17 June 2012

Ethiopia: IMF On Retreat On Ethiopia's Growth Outlook

The International Monetary Fund (IMF) has projected Ethiopia's Gross Domestic Product (GDP) will expand in 2011/12 by seven per cent, and the annual moving inflation average will subside to 22pc.

A statement that the IMF released from its headquarters in Washington DC on Thursday, June 14, 2012, admits that Ethiopia's economy "continues to grow at a robust pace, poverty continues to fall, and inflation, while still high, has been declining."

Such a rosy portrayal of the Ethiopian economy came after the conclusion of a five-member mission from the IMF, led by Michael Atingi-Ego, a Ugandan national, spent two weeks talking to senior members of the Ethiopian macroeconomic team, including Prime Minister Meles Zenawi, who talked to them for one and half hours, according to sources.

With an earlier projection that literally undercut Ethiopia's government projections, members of the mission have received a cold shoulder from senior government officials, while being confronted to disclose the basis of their assumptions by Teklewold Atnafu, governor of the Central Bank, and Hashim Ahmed, macroeconomic advisor to the Prime Minister's Office, sources disclosed to Fortune.

"They had the wrong assumption that inflation would remain high and tight monetary policy would discourage investment," said a senior government official, requesting anonymity, for he is not authorised to speak to the media. "Members of the macro[economic] team proved to them that inflation is lately dropping and much of the investment comes from the public sector."

Nonetheless, last week's statement shows an unexpected turnaround from the IMF's earlier projections, made as recently as April 2012, and released in Arusha, Tanzania, alongside the annual meetings of the Africa Development Bank (AfDB). Named an "Interim Report" for the Africa Group One Constituency, where Ethiopia belongs with 20 other countries on the continent, the report projected growth in the coming year at five per cent, much lower than the Sub-Saharan and low income countries averages. It also said that it would be a kind of growth besieged by galloping inflation at nearly 34pc, twice as large as any other country in the group.

It is the earlier figures that are visible on the IMF's official website for Ethiopia, a matter which will stay untouched until the executive directors of the IMF and its board of directors approve the new figures.

"The new numbers will not be the official numbers of the IMF before the board of directors accepts them," Jan Mikkelsen, a resident representative of the IMF in Ethiopia, told Fortune. "It will take a few months."

The mission that consulted Ethiopian authorities will produce a country report to be submitted both to the executive director and the board of directors, who will probably meet in December 2012. In this report, the mission members will have a growth outlook that is significantly different from the IMF's earlier projections, although it will remain much lower than the government's own projection of GDP growth at 11pc and inflation at a single digit rate.

"After our consultations with government officials and talking to leaders of the private sector, we revised the growth projection and the figure on inflation," said Mikkelsen. "The latest figures came after information was made available to us through our consultations."

The availability of actual data on inflation, continued expectations of drops in prices, and a policy of continued tightening in monetary policy are factors that have influenced the mission to change its mind on Ethiopia's economic outlook, according to Mikkelsen.

"This is good for growth," the resident representative told Fortune, commenting that the new information made available to the mission included enhanced public investment in infrastructure and private investments from foreign direct investment (FDI). "These have convinced us that there will be much higher growth than we originally anticipated."

But, the mission left Addis Abeba not without concerns, particularly when it comes to financing the ambitious plan for Growth and Transformation. The statement issued last week noted a financing gap between the government's desire to promote growth and ensure macroeconomic stability.

"Given the authorities' objective of financing long-term projects through domestic sources and the resulting strong financial real sector linkages, it will be important to increase the oversight of the financial sector to ensure its stability," the statement said.

Ethiopia has an economy that is vulnerable to external shocks due to limited gross official foreign reserves and low national savings as well as high inflation on the domestic front, the mission warns. The mission recommends the adjustment of interest rates on deposits, which remains at five per cent. Although there is a negative real interest rate on lending when inflation is factored, the central bank has kept this unchanged since 2010.

"Higher interest rates will also support domestic savings mobilisation efforts that are key for financing investment to achieve ambitious objectives in the Growth & Transformation Plan (GTP)," said the statement.

Although the IMF is keen to see the government live up to its words not to borrow from the central bank, many macroeconomic pundits are sceptical about the administration's desire to remain disciplined in the coming fiscal year.

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