The IMF's mixed feelings on Ethiopia’s macroeconomic situation

Ethiopia’s consecutive growth over the last five years has been constrained by the global financial turmoil that hit and continues to affect developed and emerging economies in 2008 and 2009. As the financial crisis started to grip the world economy, not much of an attention was given to the severity of its impact on Ethiopia’s economy owing to the widespread idea that the country is barely integrated with the world financial system and that as a result it would face lesser harm.

However, as the financial crisis and recession is currently showing a sign of easing that will give way to growth in developed and developing economies, the impact of the crisis on Ethiopia’s economy is being felt like never before. Now it is clearer that the crisis has hampered the rate of growth of the GDP and brought about multifaceted challenges including a widening deficit in the country’s balance of payments, declining remittances and transfers and falling direct investment inflows, which, among others drawbacks, may more than trouble the economy, at least in the near-term. And wary of the fact that the impacts of the financial crisis may hinder the development path of the country, the International Monetary Fund (IMF) on August 26 approved a 14-month arrangement loan of about USD240.6 million (115 percent of the country’s quota) under the Exogenous Shocks Facility (ESF) to help the country cope with the adverse effects of the global recession on its balance of payments. The approval came pursuant to a requested made by the government.

"The arrangement was approved under the high access component of the ESF, a facility designed to provide policy support and financial assistance on concessional terms to eligible low-income countries facing temporary exogenous shocks,” an IMF statement read. “A disbursement of about USD 115 million will become available following the Board’s decision."

“Ethiopia’s economy has been adversely affected by a series of shocks, first from surging commodity prices in 2008, and most recently from the global recession,” Takatoshi Kato, IMF Deputy Managing Director and Acting Chair, said after the discussion which ended up in approving the loan requested by the Ethiopian government. “While the [Ethiopian government] authorities have been successfully implementing a macroeconomic adjustment package since late 2008 to help lower inflation and build up international reserves, the global recession is now putting renewed pressure on the external position as export receipts and remittances weaken and inward direct investment slows.” He added, “The financial support being provided under the ESF, coupled with the new allocations of loans, will further boost foreign reserves, thereby enhancing confidence in the sustainability of the government’s economic program.”

While the IMF looks keen to provide the necessary financial support to Ethiopia to help it cope up with challenges that stem from the global recession, it has expressed mixed feelings on the country’s macroeconomic conditions in the short-and long-term.

On balance of payments

The balance of payments outlook for 2009/10 is troubling, as global recession takes a toll on remittances, exports, and direct foreign investment, oil prices move upward again, and the exceptional assistance provided by donors during 2008/09 falls away, according to IMF. The IMF staff estimates suggest that with no policy changes, reserves would decline by some USD 250 million this year, reversing about one-half of the rebuilding of reserves achieved in 2008/09. IMF staff had sought to quantify the effects of the changing global environment on the balance of payments in 2009/10, measured against the outturn in 2008/09, excluding the impact of the drop-off in donor flows (as exceptional financing ends), and under the assumption of a constant real exchange rate. According to the staff, the aggregate size of the shock is projected in the range of USD260–297 million with key components being declining remittances and direct foreign investment and higher oil prices.

On mounting public loans

A surge in public sector borrowing levels was an important factor in contributing to widening macroeconomic imbalances during 2005–08, according to the Fund. Ethiopia’s external debt levels are rising significantly as major public enterprises borrow externally to finance infrastructure investment, the IMF report reads. The stock of debt is set to rise from USD1.3 billion at end-June 2008 to USD 6.0 billion by end-June 2011, with almost 70 percent of the increase accounted for by the state-owned electric power (EEPCo) and telecom (ETC) companies, the IMF notes. “Given infrastructure weaknesses, the case for large-scale investment in these sectors is compelling but the sizeable and rapid build-up of debt underscores the need to ensure that borrowed funds are being put to effective use, that a supportive business environment is being put in place to ensure full take-up of infrastructure outputs, and that public enterprise pricing policy will ensure the full recovery of costs needed to facilitate debt service in the future,” the IMF recommends.

On Ethiopia's capacity to pay back the Fund

Ethiopia has adequate capacity to repay the Fund, according to the Fund’s report. Ethiopia’s debt to the Fund would remain at modest levels throughout the projection period. The proposed access of 115 percent of quota would amount to about ½ percent of GDP; with full disbursement under the arrangement, debt to the IMF would amount to 2 percent of total public debt in 2010/11. Future repayments to the Fund would be modest in relation to exports of goods and services, peaking at some 0.6 percent of exports in 2016, according to the report.

On GDP

The global recession is constraining export growth and limiting key external resource inflows, but the impact of these pressures on aggregate output is modest given the central role of subsistence agriculture, according to IMF staff report. “The [government] authorities expect GDP to grow by at least nine percent in 2009/10, with agriculture and industry, aided by weather conditions and progress with key infrastructure projects, growing at 6.2 and 8.7 percent, respectively. IMF staff believe that the underlying expansion in GDP is more likely to be around seven percent.”

The gradual erosion of the tax-GDP ratio in recent years is placing significant constraints on the government’s ability to finance its spending objectives, according to the Fund. The Ethiopian government authorities attach central importance to boosting revenue collections and are set to receive, in the coming months, technical assistance from the Fund’s Fiscal Affairs Department in evaluating current tax policies and tax administration, the Fund says in its statement.

On inflation

Following the dramatic movements in price indices over the past two years, single-digit inflation looks to be achievable over the current (fiscal) year, although high food price volatility and stubborn non-food price inflation (15 percent as of June 2009) are significant risk factors, according to the Fund. It says the links between CPI movements and macroeconomic aggregates have not been stable, so further volatility cannot be ruled out—although the buildup of grain reserves should help to limit speculative price surges.

Source:The Reporter.