Updated: February 25, 2021
The executive board of the International Monetary Fund (IMF) on Friday approved $2.9 billion loan for Ethiopia under an Extended Credit Facility (ECF) and Extended Fund Facility (EFF). The board also approved the immediate disbursement of $308.4 million.
An extended credit facility (ECF) allows the borrowing country to take out money over an extended period of time rather than reapplying for a loan each time it needs money while an extended fund facility (EFF) is a medium-term arrangement which allows countries to borrow a certain amount of money, typically over a three- to four-year period. The EFF aims to address structural problems within the macroeconomy that are causing chronic balance of payment inequities.
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IMF said the three-year financing package aims to help Ethiopia reduce external imbalances, contain debt vulnerabilities, lift financial repression, increase domestic resource mobilization which will also help devote adequate resources to pro-poor spending.
Mr. David Lipton, First Deputy Managing Director and Acting Chair at IMF in comments following the approval recognized Ethiopia’s rapid economic growth and strong policies, but also that public investment-driven growth model has now reached its limits.
“A decade of rapid growth, underpinned by strong policies, has supported a reduction in poverty and improved living standards in Ethiopia. However, the public investment-driven growth model has reached its limits. The authorities have prepared a Homegrown Economic Reform Plan to address macroeconomic imbalances, reduce external and debt vulnerabilities, phase out financial repression, and lay the foundation for private sector-led growth,” Lipton said.
He added: “A financial arrangement with the Fund will support the authorities’ plan, helping to catalyze concessional financing from other development partners. The program aims to address foreign exchange shortages and external imbalances; reform state-owned enterprises (SOEs); safeguard financial stability; and strengthen domestic revenue mobilization.
“Monetary tightening and reforms will help rein in inflation, facilitate credit to the private sector, and strengthen competitiveness. Greater exchange rate flexibility, supported by tighter monetary policy, will durably address foreign exchange shortages and narrow the spread between the official and parallel market rates. Further efforts are needed to modernize the monetary policy framework and deepen financial inclusion.
“Fiscal consolidation and reforms aim to reduce debt vulnerabilities, increase revenue, and strengthen expenditure efficiency while protecting social and development spending. Improving the financial positions of SOEs and strengthening their governance and oversight will also be critical to ensuring debt and financial stability.
“With strong ownership and full implementation of reforms, the authorities’ economic plan should eventually improve macroeconomic outcomes and lower external vulnerabilities. High priority is placed on removing constraints to private investment and improving the business climate, setting the stage for an acceleration in private sector-led growth.”