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During its annual consultation of Article IV, the International Monetary Fund (IMF) recommended increasing access to loans for the private sector while keeping public investment constant. The IMF team also forecasted that the real GDP growth will stand at 8.7 percent for the current fiscal year.
The IMF team, led by Andrea Richter Hume, visited Addis Ababa from June 3-17 to conduct discussions on the 2015 Article IV Consultation with Ethiopia. The IMF published a press release on June 19, in which it shared its findings and recommendations.
The team recommended that public investment, primarily from state-owned enterprises, remains consistent with macroeconomic sustainability, allowing for more credit to flow to the private sector.
Given the importance of maintaining debt sustainability, the team stressed that the government should consider innovative forms of financing. For instance, it suggested that partnerships between private and public parties could help mobilize private debt-free financing.
The IMF noted that enhancing oversight of public enterprises and improving access to information regarding their operations are critical for establishing a solid fiscal anchor.
The press release added that boosting domestic savings is also central to resource mobilization. It stated that the significant expansion in local bank branches in recent years has already contributed to the increase in depositor base.
To promote the availability of long term investment resources, Ethiopia aims to develop its capital markets.
“An important prerequisite will be raising interest rates on government securities and other key securities above inflation, and increasing the use of indirect tools for monetary management,” the statement claimed.
According to the consultation review, these steps would help vitalize the interbank market which would enhance liquidity management and promote financial intermediation, as well as establish a yield curve.
Moreover, the Ethiopian government is considering establishing a capital market. The new financial scheme is expected to be realized in the upcoming GTP II period. Although the idea of a capital market is not new, launching a secondary market to complement the bond market for the Grand Ethiopian Renaissance Dam would offer new funding sources besides direct loans.
The team stressed the importance of decisive structural reforms to foster export growth and export diversification. In the last year of the current GTP, the government has projected to earn USD 10 billion from old and new export items, while the actual achievement is very far from the projection.
Different local and international factors have been stated as a reason for the weak performance. The IMF statement stated that increasing the efficiency of customs clearance and other administrative procedures, improving the quality of logistics, and increasing access to credit remain important. Greater flexibility of the exchange rate would enhance Ethiopia’s competitiveness and support the foreign exchange reserve accumulation.
Ethiopia’s state led development model has delivered rapid and broad-based growth over many years, and it has also reduced poverty significantly, while keeping inequality low, the IMF statement added.
The outlook for Ethiopia remains highly favorable, reflecting its significant economic potential and productivity-enhancing investments and reforms. Ethiopia’s growth has so far been driven in large part by public investment.
To sustain rapid and inclusive growth over the coming years, the private sector will need to play an increasing role as a driver of growth. In the past few year the IMF consultation has been also insisted the increment of the private sector in the country economy.
This year, economic momentum has been strong, reflecting robust public investment in infrastructure and solid performance in agriculture. Exports were hit by lower commodity prices and the impact of Ebola on travel receipts, while imports increased sharply (especially for capital goods and construction-related services).
However, a strong pick-up in foreign direct investment and foreign disbursements to state-owned enterprises allowed gross international reserves to increase modestly. For the fiscal year 2014/15, the team projected a real GDP growth of 8.7 percent, which eases to about 8 percent in 2015/16. The IMF forecast is not much congruent with the government projection.
The IMF team said that inflation has remained in single digits, an important achievement for macroeconomic stability. With food prices pushing inflation close to 10 percent, the team recommends the nation should assume a continued cautious monetary policy stance, and it should give particular attention to core inflation.
It said that, the mission identified two key factors to sustain rapid and broad-based growth over the medium term: boosting domestic and foreign resource mobilization, and reducing bottlenecks to doing business. “These should allow for a growing role for the private sector, which holds the key to job-rich growth going forward,” the statement explained.
Increasing tax revenue collection mechanisms and setting up a more durable way of financing government expenditure will play an important role in bolstering domestic resource mobilization. It recalled that Ethiopia’s tax-to-GDP ratio remains below the regional average. “Improved tax administration, combined with a more streamlined use of tax incentives, will be critical in this regard,” it mentioned.
The team supports the National Bank of Ethiopia’s medium-term objective of having foreign exchange reserves grown to cover the three months expenditure of the following year’s imports of goods and services.
The IMF Executive Board is expected to complete the 2015 Article IV consultation in September 2015.