchange rate has been adjusted to improve competitiveness. The impact of the global recession has been mild, which has allowed for over performance on the external targets. Inflation has continued lower, reflecting monetary restraint, and aided by external factors and favorable weather conditions. However, progress in reducing non-food inflation will require sustained low reserve money growth. Staff welcomes the authorities’ concern to maintain a competitive exchange rate, but notes that durably improving competitiveness requires structural reforms, in addition to supporting fiscal and monetary policy.

12. Fiscal performance in 2009/10 has been strong and broadly appropriate. Staff encourages the authorities to maintain the pace of tax reform, in order to durably raise fiscal revenue. In addition to creating fiscal space for the ambitious public investment plans, this effort will play a key supporting role in macroeconomic stability and the monetization of the economy. Staff urges the authorities to strengthen further public debt management capacity, particularly regarding public enterprises to maintain the low distress risk outlook for public external debt.

13. The recent reframing of monetary policy to adopt a reserve money nominal anchor holds out the prospect for the end of financial repression. Staff welcomes the authorities’ adoption of this framework, backed by a phasing out of direct credit to government. Maintaining low reserve money growth is necessary to sustain low inflation and allow for the early elimination of the bank-by-bank credit ceilings. Monetization and financial deepening are powerful forces for growth and economic development and essential for the mobilization of domestic savings that underpin macroeconomic stability and high rates of investment. Staff highlights the need to strengthen financial sector supervision and regulation, particularly in the context of an expected monetization. Staff reiterates the benefits of an FSAP evaluation as a vehicle to identify policies to promote financial sector development and stability.

14. While the ESF-supported program has achieved its objectives of macroeconomic stabilization and a rebuilding of external reserves, much remains to be done to sustain and accelerate growth. Staff stands ready to assist the authorities in elaborating a program that could be backed by a successor arrangement with the Fund. A focus on the investment climate, trade and exchange liberalization, and financial sector development, anchored by sound fiscal and monetary policies, is essential to durable improvements in competitiveness and sustained high growth. A unification of the official and parallel exchange markets would free up significant efficiency gains. Creating more room for private sector activity would leverage the growth impact of the large public investment outlays on infrastructure. Staff urges the authorities to build on recent progress and set fiscal and monetary policy within a cautious framework going forward.

15. Staff recommends completion of the second ESF review.

Table 5.

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

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Source: IMF staff projections.

Appendix I: The Federal Democratic Republic of Ethiopia Letter of Intent

October 8, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Dear Mr. Strauss-Kahn:

1. The attached Memorandum of Economic and Financial Policies (MEFP) describes Ethiopia’s performance in 2009/10 and policies for 2010/11. The government of Ethiopia has implemented the policies contained in the economic and financial program supported by the 14-month arrangement under the High-Access Component of the Exogenous Shock Facility (HAC-ESF), approved by the IMF Executive Board on August 26, 2009.

2. We request completion of the second review of the HAC-ESF arrangement and disbursement of the third tranche of the arrangement equivalent to SDR 40.11 million (30 percent of quota). All the quantitative performance criteria for July 7, 2010, were observed. The structural benchmarks were implemented.

3. We believe that the policies set forth in the attached MEFP are adequate to achieve the objectives of the program, but 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 consultations.

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

Sincerely yours,

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Attachment:

Memorandum of Economic and Financial Policies

Appendix I: Attachment: The Federal Democratic Republic of Ethiopia Memorandum of Economic and Financial Policies for 2010/11

October 8, 2010

I. Introduction

1. This memorandum:

  1. Reviews macroeconomic and financial performance under the program through July 7, 2010.

  2. Updates the MEFP of April 28, 2010, detailing our policy commitments through October 2010.

  3. Describes macroeconomic and financial policies for 2010/11.

II. Economic Developments Under the Program Through July 7, 2010

2. The key objective of our economic and financial program for 2009/10—to make further progress on macroeconomic stability in the face of the difficult external environment—has been met. Macroeconomic conditions continued to improve while broad-based growth momentum has been maintained. Overall CPI inflation decelerated further to 5.7 percent (end-period) in July 2010; non-food inflation has declined only modestly to 18 percent. Thanks to strong external assistance (including the SDR allocation and ESF disbursement), strong export growth, and moderate import growth, international reserves rose to 2.1 months of import cover. All quantitative targets set for July 7, 2010, were met, with margins (Table 1). The structural measures covered by benchmarks were implemented (Table 2).

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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3. Fiscal performance was well within program objectives. Overall general government revenue is estimated to have risen strongly and expenditure was below target, resulting in domestic financing of only 1.8 billion birr, of which 0.8 billion birr from the NBE, against an adjusted program borrowing limit of 4.2 billion birr. The good revenue performance reflected the impact of strong economic growth, administrative efforts, and the lagged effect of inflation. Net external financing and grants were somewhat below projections.

