Addis Fortune (Addis Ababa)

10 June 2012

Ethiopia: IMF Undercuts Govt On Growth Prospects

The International Monetary Fund (IMF) is a multilateral financial institution with a reputation for conservative estimates when projecting prospects for growth among member countries. However, its recent forecast for the macroeconomic standing of Ethiopia undercuts what the government says about the economy expanding for the year 2012, while nailing the coffin on the prospects that inflation will be slashed to single digits during the same period.

The IMF released what it describes as an "Interim Report" for African countries under "Group 1 Constituency" on May 28, 2012, in Arusha, Tanzania. Signed by Moeketsi Majoro, executive director of the IMF, the report looks at the economic and financial outlook of 21 countries in Africa, including Ethiopia. Although the interim report says that Sub-Saharan Africa will see strong growth rates in 2012, such growth will be "slower than it was in the pre-crises period," crisis referring to the economic turmoil in Europe and North America.

The outlook that the IMF has on Ethiopia is even slower. Not only will it be less than half of what the Ethiopian government claims it will be, it will be much lower than what other international finance organisations say Ethiopia will grow.

"Ethiopia has been among Africa's fastest growing economies in recent years and certainly one of the best-performing non-oil economies in the region," IHS Global Insight, which puts the country's gross domestic product (GDP) growth at 8.3pc, says in its report released in February 2012. "Growth is likely to remain buoyant in the short and medium terms, despite the perennial threat of drought."

This is an outlook contrary to the IMF's.

Ethiopia's GDP will only grow by five per cent in 2012, it forecasted, drastically lower than the 11pc the administration of Prime Minister Meles Zenawi claims the GDP will expand, while the growth prospects are much lower than the Sub-Saharan average of 5.4pc and the 5.9pc average for low-income countries.

This certainly was not pleasant news for Ethiopian authorities who have given a cold shoulder to a five-member mission from the IMF, headquartered in Washington DC, currently in town for consultations with macroeconomic policymakers, led by Michael Atingi.

What is even more unpleasant is the IMF's projection of inflation at nearly 34pc for the year 2012, the single largest among the 21 countries under Group 1 and three times higher than the Sub-Saharan Africa average as well as two fold to what is an annual average inflation for low income countries. At 23.4pc annual inflation, it is Uganda that is believed to follow Ethiopia with a macroeconomic environment that is inflationary.

Indeed, fighting inflation has been an uphill battle for macroeconomic policymakers in Ethiopia.

Chaired by Prime Minister Meles Zenawi, the nation's macroeconomic team comprises senior officials of the administration such as Sufian Ahmed, minister of Finance & Economic Development (MoFED); Teklewold Atnafu, governor of the central bank; Mekonnen Manyazewal, minister of Industry (MoI); and Newayab Gebreamlak, chief economic advisor to the Prime Minister. This team has been struggling to keep inflation at bay and contain it to single digits since 2006, without much success.

Although the country has seen the consumer price index fall for the third month in a row in May, at 25.5pc, from a monthly moving average of 36.3pc in February, inflation and the escalating cost of living in the absence of wage increases is wreaking havoc on households. Food inflation is particularly soaring at 29.2pc in May, although having slowed from 36.7pc in April.

"With global and regional food prices rising and with the fiscal and monetary policy in Ethiopia likely to remain expansive, we expect consumer price inflation to stay in the double digits in the short to medium term," says the report from IHS Global.

The source of the economic woes are right in this "expansive monetary and fiscal policy," which the IMF has a record of warning the government of the dire consequences, according to a macroeconomist who asked to remain anonymous due to the sensitivity of the issue. "It is a matter of credibility, where the IMF weighs higher on the scale."

Such projections contrary to the government's rather upbeat growth outlook coming from a reputable international finance agency would have an impact on decisions made by foreign investors who may come to Ethiopia and international organisations doing business with Ethiopia, according to this macroeconomist.

Senior government officials were talking to the IMF mission last week in Addis Abeba, trying to reach an understanding of the basis of the assumptions that macroeconomists at the IMF used in scaling back Ethiopia's growth outlook, sources disclosed to Fortune.

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