IMF and Ethiopian authorities reached staff level agreement on 2nd review of the 4 year USD 3.4 billion Extended Credit Facility (ECF). Upon approval by the IMF executive board, the agreement would allow Ethiopia to have access to USD 251 million financing.
In their second visit since the approval of the 4 year ECF arrangement amounting USD 3.4 billion, the IMF staff approved the progress in regards to transition towards market-determined exchange rate citing the ease of foreign exchange requirements, and promising transactions in the fledging interbank forex market, and successful launch of interbank money market. The staff argued these reforms helped ease forex shortages substantially and led to a significant narrowing of the spread between the official and parallel market, hitting below 10 percent.
The IMF staff projected a positive outlook for growth and downplays concern for a continued rise in inflation following the move to float the currency and the substantial supplementary budget passed recently[1]. IMF has argued such inflationary pressures can be muted by a tight monetary policy that the authorities are expected to implement in the medium-term while transitioning to interest rate-based monetary policy.
IMF’s outlooks are overoptimistic. Its measure of current inflation is likely based on suppressed inflation reports, and as such underestimates the inflationary pressure of the move to a floating exchange rate regime. In its projections of the medium-term outlook, it also missed on the policy uncertainty, particularly tax policy uncertainty, facing investors and pushing some foreign investors to close up enterprises and move to neighboring countries with a relatively stable investment and tax policy regime. This is counter-intuitive to the transition to private sector led growth which is an overarching theme in the home grown economic reform (HGER) agenda supported by the IMF’s ECF.
[1] The House of People’s Representatives of Ethiopia, approved 582 billion birr (USD 4.7 billion) supplementary budget for 2024/25 fiscal year in November 2024. This amounts 60% of 971.2 billion birr already approved for the fiscal year in July 2024.