The International Monetary Fund (IMF) has reached the significant milestone with Ethiopia, concluding a staff-level agreement on the second review of the four-year Extended Credit Facility arrangement. This agreement underscores the progress Ethiopia is making in its homegrown economic reform program, signaling hope for continued growth and stability.
In July 2024, the IMF approved a $3.4 billion ECF arrangement to support Ethiopia’s ambitious economic reform program. Now, with the second review, Ethiopia is set to access an additional $251 million. These funds are expected to bolster ongoing efforts to stabilize the economy and create a conducive environment for sustainable growth.
IMF staff, led by Mr. Álvaro Piris, conducted extensive discussions with Ethiopian officials, including Finance Minister Ahmed Shide and National Bank Governor Mamo Mihretu, during the recently working tour. The delegation also engaged with key stakeholders from the banking and business sectors to assess the progress and priorities of Ethiopia’s economic program.
One of the standout successes of Ethiopia’s reform program is the transition to a market-determined exchange rate. This policy shift has played a pivotal role in easing foreign exchange shortages, a persistent challenge for the Ethiopian economy. The narrowing of spreads between official and parallel exchange rates now below 10%—highlights the positive impact of these reforms.
Other achievements include regulating foreign currency surrender requirements made the level playing field of the economy conducive. Businesses are now experiencing more flexibility, leading to improved currency liquidity.
Solomon Zegeye is an economist working as consultant for various firms. As to him, securing of loan from the International Monetary Fund indicates that how Ethiopia is moving in the right direction to liberalize its economy and open up to the domestic and foreign investors to enhance their role which has been growing in the past six years.
He further said that, the loan also enables the nation to shore up shortage of hard currency, enhance its currency reserve and facilitate import and export trade. It also enables to creating space for priority public spending through mobilizing domestic revenue and restoring debt sustainability, including through securing timely debt restructuring agreements with external creditors and strengthening the financial position of state-owned enterprises to tackle critical macro-financial vulnerabilities.
According to Solomon, the previous regime even though claimed that it pursued free market economy, it did not implemented in a full-fledged manner as the result, the role of the private sector in the economy has been limited in the specific sectors. The dominant role of the government in the economy hampered the growth of the private sector. Even though the public investment attributes for the development of infrastructure, the absence of proper management of resource paved the way for rampant corruption which intern negatively affect the growth and ultimately, left the nation to high indebted country which is beyond its repayment capacity.
He further said that, the development model in the past decade has generated greater demand for foreign exchange than supply. Large-scale public investment projects have absorbed a significant share of scarce foreign currency while the currency revenue anticipated from the projects didn’t materialize in time.
High demand for imports in the context of limited export growth resulted in large current account deficits and severe foreign currency shortages. An overvalued official exchange rate and a growing gap between the parallel and official market rates also discourage exports as the exporters’ cost is likely to be affected by the parallel market rate while their revenue is determined at the official exchange rate. Maintaining a stable rate of exchange in the environment of relatively high inflation also means a real exchange rate appreciation, which is equivalent to a tax on exports.
According to the IMF officials, the government economic program, supported by the four-year ECF arrangement, envisages a comprehensive policy package to stimulate private sector activity and increase economic openness to promote higher and more inclusive growth. Strengthening social safety nets to mitigate the impact of reforms on vulnerable households is a critical component of the authorities’ reform program.
The Key policies are elaborated including, moving to a market-determined exchange rate to help address external imbalances and relieve foreign currency shortages.
It also paved the way for combating inflation through modernizing the monetary policy framework, eliminating monetary financing of the budget and reducing financial repression.
Ethiopia’s new IMF-supported economic program is intended to stimulate private-sector led growth.
According to the IMF, this should allow for more spending on areas like health, education, investment and social safety nets.
Expanding the coverage and increasing support to the most vulnerable households was a key part of the government’s reform agenda.
The IMF looks forward to supporting these efforts to help make the economy more vibrant, stable, and inclusive for all Ethiopians.
As to Solomon, the money obtained from IMF in the form of loan helps the nation debt service performance and enables to get green light to obtain more money to meet its development endeavor.
The introduction of new exchange regime could build confidence to the diaspora to send their remittance in the formal channel and helps to boost the nation currency reserve. He further said that the opening of private foreign currency exchange offices other than the commercial banks and monitored by the National Bank of Ethiopia dramatically reduced the scarcity of hard currency in the market. The ongoing inter-Bank business increased activity in the market is promoting transparency and efficiency in currency exchange and it can be said as good step in modernizing the nation financial infrastructure.
With macroeconomic stability supported by prudent policy measures, Ethiopia is poised for growth. The recently approved supplementary budget by the Council of Ministers aims to address tight liquidity conditions while maintaining fiscal discipline. Additionally, Ethiopia is transitioning to interest rate-based monetary policy, ensuring inflation remains under control.
The IMF emphasized that tight monetary and financial conditions are crucial during this transition to secure long-term economic stability.
The next steps involve the approval of the agreement by the IMF management and Executive Board in the coming months. Future reviews of the ECF arrangement will occur every six months, ensuring that Ethiopia’s progress remains on track.
As Ethiopia continues its journey of economic transformation, the collaboration with the IMF serves as a testament to the country’s commitment to reform and resilience. With improved foreign exchange conditions, controlled inflation, and a clear focus on sustainable growth, Ethiopia is setting a strong foundation for a more prosperous future.
Increased activity in the market is promoting transparency and efficiency in currency exchange.
With macroeconomic stability supported by prudent policy measures, Ethiopia is poised for growth. The recently approved supplementary budget by the Council of Ministers aims to address tight liquidity conditions while maintaining fiscal discipline. Additionally, Ethiopia is transitioning to interest rate-based monetary policy, ensuring inflation remains under control.
The IMF emphasized that tight monetary and financial conditions are crucial during this transition to secure long-term economic stability
Mr. Piris expressed the IMF’s gratitude for the Ethiopian authorities’ dedication and proactive measures in implementing the economic program. He also commended the constructive dialogue with Ethiopian officials and stakeholders, which has been instrumental in advancing the reform agenda.
The next steps involve the approval of the agreement by the IMF management and Executive Board in the coming weeks. Future reviews of the ECF arrangement will occur every six months, ensuring that Ethiopia’s progress remains on track.
As Ethiopia continues its journey of economic transformation, the collaboration with the IMF serves as a testament to the country’s commitment to reform and resilience. With improved foreign exchange conditions, controlled inflation, and a clear focus on sustainable growth, Ethiopia is setting a strong foundation for a more prosperous future.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD TUESDAY 18 FEBRUARY
