The International Monetary Fund (IMF) has approved the immediate disbursement of about US$261 million to Ethiopia following the completion of the fourth review of the country’s Extended Credit Facility (ECF) program, providing critical support to address balance of payments pressures and fiscal financing needs while advancing ongoing economic reforms.
The decision follows the IMF Executive Board’s assessment that Ethiopia’s program implementation remains broadly on track, with key performance targets largely met and reforms progressing under the government’s Homegrown Economic Reform Agenda, aimed at restoring macroeconomic stability and laying the groundwork for sustainable, private sector-led growth.
The latest disbursement brings total IMF financial support to about US$2.18 billion under the four-year arrangement, reinforcing Ethiopia’s efforts to strengthen fiscal discipline, modernize monetary and foreign exchange policies, and advance debt restructuring discussions to support long-term economic stability.
Ethiopia’s ECF arrangement for a total of SDR 2.556 billion (850 percent of quota) or about US$3.4 billion at the time of program approval on July 29, 2024, is aimed at supporting the authorities’ Homegrown Economic Reform Agenda (HGER) to address macroeconomic imbalances and lay the foundations for private sector-led growth.
Overall program performance was broadly in line with program commitments. All quantitative performance criteria (QPCs) and most indicative targets (ITs) were met. A new QPC setting a zero limit on foreign exchange (FX) intervention except through auctions has been introduced. The government’s contribution to the targeted social safety nets (indicative target) was lower-than-targeted to prioritize absorption of development partner contributions. Most of the structural benchmarks have been met. While the thrust of fiscal reforms has been consistent with program commitments, the Federal Budget for FY25/26 deviated from program parameters agreed at the third review (missed structural benchmark). The authorities have committed to a set of measures to ensure the fiscal deficit is financeable, and expenditures remain consistent with program objectives. The structural benchmark on the publication of Ethiopian Investment Holdings’ (EIH) financial statements was not met due to implementation delays.
Maintaining a tight monetary stance continues to be appropriate to anchor inflation expectations and support further declines in inflation. The authorities continue to take steps to enhance the functioning of the foreign exchange market.
Revenue mobilization has been strong, and recent tax policy reforms bode well for broadening the tax base and raising revenue potential. Tax and customs administration reforms will be important in broadening the tax base fairly and sustainably, fostering a more stable taxation environment that can support private investment. Continued prudence in raising spending despite occasional strong pressures, consistent with revenue performance, and efforts to develop domestic sources of financing are essential to maintain sustainable fiscal policy.
The authorities continue their efforts to restore debt sustainability and secure a debt treatment. The progress made on debt restructuring negotiations under the Common Framework, including the recent completion of the signing of the Official Creditor Committee Memorandum of Understanding, is welcome. Discussions with private external creditors are ongoing. The financing assurances received and adjustment efforts made are consistent with IMF policy requirements and program parameters.
Following the Executive Board discussion, Mr. Nigel Clarke, Deputy Managing Director and Chairman of the Board, made the following statement:
“The authorities continue to make progress in advancing their ECF-supported economic reform agenda. Measures to enhance the foreign exchange (FX) market, modernize monetary policy, mobilize fiscal revenues, and advance the financial regulatory agenda continue to show encouraging results, with better-than-anticipated macroeconomic outcomes. Maintaining the reform momentum remains key to the promising macroeconomic outlook.
“Ongoing efforts by the National Bank of Ethiopia (NBE) to strengthen FX market functioning are welcome, including publishing FX auction guidelines consistent with international best practice, limiting FX intervention to auctions, and developing a plan to bring the Commercial Bank of Ethiopia’s Net Open FX Position within prudential limits. Developing the interbank FX market will be important to strengthen banks’ FX risk management and enhance transparency.
“Maintaining tight monetary conditions remains important to sustain disinflation. Recently-approved increases in reserve requirements maintain tight liquidity conditions, while a phased exit from the cap on private credit growth would help make further progress toward an interest-rate based monetary policy framework while avoiding an overly rapid expansion of credit. Interbank market and repo market development will support monetary policy transmission.
“Prudent expenditure control and sustained efforts to mobilize domestic resources are essential to ensure fiscal sustainability. Tax and customs administration reforms will be key to broadening the tax base to maximize tax policy reform gains and foster a more stable taxation environment. Phasing out fuel subsidies is important for rebuilding fiscal buffers and improving the efficiency of spending, while social protection expenditure should be safeguarded.
“Securing a debt treatment will help restore debt sustainability and meet financing needs. Continued avoidance of non-concessional borrowing, except financing for the Koysha dam project, and careful evaluation of proposed new concessional debt, will help contain debt vulnerabilities.
“Continued efforts to strengthen financial sector oversight and build the financial sector safety net will help to keep financial stability risks in check.
“Finalization of NBE’s governance reform plan, including appointing new members to the Board in line with the requirements of the amended central bank law, will be important for ensuring NBE’s autonomy and capacity to execute its policy mandate, as will strengthening NBE’s financial position in due course.”
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