IMF Hails Ethiopia’s Reforms, Remains Optimistic

Despite the tough macroeconomic situation in the country, the International Monetary Fund team projected that the gross domestic product (GDP) of Ethiopia would grow by 8.5pc in the 2018/19 fiscal year.

Led by Julio Escolano, the team undertook a two-week consultation. In the process, the team met Prime Minister Abiy Ahmed (PhD); Abraham Tekeste (PhD), minister of Finance & Economic Cooperation; and Yinager Dessie (PhD), governor of the National Bank of Ethiopia. The team has also met representatives of public enterprises and the private sector, labour unions and development partners.

“The growth rate is expected to step up supported by stronger confidence as the uncertainty of the previous year recedes,” said Escolano in the report, “and the availability of domestic and foreign direct investment improves.”

The IMF hails Ethiopia for cutting its current account deficit, the value difference of exports against imports, down to 6.4pc of GDP in 2017/18.

Eyob Tekalign, a commissioner of the National Planning Commission, attributes the reduction to improvements with public investment management, sharing the IMF’s avowal in recognising the government’s tight monetary policy in limiting imports for infrastructure, reducing borrowing and controlling inflation.

“Though it has improved, we are still a ways from reaching a point we aspire to and expect,” Eyob told Fortune.

Macroeconomist Eyob Tesfaye (PhD) begs to differ.

He believes that imports have been reduced due to the severe forex crunch in the country.

“The import decline can’t be celebrated,” Eyob said. “This signals that the situation around forex is becoming very serious.”

The IMF also admits to last year’s challenging economic situation in the country.

“Political uncertainty, foreign exchange shortages and weak prices for traditional exports hampered economic activity,” the IMF noted in the report. “Tax revenue continued to disappoint.”

Commissioner Eyob defined the past fiscal situation as challenging.

“It is perceptible that the growth rate was not in double-digits as targeted by the Growth and Transformation Plan,” he said.

For the past fiscal year, the government hoped for an economic growth rate of 11pc.

Prime Minister Abiy has confirmed that the growth rate last year was in the single digits.

“The rate is below 10pc but more than nine percent,” he told the parliament in June, closing the past fiscal year’s parliamentary session with his report.

While the government hoped for double-digit growth last year, the Fund projected the rate to be 7.5pc, a percentage point lower than this year’s forecast.

Even this year’s forecast is ambitious, according to Alemayehu Geda (Prof.), a university lecturer and a macroeconomist.

“With the existing political uncertainty, forex crunch and debt stress,” Alemayehu said, “six to seven percent growth is a big deal for the country.”

However, the IMF foresees the political uncertainty of last year to recede soon and anticipates an increase in domestic and foreign investments. It also highlights that the government is forwarding a strategy in shifting the engine of economic activity to private sector development.

Eyob, the macroeconomist, shares the view of the IMF in this regard.

Assuming the political situation could be stable, the mega projects and factories in the industrial parks that will be operational shortly and the ongoing construction activities could motivate the economy, according to him.

“Considering this, 8.5pc economic growth is reasonable,” Eyob said.

Public sector borrowing, inflation and external imbalances will remain a source of macroeconomic risk, warns the IMF. It urged Abiy’s administration to reduce public sector borrowing and bring inflationary pressure back to its target while recommending tight monetary and fiscal policy stances. It also advised Ethiopia to introduce a more flexible exchange rate regime and introduce reforms in the financial system and markets.

A flexible exchange rate regime is not wise advice from the IMF, according to Alemayehu, who argues that it could further fuel inflationary pressure.

“It can’t address the balance of payment, as a structural problem causes the latter,” he told Fortune, “and their advice in privatising state companies, such as Ethiopian Airlines, is wrong.”

“Thus the government should be very careful in considering the advice of the Fund,” he added.

“We do not believe there will be a fundamental and sustainable problem in the economy,” said Commissioner Eyob, “therefore we are working on significant, cautious and well-researched reforms to improve the situation.”

Eyob, the macroeconomist, suggests a complete overhaul of the economy.

The government should get away from the addiction of expansionary monetary policy, he said. He also advised the government to increase revenue by encouraging private investment.

“The government has to establish a strong and robust export promotion council, comprising professionals led by the Prime Minister,” Eyob said. “It will help the country stop the ad-hoc style of economic promotion.”






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