The Federal Democratic Republic of Ethiopia Staff Report for the 2016 Article IV Consultation—Informational Annex
Author: International Monetary Fund. African Dept.
Publication Date:
04 Oct 2016
eISBN:
9781475543643
Language:
English
Keywords:
ISCR; CR; export; deficit; debt; Ethiopia; government; update assessment; NBE's autonomy; SDR equivalent; fund request; nominal exchange rate; Government finance statistics; Financial statements; Exchange rate arrangements; Tax administration core functions
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The newly issued five-year second Growth and Transformation Plan (GTP II) envisages continued high growth and public infrastructure investment, while placing a greater emphasis on private sector development and foreign direct investment (FDI), competitiveness, and export-oriented industrialization. A major drought and deterioration of the external environment resulted in a 2015/16 growth slowdown to an estimated 6.5 percent. Stability-oriented macroeconomic policies and effective policy responses, including food imports, to mitigate the drought's social costs kept inflation low and the budget deficit on target. The current account, however, posted for a second year a deficit above 10 percent of GDP.

Abstract

The newly issued five-year second Growth and Transformation Plan (GTP II) envisages continued high growth and public infrastructure investment, while placing a greater emphasis on private sector development and foreign direct investment (FDI), competitiveness, and export-oriented industrialization. A major drought and deterioration of the external environment resulted in a 2015/16 growth slowdown to an estimated 6.5 percent. Stability-oriented macroeconomic policies and effective policy responses, including food imports, to mitigate the drought's social costs kept inflation low and the budget deficit on target. The current account, however, posted for a second year a deficit above 10 percent of GDP.

Relations with the Fund

(As of July 31, 2016)

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Latest Financial Arrangements:

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Formerly PRGF.

Overdue Obligations and Projected Payments to Fund2

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of Multilateral Debt Relief Initiative (MDRI):

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Implementation of Catastrophe Containment and Relief (CCR): Not Applicable

As of February 4, 2015, the post-Catastrophe Debt Relief Trust has been transformed to the Catastrophe Containment and Relief (CCR) Trust.

Exchange Rate Arrangement

The de-facto exchange rate arrangement is classified as a crawl-like arrangement. The authorities describe their exchange rate regime as a managed float with no predetermined path for the exchange rate. The pace of depreciation of the nominal exchange rate, however, has been stable. The NBE continues to supply foreign exchange to the interbank market based on plans prepared at the beginning of each fiscal year, which take into account estimates of supply and demand. The transaction-weighted average interbank market exchange rate as of August 5, 2016, is Br 21.8943 = US$1.

Ethiopia maintains four restrictions on payments and transfers for current international transactions, which relate to: (i) the tax certification requirement for repatriation of dividend and other investment income; (ii) restrictions on repayment of legal external loans and suppliers of foreign partners credits; (iii) rules for issuance of import permits by commercial banks; and (iv) the requirement to provide a clearance certificate from the NBE to obtain import permits. These restrictions are inconsistent with Article VIII, Section 2(a), of the IMF’s Articles of Agreement and remain unapproved. In addition, In February 2016, the authorities introduced a regulation providing for the prioritization of foreign exchange for certain import items and payments. Staff is in the process of assessing this and other measures introduced by the authorities with respect to their implications to Ethiopia’s obligations under Article VIII, Section 2(a) and 3.

Safeguards Assessment

The National Bank of Ethiopia (NBE) was subject to an update safeguards assessment in 2009 (previous assessment was completed in 2001). The update assessment found improved financial reporting and internal audit practices. However, weaknesses were noted and recommendations primarily focused on strengthening oversight of risks and controls, improving accounting records and external audit process, and legal amendments to address safeguards shortcomings in the Law. Since 2009, the NBE has further strengthened its internal audit function through capacity building, and has implemented the outstanding actions of the 2007 external quality assessment. Some progress has been reported on the outstanding safeguards recommendations related to legal amendments needed to strengthen NBE’s autonomy. While there have been improvements in financial statement disclosures, they still do not fully comply with International Financial Reporting Standards. The assessment also noted that a full set of the audited financial statements is usually available to the public in hard copy, but the NBE does not publish the financial statements on its website.

