The Federal Democratic Republic of Ethiopia: Requests for Purchasing Under the Rapid Financing Instrument, Debt Relief Under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-year Arrangements Under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access Under the Extended Fund Facility Arrangement—Press Release; Staff Report; and Statement by the Executive Director for the Federal Democratic Republic of Ethiopia
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International Monetary Fund. African Dept.
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Publication Date:
06 May 2020
eISBN:
9781513542935
Language:
English
Keywords:
ISCR; CR; financing; emergency financing request; pandemic; balance of payments pressure; IMF lending tracker; financing gap; reform agenda; economic reform program; inflation dynamics; Debt service; Debt relief; COVID-19; Global; health sector support package; IMF staff; donor financing; IMF Staff; NBE liquidity support; Imports
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Requests for Purchasing under the RapidFinancing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended CreditFacility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

Abstract

Requests for Purchasing under the RapidFinancing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended CreditFacility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

Context

1. Before the COVID-19 pandemic, the ECF-EFF arrangements had gotten off to a promising start. The authorities met all but one performance criterion for the first review of the ECF-EFF arrangements and are on track toward meeting most structural benchmarks.1 Moreover, a pick-up in the pace of depreciation has contributed to narrowing the spread between the official and parallel exchange rates from 35 percent in mid-November to 27.5 percent as of April 22; the fiscal deficit in the first half of the fiscal year was narrower than programmed amid strong revenues; SOE debt has continued to edge down as a share of GDP as of December 2019; the newly-established T-bill auctions are progressing well; and the NBE has kept monetary conditions tight, though inflation remains close to recent peaks on the back of rising food prices.

2. A decisive policy response has slowed the pandemic, but the virus is spreading, and national elections had to be postponed. At the outset of the global pandemic, the authorities enforced temperature screening at ports of entry and strengthened epidemic response coordination, including by designating isolation and treatment centers and training rapid response teams. When the first case of COVID-19 was identified in Ethiopia on March 12, and the virus started to spread, the authorities closed schools, banned large gatherings, and announced social distancing. In addition, travelers entering Ethiopia became subject to a mandatory 14-day quarantine. As of April 23, 116 cases had been identified—including some without known contacts with foreigners— and three people have died. The authorities indicated that a new timeline for the elections— previously scheduled for August 29—will be announced once the pandemic subsides.

3. The authorities have requested emergency financing to help deal with the unfolding crisis. They have requested a purchase under the Rapid Financing Instrument (RFI)—to meet urgent balance of payments needs arising from both the external shock and the needed fiscal policy response to the crisis—as well as debt relief under the Catastrophe Containment (CC) window of the Catastrophe Containment and Relief Trust (CCRT). Given their request for RFI financing, and to remain within the GRA normal access limits, the authorities have requested rephasing of future disbursements/purchases under the ECF-EFF arrangements and reducing the second and third EFF purchases, as well as the overall access (by a total of SDR 150.35 million; 50 percent of quota), under the EFF arrangement. In this context, they reaffirmed their commitment to the objectives under the ECF-EFF arrangements. To further free up resources for the COVID-19 response, they also intend to request debt service relief from official bilateral creditors under the G20 initiative.

Outlook and Risks AMID COVID-19

4. The impact of the pandemic on economic activity is projected to be large but temporary. It was initially felt through weakening demand for hospitality services and air transport, with Ethiopian Airlines suspending passenger flight routes and reporting sharp losses. Exports of flowers and manufacturing goods—as well as commodities—such as coffee and oil seeds—were hit hard by falling global demand and/or declining prices. Nevertheless, given Ethiopia’s limited trade integration and exposure to short-term financial flows, the bulk of the impact on activity is expected to result from domestic containment measures as well as lower remittances and foreign direct investment. While the largely rural and subsistence-based agricultural sector will be less affected, secondary and tertiary activities—especially tourism and hospitality services—are expected to be hit across the board. Given the late spread of the pandemic to Ethiopia, the shock would materialize mostly in Q2 and Q3 of 2020—spreading the negative impact on GDP across two fiscal years. Staff revised growth projections from 6.2 and 6.1 percent to 3.2 and 3.7 percent in 2019/20 and 2020/21, respectively, despite significant policy support. The recovery would start gradually in Q4 2020, with real GDP remaining below pre-shock projections throughout the medium-term.

5. External accounts are expected to weaken materially. The current account is projected to strengthen modestly this fiscal year amid a significant decline in imports of goods and services on the back of weak domestic demand and lower project inflows. Falling remittances and the concurrent decline in exports—led by air travel—would less than offset the import contraction amid a substantial strengthening in the terms of trade (including from higher coffee prices and lower global oil prices). However, the overall balance of payments is projected to weaken, on the back of a large drop in foreign direct investment, including due to privatization delays, in part due to the pandemic. As a result, an additional financing gap of US$1.7 billion has emerged for 2019/20 (Text Table 1). In 2020/21, both exports and imports are expected to grow on the back of an incipient recovery, resulting in a deterioration in the trade balance, but an improved services balance and stronger remittances will mitigate the impact on the current account. Privatization revenues will help contain the additional financing gap, which is projected to reach US$731 million.

