International Monetary Fund Shifts Policy Battleground to Consolidated Budget

The policy battleground between the International Monetary Fund (IMF) and Ethiopia appears to have shifted from traditional monetary issues to the persistent demand for the latter to uphold a consolidated fiscal option as its policy anchor.

Ethiopian authorities have rejected the recommendation outright, considering it has no meaning to the overall debt sustainability of the country. In the absence of explicit guarantees, debts of public enterprises represent no liabilities to the government, they argued.

“This isn’t what we see as wise advice to take,” Sufian Ahmed, Minister of Finance & Economic Development (MoFED), and the nation’s point man in dealing with the IMF, told Fortune on Saturday October 4,2014. “Although we have accepted their advice to implement transparency in the business of state enterprises, we are not willing to agree to uphold a consolidated fiscal option.”

The IMF’s Executive Board issued a statement on Friday, October 3, 2014, as a customary practise, whereby its teams of experts engage member countries through consultations under Article IV. A mission of the IMF, led by S. Kal Wajid, was on a visit to Ethiopia last June 2014, when it reported on the “strong and robust” economic growth Ethiopia had registered in 2013/14.

There appears to be a little difference of opinion between Ethiopian authorities and the IMF over the accomplishments of the economy in the last fiscal year. There is a wider consensus that inflation remained in single digits, at 8.5pc – pulled down by lower food prices – and the economy expanded by 7.5pc, due to an increase in agricultural production, enhanced foreign direct investment and large public sector investments. There was considerable progress made in “expanding employment” last year, the IMF noted.

This as a tactful acceptance from the IMF of the development model Ethiopia follows to achieve its national aspirations in the Growth & Transformation Plan (GTP), according to a macro-economic expert with a background in advising the government.

“It isn’t a report that is rejectionist in its approach,” said the macro-economist. “The IMF wants to see them feed on its advices to make the economy work and remain sustainable.”

If there are sharp differences between the two parties over what to do to make growth sustainable, it is about the place state enterprises have within the economy, the limited access the private sector has in getting financing and what to do to keep the national economy competitive in the global market. In these lie the grey areas of ideological preferences, where the IMF sees “downside risks”, such as “declining prices for export commodities and weather related shocks”. But none seem more worrying to the IMF than the increase in external financing of public investment programmes, which now represent well over 10pc of the GDP.

There are several state owned enterprises, such as Ethiopian Airlines, Ethiopian Electric Power, ethio telecom and the Metal & Engineering Corporation (MetEC), which obtain finance from foreign sources in the form of non-concessional loans and undertake a series of mega projects. Their activities raise eyebrows not only in their impact in shifting the balance to the public sector, but too there is a fear that their expenditures cloud the health of the national economy, understating the budget deficit that it carries.

At an average of two percent, Ethiopia’s annual budget deficit remains low as its share of the gross domestic product (GDP) – one percentage point lower than what is limited in the Stability & Growth Pact of the Euro Zone, signed in 1998. The IMF reported that Ethiopia’s budget deficit rose to 2.7pc in 2013/14, increasing by 0.7 percentage points from the previous year.

Should Ethiopian authorities remain complacent about this, the IMF warns that the picture will be alarming if the expenditures of state enterprises be included in the calculation.

“Public enterprises continue to borrow heavily from the banking system and externally to finance their investments,” the report noted, claiming this to have put the overall public sector financing at 10pc of GDP.

The IMF called on the Ethiopian authorities to adopt a “consolidated fiscal position, as a more robust fiscal anchor” and insisted that they ensure these borrowings are “done within the context of a comprehensive debt strategy.”

It is a timely call, before the country experiences “external shocks with a ballooning trade deficit that is not well structured,” the macro-economist Fortune talked to said, echoing the fear. Despite the continuous and consistent growth Ethiopia has registered under the rule of the Revolutionary Democrats over the past decade, the economy has seen little in the way of structural transformation – from a subsistence agriculture to manufacturing, as designed in the GTP – the macro-economist observed.

“You have an economy that has shifted from low productivity in agricultural to low productivity in services,” said the macro-economist. “The job creation capacity of services is as low as that found in the agricultural sector.”

He sees little in the form of structural transformation taking place in the economy.

The IMF has a series of recommendations in order for transformation to take place. Fundamental among them is its strong advice for the government to shift the balance towards “private sector-led sustainable growth”. It requires policymakers in Ethiopia to do away with the 27pc bonds commercial banks are compelled to buy from the state owned National Bank of Ethiopia (NBE). Nonetheless, Ethiopian authorities have made it clear to the IMF that this is a policy that will continue for the “foreseeable future”.

Yet, administration sources claim that the private sector will have a central role in the design of the second generation of the GTP.

“We have solidly put the private sector at the forefront of the economy,” said an economic advisor involved in the crafting of the GTP-II.

The IMF wants to see the declining crowding out effect on the private sector to be complimented with measures in broadening the tax base, through customs reforms and tax administration, in a bid to increase the share of revenue to GDP. Revenues to GDP has declined from 14.6pc in the previous year to 14.1pc last year, according to the IMF. It advised the government to do away with the tax exemptions given to many companies as an incentive to attract investment.

Yet, another sticky point is the pressure building on the Ethiopian government from the Bretton Woods Institutions to depreciate the value of the Birr against a basket of major international currencies. The IMF believes Ethiopia’s competitiveness in the global market is undermined not only by its poor trade logistics, but too calls for urgent improvements. Its experts believe that the value of the Birr is 30pc higher than its real value against major currencies, to the disadvantage of exports.

At 3.6 points, the World Economic Forum places Ethiopia in its competitiveness index at 118th out of 144 countries, which is considered to be moderate.

“Competitiveness is declining and the exchange rate remains overvalued,” the macro-economist agreed.

Executive directors of the IMF are encouraging Ethiopian authorities to improve export competitiveness by reducing the over-valuation of the real effective exchange rate “through enhanced exchange rate flexibility”. What this flexibility involves is where the major differences lie.

With the exchange rate of the Birr depreciating by an average of five percent a year, reaching a little over 20 Br against the dollar, and the parallel market hovering at 21.10 Br, Ethiopian authorities remain adamant. They rather told the IMF they would want to see a gradual and nominal adjustment of the Birr taking place in an environment where inflation further declines and productivity for exports improves.

“We find it hard to agree with their suggestion to devalue the Birr as they would want us to,” Sufian told Fortune.






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