IMF forecasts domestic debt to decline, external debt to rise

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The International Monetary Fund forecasts that Ethiopia’s domestic debt will decline while its external debt rises. The final version of the International Monetary Fund’s (IMF) Article IV for the past fiscal year indicated that the country external debt grew at a higher percentage than the past few years, while domestic debt will decline in the current fiscal year.
The report, issued in the middle of the week, stated that the country’s external debt compared with its GDP will be 33.1 percent. This is an increase of two percent compared with the 2016/17 fiscal year.
The IMF has raised concerns about the nation’s external growth. However, its external debt growth has not risen significantly over the past three years and has not passed 30 percent.
The IMF’s statement indicates that Ethiopia’s external debt will be 33.1 percent, which is slightly more than the estimated 30.4 percent last fiscal year. Two years ago the country’s external debt was estimated at 30.7 percent and 30.3 percent in 2014/15.
The IMF Executive Directors who appreciated the government’s efforts to expand exports, and increase private sector involvement in the economy, underlined that external imbalances and inadequate reserve buffers remain a key risk, and urged the authorities to maintain determined policy actions to control external borrowing.
The estimation for this year, is the second largest move after 2014/15, according to the report. The IMF statement indicated that the country’s external debt compared with the GDP has increased to 30.3 percent from 25.8 percent the preceding year.
The IMF projection indicated that the country’s public debt which includes domestic debt will be 59 percent of the GDP for the 2017/18 fiscal year, which was estimated to be 56.9 percent in the past fiscal year.
The report projected that domestic debt will decrease compared with the past year. It would be the first incident after years of stagnation if the IMF projection comes true. The domestic debt has been growing steadily in previous years. A small growth rate of domestic debt is part of the target set by the government to keep inflation to single digits.
The IMF report stated that the domestic debt would 25.9 percent of the GDP, which is a decrease compared with the 2016/17 fiscal year.
The Directors commended the restrictive public sector borrowing policy to contain external debt and imports while protecting pro-poor spending, the devaluation of the currency to regain competitiveness, and the tight monetary policy to rein in inflation.
Gross domestic investment will also decrease for the third year in the row. The Article IV Consultation of IMF indicated that the domestic investment will stand at 36.4 percent which is a decrease of 0.2 percent compared with 2016/17. The gross domestic investment has decreased for the past two years and will continue during the current year from its heyday in 2014/15 when it was 39.4 percent.
Private investment will continue growing, while the public investment will slow down as has been the trend over the previous three years.
The country’s gross official reserve will show an improvement for the current year over the estimated 1.9 months of imports or USD 3.2 billion. The projection indicated that the gross official reserve will become two months or USD 3.67 billion, but this is lower than the standard of at least three months of imported goods.
It indicated that the Executive Directors welcomed plans to improve the management and oversight of public enterprises, including undertaking audits for some large state-owned enterprises (SOEs). “Public-private partnerships (PPPs), long-term concessions, and privatization of SOEs could offer opportunities to fund critical infrastructure,” the report added. Recently, the government secured a huge amount of hard currency from its sale of shares of the National Tobacco Enterprise to Japan Tobacco International at a cost of USD 434 million.
The directors also encouraged the authorities to continue to monitor the NPLs of the national development bank (Development Bank of Ethiopia, NPL reached over 25 percent) and to shift its current funding mechanism to a less distortive system.
The statement that IMF released on January 17 indicated that the directors urged implementation of the action plan to further strengthen the AML/CFT (anti-money laundering/combating the financing of terrorism) framework.
IMF welcomed the birr devaluation by 15 percent against other major hard currencies. In the report the directors noted that a more flexible exchange rate would help preserve competitiveness and foster export diversification, and recommended eliminating exchange restrictions.