Text Table 1.

Ethiopia: Additional Balance of Payments Needs Relative to Program Approval

(In millions of U.S. dollars)

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Source: IMF staff estimates.

Reflects a correction in staff’s baseline on the timing of principal repayment on one of the underlying debt.

In 2019/20, reflects a move from below the line to above the line in the Balance of Payments.

6. The shock could also worsen bank asset quality and intensify liquidity shortages. Asset quality at the Commercial Bank of Ethiopia (CBE) remains a concern amid large SOE exposures. While deposit funding in the banking system remains stable to date, both private and public banks are now facing increasing calls from borrowers to delay loan payments, especially in sectors directly affected by the pandemic. This could translate into weakening asset quality and intensified liquidity pressures going forward.

7. Risks are tilted to the downside. A prolonged COVID-19 outbreak in Ethiopia, including protracted containment measures and uncertainty about the intensity and duration of the pandemic, could further deteriorate the outlook, impair balance sheets, threaten debt sustainability, and slow the recovery.2 Widespread social discontent and political instability related to the crisis fallout could complicate the adjustment. Ethiopia is also affected by the worst locust infestation to hit East Africa in decades, though the impact so far seems to be mainly in pastoral regions that are not major food-producing areas. Should it intensify and spread to major crop-producing regions, food shortages could deepen and reignite inflation. Moreover, political instability in the run-up to the elections could delay the implementation of reforms.

Economic Policies to Combat the COVID Crisis

Key policy objectives in the near term include (i) providing the health sector with sufficient resources to combat the pandemic, (ii) augmenting the spending envelope, and allowing for a temporarily wider fiscal deficit, to support the economy and protect the most vulnerable during the downturn; (iii) accelerating the pace of exchange rate depreciation to support activity; (iv) addressing tight liquidity conditions in commercial banks to prepare for a potential deterioration in asset quality; and (v) progressing with key commitments under the ECF-EFF arrangements.

A. Fiscal Policy

8. The authorities are loosening the fiscal stance temporarily to combat the pandemic and support the most vulnerable. The initial response included a health sector support package— including to fund medical supplies, facilities, and to cut trade taxes for medical goods—amounting to 5 billion birr (US$154 million; 0.15 percent of GDP) in spending (Box 1). The package is expected to be funded by reallocating budgetary funds away from uncommitted investment projects. On April 3, the authorities announced that additional spending needs during the remainder of the fiscal year would total $1.64 billion (1.6 percent of GDP). They indicated that the bulk of the outlays would be channeled toward emergency food distribution (0.6 percent of GDP) and health sector support (0.4 percent of GDP).3 With tax revenues declining due to the downturn, and despite higher-than-expected grants, the 2019/20 general government deficit would increase by 1½ percent of GDP to 4 percent of GDP. To partially offset the impact of the wider deficit on public sector debt, the authorities should consider making space by constraining spending of SOEs that are not engaged in implementing emergency response measures to the pandemic.

Economic Policy Response to COVID-19

The authorities have established an inter-ministerial task force chaired by the Prime Minister to coordinate preventative and response measures to mitigate the impact of COVID-19. They announced an initial package to bolster healthcare spending in early March, followed by a set of measures aimed at stabilizing the economy at end-March. The authorities have also published an estimate for the total cost of the pandemic for the remainder of the fiscal year.

Initial healthcare measures. The authorities announced a 300-million-birr package to bolster healthcare spending (funding for health facilities, trade tax cuts for medical imports) in early March. On March 23, the package was augmented to 5 billion birr (US$154 million or 0.15 percent of GDP), to be funded largely through reallocations within the budget.

Initial stabilization measures. The authorities announced a set of measures to counter the economic impact of COVID-19 on March 27. It includes:

  • Tax exemptions and preferential access to currency for importers of materials and equipment to be used in the prevention and containment of COVID-19.

  • NBE liquidity support of 15 billion birr (US$457 million or 0.45 percent of GDP) to private banks by redeeming NBE bills (associated with the abolished “27 percent rule”) to facilitate debt restructuring.

  • Increased mobile banking transfer limits at the Commercial Bank of Ethiopia to limit in-person transactions.

  • Intensified enforcement action against businesses found to be illegally increasing consumer prices.

Spending measures for the remainder of 2019/20. On April 3, the authorities announced that the multi-sector emergency response plan to be implemented over the next three months will require US$1.64 billion in funding (about 1.6 percent of GDP). The funds are expected to be allocated as follows:

  • US$635 million (0.6 percent of GDP) for emergency food distribution to 15 million individuals vulnerable to food insecurity and not currently covered by the rural and urban PSNPs.

