IMF calls for favorable business environment, enhanced role of private sector, improved data quality in Ethiopia
October 1, 2012
On September 12, 2012, the
Executive Board of the International Monetary Fund (IMF) concluded the Article
IV consultation with Ethiopia.1
Background
Ethiopia’s macroeconomic performance in
2011/12 has been mixed. Strong, broad-based growth continues at a pace of about
7 percent and poverty reduction measured by poverty head count declined
from 38.7 to 29.6 percent during the six years to 2010/11. However,
inflation surged to 40 percent in August 2011, largely reflecting a
combination of factors including loose monetary policy, and high global food
prices but has eased to about 21 percent in June 2012 supported by a
slowdown in global food and fuel price inflation and the implementation of the
base money nominal anchor. Despite the continued robust increases in goods
exports and remittances, the current account deteriorated in the first half of
2011/12 contrasting the surplus recorded in 2010/11 attributed to a
frontloading of import of capital goods the previous year. The developments in
2011/12 largely reflect a recovery of imports of capital goods, an increase in
consumer goods imports, and a weakening of the services balance due to a surge
in service imports.
The federal government budget execution in
2011/12 has been tight based on a strong tax revenue increase when compared to
the previous fiscal year, and a slower-than-budgeted execution of recurrent
expenditure. However, the public sector (including state-owned enterprises) as
a whole has been providing strong fiscal impulse given the state-owned
enterprise substantial capital expenditures financed by borrowing from external
sources and the Commercial Bank of Ethiopia (CBE). A rise in regional government
deposits at CBE contributed to the funding. The 2012/13 budget focuses on
sustaining growth, lowering inflation further, mobilizing revenue, and spending
on pro-poor projects. The revenue target is within reach with the continuation
of administrative efforts. Total expenditure is projected to grow slower than
nominal GDP, but poverty-related spending as a share of GDP will be maintained.
Monetary policy in 2011/12 has largely been
geared toward lowering inflation with the implementation of the base money
nominal anchor. Base money at end-May 2012 declined by 0.9 percent
year-on-year as the central bank has ceased providing new direct credit to the
government since July 2011 and has been selling foreign reserves in recent
months to achieve a base money contraction target of 4 percent for the
fiscal year. However, the lowering of the reserve requirement ratio in early
January from 15 percent to 10 percent weakens the tightening effect
of the base money contraction. Broad money at end-May 2012 grew by 29 percent
year-on-year on account of strong credit growth to public enterprises. Despite
the planned National Bank of Ethiopia (NBE) financing of the 2012/13 budget,
which could affect inflation expectations, the 2012/13 monetary targets focus
on lowering inflation.
The NBE directive that requires commercial
banks (excluding CBE) to hold bills issued by NBE is impeding financial
intermediation. By creating a significant maturity mismatch in the private
banks balance sheets, it has a considerable negative impact on their capacity
to play their conventional intermediation role. Financial sector soundness
indicators do not point to immediate concerns. However, recent developments
such as the increasingly dominant market share of CBE and its growing exposure
to large public enterprises, and the adverse impact of NBE directive on private
banks suggest a need for a closer scrutiny of the banking system.
Absent increased role of the private sector
to leverage the large public infrastructure investment and efforts to improve
the doing business conditions, IMF staff project that real GDP growth will slow
down to 6.5 percent in 2012/13 and over the medium term. However, the
authorities project the economy to grow at double digit rates.
Executive Board Assessment
Executive Directors welcomed Ethiopia’s
strong economic growth and continued progress in poverty reduction. However,
Directors noted that the authorities’ public sector-led development strategy is
contributing to macroeconomic imbalances. To sustain robust growth and address
the emerging risks, policies for the period ahead should focus on promoting
disinflation, achieving an appropriate pace of public investment,
reconstituting official reserves, and promoting greater financial sector
stability.
Directors welcomed the authorities’ goal of
reducing inflation. In this context, they urged the central bank to pursue a
tighter monetary stance and avoid further deficit financing. Directors also
underscored the importance of broadening the toolkit of monetary policy instruments,
including by revamping the market for government securities, which could foster
private saving and investment. Greater exchange rate flexibility would
safeguard foreign exchange reserves, strengthen external competitiveness, and
mitigate external vulnerabilities.
Directors encouraged the authorities to
persevere with their fiscal reforms. In particular, they saw scope for further
improvements in tax administration and revenue mobilization. Additional public
financial management reforms and development of a medium-term debt management
strategy encompassing both domestic and external debt would help achieve the
fiscal objectives under the Growth and Transformation Plan and maintain fiscal
sustainability. Any non-concessional borrowing should be consistent with
maintaining a low risk of debt distress.
Directors stressed that effective financial
sector supervision and regulation remain crucial for macroeconomic stability.
In this regard they advised the authorities to consider participation in the
Financial Sector Assessment Program which would help identify vulnerabilities
in the financial system and suggest corrective actions as appropriate.
Directors encouraged the authorities to address the remaining deficiencies in
Ethiopia’s AML/CFT regime.
Directors agreed that deeper structural
reforms are essential for promoting growth. Accordingly, they underscored the
importance of creating a more favorable business environment and enhancing the
role of private sector in the economy. Directors also called for further
efforts to improve data quality and supported Fund technical assistance in this
area.
Read more here: http://www.imf.org/external/np/sec/pn/2012/pn12117.htm