IMF Approves Second Annual ESAF Loan for Ethiopia

Report
from International Monetary Fund
Published on 23 Oct 1998
The International Monetary Fund (IMF) has approved the second annual loan for Ethiopia under the Enhanced Structural Adjustment Facility (ESAF),1 equivalent to SDR 29.5 million (about US$42 million) to support the government's economic and financial program for the fiscal year 1998-99 (July 8-July 7). The loan will be disbursed in two equal semiannual installments, the first of which is available immediately.
Background

On October 11, 1996, the IMF approved a three-year ESAF arrangement for Ethiopia. However, the mid-term review under that arrangement could not be completed, and the first annual ESAF arrangement was allowed to expire on October 10, 1997.

The Ethiopian authorities have taken significant strides in deepening economic reforms. The economy slowed in 1997/98, with real GDP growth estimated at 0.5 percent compared with a robust 5.6 percent in the previous fiscal year. The slowdown can be mainly attributed to the adverse effects of the El Niño weather phenomenon on the agricultural sector. Average inflation was contained to 2.5 percent owing to a relatively tight monetary stance and abundant food availability. Ethiopia's gross domestic savings is estimated to have remained at 7 percent of GDP in 1997/98, but at these levels the country remains extremely dependent on foreign savings. The overall government deficit was estimated at 6.4 percent of GDP, compared with 4.9 of GDP percent recorded in 1996/97. On the external front, Ethiopia's export performance was stronger than anticipated owing mainly to a pickup in coffee prices. The growth prospects for fiscal year 1998/99 remains favorable. However, a timely and peaceful resolution of the unsettled border dispute with Eritrea is essential to bolster economic prospects.

Medium-Term Strategy and the Program for 1998-2001

The government's medium-term economic strategy is geared at securing fast, broad-based and more equitable economic growth in the context of macroeconomic stability. The principal macroeconomic objectives for 1998-2001 are to achieve an average annual GDP growth of 7.75percent a year, contain inflation below 4 percent, and rebuild gross foreign reserves to a more comfortable level. The external current account deficit is projected to remain at 8-8.5 percent of GDP due to growing imports and weak prospects for coffee export prices. Private sector investment is slated to increase over the medium term as a result of a better regulatory environment and improvements in infrastructure.

Within this medium-term strategy, Ethiopia's program for 1998-99, which will be supported by the second annual ESAF arrangement, a significant recovery in GDP growth is projected, possibly in the 8-9.5 percent range, keeping inflation under 4 percent, and containing the external current account deficit at about 8 percent of GDP. Preliminary data suggest that macroeconomic developments have been largely positive in the first quarter of 1998-99 and that most quantitative benchmarks for end-September 1998 under the second ESAF arrangement were likely met.

Structural Reforms

The government's agenda in the structural area includes financial sector reforms, trade liberalization, strengthening the country's legal and regulatory framework, and raising health and education standards. In the financial sector, the government's immediate focus is on building the supervisory capacity of the central bank and on developing a sound legal framework. Capital requirements of the domestic commercial banks will be raised and new players will be allowed to enter the market to enhance competition in the banking system. In the external arena, remaining restrictions on payments and transfers for current international transactions will be eliminated. The maximum import tariffs will be reduced to 40 percent from 50 percent in the current fiscal year, the number of tariff bands from eight to seven, and the average tariff to 19.5 percent from 21.5 percent. And in the following two years the average tariff will be lowered further to 17.5 percent. Other structural reform initiatives, undertaken with the assistance of the World Bank and bilateral donors, are aimed at raising health and education standards from extremely low levels, protecting the environment, and alleviating poverty, through fostering rural development.

The Challenge Ahead

Ethiopia faces difficult challenges ahead in modernizing the economy, alleviating poverty and achieving external sector viability. The government needs to take strong and sustained action to eliminate structural weaknesses and consolidate the country's macroeconomic situation. The ESAF program reflects the government's strong sense of ownership.

Ethiopia joined the IMF on December 27, 1945. Its quota 2 is SDR 98.30 million (about US$139 million). As of end-September 1998, Ethiopia's outstanding use of IMF resources totaled SDR 62.75 million (about US$89 million)