IMF recommends further devaluation of Birr

Even though the tax to GDP ratio has gone down more than expected, the government is expected to introduce a new tax levy in addition to reforming the excise tax to boost the government revenue. The International Monetary Fund (IMF) has recommended another devaluation of the birr and forex market flexibility.
Since the beginning of the first Growth and Transformation Plan (GTP) the government has expressed its eagerness to expand the revenue from tax in line with the rate of the GDP. It has also show an improvement in the first GTP even though the rate is under the projection. At the heyday of tax collection in 2014/15, which was the end of GTP I, the revenue authority body which at the time was the Ethiopian Revenue and Customs Authority, collected 12.7 percent of the DGP. This is lower than peer economies and countries in the east Africa region.
However the tax collection has not risen in proportion to the growing GDP. For instance, in the 2016/17 budget year the tax collection stood at 11.6 percent of the GDP. According to the latest report of the IMF it has went down more in the previous fiscal year and is now 11.1 percent less than the preceding period, which is very far from the target of 17 percent at the end of the current GTP, which will end in the coming budget year. The IMF forecast indicated that in the current and the coming budget year the tax GDP ratio will stand at 11.2 and 11.3 percent which indicates that the government will never attain its target of over 17 percent in 2020. In its Article IV consultation the IMF usually recommends that expand its tax revenue to widen the public expenditure coverage from tax.
The latest IMF report, which is the final of preliminary reports issued in September this year, stated that Ethiopia has made progress in mobilizing domestic revenue since the mid-1990s, but still lags countries in the region and other low income countries (LICs). “The tax-to-GDP ratio rose from 8.6 percent in 2008/09 to 12.7 percent in 2014/15, but it has declined since then to 11.1 percent in 2017/18,” it said. In the past budget year the government has targeted collecting 200 billion birr, but the actual performance was actually ¼ of the target, which is a significant reduction compared with the recent trend in the tax collation and target achievement ratio.
“Ethiopia relies heavily on trade taxes, while direct and indirect taxes have underperformed. Direct and indirect tax revenue was 56 percent of total revenue in Ethiopia in 2016/17, below the 64 percent average for LICs. Trade tax revenue, at 26 percent of total, is substantially above peers, while non-tax revenue plays a small role in domestic revenue,” it added.
Ethiopia lags behind regional peers on VAT and CIT (corporate income tax) efficiency measures-a key reason for the low tax-to-GDP ratio, according to the IMF consultation report.
“On revenue mobilization, the authorities intend to redouble their efforts, with support from donors, including the Fund, to strengthen revenue administration and were also considering revenue-enhancing tax policy measures-such as excise reforms,” it added.
It has added that the government goal of addressing the decline in tax revenues through a comprehensive Tax Transformation Program (TTP) that has directly followed by the Prime Minister and undertaken a consultant and a task force under Ministry of Finance to improve the tax system and revenue via a browed tax system. The TTP focuses on taxpayer registration, e-filing and digitalized self-assessment, compliance risk management, tax arrears management, and federal regional tax coordination with assistance from the Fund and other development partners.
“Consistent with Fund advice, the authorities are conducting a cost-benefit analysis of existing tax expenditures with a view to their rationalization,” it said. In addition, the authorities could implement reforms in excises and introduce a property tax, thus generating additional fiscal space.
Currently the government has imposed from 10 to 100 percent in excises tax on 19 different types of products. However the property tax would be new for the country if it becomes effective. Source at Ministry of Finance told Capital that initially property tax has been studied by Ministry of Urban Development and Construction. “Because it is not the mandate of the urban development ministry we have now taken it to study under our jurisdiction,” a source, who is in the legal department at Ministry of Finance said.
The urban finance strategy of Ministry of Urban has been included the revenue collection from property in towns that is now revised by Ministry of Finance, according to sources.
Currently individuals are focused on buying houses, which are not taxed, they then invest their capital in other businesses. Property tax has targeted discouraging those who focus on expanding property ownership in addition to expanding government revenue, according to sources. Property taxation is common in other countries. For instance the majority of African states have a property tax system.
