Radar | Mar 20,2021
As federal authorities eagerly anticipate the potential billion-dollar International Monetary Fund (IMF) package, a team from the Fund conducted a series of meetings in the capital over the past week that could significantly determine the country's economic fate.
The staff met with Mamo Mihretu, governor of the National Bank of Ethiopia (NBE); Ahmed Shide and Eyob Tekalegen (PhD), minister and state minister for Finance; Abie Sano, president of the state-owned Commercial Bank of Ethiopia (CBE); Fistum Assefa (PhD), minister of Planning & Development; Teklewold Atnafu, senior monetary policy advisor; and, Girma Birru, chief macroeconomic advisor to the Prime Minister.
The team's visit is part of ongoing discussions, a follow-up to the one held back in October. A staff-level agreement is expected to be reached before the IMF Board approves a program. However, no deal was reported until our press time on Saturday evening.
Ethiopia's request for financial assistance from the IMF to address food security, humanitarian needs, post-conflict reconstruction, and combatting high inflation is contingent on a staff-level agreement requiring structural economic reforms. Its economic future hinges on a successful negotiation with the IMF, whose directors have signalled their interest in providing up to 3.5 billion dollars in loans.
"Discussions took place and will continue to occur," Governor Mamo told Fortune, declining to comment on details of the discussions.
Tobias N. Rasmussen, IMF's resident representative in Ethiopia, also declined to comment.
"We cannot answer these questions as negotiations are ongoing," he responded by email to questions Fortune forwarded to his office.
However, people informed of the ongoing talks point to the liberalisation of the forex regime, discipline over off-budget spending, tax reforms, and the restructuring of high debts held by state enterprises as contentious issues between Prime Minister Abiy Ahmed's (PhD) administration and the IMF. The IMF team argue that these are crucial steps to restore macroeconomic stability.
Experts say that while loans and debt restructuring offer a lifeline, implementing the reforms the IMF pushes will be critical to achieving sustainable economic growth. For a country currently juggling foreign currency sufficient to cover only three weeks of imports, with over 20 million people in need of humanitarian assistance, and security concerns in several parts of the country impeding economic productivity, they pose the question, what next?
According to Governor Mamo, the central bank is committed to maintaining stable prices with a single-digit inflation rate, promoting financial inclusion and restructuring the central bank under a new proclamation soon, regardless of external support. He said the National Bank of Ethiopia's three-year strategic plan guides these actions.
The three-year plan involves transitioning from a monetary policy targeting aggregate money to a price-based system, relying on open market operations and interest rates as key initiatives. The shift aligns with the recommendations often prescribed by IMF's experts for debt-burdened economies seeking assistance from multilateral banks. It also includes measures such as promoting market operations, enhancing interbank forex and money markets, reviewing current and capital account restrictions, and addressing the disparities between official and parallel foreign exchange rates.
The potential IMF financial assistance to Ethiopia carries significant implications beyond immediate relief, as it is a prerequisite for successful debt relief under the Group of 20's Common Framework mechanism. Bilateral creditors have set a deadline of March 31 for an agreement with the IMF, enabling Ethiopia to benefit from a debt suspension agreement from November. An IMF program is vital to the debt restructuring process under the Common Framework (CF).
Ethiopia's application for debt restructuring was filed in February 2021, with talks beginning five months later. On September 16, 2021, a creditor committee comprising 12 countries, co-chaired by China and France, was formed. The committee includes Ethiopia's major creditors, such as Denmark, France, Italy, Korea, Japan, and the Saudi Fund for Development. China is the major bilateral non-Paris Club creditor, claiming 30pc of the total external debt stock.
The evolution of Ethiopia's external debt over the four years since 2019 has been marked by slight fluctuations, revealing the authorities' caution to borrowing and debt management during economic uncertainties and aid freezes due to wars. The external debt witnessed modest adjustments — rising to 29.4 billion dollars in 2020/21 from 28.8 billion dollars the year before. It then dipped to 27.9 billion dollars in 2021/22, making a minor recovery to 28 billion dollars last year. As of September 30, 2023, the figure slightly lowered to 27.7 billion dollars.
