December 7, 2022

IMF says multiple shocks hitting Ethiopia’s economy have dampened growth, increased inflation and created fiscal and external pressures amid Tigray conflict

Ethiopia's Prime Minister Abiy Ahmed Ali
Ethiopia's Prime Minister Abiy Ahmed Ali

The International Monetary Fund (IMF) said on Tuesday that multiple shocks hitting Ethiopia’s economy have dampened growth, further increased inflation and created fiscal and external pressures amid instability in the east African nation.

“The Ethiopian economy has been subject to multiple shocks over the past two and a half years, including the COVID-19 pandemic, drought, conflict in the north of Ethiopia, and the war in Ukraine. This has created significant macroeconomic and humanitarian challenges,” said Ms. Sonali Jain-Chandra, who led an IMF staff team to Ethiopia during June 13-17.

The purpose of the staff visit was to discuss Ethiopian authorities’ reform plans and economic developments, which could provide important input for a future mission to negotiate a potential new Fund program, the IMF said.

In her statement, Ms. Jain-Chandra said “Delivery of a debt treatment for Ethiopia under the G20 Common Framework, as part of a package supported by an IMF program, is essential to reduce debt vulnerabilities.

She wrote, “The authorities reiterated their interest in an IMF program to support their reform agenda. The Fund will continue to cooperate closely with the Creditor Committee to provide technical support to the Common Framework process and is working on steps towards commencing discussions on an IMF program as soon as conditions allow.

“Growth is projected to have fallen to 3.8 percent for FY2021/22 resulting from the conflict in Northern Ethiopia, lower agricultural production, a sharp fall in donor financing and intensifying Foreign Exchange (FX) shortages, drought, and spillovers from the war in Ukraine. Inflation has been high and rising, including due to rapidly increasing food prices and supply-side constraints.

“Exports and Foreign Direct Investment have held up well despite the difficult economic environment. However, rising global commodity prices for fuel, food and fertilizer driven, in part, by the war in Ukraine, will increase imports and widen the current account deficit in FY2021/22. This, combined with lower external loan disbursements has weakened the external sector and put downward pressure on reserves, which remain inadequate.

“The budget deficit is projected to widen, following approval of a supplementary budget which included increased military and humanitarian spending, and with sharply lower tax revenues amid the conflict. While the reform of the treasury bill market has facilitated substantial increases in the volume of issuances, the lack of external financing has required central bank advances to finance the larger deficit. The authorities remain committed to improving the efficiency of public investment, oversight and reforms of State-Owned Enterprises and containing public sector borrowing, consistent with their goal of meeting development objectives while strengthening debt sustainability.

“Progress on implementing roadmaps on foreign exchange (FX) reforms and modernization of monetary policy should help address FX shortages and reduce inflation. Revenue reforms consistent with ambitious revenue projections in the government’s 10-year plan will support sustainable financing of development needs. Continued progress on reforms to shift from public to private sector-led growth as laid out in the Homegrown Economic Reform Plan will contribute to high and sustainable growth over the long term. We welcome recent steps to build peace and address the humanitarian situation and hope for continued improvements in these areas.

“During the mission, the IMF team met with Minister of Finance, Ahmed Shide, Governor of the National Bank of Ethiopia, Dr. Yinager Dessie, State Minister of Finance, Dr. Eyob Tekalign; Vice Governor Fikadu Huriso, other government officials, representatives of the private sector, including banks, and the development partner community. The team extends its appreciation to the authorities for their hospitality, cooperation and productive discussions.”

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