Article IV Consultation

Ethiopia is on the standard 12-month consultation cycle, in accordance with the Decision on Article IV Consultation Cycles (Decision No, 14747-(10/96), 9/28/2010). The last consultation was concluded on September 21, 2015.

Technical Assistance (2015–present)

Table 1.

Ethiopia: Fund Technical Assistance

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Resident Representative

The IMF had a resident representative in Addis Ababa since 1993 to October 2015, when the term of the last Resident Representative ended. Since then, the office has been staffed by local employees.

Joint Management Action Plan, July 2016–June 2017

(As of July 31, 2016)

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Statistical Issues

(As of July 31, 2016)

I. Assessment of Data Adequacy for Surveillance

General: Data provision is broadly adequate for surveillance. However, in 2015/16 some data reported to the Fund were subject to considerable delays and revisions. The existing data weaknesses reflect capacity constraints and the authorities are seeking to address them through technical assistance (TA).

National Accounts: Deficiencies in the source data and compilation practices affect the accuracy and reliability of the GDP statistics. Weaknesses are particularly evident in respect to the estimation of private consumption, saving, investment, and fixed capital formation. The statistical discrepancies between the expenditure categories and output remain significant. Information provided to the Fund is subject to discrepancies. Policymaking and surveillance would benefit from improving national accounts statistics. The authorities have been receiving TA in this area from AFRITAC East.

Government finance statistics: Despite some improvements, the government fiscal statistics continue to be affected by shortcomings in terms of coverage and outdated reporting standards. Data for the general government are based on Government Finance Statistics Manual (GFSM) 1986. Establishing a framework for compiling and disseminating Government Finance Statistics (GFS) and public sector debt statistics that meet GFSM 2001 is an urgent task (in October, the authorities will receive TA in this area from AFRITAC East). Lack of consolidation of extra-budgetary funds into comprehensive fiscal reporting hinder proper assessment of the Government’s fiscal stance, savings, and borrowing requirement. Current financial statements of public enterprises and other information on their operations is not available.

Monetary statistics: Monetary survey data for commercial banks are subject to revisions and frequent delays in the reporting to the Fund.

Financial statistics: Aggregate set of Financial Soundness Indicators (FSIs) neglect many core indicators. In addition, information gaps, e.g.: commercial banks’ income statements, information on distribution of non-performing loans (NPLs) by sector, NPL provisions, maturity of credit, net open position, have implications for conducting an assessment of financial sector risks.

Balance of payments: Balance of payments data require improvements in coverage, valuation, timing, and classification of current account transactions. Financial and capital account transactions are also incompletely covered. Data on FDI is based on an estimation method developed by the NBE. An exploratory survey needs to be conducted to verify the actual investment made in Ethiopia and to establish the universe of the enterprises with private cross border capital. A survey on cross-border financial flows and stocks for the private sector should also be undertaken. Full implementation of BPM6 methodology is recommended.

II. Data Standards and Quality

Ethiopia participates in the General Data Dissemination System (GDDS) and metadata were partially updated in early 2008. No Report on the Observance of Standards and Codes has been completed.

The Federal Democratic Republic of Ethiopia: Table of Common Indicators Required for Surveillance

(As of July 31, 2016)

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Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

The authorities provide aggregate balance sheet items but not detailed enough for proper financial stability analysis.

Both market-based and officially determined, including discount rates, money market rates, and rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government and local governments.

Including currency and maturity composition.

Reflecting capacity constraints which the authorities are addressing through technical assistance.

2

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

3

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence, these two amounts cannot be added.

4

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

5

The MDRI provided 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

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Cover IMF Staff Country Reports
The Federal Democratic Republic of Ethiopia: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 322
Publisher:
International Monetary Fund
ISBN:
9781475543643
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781475543643.002