  • US$430 million (0.4 percent of GDP) for health sector response under a worst-case scenario of community spread with over 100,000 Covid-19 cases of infection in the country, primarily in urban areas.

  • US$282 million (0.3 percent of GDP) for provision of emergency shelter and non-food items.

  • The remainder (US$293 million, 0.3 percent of GDP) would be allocated to agricultural sector support, nutrition, the protection of vulnerable groups, additional education outlays, logistics, refugee support and site management support.

9. Staff supports relaxing the fiscal stance to address the pandemic. Tax revenues are projected to drop by nearly ¾ percent of GDP relative to 2018/19 due to the severity of the shock. This is expected to more than offset the revenue overperformance in the first half of the fiscal year. While staff expects grant receipts to come in ¾ percent of GDP higher than previously anticipated, higher spending and lower tax revenues are projected to result in a fiscal financing gap of 1.4 percent of GDP, to be financed through budget support under the RFI (0.4 percent of GDP) as well as unidentified financing from donors and domestic banks (1 percent of GDP). Staff emphasized the need to continue reassessing spending needs and to prepare for potential SOE-related contingent liabilities. Staff welcomed the authorities’ commitment to a transparent and accountable delivery of these policy measures, including through an independent and robust ex-post audit of how emergency relief funds are spent.

10. Fiscal consolidation is expected to resume in 2021/22. The authorities remain committed to introducing measures to raise tax revenues for 2020/21 by 1 percentage point of GDP. In the event that the pandemic renders this difficult, staff would support delaying implementation until the crisis abates and then introducing them in a supplementary budget law. Spending needs to counter the pandemic are expected to amount to 0.9 percent of GDP. With slightly higher grants than previously projected (0.1 percent of GDP), the deficit would increase to 3½ percent of GDP, 1¼ percent of GDP higher than anticipated at the approval of the ECF-EFF arrangements in December. The deficit is projected to return to its previously projected path by 2021/22.

11. Public debt is projected to remain sustainable although downside risks and liquidity pressures have increased. The authorities aim to strengthen Ethiopia’s debt position to help improve the external debt distress rating to “moderate” over the course of the ECF-EFF arrangements. However, downside risks have increased. The authorities have made progress on the first phase of reprofiling but have yet to finalize it (it is included in the baseline scenario). Progress on the second phase is uncertain, but staff emphasized the need to get specific and credible assurances ahead of the first review, taking into account the implications of the COVID-19 shock for the needed relief. The joint World Bank–IMF Debt Sustainability Analysis (DSA) shows that debt is sustainable. However, liquidity pressures to service external debt have increased, the room to absorb shocks is now smaller than at program approval due to lower export projections, and a large or more persistent impact of the COVID-19 shock than presently assumed could further worsen the outlook. On the domestic front, public debt remains vulnerable to contingent liability shocks, including those stemming from public banks. Despite severe losses due to COVID-19, Ethiopian Airlines intends to continue servicing its debt and does not have plans to seek government support.

Text Table 2.

Ethiopia: Additional Fiscal Needs in 2019/20 and 2020/211

(In percent of GDP)

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Sources: Ethiopian authorities and IMF staff estimates and projections.

Government financial statistics are reported by the authorities based on GFSM 1986.

Excluding special programs (demobilization and reconstruction).

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

Includes prospective donor financing to close the financing gap.

Reflects privatization receipts net of financial investments or recapitalization on SOEs.

Including grants and excluding requested IMF RFI.

B. Monetary, Exchange Rate, and Financial Sector Policies

12. Staff agrees with the need to ensure adequate commercial bank liquidity buffers. The NBE injected 15 billion birr (0.45 percent of GDP) into private banks in March by redeeming NBE bills (Box 1). The measure aimed at addressing tight liquidity conditions that had arisen prior to COVID-19 and aids banks in repaying some of the 1-month loans previously provided through the Individual Bank Lending Facility—introduced in February—for the same purpose. The NBE is also planning to extend 16 billion birr (0.5 percent of GDP) in liquidity to the CBE. Staff supported the decision to build adequate liquidity buffers but emphasized the need to ensure that NBE lending to the CBE reflects the terms available to private banks and avoids implicit solvency support. Structural weaknesses in CBE’s balance sheet should be dealt with through a comprehensive solution that addresses debt sustainability challenges at its SOE borrowers.

13. Staff urged the authorities to closely monitor the impact of COVID-19 on financial stability. The authorities are encouraging banks to reschedule loan repayments, currently on a case-by-case basis, but have not changed loan classification rules. Staff recommended close monitoring of liquidity positions, loan-to-deposit ratios, and asset quality. In particular, there is an urgent need to step up monitoring of deposits and bank liquidity, as well as frequent supervisory review and reassessment of banks’ loan portfolios during the crisis. Staff also emphasized the need to consider policy options to deal with potential further bank liquidity shortages, such as strengthening the framework for emergency lending and adjusting reserve requirements.