4. Monetary policy was consistent with the program objectives. Reserve money growth was limited to 5.4 percent in the first half of 2010, against a program target of 9.2 percent, on account of lower credit extension to government by the NBE. On an annual basis, reserve money growth declined markedly to 6.5 percent from about 16 percent at end-2009. As a result, excess liquidity in the banking system was significantly reduced. T-bill rates have risen somewhat in recent auctions. Broad money growth rose to 24 percent from 20 percent at end-2009, reflecting a significant increase in bank credit to the private sector, as credit ceilings were eased.

5. The birr was allowed to depreciate by 16.5 percent (in foreign currency) on September 1. This was aimed at removing any remaining overvaluation of the currency; boosting exports further by strengthening the country’s external competiveness; promoting import substitution; and encouraging remittances. The contracting of non-concessional external loans of US$470 million was completed in late June (within the program limit) to finance infrastructure projects. No external payment arrears have been incurred during the period.

6. Our structural reform agenda is being implemented as agreed. A liquidity control framework is being implemented by NBE. The tax reform strategy is being implemented with the repeal of the exemptions on cement and some foods from the VAT, the review of exemptions, and the merger of the collection of taxes of Addis Ababa City with ERCA. A high level joint committee of the NBE and the Ministry of Finance and Economic Development (MoFED) staff has been monitoring borrowing by the public enterprises from the domestic banking system. An action plan to strengthen national account statistics was adopted in August 2010, based on technical assistance by the IMF’s Statistics Department.

III. Macroeconomic Policies for 2010/11

7. We remain committed to implementing the policies and meeting the quantitative and structural reform objectives described in our previous MEFP. We are aiming at real GDP growth of about 11 percent in 2010/11, but maintain the conservative assumption for the purpose of the program of 8.5 percent in 2010/11. We aim to keep inflation in the single digits. The external current account deficit is expected to widen to 8.0 percent of GDP on account of a sizable increase in capital goods imports associated with new aircraft purchases and large hydro power investments. The gross official reserves coverage target at end 2010/11 is 2.3 months of imports. The macroeconomic priority for 2010/11 is to contain inflation, strengthen international reserves, and reform monetary policy to promote financial deepening. This will require limited domestic financing, consistent with the intention to contain reserve money growth, the vigorous implementation of tax reforms aimed at raising fiscal revenue. Sustained levels of concessional external financial assistance remain critical to our development needs.

Fiscal policy for 2010/11

8. Fiscal policy in 2010/11 aims at continuing our strong investment in physical and social infrastructure while preserving our low external public debt distress risk rating and low domestic financing. The tax reform measures, combined with the positive impact of the exchange rate depreciation on custom duties and other taxes, are expected to raise general government tax revenue to at least 11.3 percent of GDP. This somewhat cautious revenue forecast recognizes the uncertainties of the exact impact of the reform effort. In this light, we intend to use the bulk of any domestic revenues or external financial support over and above the budget projections to raise pro-poor expenditure and reduce domestic financing. Expenditure will be contained at about 19.8 percent of GDP with recurrent expenditure maintained at 9.1 percent and capital expenditure rising to 10.8 percent. The overall deficit, excluding grants, is targeted at 6.5 percent of GDP. We also intend to further our efforts to enhance expenditure management.

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Public sector

9. We will continue to monitor closely the domestic borrowing of the public enterprises and agencies. An inter agency committee is now monitoring enterprise borrowing on a monthly basis. The limit on the aggregate domestic financing of public enterprises and agencies will be set at 10 billion birr or 2.1 percent of GDP in 2010/11. We believe this target is consistent with overall credit and money growth that allows for sufficient credit expansion to the private sector and avoids a build-up of excess demand pressures on the economy. Domestic fuel prices have been adjusted monthly since October 2008 with prices set somewhat higher than import costs to enable the Oil Stabilization Fund to repay its accumulated debt to the banking system.

Monetary policy

10. We have recently adopted reserve money as our nominal anchor. The objective of monetary policy is to maintain inflation in the single digits and promote a remonetization of the economy to foster credit to the productive sectors, thereby stimulating growth and employment. To support these objectives, we aim to absorb the remaining excess liquidity in the banking system by end-2010 and will abolish the exceptional bank-by-bank credit ceilings as soon as possible thereafter, subject to confirmation that inflation remains in the single digits. We are committed to achieving positive real interest rates on deposits. We aim to contain reserve money growth in the single digits in 2010/11, aided by very low credit from the NBE to government. We are working to refine our liquidity management capability, including through a move to weekly T-bill auctions and introduction of 1 year T-bills. Broad money is projected to grow by 35–40 percent in 2010/11, on stronger deposit growth and credit demand from the private sector. We are also strengthening our oversight of the financial system. We will also modernize our reserve and liquidity requirements regulations by early 2011.