Monetary and financial sector policies recommendation
In its latest report IMF under its monetary and financial sector policies recommendation gives the usual suggestion for more devaluation, despite that the government applied a 15 percent devaluation on the birr against major hard currencies in October 2017.
IMF stated that the tighter fiscal and monetary policy stances, coupled with a more flexible exchange rate, would support external competitiveness. “The competitiveness boost from the October 2017 devaluation has since been largely eroded. The birr was kept constant relative to the US dollar while the latter appreciated against major currencies; and Ethiopia’s inflation differential relative to trading partners has stayed high,” the report explained. “As a result, staff assesses that the external position is weaker than medium-term fundamentals and desirable policy settings would imply, and the real effective exchange rate was overvalued by 12–18 percent as of September 2018 only a modest improvement since last year’s assessment,” it added. According to the IMF, more recently, the National Bank of Ethiopia (NBE) has resumed its previous policy of gradual nominal depreciation against the US dollar. It added that a more flexible exchange rate aimed at eliminating misalignments and building up reserves would help competitiveness and foster stability, while reducing foreign exchange shortages.
The report believed that a more flexible exchange rate policy aimed at reducing the real overvaluation of the birr, reducing foreign exchange shortages, and accumulating reserves would help to improve competitiveness.
The report stated that the more restrictive monetary base targets and public sector credit policies, including tighter NBE deficit financing, will help bring down inflation. “These policies need to be complemented by a more flexible exchange rate policy aimed at correcting the birr overvaluation, improving reserve coverage and reducing foreign exchange shortages, as well as by the development of financial instruments with market-based interest rates and other financial development measures, as discussed below,” it added.
The country debt has also grown compared with the past year by close to 4 percent. A year ago the debt ratio compared with GDP has stood at 57.2 percent, while in 2017/18 fiscal year it grew to 61 percent. From the total debt domestic debt has increased by one percent and stood at 28.8 percent. The external debt was 32.3 percent in 2017/18, and was 29.4 percent in 2016/17.
According to the government, due to the growing debt stress in the current 2018/19 budget year, no new projects will be allowed to rely on non-concessional financing, and ongoing projects will largely shift to concessional financing.
IMF stated that the Debt Sustainability Assessment (DSA) shows that Ethiopia remains at high risk of debt distress because of its small export base. Public and publicly-guaranteed external debt breaches the thresholds for the present value of debt-to-exports and debt service-to-exports in the baseline. Debt service payments are expected to increase in the coming years, as grace periods on non-concessional debt acquired in the past expire.
Regarding real GDP growth activity will be supported by continued growth in manufacturing and services, particularly expansion of air transportation, while construction may remain subdued due to restrictive public policies, according to the IMF.
Based on current policy settings, medium-term economic growth is envisaged to converge to around 7 percent, supported by rising FDI, continuing investment in infrastructure by the public sector, and rising productivity levels as export-oriented industries take root and start operations.
The IMF report forecasts that FDI and remittance growth are expected to resume as political uncertainties settle following the leadership transition. “External financing constraints will temporarily ease in 2018/19, owing also to the recent USD 1 billion deposit from the UAE and a USD 1.2 billion World Bank Development Policy Financing (DPF) operation. As a result, international reserves are expected to reach USD 3.4 billion (1.8 months of prospective imports) in June 2019 consistent with the authorities’ projections.
According to the report as of the end of the past fiscal year the country’s reserve stands at USD 2.8 billion of imports of goods and nonfactor services of only 1.6 months (the government stated that it was a 2.1 months) that supposed to be at least 3 months. In the 2016/17 fiscal year the reserve was USD 3.19 billion or importation for two months.
According to the IMF, foreign reserves have increased to USD 3.7 billion in September, following the receipt of a USD 1 billion deposit from the Abu Dhabi Fund for Development (ADFD) in NBE in July. However, foreign exchange shortages persist, as evidenced by the spread between the official and parallel market exchange rates and the long wait times for businesses to obtain foreign exchange.
