Fortune: How would you rate Ethiopia’s macroeconomic performance in recent years, considering a remarkable growth in GDP but beset with recurrent inflation, high youth unemployment, unsustainable trade deficit, implicitly high budget deficits, an excessive external debt burden, and severe foreign exchange shortage?
Lagarde: Ethiopia has enjoyed sustained high growth coupled with improvements in living standards over 15 years. The medium-term prospects are also strong: past investments in trade-enhancing infrastructure are starting to pay off. The challenge now is to manage a transition from public sector-led growth to a situation where the private sector takes the lead, something rightly emphasised in the government’s Second Growth and Transformation Plan (GTP II). Transitioning to private sector-led growth, as envisaged in the GTP II is important for several reasons. A strong private sector can provide jobs, and through the taxes paid, finance critical public services, including those targeting the most vulnerable segments of the society and aiming at reducing poverty. In parallel, the country’s current emphasis on exports addresses a key issue for Ethiopia as it helps reduce the deficit of the external current account. Another beneficial effect would be to reduce the burden on the public sector to provide infrastructure services. In this regard, a more extensive use of public-private partnerships, private concessions, and privatisation proceeds—as envisaged by the authorities—will safeguard public resources while helping private sector development.
Q. How effective do you see the use of monetary policy tools in Ethiopia in controlling inflation, maintaining exchange rate stability and the soundness of the banking and financial sector? What would you advise to address the country’s monetary, exchange rate, credit policies, and the overall development strategies, including the on the focus of developing industrial parks?
Monetary and exchange rate policies play an important role in achieving and maintaining macroeconomic and financial stability. The policies announced by the National Bank of Ethiopia (NBE) at the time of the October devaluation of the birr are a coherent and timely push in the right direction. Tighter monetary policies will help address inflation which, if left unchecked, would erode the benefits of the devaluation. But monetary policy needs to be complemented by other key policies. The government’s restraint on public imports, particularly by public enterprises, helps reduce the external deficit; mobilising domestic revenue reduces the need to borrow abroad; and improving the business climate attracts domestic and foreign private investment, and raises competitiveness and exports. On the financial sector, the critical focus should be to ensure that banks expand safely and provide credit and financial services to investors while building on Ethiopia’s progress on financial inclusion. Here, many indicators are positive, but there is certainly scope to spur further financial deepening by carefully introducing innovation and competition.
Q. How do you assess the government’s often-criticised overemphasis on infrastructure investments without commensurate increases in the in the production of basic goods and services to deal with supply-side constraints?
Ethiopia has invested in recent years in infrastructure to unlock constraints to sustainable growth, mainly in transportation, power generation and transmission, and export-oriented industrial facilities. This is essential to develop the private sector and expand supply. In the case of energy, Ethiopia has the potential not only to generate electricity to power its own growth, including export-oriented industries but to sell power to its neighbours. A recent analysis by the World Bank suggests that electricity exports from Ethiopia could reach US$1 billion in 2023. There have also been substantial investments in improving the productivity and resilience of agriculture. Better seeds, fertilisers, investment in irrigation and training for farmers has seen agricultural output increase over time while becoming better able to handle shocks such as droughts. Of course, deciding where resources ought to be allocated is based on judgment, and on an assessment on the balance of needs. The critical challenge is to assess if and how this balance ought to change in view of current economic circumstances. And as I mentioned before, the emphasis in the government’s Second Growth and Transformation Plan on the private sector playing a larger role is welcome and should make the economy more responsive to developments.
Q. What are the major factors that led to the recent devaluation of the country’s exchange rate, “the Birr”, credit cap, foreign exchange control and de facto rationing, and adjustment of the interest rate on deposits?
Before the devaluation, the Birr price of the dollar created a gap where the demand for foreign exchange outstripped its supply, leading to rationing. The devaluation, which adjusted the price of the dollar upward relative to the Birr, should narrow the gap by both increasing the supply of, and reducing demand for, foreign exchange. Additionally, the upward adjustment of interest rates and credit caps serve to further lower demand for credit, which would have otherwise increased the demand for foreign exchange. Looking ahead, it will be important to monitor the performance of the external sector over the next year or so. It is essential that the exchange rate be sufficiently flexible to prevent any future under- or over-valuation of the Birr in the face of developments that are unrelated to the Ethiopian economy (e.g., movements in the strength of the U.S. dollar against other major currencies), or inflation differentials with trading partners.
Q. What do you think would be the response to devaluation on the supply side, in view of the structural constraints in terms of land reforms, entrepreneurial deficiencies and capital access limitations?
In the short term, we expect the devaluation to help with foreign exchange shortages. The price effect of devaluation should help increase the supply of foreign currency. The export price in Birr becomes cheaper thereby attracting more buyers for Ethiopian exports while the Birr import prices increase which lowers import demand. Subsequently, increased export competitiveness, coupled with structural policies – such as the creation of export-oriented industrial parks and increased provision of infrastructure – will likely attract additional foreign direct investment, further alleviating foreign exchange shortages.
