The International Monetary Fund has commended the federal government on the execution of the terms of its Extended Credit Facility (ECF) program while cautioning about looming risks.
Last week, the IMF released a 90-page report of its first review of the ECF program approved in July and scheduled to last four years. The EFC comprises part of a USD 10.7 billion package from development partners and creditors for Ethiopia.
“The estimated residual financing gap over the 2024/25–2027/28 program period remains unchanged at USD 10.7 billion and is expected to be covered,” states the new report.
The IMF is extending USD 3.4 billion as part of the program, while the government expects USD 3.75 billion in budget support from the World Bank, a further USD 3.5 billion associated with debt treatment under the Common Framework.
The report indicates that Ethiopia’s forex reserves had almost tripled to USD 3.6 billion within a month after signing the agreement with the IMF, partially bolstered by high gold export revenues.
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Lower-than-projected sales of FX by the NBE and stronger gold exports in July and August 2024 contributed to the over performance in meeting the August 16 target, reads the report.
The IMF called the implementation of economic reforms in Ethiopia “commendable,” praising progress made in narrowing the spread between the formal and parallel market exchange rates.
The spread fell from 96 percent to less than 10 percent over the last few months. The report notes that forex liquidity is still limited, evidenced by a lack of activity in the newly-opened interbank forex market and banks’ preference for satifying own-client demand.
“The supply of foreign exchange is picking up, helping alleviate acute foreign exchange shortages. Nonetheless, some unmet foreign exchange demand persists as economic agents are still adjusting to the new FX regime,” reads the report.
The IMF urges continued tight monetary policy and elimination of monetary financing of the government as crucial to cooling inflation, while it recommends expanding social safety nets to mitigate the impacts of reforms on vulnerable people.
“Maintaining momentum on domestic revenue mobilization and structural reforms in the SOE sector is essential to creating sufficient space for social and developmental capital spending,” reads the report.
A statement from Bo Li, deputy managing director and chair of the IMF board, indicates the existence of arrangements to address due forex payments for past fuel imports.
Last month, the federal government decreed that all commercial banks are expected to cover a significant portion of the foreign currency needed for fuel imports.
“As economic agents adjust to the new FX regime, reform momentum and clear communication will need to continue to ensure a fully successful and sustained switch to a floating exchange rate,” reads Li’s statement.
The IMF praised the Ministry of Finance and the National Bank of Ethiopia (NBE) for following its program recommendations to the tee, including in introducing new tax rates, lifting fuel subsidies, and issuing a 900 billion birr bond to cover SOE debt.
In a letter addressed to IMF Director Kristalina Georgieva, Finance Minister Ahmed Shide and central bank Governor Mamo Mihretu also reiterated their commitment to implementing the IMF program in full.
Nonetheless, the IMF program review report also lists potential risks.
“While tightening policies and adjustment will constrain economic activity in the near term, policy reforms are expected to support higher growth and continued easing of inflation over the medium term. Key downside risks include persistent inflation or depreciation expectations, security risks or social unrest, policy slippages and commodity price volatility,” reads the report.
It cautions that potential exchange rate pressures could generate volatility, while noting that inflation and depreciation could call for a stronger policy reaction.
“Inconsistent implementation or reversal of key fiscal or exchange rate reforms could result in larger financing gaps or withdrawal of development partner or creditor support. Intensifying regional spillovers from regional conflicts also pose risks to the outlook,” it reads.
Disruption due to domestic conflict in the Amhara, Oromia, and Tigray regions, rising import costs owing to international price hikes, potential social unrest associated with inflation, and climate shocks are also mentioned as risks.
Fallout with Somalia over the Somaliland MoU and a resurgence in Al-Shabaab terrorism could cause a decline in regional stability and have spillover economic effects, according to the IMF.
It recommends the government to espouse policies for clear communication, the facilitation of humanitarian aid, and accelerated peace talks to subvert the risks. The IMF also recommends the acceleration of reforms enhancing export competitiveness and adopting a market-clearing exchange rate policy.
Accelerating the WTO accession process and the implementation of trade agreements such as AfCFTA are also on the list of recommendations.
The government will likely need to increase social spending to cope with higher prices for import commodities such as food, fuel, and fertilizer.
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