In the monetary and finical sector policy the IMF stated that the NBE’s stance of containing reserve money growth to 13.3 percent in 2018/19 is a welcome step to bring inflation to target but will need to be complemented by other policy measures.
In recent years, the growth rates of reserve money and of broader credit and monetary aggregates have diverged. This signals that reserve money may be losing its effectiveness as a monetary policy instrument a natural transition as the financial system deepens and becomes more sophisticated. “Hence, the base money target needs to be complemented with policies to contain credit growth, especially to the broad public sector,” IMF recommended.
Beyond the immediate term, however, the NBE’s intention to develop market-based indirect monetary instruments will necessitate the creation of a market for government debt with market-determined interest rates, according to IMF.
It added that Ministry of Finance could issue specially designed marketable securities in gradually increasing volumes to finance the budget, which could be held and transacted by banks and other appropriate institutions.
In turn, the NBE would use interventions in this market to signal its interest rate stance, helping to better control broad money and credit growth. Issuance of these budget-financing securities would allow the gradual phasing out of NBE financing of the government.
Since the commencement IMF opposed the implementation of NBE bills that forced banks to buy 27 percent of every loan with a five year maturity and 5 percent interest rate, which was 3 percent before October 2017. In its latest report it has also recommended the reform of NBE bills in addition to discontinuing the funding of the policy bank, Development Bank of Ethiopia (DBE), the cash collected from private banks on NBE bills.
“These 5-year NBE bills must now be purchased by private commercial banks in an amount equivalent to 27 percent of gross credit extended, irrespective of the maturity of the loans-about 75 percent of these funds are then used to fund the DBE, whose NPL ratio has steadily increased to 39 percent,” it said. It said that NBE bills now represent 30–40 percent of private commercial banks’ loans outstanding, and although the interest rate on them was recently increased, it remains negative in real terms.
“The bills have been successful in reducing banks’ excess liquidity, but their design should be improved to better serve this purpose until a T-bills market develops-by reducing their maturity and possibly basing the purchase obligation on excess reserves,” it said. “Further funding of the DBE by the NBE should be discontinued, at least until the ongoing comprehensive assessment of its financial situation is completed and resolution measures are implemented,” it added
The IMF report has indicated that the country GDP at current market price stood at 2.138 trillion birr in 2017/18 fiscal year; a year ago it was 1.807 trillion birr.

The Ministry of Trade and Industry (MoTI) is accusing oilseed and pulses exporters of illegal activities associated with foreign trade because they allegedly traded sesame seeds and white pea beans outside the Ethiopian Commodity Exchange (ECX).
Two weeks ago officials at the ministry called a meeting of 95 business people involved in exporting sesame and white pea beans including the board of directors of Ethiopian Pulses, Oilseeds and the Spices Processors and Exporters Association (EPOSPEA) to consult and warn about the illegal activity in illegal trading against ECX.
Sources in the sector told Capital that the officials have clearly indicated that the export price of sesame seeds are lower than the value that exporters purchased them from ECX and some of the exporters have suspended their export. This is happening at a time when other exporting countries like Sudan and Nigeria are expanding their exports and boosting their production, according to sources who attended the meeting. The source adds that, MoTI officials say Ethiopia is losing its major sesame seed market in China, which consumes 70 percent of Ethiopia’s production.
The sector experts said that even though it is the peak season for sesame seed production like other export items traded at ECX the price has sharply increased every day. A pulse and oilseed trading consultant, who requested anonymity also said that even though the price has gone up at ECX some of those exporters are exporting the seeds at lower price than the rate that they paid at ECX. “This has confused the market,” he added.
“For instance, even though the exporter paid USD 1,750 per ton of sesame seeds during trading at ECX it will sell it for USD 1,500. This trend has affected the export oriented businesses,” he explained.
