According to the IMF report, Ethiopia is undergoing significant economic reforms supported by a four-year arrangement with the IMF under the Extended Credit Facility (ECF), which was approved in July 2024. The program aims to correct macroeconomic imbalances, ensure external debt sustainability, and establish a foundation for robust, private sector-led growth, all while navigating challenging socio-economic conditions. The authorities’ Homegrown Economic Reform Agenda (HGER) is central to these efforts.
Program Performance and Key Reforms
The IMF Executive Board recently completed the second review of the ECF, allowing Ethiopia to draw approximately US$248 million. This is part of a larger US$10.7 billion support package from development partners and creditors. The report indicates that the program’s performance has been generally strong, with most quantitative performance criteria (QPCs) and indicative targets (ITs) met. Specifically, all QPCs for end-September 2024 were met, demonstrating the authorities’ commitment. The one missed IT was on budgetary contributions to the Productive Social Safety Net Program (PSNP), but this is being addressed. The report also states that structural benchmarks are also progressing, although the finalization of the NBE audit has been slightly delayed.
Key reforms implemented include:
- Transition to a flexible exchange rate.
- Modernization of monetary policy.
- Efforts to mobilize domestic revenue.
- Strengthening of social safety nets.
- Reforms to state-owned enterprises (SOEs).
- Measures to ensure financial stability.
- The establishment of an interbank FX market.
The report highlights that strong ownership and early success of these reforms have strengthened support for the program. The Ethiopian economy has shown resilience despite various challenges.
Monetary and Exchange Rate Policies
According to the report, the transition to a flexible exchange rate has advanced, and the parallel market premium has stabilized. The National Bank of Ethiopia (NBE) has limited its FX interventions to managing disorderly market conditions, emphasizing a market-based approach. The NBE is also working to enhance the efficiency of the FX market. The NBE is offering guidance to improve understanding of the FX directive. By March 2025, NBE will review the maximum amount allowed for advance payment of imports that does not require importers to submit a foreign bank guarantee.
The authorities aim to achieve a positive real monetary policy rate by end-March 2025, a key step to build credibility in the new policy framework and manage inflation. The central bank is moving from quantitative credit controls to interest rate-based monetary policy. They are carefully considering how to phase out the cap on private sector credit growth and no longer provide monetary financing for fiscal deficits.
Fiscal Policy and SOE Reforms
The report indicates that the government is focused on revenue mobilization to restore long-term fiscal stability. Reforms include streamlining tax exemptions for imported intermediate inputs, assessing and addressing gaps in corporate income tax, and reviewing motor vehicle ownership taxes. The report also details efforts to improve tax administration, including digitalization and compliance risk management.
Fiscal transparency and accountability are being strengthened through the publication of mid-year budget reviews and quarterly budget execution reports. Fuel taxes will be remitted to the federal budget, and the practice of earmarking fuel VAT for the Road Fund will be discontinued.
Reforms in the SOE sector are aimed at improving governance, transparency, and financial performance. The Ethiopian Investment Holdings (EIH) is working on consolidated financial statements for the SOE portfolio. A framework for Public Sector Obligations (PSO) is being developed, with pilots in the electricity sector.
Debt Management and Financial Sector
The report states that Ethiopia is actively working to restore debt sustainability through debt treatment agreements with official creditors under the G20 Common Framework. The Official Creditor Committee (OCC) has recognized progress toward an agreement. The country is also engaging with Eurobond holders for comparable debt treatment. The authorities have also reiterated their commitment to not taking on new non-concessional borrowing.
The report indicates that the financial sector is being strengthened through reforms at the Commercial Bank of Ethiopia (CBE) and the Development Bank of Ethiopia (DBE). A new Banking Business Proclamation was passed allowing foreign investment in the sector. The authorities are also working to reduce non-performing loans, modernize bank regulations, and adopt a capital framework consistent with Basel II standards.
Structural Reforms and Challenges
The HGER 2.0 aims to improve the trade and investment climate, as well as increase productivity across key sectors. Ethiopia is pursuing accession to global and regional trade agreements. Reforms are ongoing in agriculture, mining, tourism, ICT, and manufacturing sectors. The Ethiopian Stock Exchange has been launched, and partial privatization of Ethio Telecom is underway.
The report notes that despite the progress, Ethiopia faces challenges such as potential domestic policy slippages, social discontent, security concerns, and data limitations. The IMF is closely monitoring the situation through semi-annual reviews.
Looking Ahead
According to the report, Ethiopia is committed to maintaining reform momentum, focusing on price stability, a flexible exchange rate, debt sustainability, and private sector-led growth. The authorities aim to deepen resource mobilization, advance SOE reforms, and finalize debt treatment negotiations. The country is also working on improving the quality of its economic statistics. The IMF is providing ongoing support to these efforts.