14. Continued vigilance is needed to ensure that the single-digit inflation objective will be achieved as planned. While it is difficult to predict how the COVID-19 shock will affect the inflation trajectory, staff and the authorities agreed that it will be important to adjust the policy stance as needed to ensure that the single-digit inflation objective can be achieved once the crisis abates. The planned liquidity injections (discussed above) aim at achieving financial stability objectives but will also expand reserve money beyond the levels projected at the time of the ECF-EFF approval. Consequently, and also in view of the upward revision of the near-term inflation path—reflecting higher-than-expected inflation outturns in recent months—a significant tightening of policy will be needed when conditions normalize to bring inflation down to the authorities’ single-digit objective as anticipated at ECF-EFF approval. In the meantime, first-round effects from the crisis should be accommodated.

15. Staff urged the authorities to increase the pace of exchange rate depreciation. Increasing the pace of depreciation would help reduce real overvaluation and act as a shock absorber during the crisis. The authorities underscored continued commitment to closing the gap with the parallel rate to eventually move to a market-clearing exchange rate but signaled a need to continue moving with caution.

16. The authorities remain committed to the objectives of the ECF-EFF arrangements. While much of the focus in the near term will be on responding to the fallout of the crisis, the authorities underscored that they will continue to further the reform agenda. They highlighted their commitment to gradually ending financial repression by increasing T-bill issuances, ceasing new NBE financing to the Development Bank of Ethiopia (DBE) in June, and gradually reducing direct NBE advances to the government. They also remain committed to implementing the FX roadmap to be finalized by end-April to lay the groundwork for an eventual move to a market-clearing exchange rate. Dealing comprehensively with debt sustainability challenges in the SOEs to strengthen bank balance sheets will also be key. Finally, the authorities remain committed to strengthening governance under the ECF-EFF arrangements.4

Modalities of Support

17. The authorities request a purchase under the RFI equivalent to 100 percent of quota, provided that the Executive Board approves the request for a rephasing of access under the ECF-EFF arrangements and a reduction of access under the EFF arrangement. Current and prospective access under Ethiopia’s existing ECF arrangement does not leave any space for borrowing under the Rapid Credit Facility (RCF), given the hard cap on cumulative exceptional access to PRGT resources. Given their urgent needs, the authorities are therefore requesting a purchase under the RFI regular window in the amount of 100 percent of quota (SDR 300.7 million, about US$ 415 million). They have also requested that access be made available entirely as budget support. The urgent balance of payments difficulties that led the authorities to request access under the RFI were caused primarily by the COVID-19 shock. The purchase would provide support to address these needs and would help avoid a sharper drop in international reserves.

18. Given their request for the RFI purchase, and to remain within the normal General Resources Account (GRA) access limits, the authorities request a rephasing of access under the ECF-EFF arrangements and a reduction of access under the EFF arrangement (by SDR 150.35 million; 50 percent of quota). Under the applicable policies on annual access limits for financing via the GRA, Ethiopia’s access in the first 12 months since the approval of the ECF-EFF arrangements is limited to 145 percent of quota (including prospective purchases). With 90 percent of quota in EFF access already approved or available in this period, an additional 100 percent of quota in RFI access can only be accommodated through a reduction of access for the second and third disbursements under the EFF arrangement, and the resulting reduction in overall access. The requested reduction in access would bring total access to GRA resources under the EFF arrangement to 250 percent of quota. The authorities are also requesting rephasing of future disbursements/purchases (the third and subsequent ECF-EFF disbursements), given delays in the first review discussions resulting from COVID-19 and to comply with limits on annual access to the GRA, which will allow to accommodate the RFI purchase within the normal GRA annual access limit.

19. The authorities also request debt relief under the CCRT. Ethiopia is PRGT eligible and meets the income threshold with GNI per capita of US$790 in 2018, below the threshold of US$1,175. Ethiopia has eligible debt service of SDR 8.56 million falling due during the initial period of debt service relief until October 13, 2020 (Table 5). Its eligible debt service falling due amounts to SDR 14 million between the CCRT request approval date and April 13, 2022 (the maximum potential period of debt service relief, subject to availability of resources and decisions of the Executive Board).

20. Ethiopia’s capacity to repay the Fund is assessed to be adequate. Considering the proposed access under the RFI and the modified access under the ECF-EFF arrangements, debt service to the Fund will peak at 0.3 percent of GDP, 2.9 percent of exports, and 1.7 percent of revenues in 2027/28. These ratios are broadly unchanged compared to those at the time of ECF-EFF approval and compare favorably with other high access programs in recent years. However, the outstanding Fund credit to gross reserves ratio would now peak at 41.3 percent in 2021/22, compared to 32.7 percent at the time of the approval of the ECF-EFF arrangements. The authorities will establish a memorandum of understanding between the central bank and the ministry of finance, that clarifies responsibilities for timely servicing of the financial obligations to the IMF.

