IMF released a report on the current status of the Ethiopian economy and their basis for providing $62.5 million to Ethiopia. Here is the executive summary.
EXECUTIVE SUMMARY
Continued good progress has been made on macroeconomic stability and growth momentum remains strong. Inflation continues to ease in the mid-single digits. Reflecting buoyant exports, strong donor inflows, and financing from the Fund, international reserves are building up. Real GDP growth is estimated to have reached 8 percent in 2009/10. The fiscal stance was tightened with much lower domestic financing than targeted.
Monetary policy was tightened considerably with reserve money growth reduced to single digits on lower credit to government. Excess liquidity in the banking system was significantly reduced.
The ESF(Exogenous Shocks Facility) arrangement remains on track. All of the quantitative performance criteria and indicative targets for July 7, 2010, were met with margins, the structural benchmarks were implemented and completion of the second and final ESF review is recommended.
The macroeconomic outlook for 2010/11 is broadly favorable. After the large devaluation of the currency on September 1, real GDP growth will rise to 8.5 percent, reflecting an anticipated bumper harvest and ongoing strong goods and services exports. The external current account balance would deteriorate as imports pick up, including a large aircraft purchase, and official transfers return to their historic levels. The key policy objectives are to keep inflation in single digits, to continue building international reserves, to implement a monetary policy that promotes monetization and financial deepening, and to maintain fiscal sustainability.
Fiscal policy in 2010/11 aims to continue the strong focus on physical and social
infrastructure investment, while raising the revenue effort. The ongoing tax reform measures will help raise the general government tax revenue-to-GDP ratio further. On the expenditure side, capital outlays and social spending would rise while other outlays are maintained in relation to GDP. The fiscal stance is compatible with maintaining the low risk of public external debt distress and the authorities intend to continue effective control of public enterprise borrowing.
Monetary policy has recently been reframed to target reserve money in support of a
monetization effort. Low reserve money growth, backed by a phasing out of new central bank direct credit to government, will enable the absorption of remaining excess liquidity by end-2010 and the removal of the bank-by-bank credit ceilings, shortly thereafter. To ensure monetization is accompanied by financial stability an upgrading of the NBE’s supervision and regulation capacity is needed. An FSAP would provide a useful guide for financial sector.
The ESF-supported program has achieved its objectives of reducing inflation and
rebuilding external reserves. However, much remains to be done to sustain and accelerate
growth. A focus on the investment climate, trade and exchange liberalization, and financial
sector development, anchored by sound fiscal and monetary policies, is essential to by sound fiscal and monetary policies, is essential to durable improvements in competitiveness and sustained high growth. A unification of the official and parallel exchange markets would free up significant efficiency gains. Creating more room for private sector activity would leverage the growth impact of the large public investment outlays on infrastructure.
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