Ministry officials are warning the illegal traders that they are only harming themselves. “Both your business and the country are losing due to your practices,” the officials said. They have told the exporters that they consider this to be under invoicing, which is illegal.
Experts said that some new exporters are joining the export business in order to access hard currency, which is severely scarce, for their other business.
The latest trend is also seen by some of the manufacturers who are unable to get foreign currency from banks unless they are engaged in export business. According to experts they are told by banks to engage in an export business to access foreign currency which affects the export business.
“Manufacturers are engaging in the export to get relief from their daily work and settlement of bank loans and labor costs since it is their ultimate goal, but it has affected the country’s hard currency earning and business owners,” experts said.
In the meeting at MoTI, the officials also stated that there are exporters buying white pea beans outside of the trading floor. Sources said that some of the exporters are engaged in buying the bean from primary markets like Adama.
Sources said that even though MoTI officials warned those illegal actors nothing has changed so the ministry has written a warning letter to exporters via their association.
Association sources said that the current move from the government is the right decision otherwise the sector will be crushed in the coming few weeks since most of the regular exporters are buying and selling the products in connection with a loan scheme from banks.
The letter issued on Monday December 3, and signed by Mesfin Abebe, Crops Marketing Directorate Director at MoTI, stated that the ministry has been made aware of the latest illegal practices at the sector.
The letter that Capital obtained stated that the ministry will take action against those engaged in illegal activity.
According to the sector actors, engaging in exporting sesame seeds, which is the second largest hard currency source after coffee, is not difficult for new comers since the seeds are well accepted by major destinations in Asia. A few years ago Ethiopia was one of the top sesame seed exporters in Africa and listed as one of the top five in the seed production and trade in the world. The latest data indicated that new countries like Tanzania and Nigeria have expanded their production more than Ethiopia. China, India and Myanmar are major producers but they are also large consumers.

A Joint Venture contracting company which is developing the National Integrated Justice Information System (NIJIS) is complaining that the government has been slow to finish reforms which are affecting its development. They want the customization finished faster. The local partner of the JV Africom Technologies stressed that the finalization of the National ID is also necessary for the highly expected system to operate effectively.
It was back in April the project was signed between the Office of the Attorney General and Africom Technologies, ISYX Technologies and ALROWAD IT at a price of USD 14 million. The JV which is in the process of receiving 10 percent of the total payment says the delay in the precondition means the project will slow down and hinder their business.
“We deposited USD three million to the government both for performance and advanced security and we are expecting a USD 1.5 million advance payment,” said Baheru Zeynu. “The project will be delayed a few months based on the current status and if the government can’t finalize the preconditions both our business and the peoples’ demand for justice will be affected.”
With a life span of 28 months, the integrated system will enable the federal and regional institutions under the justice umbrella including police, courts, prison and documents registration. The companies are expected to work on the maintenance, support, and training of the system after the implantation is finalized.
The JV that beat out seven global companies, including ZTE and Huawei, is composed of two Asian companies which built and operate the Judicial Data System in Dubai. Alrowad is the company which runs the Social Security Service in Dubai.
The JV also finished the gap analysis and is waiting for the government to hand over its workflows to go to the next stage of customization, according to Baheru. The companies apparently have 20 features in their past experience and it only needs to be adapted to the Ethiopian feature.
The Office of Attorney General established technical committees to finalize the demands, according to Zenabu, PR directorate Director of the Office.
Capital’s repeated effort to obtain a comment from the IT Directorate Director at the Office, monitoring the project, bore no fruit.
When the system is completed it is expected to contain the entire history of the justice records in the city. This would include: finger prints, the medical history, educational background and details in the crime record. Currently the justice sector stakeholders are performing their jobs separately in terms of data and that is said to affect the rights of the cities. A sector analysis revealed that there were cases where prisoners spent additional time in prison because of a misinterpreted release date.
The OAG claimed the delay was created because of the payment constraints as a result of the lack of necessary conditions by the office before the singing of the contract.