21. An updated safeguards assessment of the NBE is underway. Initial findings suggest that amendments to the NBE Law are needed to address governance and autonomy weaknesses, strengthen oversight, and to improve financial reporting and external audit arrangements. Moreover, fiscal dominance has weakened the financial position of the central bank, the preparation of annual financial statements is significantly delayed, and the external auditor has an unusually long tenure, which raises concerns about their independence as well as about audit quality (in light of unmodified (clean) audit opinions despite shortcomings in the financial reporting practices in past years). The framework for emergency liquidity support to banks is also underdeveloped. Staff has recommended to the authorities to take steps to address these shortcomings.

Staff Appraisal

22. Ethiopia faces a pronounced economic slowdown and an urgent balance of payments need as a result of the pandemic. COVID-19 is affecting Ethiopia through both global spillovers and domestic containment measures. Economic growth projections have been revised down substantially for this fiscal year and next.

23. Staff welcomes the swift policy response to contain the virus and limit the human and economic fallout. Beyond strengthening the health system’s ability to respond to the pandemic, the authorities have moved decisively to contain the virus and have announced a set of measures to limit the pandemic’s impact on the economy and to support vulnerable households.

24. Staff supports expanding the fiscal deficit on a temporary basis, within the framework of a continued commitment to strengthen debt sustainability. The increase in the spending envelope is appropriately targeted toward dealing with the fallout of the crisis, and the authorities highlighted that these needs are temporary. The authorities should continue their efforts to finalize the first phase of debt relief, and secure credible assurances for the second phase, ahead of the first review of the ECF-EFF arrangements.

25. Strengthening bank liquidity will help prepare for the expected slowdown. Targeted liquidity provision to ensure adequate bank liquidity buffers is needed in the face of the crisis. Structural weaknesses in the systemically important bank’s balance sheet should be dealt with through a comprehensive solution that addresses debt sustainability challenges in its state-owned enterprise borrowers.

26. The authorities should continue to gear monetary policy toward achieving the single-digit inflation objective. While it is difficult to predict how the COVID-19 shock will affect the inflation trajectory, it will be important to adjust the policy stance as needed to ensure that the single-digit inflation objective can be achieved.

27. Staff also welcomes the authorities’ continued commitment to the objectives of the ECF-EFF arrangements. Discussions on the first review of the arrangement have been delayed amid the heightened uncertainty. While a shift toward proactively dealing with the fallout of the crisis is needed in the near term, the authorities should continue working toward their commitments under the ECF-EFF arrangements and implement the reform agenda as conditions permit.

28. Staff supports the following requests from the authorities:

  • Request for a purchase under the Rapid Financing Instrument in the amount of SDR 300.7 million (100 percent of quota), provided that the Executive Board approves the request for a rephasing of the ECF-EFF arrangements. Staff support is based on the severity of the impact of the pandemic, the authorities’ existing and prospective policies to address this external shock, the urgent balance of payments need, and the authorities’ policy commitments to the objectives of the ECF-EFF arrangements. Staff also supports the authorities’ request to use this financing as budget support as the additional financing need results primarily from outlays on healthcare and social protection to face the COVID-19 shock.

  • Rephasing of access under the ECF-EFF arrangements and reduction of access under the EFF arrangement (by SDR 150.35 million; 50 percent of quota). The rephasing of access under the ECF-EFF arrangements, and the reduction of access under the EFF arrangement, would allow for an RFI purchase up to the maximum limit to deal with Ethiopia’s urgent balance of payments needs while remaining within the normal GRA access limits.

  • Request for debt relief under the CCRT. Ethiopia is eligible for the debt relief and staff assesses that Ethiopia faces exceptional balance of payments needs stemming from the impact of COVID-19 and is pursuing appropriate macroeconomic policies to address the disaster.

Table 1.

Ethiopia: Selected Economic and Financial Indicators, 2017/18–2024/25

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Sources: Ethiopian authorities and IMF staff estimates and projections.

For 2015/16 and earlier, based on December 2011 base; for all subsequent data and projections, the base is December 2016.

Based on data from Central Statistical Agency (CSA), except for the current account balance, which is based on BOP data from National Bank of Ethiopia (NBE).

Public and publicly-guaranteed external debt, which includes long-term foreign liabilities of the NBE and external debt of Ethio-Telecom.

Table 2a.

Ethiopia: General Government Operations, 2017/18–2024/251

(Millions of birr)

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Sources: Ethiopian authorities and IMF staff estimates and projections.

Government financial statistics are reported by the authorities based on GFSM 1986.

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 the African Development Bank.

Includes prospective donor financing to close the financing gap.

Reflects privatization receipts net of financial investments or recapitalization on SOEs.

Including grants and excluding requested IMF RFI.

