The IMF cautions Ethiopia that the pace of change is vulnerable due to declining donor support
Ethiopia has met important program milestones, but the International Monetary Fund (IMF) warned Tuesday that the country’s reform agenda under a $3.4 billion loan package is being hampered by dwindling donor support.
In a lengthy study, the IMF commended Ethiopian officials for enacting tax reforms, monetary tightening, and subsidy reductions, among other economic measures.
It did, however, issue a warning that growing vulnerabilities, like a resurging parallel foreign exchange market and precarious security conditions, might impede development and make debt restructuring initiatives more difficult.
After reaching an agreement in principle with official creditors earlier this year, Ethiopia is still in default and is looking to bondholders for similar debt relief. “The outlook remains subject to downside risks given security challenges and declining donor support,” Nigel Clarke, the Deputy Managing Director of the IMF, stated.
Ten years ago, foreign aid to Ethiopia was 12% of GDP; today, it is less than 4%, and more cuts are expected as organizations like USAID reduce their spending. With the UN response plan underfunded and other initiatives depending on temporary waivers, the IMF reported that one in five Ethiopians needed food or humanitarian aid this year.
Although Ethiopia has made strides toward liberalizing its foreign exchange market, structural problems still exist, such as high transaction costs, a 2.5% central bank tax on FX sales, and restricted interbank liquidity. According to the IMF, these factors have caused the parallel market premium to rise to 15%.
With the help of stricter monetary policy and credit limits, inflation has decreased more quickly than anticipated. However, in order to increase credibility, the IMF advised Ethiopia to speed up its shift to a contemporary policy-rate-based framework and enhance communication.
Delays in privatization and lower-than-expected foreign direct investment were also noted by the IMF as potential obstacles to attempts to restore reserves and reduce the balance of payments gap.
With exports of goods and services now expected to reach 12% of GDP in fiscal year 2024–2025, up from 9.6% at the time of the second review, the IMF acknowledged an improved export outlook. Earlier this month, Ethiopia got a $262 million payout from its IMF program.