“As the payment is going to be made from the capital budget Ministry of Finance asked for a letter from the consulting company insuring the appropriateness,” said Fantaye Kumsa, Head of the IT Directorate at the office. “But after long debates the Ministry agreed to pay the advance payment to the companies referring only to the contract. Also INSA was hired as a consultant to look over the project but now we agreed that no payment will be made to them and we are finalizing an external consultant.”
Establishing the Project office which will look on to the inception report of the JV took time and it is looking to the report to send its comment next week, according to Fantye. She also stated that the issue of the national ID will be solved before the finalization of the NIJIS as the respective Ministry is handling the issue critically.
“We will accelerate the procedures starting next week as most of the constraints are moved away, expect for the foreign exchange issue which we will expect to consider in advance,” she said.

The Djibouti branch of the state owned Commercial Bank of Ethiopia, (CBE) Djibouti Limited is hoping to escalate its business via international business and transfers after the long awaited SWIFT Code is secured.
Mathewos Kidane, Acting Manager for Customer Service at CBE Djibouti, said that his company has been unable to commence the massive banking business which they were planning on starting in Djibouti because the bank was waiting for a SWIFT connection.
He said that the bank has a goal of starting the activity in the export operation and transfer service, which is in high demand by Ethiopians based in Djibouti.
In the past 20 months since its recommencement of operations the bank has been focused on opening current and savings accounts, which is manage by USD and the Djibouti Franc. So far the Djibouti branch has about 300 account holders including Ethio Djibouti Railway Corporation which is a pioneer as a client at CBE Djibouti Limited. “We did not introduce total banking operations so we have been focused on opening accounts,” he said. “Now we hope that in the near future the operation will expand into major business in the country which means foreign businesses and transfers,” Mathewos added.
According to the acting manager for customer service, initially the branch was expecting to get the SWIFT Code in a short amount of time, but the Italian company asked for several preconditions and documentation to provide the code. “We got a green light about a month ago and expect to commence the whole business in the coming weeks,” he explained. Currently employees of the bank, which has about 17 employees at Djibouti, in training sessions to introduce the new service, while IT experts are expected to arrive in Djibouti to commence operation.
The financial sector environment in Djibouti is highly competitive since some prominent international banks are involved. Including CBE 12 banks operate in Djibouti, which has less than one million people. “The bank has a direct relationship with Ethiopia wants to serve Ethiopians and Djibouti citizens, who have a business relationship with Ethiopia, to work with the bank,” Mathewos told Ethiopian journalists visiting Djibouti.
The country has a direct business relationship with Ethiopia that attracts an international cliental. For this reason adequate facilities are needed to serve major Ethiopian businesses or operations like the Ethiopian Embassy, Ethiopian Shipping and Logistics Services Enterprise and other Ethiopians. ESLSE was registered as the first account holder at the Commercial Bank of Ethiopia Djibouti Limited when it opened its doors on April 8 in the heart of the city.
CBE Djibouti Limited wants to dominate Ethiopia’s logistics business transactions between the two nations.
About twenty months ago, the bank reopened with a total capital of over USD 6.3 million and a plan to be one of the major financial institutions in Djibouti.
Before its closure in 2004 the bank was one of Djibouti’s major financial players. As former leaders of the branch bank stated it was a respected bank in the past and can return to that reputation.
When the bank closed its doors over a decade ago the major reason was a high non performing loan portfolio amounting to USD 16.7 million.
Djibouti mostly imports Khat from Ethiopia. Before halting its operation in 2004 Khat importers were the major customers of CBE’s Djibouti branch. The Ethiopian community was another potential customer for the bank. At that time the economic activity was very slow and the bank activity mainly focused on Khat.
Before it left Djibouti, CBE Djibouti sold several of its buildings. Initially the bank expected to become profitable within two years, but currently it is losing money.
In Djibouti CBE began operation in 1962 as a liaison office and became a full-fledged bank in 1971.