Table 2b.

Ethiopia: General Government Operations, 2017/18–2024/251

(Percent of GDP)

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

Government financial statistics are reported by the authorities based on GFSM 1986.

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 the African Development Bank.

Includes prospective donor financing to close the financing gap.

Reflects privatization receipts net of financial investments or recapitalization on SOEs.

Including grants and excluding requested IMF RFI.

Table 3.

Ethiopia: Monetary Survey and Central Bank Accounts, 2017/18–2024/25

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Sources: NBE and IMF staff estimates and projections.

Claims on the general government by the banking system less deposits of the general government with the banking system.

Table 4a.

Ethiopia: Balance of Payments, 2017/18–2024/25

(Millions of U.S. dollars)

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Sources: Ethiopian authorities and IMF staff estimates and projections.

Includes net borrowing by state-owned enterprises and NBE time deposits.

In 2023/24 and 2024/25, savings from debt reprofiling are shown in the residual financing gap for completeness.

The NBE definition for import coverage excludes food-aid and franco-valuta imports.

Table 4b.

Ethiopia: Balance of Payments, 2017/18–2024/25

(Percent of GDP)

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Sources: Ethiopian authorities and IMF staff estimates and projections.

Includes net borrowing by state-owned enterprises and NBE time deposits

In 2023/24 and 2024/25, savings from debt reprofiling are shown in the residual financing gap for completeness.

Table 5.

Ethiopia: Debt Service to the Fund Eligible for Debt Relief, May 2020–April 2022

(In SDR)

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Source: IMF, Finance Department.

Effective from the date of approval by the Executive Board of Ethiopia’s request for debt relief under the CCR Trust. Th e first tranche is applicable to eligible debt service up to October 13, 2020. The second tranche is contingent on adequate financing for the Trust.

Table 6.

Ethiopia: Financial Stability Indicators, 2012/13–2018/19

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Sources: National Bank of Ethiopia, provided to IMF staff during the mission.

The average capital used to calculate the ROE execludes retained earning and profit & loss.

Total income comprises gross interest income and gross non-interest income.

Gross income comprises net interest income and total non-interest income.

Customer deposit includes time, current and saving deposits.

Table 7.

Ethiopia: Gross External Financing Needs

(Millions of U.S. dollars)

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Source: IMF staff estimates.

Includes guaranteed and non-guaranteed SOE loans and long-term debt of National Bank of Ethiopia (NBE).

Currently available on debt service to the Fund falling due until October 13, 2020. Subsequent relief is contingent on availability of financing for the Trust.

Represents reprofiling that could yield moderate risk of external debt distress rating during the ECF-EFF arrangements. Includes data corrections for the first phase. Specific and credible commitments for the second phase of debt reprofiling are expected by the first review of the arrangements.

In 2023/24, saving from debt reprofiling, reflected above the line in the balance of payments (BoP), is shown for completeness of information.

In 2019/20, the previously identified donor support has been moved above the line following its approval in April 2020. In 2020/21, reflects staff expectation on financing from the World Bank Development Policy Operation (previously included above the line in BoP).

Table 8a.

Ethiopia: Approved Schedule of Disbursements/Purchases Under the ECF and EFF Arrangements

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Source: IMF staff caculations.

Ethiopia’s quota is SDR 300.7 million.

Table 8b.

Ethiopia: Proposed Revised Schedule of Disbursements/Purchases Under the ECF and EFF Arrangements

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Source: IMF staff caculations.

Ethiopia’s quota is SDR 300.7 million.

Table 9.

Ethiopia: Capacity to Repay to the Fund, 2019/20–2034/35 1/

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Source: IMF staff estimates.

Year ending in June.

Including the proposed disbursements under the new ECF/EFF.

On March 26, 2020, the Executive Board approved changes to the Catastrophe Containtment and Relief Trust (CCRT) to enable Fund to provide relief on eligible debt service for its poorest and most vulnerable members for a period of up to two years from April 14, 2020 or the date of a country’s request for relief under this trust, whichever is later. The relief will be provided in two tranches. The first tranche is applicable to eligible debt service up to October 13, 2020. The second tranche is contingent on availablility of funding for the trust. Staff’s macroframework includes the amounts expected, but not yet guaranteed, under the second tranche.

Appendix I. Letter of Intent

April 24, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

700 19th St, NW

Washington, DC 20431

USA

Dear Managing Director:

Before the COVID-19 pandemic hit Ethiopia, our economy was healthy, and we had made good progress under the ECF-EFF arrangements with the IMF. When the shock materialized, the impact was felt well before our country’s first case was confirmed on March 13: export industries, including air travel, were under pressure, and demand for tourism and hospitality services plummeted. Our preliminary estimates suggest that projected growth rates could decline by around 3 percentage points during 2019/20. The impact for 2020/21 could be of a similar order of magnitude but would depend on how the pandemic evolves and corrective measures taken. While the impact on our largely rural and subsistence based agricultural sector should be limited, secondary and tertiary activities—especially tourism and hospitality services—are likely to be hit across the board. The risks to these projections are slanted heavily to the downside.

