Ethiopian News and Views.

Ethiopia and IMF: Drawing lances or lines?

By Keffyalew Gebremedhin

At the completion of its Article IV consultations with Ethiopia on September 12, 2012, the just released IMF Executive Board conclusion reveals not only how far apart Ethiopia and the Fund have gone. But also the IMF has written a contentious report on the cooling of the Ethiopian economy that for a few years has enjoyed acclaim as one of the few fastest growing in the world.

In Ethiopia, the Executive Board’s conclusion would be taken with great concern and consternation, even by the general public. This does not mean that ordinary people may not agree with some of the Fund’s conclusion, given the difficult and worsening economic conditions in the country.

What would be difficult for this proud people is the possible end of the party, in which they have not even been participating. However, they have been made to believe that the growth of the past years have helped slightly improve the country’s image that always has been associated with drought and famine. Their fear could be that this would bring about possibility of drying of foreign investments from near and afar, unseen and unheard of before in the country’s long history.

The official response to the IMF is rather very well-known. It has been familiarized since 2005, mostly through the late prime minister who used to cherish every minute of his IMF tongue-lashing, as one of his detractors. The Government Spokesperson Bereket Simon is quoted in this week’s Addis Fortune, showing that the country still has enough aces at tongue-lashing. No less, he said, “Ethiopia, today, is a country whose arm could not easily be twisted.”

Addis Fortune states that Bereket’s is a response to the 13 September remark by Jan Mikkelsen, IMF’s Country Representative. It is alleged that he had urged Ethiopia to slow down the construction of the Grand Renaissance Dam on the Nile River – a cardinal sin! In a correction he requested from Bloomberg, probably prompted from headquarters in Washington D.C., he was refused and both sides are holding their grounds. Ethiopia is still fuming from that.

To add insult to injury, the IMF Executive Board is now saying the economic performance of Ethiopia during 2011/12 has been mixed. Accordingly, contrary to the projection of double digit growth rate by Ethiopian authorities, the Executive Directors have trimmed nearly by half of the government’s forecast. To make matters worse, this new forecast is not only for the coming year, but also for the medium-term. In that regard, the Board firmly states:

“Absent increased role of the private sector to leverage the large public infrastructure investment and efforts to improve the doing business conditions, IMF staff project that real GDP growth will slow down to 6.5 percent in 2012/13 and over the medium term.”

The economy’s grimmer picture, as far as the Board is concerned, has its roots on one hand in the inflation that surged to 40 percent in August 2011 and on the other in the increased imports of capital goods and consumer goods the consequent effect of which has weakened the country’s services account balance.

Moreover, the Directors pointed out that, despite the continued robust increases in goods exports and remittances, since the first half of 2011/12 the current account has deteriorated in contrast to the surplus recorded in 2010/11.
The IMF has also looked backwards in making its assessments. While the Executive Directors acknowledge the country’s “strong, broad-based growth”, they estimate the growth rates over the six years to 2010/11 to about 7 percent. As consolation, they tacked alongside poverty reduction from 38.7 to 29.6 percent, as measured by poverty head count and reported by the government last March.

Returning to their constant theme, the Directors indicate that their continuing concern is the fact that the country’s continuing macroeconomic imbalances has its origin in the public sector-led development strategy.

As evidence, for instance, the Board recognizes the efforts made in tightening the federal government budget in 2011/12, based on a strong tax revenue increase and slower execution of budgeted recurrent expenditures. At the same time, however, the it could not hide its displeasure with the public sector (including state-owned enterprises) having strong fiscal impulse through the substantial capital expenditures of state-owned enterprises, financed by borrowing from the Commercial Bank of Ethiopia (CBE) and foreign sources.

In the circumstances, by way of recommendations hoping to help control inflation and sustain robust growth in the coming years, the Executive Board has called attention in the following areas:

(i) The need to exert efforts to achieve appropriate pace for public investments, reconstitute official reserves and promote financial sector stability;

(ii) The National Bank of Ethiopia is requested to pursue tighter monetary stance by avoiding further deficit financing. The Directors also underscored the importance of revamping the market for government securities to be able to foster private saving and investment. In addition, they urged greater exchange rate flexibility to safeguard foreign exchange reserves, strengthen external competitiveness, and mitigate external vulnerabilities.

(iii) The Directors pointed to further scope in revenue mobilization, including the development of medium-term debt management strategy encompassing both domestic and external debt.

(iv) The Directors advised the authorities to consider participation in the Financial Sector Assessment Program which would help identify vulnerabilities in the financial system and suggest corrective actions as appropriate. Directors encouraged the authorities to address the remaining deficiencies in Ethiopia’s AML/CFT regime [Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)].

(v) The Directors stressed the importance of creating a more favorable business environment and enhancing the role of private sector in the economy.

Why should a country show its books to the IMF?

The simple answer is that it is an international obligation. By international agreement, the IMF says it has been mandated to oversee the international monetary system and monitor the economic and financial policies of all its member countries- big and small. This activity has come to be known as surveillance.

As part of this process, which takes place both at the global level and in individual countries, the IMF is required to highlight possible risks to stability and advises on needed policy adjustments. In this way, it helps the international monetary system serve its essential purpose of facilitating the exchange of goods, services, and capital among countries, thereby sustaining sound economic growth.

Article IV has five sections. For purpose of the discussion above and also clarity, Section 1 on General obligations of members has been reproduced* hereunder:

Section 1. General obligations of members

“Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:

(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and

(iv) follow exchange policies compatible with the undertakings under this Section.”

* Source: Articles of Agreement of the International Monetary Fund

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