Q. What specific policy reforms would you recommend in the context of the current dire economic and financial situation in Ethiopia?
Overall, the performance of the Ethiopian economy has been strong, and the prospects are positive. However, external imbalances have developed in the last few years that need to be addressed. In that regard, our advice is broadly consistent with the government’s own policy stance: restraint in public spending; strong control over public foreign borrowing; and continuing steps to strengthen export competitiveness.
Q. Despite considerable financial and development assistance both from the IMF and the World Bank, not a single African country over the last nearly 60 years since independence has succeeded in achieving technology and innovation based on economic and social transformation as is the case with China, South Korea, Singapore and even Vietnam? Any thoughts on this?
Harnessing the potential of technology to transform African economies and societies is critical. Indeed, my speech in Ethiopia is focused on this topic and will explore the foundations of technological transformation in Africa. Countries in Africa could do more in using technology to achieve structural transformation and diversification, but we should not lose sight of the significant progress that is already being made. I am encouraged by some creative and pioneering ways in which technology has been a game-changer in several countries in the region. I will discuss this in more detail in my speech, but just to give a few examples. Ghana is using blockchain technology to solve land registration problems that are endemic in that country (as in so many others). In Rwanda, drones are being used to distribute medical supplies. Ethiopia is building facilities to generate electricity in volcanic areas from geothermal energy, and solar power is already providing households with electricity in parts of Ghana, Côte d’Ivoire, and Tanzania, among others. In Kenya, mobile-phone technology has developed into a leading retail payments system and a virtual savings and credit supply platform that has facilitated broader access to banking services. And digital revolutions in 4 public finance hold even more promise for countries, in terms of increasing transparency, accountability, and efficiency.
Q. What is your view on economic growth that is induced by inflationary financing and external debt accumulation? Do you think this way of fueling growth is advisable and sustainable?
Our research shows that inflationary financing is counterproductive. There is ample empirical evidence to demonstrate that inflation, especially at double-digit levels, is harmful to growth. On that basis, we have long emphasized the role of macroeconomic stability (which includes low and stable inflation) as one of the key factors to allow for sustained, robust and inclusive growth that benefits all. Indeed, helping our member countries achieve and maintain macroeconomic stability is one of the core functions of the Fund Regarding debt levels, national authorities need to strike the right balance between addressing formidable development needs and maintaining debt sustainability. For many countries, this will mean strengthening efforts to improve public investment selection processes, implementation, and efficiency. Furthermore, governments should give priority to investments in human capital, especially investments in programs aimed at boosting healthcare and education.
Q. Is there truth in the criticism that the IMF, as well as the World Bank, have been instrumental in helping undemocratic regimes preserve themselves in power through undeserved financial and development largesse despite obviously misguided policies on land, education and access to finance, as well as political repression?
Any such views would reflect a misunderstanding of what the IMF does. The IMF’s work focuses on supporting the aspirations of our member countries to achieve and maintain robust growth that improves living conditions for all citizens and protects the poor. We do this by providing financial support, technical assistance, and policy advice all geared towards helping our member countries strengthen their economies. Our focus includes building institutions, enhancing transparency which is critical for good governance, improving economic policy-making, and establishing the conditions for sustained, inclusive growth.
Q. It is a matter of historical record that the IMF had often praised Ethiopia’s military-Marxist regime, no less than the present EPRDF government, for – and in typical IMF terminology – its “prudent monetary policy” contrary to some of the realities on the ground. How do you respond to critics that political considerations colour the Fund’s country economic assessments?
Our economic assessments are certainly not coloured by political considerations, nor are they dissociated from realities on the ground. For all our member countries, from the smallest to the very largest, we hold periodic and candid discussions on all aspects of their economic and financial policies, with a view to identifying risks and opportunities, and we tell them what our assessment is after these discussions. We praise countries in areas they are doing well, but we also note areas that need to be improved and offer our advice on how to do it. Let me elaborate with an example from the policy area you mentioned, monetary policy. The 2016 IMF staff report on Ethiopia observed that inflation declined from nearly 12 percent in July 2015 to 6 percent in August 2016, despite a severe drought, mainly thanks to the importation of large quantities of foods by the government, coupled with a vigilant monetary policy. We determined that those policies were appropriate at the time as they prevented adverse outcomes for the people of Ethiopia. On the other hand, we clearly stated in that same report our assessment that the Birr was overvalued, and we recommended policy actions to address this issue. As you can see, our country assessments strive to be even-handed and candid: giving credit where we think policies have been appropriate, and being critical of policies we think damage development prospects. We also provide technical assistance and training to our member countries upon their request, to help them design and implement the kind of policies needed to make their economies strong and healthy.
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