IMF Omission Casts Gloomy Picture

IMF seems confident that Ethiopia's economy is on track despite the worsening forex reserve

In a time when the Forex crunch went through the roof, the International Monetary Fund (IMF), in its latest report, chose to remain quiet about the foreign exchange crisis in the country.

IMF, in its two-page preliminary report, seems increasingly confident that the economy of the country is on track despite the worsening forex reserve caused by a slump in export earnings and remittance flow.

The report comes three months after the Central Bank notified a collapse in the Forex reserve of the country. As of May 2017, the country’s forex reserve reached a point where it could only finance 2.3 months of the import- down from 2.6 months a year ago.

The disregard of the body, which is a master of suggesting solutions to such crises, is unprecedented for the experienced macroeconomist, who is aware of the current state of the country.

“It is uncharacteristic of IMF,” said the economist, who is also a member of the Ethiopian Economic Association. “It is unbecoming of an institution known for being a specialist in exchange to say nothing about the existing forex condition.”

The report gives much more emphasis on international competitiveness, budget and current account deficit, and investment. To the surprise of many, it also overlooked the rise in inflationary pressure, which hit a double-digit in August 2017.

“The economy of Ethiopia showed a strong resilience in the past fiscal year amid the recurrent decline in global prices and re-emergence of drought,” said Julio Escolano, an advisor in the IMF’s African Department, giving an overview of the economy.

Despite stagnant export earnings and an upsurge in drought, growth in Ethiopia’s economy has shown an improvement from eight percent to nine percent in the past fiscal year, International Monetary Fund (IMF) reported.

It fell two percentage points lower than the target set by the government of Ethiopia to be achieved during the second edition of the Growth & Transformation Plan (GTP II).

The new report released almost half a year after the IMF announced a recovery in the global economy but cut its expectations for Ethiopia’s economy. It has projected the economy to grow by 7.5pc in the coming year- the lowest in 12 years.

The Body made an official statement about the growth of the economic powerhouse of East Africa after its team led by Escolano, made a consultation discussion with Prime Minister Hailemariam Desalegn, Abraham Tekeste (PhD), minister of Finance & Economic Cooperation and Teklewold Atnafu, governor of the Central Bank.

For the past three years, the export earnings of the country remained constant- around three billion dollars, two times lower than neighbouring Kenya.

The number of people in need of urgent assistance has also increased from 5.6 million in April 2016 to 8.5 million two months ago, raising the financial requirement for the drought from 300 million dollars to 1.2 billion dollars.

Despite this gloomy picture, the drought was contained by the government according to IMF’s staff.

“The responses of the government in cooperation with development partners to the drought were timely and efficient, minimising human cost for the country,” said Escolano.

Although the government managed to achieve a better economic prospect in the past fiscal year, the widening of the current account deficit (CAD) continues to be a major challenge to the economy. This is usually caused by the unprecedented boom in local demand and decline in the export competitiveness of the country, according to macroeconomists.

Up until last year, the CAD stood at 10.6pc of the GDP- twice the threshold for developing economies like Ethiopia.

To raise its competitiveness in the global arena and increase the export earnings, IMF suggested the government to implement more flexible exchange rate, similar to its previous recommendation.

“This is true. The government is deviating itself from the reality,” said Tassew Woldehana (Prof.), a macro-economist and a policy analyst with three decades of experience. “Making the Forex system more flexible and devaluating the currency is important to be competitive and solve the foreign exchange crisis.”

The decline in export competitiveness coupled with the increase in debt put the country under risks associated with growth in outstanding debt, which has reached 23 billion dollars as of March 2017.

Realising the problem arises from soaring indebtedness; the government has already shifted its attention to concessional loans by reducing commercial loans. This tight fiscal policy, according to the IMF, should blend with a limit in high borrowing requiring public investment projects.

“Even though the government needs to invest in significant infrastructural development projects, restraint is important if it is adversely affecting the economy,” he said. “Otherwise, it will undermine the economic growth in the country.”

The IMF has also applauded the efforts of the government to keep the budget deficit to GDP ratio at 2.5pc.

Tassew agrees with the IMF.

“The rate is very reasonable considering the trend observed even in developed countries,” he said. “Many countries have more than three percent of the budget deficit to GDP ratio.”

Nevertheless, there is a fear that the country might experience bulge of the budget deficit from the projected amount, 53.8 billion Br, owing to the underperformance of the government to mobilise domestic resources.

To tackle further increase of the debt and boost domestic resource mobilisation, the IMF calls for efficient governance of public enterprises.


Published on Oct 02,2017 [ Vol 18 ,No 910]



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