Ethiopia's external debt structure is characterised by its interest rate composition, which mixes fixed and variable rates, with a portion being interest-free. Over recent years, there has been a noticeable tilt towards fixed interest rates, showing the authorities' preference for predictability in debt service costs, which are believed to reach four billion dollars in two years, according to projections the UNDP made.
There has been a significant channelling of funds into sectors deemed essential for growth and development. The government has prioritised investment areas in agriculture, transport and communications, electricity, gas and steam, and water supply.
The authorities depended on a mix of official creditors for the country's financial needs. Multilateral institutions like the International Development Association (IDA) and the African Development Bank (AfDB) remain significant sources of concessional loans, which offer lower interest rates and extended repayment terms. The authorities view the benefits of concessional loans — lower interest rates and more extended repayment periods — as critical in maintaining debt sustainability. However, non-concessional and commercial loans introduce a layer of burden, stressing the need for meticulous debt management to prevent less favourable loan terms from undermining the country's financial stability.
The external debt stock, with 19pc owed to private creditors, has attracted increased scrutiny from foreign bondholders. The scrutiny intensified when the country failed to make a 33 million dollar coupon payment in December.
An IMF program entails more than transitioning to a market-based exchange rate system; it requires comprehensive macroeconomic stability. Reforms to address current account deficits, achieve debt sustainability, recalibrate the balance of payments, reduce inflation to single digits, and ensure debt sustainability are first in line. A macroeconomist, speaking anonymously, likened the IMF program to an ambulance providing immediate assistance, with long-term health dependent on sustained attention to overall well-being.
"Tough but essential measures are what the program offers," he said.
The macroeconomist praised the central bank's current orientation and urged strong, sound, and resilient reforms. According to the macroeconomist, countries benefiting from IMF programs must leverage the potential credit facility to address structural economic imbalances effectively.
"It's timely and encouraging," he told Fortune.
While forecasts about the economic implications of an IMF agreement have to wait until the specific deals are known, the potential benefits of further debt restructuring agreements for lifting temporary debt burdens are not up for debate.
The inevitable devaluation of the Birr has been a topic of discussion, partly driven by the IMF's emphasis on liberal exchange markets and the Prime Minister's hinting at forthcoming reforms. Prime Minister Abiy recently likened reforms to a dentist pulling out a tooth, signalling the need for strict measures. The IMF's support for Ethiopia's economic reform agenda is contingent upon the administration's political will to implement enabling reforms. The initial reforms proposed in 2019 targeted a gradual transition to a flexible exchange rate regime to narrow the gap between the parallel and official markets.
People familiar with the ongoing talks say Ethiopia's authorities have agreed on the reform measures to be taken in principle; the bone of contention with the IMF is over extended time and phased implementations deals they call "back-loaded." In the experts' parlance, the IMF team insisted on "front-loaded" deals, meaning the authorities should take reform measures immediately after programs have been agreed upon.
Economist Atlaw Alemu (PhD) downplayed the significance of either a slight currency devaluation or a significant shift in exchange rate policy for the main economy. He views the economic turmoil as stemming from deeper systemic failures rather than exchange rate policies. Recalling past devaluations, including a 15pc drop six years ago, Atlaw noted that such actions did little to improve export performance or bolster foreign currency reserves.
"Exchange rate policy is a smaller element of the country's economic problems," he told Fortune.
According to the economist, the agricultural export sector, reliant on imports for inputs like fertiliser and seeds, will struggle with higher costs regardless of exchange rate adjustments. Unlike countries like China, which benefit from currency devaluation due to higher exports, Ethiopia's productivity levels have not improved significantly. Atlaw suggested that while the IMF program could somewhat relieve debt burdens, it may not address the root causes of the economic malaise.
"A path to a little debt relief is all the IMF could offer," Atlaw said.
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