It is difficult at this stage to fully and accurately assess the impact of the pandemic on the budget. However, expenditures to directly fight COVID-19 in Ethiopia, as well as to support the economy and provide for affected households, are currently expected to entail additional spending of around 1.6 percent of GDP. These costs could rise if the crisis deepens. Specific measures include emergency food distribution ($635 million, 0.6 percent of GDP), health sector support ($430 million, 0.4 percent of GDP) and emergency shelter and non-food items ($282 million, 0.3 percent of GDP), with the remainder allocated to agricultural sector support, nutrition, the protection of vulnerable groups, additional education outlays, logistics, refugee support, and site management support.

The policies we are undertaking to address the crisis will make it necessary to delay our ambitious multi-year fiscal consolidation plan for the general government. We project that the fiscal deficit will rise by some 1.5 percent of GDP in 2019/20 and by 1.3 percent of GDP in 2020/21 relative to IMF staff projections at the time of ECF-EFF approval in December. We would like to highlight, however, that we see the spending increases as strictly temporary and remain committed to the multi-year fiscal adjustment plan under the ECF-EFF arrangements. In this context, and to partially offset the impact of the general government deficit increase on overall public sector debt, we have further constrained spending plans for SOEs that are not engaged in implementing emergency response measures to the pandemic for this year and next.

We commit to a transparent and accountable delivery of policy measures to respond to COVID-19 health and economic challenges and to effectively mitigate corruption concerns. Targeted measures will include (i) publishing all public contracts related to the COVID-19 response, using open and competitive bidding and strictly limiting the use of emergency non-competitive processes to the extent possible; (ii) publishing online eligibility criteria and budgeted limits for the various relief measures as soon as they are adopted; (iii) channeling donor funding through the budget with full transparency on its utilization; (iv) frequent monitoring of spending on crisis mitigation measures at the end of each month for the duration of the crisis; and (v) making information on how emergency relief funds are spent available to internal auditors and, as soon as practicable, to independent auditors to conduct ex-post audits over COVID-19 related spending and revenue collection.

We also remain committed to strengthening debt sustainability. The first phase of reprofiling we committed to under the ECF-EFF arrangements is expected to be finalized in April. The total cashflow relief under this phase is projected to amount to US$1.65 billion until FY 2022/23. Under the current global context, progress on the second phase is uncertain, but we continue to work toward getting specific and credible financing assurances ahead of the first review.

The National Bank of Ethiopia (NBE) has already undertaken important steps to maintain financial stability during the crisis. This includes redeeming NBE bills held by private banks and providing access to its standing liquidity facility to ensure that adequate liquidity buffers are being maintained. The NBE will also provide additional liquidity to the Commercial Bank of Ethiopia as the bank’s already tight structural liquidity conditions are being exacerbated by the COVID-19 economic shocks. While it is difficult to predict how the COVID-19 shock will affect the inflation trajectory, we will stand ready to adjust our policy stance as needed to ensure that the single-digit inflation objective can be achieved as anticipated at ECF-EFF approval.

We also remain committed to the policies under the ECF-EFF arrangements with the IMF and plan to continue implementing the reforms as conditions permit. This will include gradually ending financial repression through increased T-bill issuances, ceasing new DBE financing from the NBE and gradually reducing direct NBE advances to the government. It also implies continuing to work toward a market clearing exchange rate by steadily reducing overvaluation, strengthening reserve accumulation and implementing the FX roadmap to be finalized in April. In addition, we will continue working toward a solution for SOE debts, where these companies are not able to service their debts themselves, and to strengthen bank balance sheets. Finally, we remain committed to reforms to strengthen governance under the ECF-EFF arrangements, including through publishing the consolidated financial performance report covering all state-owned enterprises supervised by the Public Enterprise Holding and Administration Agency (PEHAA), and by carrying out a Public Investment Management Assessment in cooperation with the IMF. In the context of the ongoing safeguards assessment, we remain committed to following up on IMF staff’s recommendations. We will also provide IMF staff with access to the central bank’s most recently completed external audit reports and authorize its external auditors to hold discussions with Fund staff.

We also commit not to introduce or intensify exchange and trade restrictions and other measures or policies that would compound these difficulties. We have engaged in discussions with some foreign investors regarding potential FX convertibility guarantees that could catalyze foreign investment and reduce FX shortages in the short-term. We underscore that this decision does not undermine in any way our commitment to moving decisively to achieving a market-clearing exchange rate. We also commit to introducing the necessary safeguards in these contracts, in consultation with IMF staff, to avoid contingent claims on foreign exchange during the ECF-EFF arrangements as well as any risk that such contracts could constitute exchange restrictions or intensifications thereof.