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Exchange rate and external policy

11. The government is committed to adjusting the nominal exchange rate in order to preserve external competitiveness and to continue to gradually rebuild official external reserves. For 2010/11, a further rebuilding of net external reserves by US$210 million to 2.3 months of imports is targeted. Exchange rate adjustment on September 1, 2010, has brought Ethiopia’s real effective exchange rate close to that consistent with external equilibrium. We have not introduced, nor will we introduce, any new, or intensify any existing, exchange restrictions.

12. Avoiding an unsustainable accumulation of public external debt is a key objective of the government economic policy. In September 2010, the government contracted for non-concessional external loans of US$296 million to finance hydropower infrastructure with a further US$700 million planned later in 2010/11 for infrastructure and productive investments. These borrowings are consistent with a cautious approach to non-concessional debt and maintaining our low risk external public debt rating. The government is committed to maintaining effective oversight over the evolution of public sector external debt, including that incurred by the public enterprises, and will update its debt management strategy. While the debt sustainability analysis provides a reassuring assessment of Ethiopia’s low external debt distress risk, we will continue to keep debt levels under close review and we will make every effort to ensure that new borrowing is contracted on concessional terms and that large foreign-financed projects are subject to rigorous economic appraisals before being approved.

IV. Medium-Term Outlook

13. Our new 5 year Growth and Transformation Plan has recently been finalized and submitted to parliament for approval. It covers the period 2010/11-14/15 and has benefitted from broad consultations across all segments of the population as well as with development partners. The plan seeks to achieve at least an 11 percent real growth rate, aiming to enhance social development and achieve the MDGs. We aim to maintain inflation in the single digits, preserve macroeconomic stability, and ensure our public debt remains sustainable. Agriculture will continue to be the engine of growth and the main focus of efforts to improve productivity and rural income growth, but aim to have the industrial sector play a key role in economic development. Large public investments in transportation and energy infrastructure are planned. A high case scenario aims at 14.9 percent real growth. While these objectives are ambitious, we believe they are achievable with greater mobilization of domestic savings and donor financial support.

V. National Account Statistics

14. We are committed to improving the quality of macroeconomic statistics, in particular the compilation methodologies and institutional arrangements for the national accounts. We have adopted and are implementing an action plan to strengthen national accounts statistics. We will seek further technical assistance support from the IMF Statistics department and other relevant external statistical agencies to implement this plan.

VI. Safeguards and Reporting

15. The 2001 safeguards assessment was updated in December 2009 and identified some issues relating to the oversight of the external and internal audit functions. In response, the NBE established a functional Audit Committee and set up an independent review of monetary data submitted for program monitoring purposes by the NBE’s internal auditors.

16. We continue to benefit from the policy and technical advice of IMF staff and wish to maintain close engagement. To help ensure regular and close surveillance by IMF staff, we are committed to submitting economic and financial data to the Fund, as laid out in Table 3.

Table I.3.

Ethiopia: Data Reporting

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1

At the time of the 2010 Article IV consultation staff estimates suggested that the exchange rate in 2010 Q1 was overvalued by about 7 percent, using the equilibrium real exchange rate approach, and by about 10 percent, using the macroeconomic balance approach (Box 4, IMF Country Report No. 10/175). The size of the devaluation effected in September was greater than staff estimates, but is broadly appropriate given the standard errors of the estimates, and that external reserves remain well below 3 months of imports.

2

The government adopted a tax reform strategy in early 2010.

3

Monetization refers to an increase in the broad money to GDP ratio, while financial deepening refers to the decline in the proportion of currency in broad money.

4

Consultations with various stakeholders are ongoing. A complete document, which serves as a PRSP, is expected to be finalized in November. Once the document has been officially adopted, Fund and World Bank staff will prepare a Joint Staff Advisory Note.

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Cover IMF Staff Country Reports
The Federal Democratic Republic of Ethiopia: Second Review of the 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 2010: Issue 339
Publisher:
International Monetary Fund
ISBN:
9781455212637
ISSN:
1934-7685
Pages:
38
DOI:
https://doi.org/10.5089/9781455212637.002
Figure 1.

Ethiopia: Official and Parallel Exchange Rates

(Birr per US$)
Figure 2.

Ethiopia: Treasury Bill Outstanding and Yield
Figure 3.

Selected Sub-Saharan African and Asian Countries: Broad Money-to-GDP
Figure 4.

Ethiopia: Reserve Money Growth and Excess Reserves