Our external accounts are expected to weaken as a result of COVID-19. The projected drop in import demand, and the strengthening in our terms of trade, are expected to more than offset weaker export demand and remittances in our current account this fiscal year. However, paired with the expected large decline in foreign direct investment, the overall balance of payments is set to weaken relative to projections at the time of ECF-EFF approval, thus opening up a sizable financing gap. We intend to fill this gap by reducing reserve accumulation and seeking assistance from our development partners.

Against this backdrop and given the urgent balance of payments financing need facing our country due to the pandemic, we request emergency financing from the IMF under the Rapid Financing Instrument (RFI) of SDR300.7 million, equivalent to 100 percent of our quota. We request that the funds be disbursed entirely as budget support. In view of this, a memorandum of understanding will be established between the government and the NBE on their respective responsibilities for servicing financial obligations to the IMF. The purchase will help fill our expected fiscal financing gap and strengthen international reserves. IMF involvement in Ethiopia’s response to this emergency will also likely act as a catalyst for additional financing from other development partners. We also request a rephasing of access under our ECF-EFF arrangements and a reduction of access under the EFF arrangement (by SDR 150.35 million, or 50 percent of quota) to accommodate delays in the completion of the forthcoming review and to comply with the applicable annual access limit policies.

In addition, we request grant assistance under the Catastrophe Containment (CC) window of the Catastrophe Containment and Relief Trust (CCRT) to cover our debt service to the IMF falling due from the date of approval of the grant assistance to April 13, 2022. This debt relief will free up budgetary resources to address public health needs and support economic activity in key sectors and will also help contain the exceptional balance of payments need resulting from the pandemic. To further free up resources for our COVID-19 response, we intend to request debt service relief from official bilateral creditors under the recently announced G20 debt service relief initiative.

We authorize the IMF to publish this Letter and the staff report for the request for the purchase under the RFI and grant assistance under the Catastrophe Containment (CC) window of the Catastrophe Containment and Relief Trust (CCRT).

Sincerely yours,

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1

The authorities did not meet the continuous performance criterion on the non-accumulation of new external arrears, with a total breach of US$210 million. The breach was due to coordination problems between the National Bank of Ethiopia (NBE) and some state-owned enterprises (SOEs). It also reflected a delay of a Federal government payment of US$8.7 million on suspicion of fraudulent electronic communication ahead of the scheduled date. The authorities have since cleared all these arrears and have taken corrective actions on monitoring and effecting SOEs’ external debt service. The authorities met the end-March structural benchmarks (SBs) to enact excise tax legislation and to submit a supplementary 2019/20 budget to parliament and are on track to prepare the FX reform roadmap by end-April (a draft of which has been shared with staff). The authorities have not met the end-February SB on publishing a consolidated financial performance report for PEHAA supervised SOEs but are committed to completing the action by the time of the first review.

2

The April 2020 World Economic Outlook sees severe risks of a worse global economic outcome. It estimates that, under alternative outbreak scenarios, global GDP could be 3–8 percent below the baseline over 2020–21, recovering gradually thereafter but remaining below the baseline throughout the medium term (up to 5 percent in 2024).

3

The authorities are considering implementing additional measures to protect jobs and support micro, small and medium enterprises if the crisis continues to deepen, and conditional on the availability of financing.

4

The safeguards assessment is underway. The authorities are planning to undertake a Public Investment Management Assessment in consultation with the IMF. Good progress has been made toward enhancing SOE governance and transparency. While they have not met the February structural benchmark, as mentioned above, the authorities have provided staff with individual financial statements for the majority of the companies and remain committed to completing the consolidated report by the time of the first review of the ECF-EFF arrangements. The authorities have also provided staff with a previously unavailable time series of SOE debt broken down by company and type (external, CBE, and other domestic).

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Cover IMF Staff Country Reports
The Federal Democratic Republic of Ethiopia: Requests for Purchasing under the Rapid Financing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-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 2020: Issue 150
Publisher:
International Monetary Fund
ISBN:
9781513542935
ISSN:
1934-7685
Pages:
48
DOI:
https://doi.org/10.5089/9781513542935.002
Front Matter
The Federal Democratic Republic of Ethiopia: Requests for Purchase Under the Rapid Financing Instrument, Debt Relief Under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-year Arrangements Under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access Under the Extended Fund Facility Arrangement—Debt Sustainability Analysis
IMF Executive Board Approves US$411 Million in Emergency Assistance to Ethiopia to Address the COVID-19 Pandemic
Statement by the Executive Director, Dumisani Hebert Mahlinza, and the Advisor of the Executive Director, Mr. Abdulqafar Abdullahi Requests for Purchasing Under the Rapid Financing Instrument, Debt Relief Under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements Under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access Under the Extended Fund Facility Arrangement on The Federal Democratic Republic of Ethiopia April 30, 2020