18 January 2018

Ethiopia: IMF Board Warns of Dwindling Reserves

Photo: Addis Fortune
(File photo).

External imbalances and inadequate reserve buffers remain key risks to Ethiopia's economy, warn the Board of Directors of the International Monetary Fund (IMF).

IMF's Board met earlier this week for a country consultations on Ethiopia, following a report it received from a mission that has visited the country back in mid-September 2017. The Board has given the nod to the conclusions of the mission led by Julio Escolano, which praised Ethiopian authorities for the expansion of the economy by nine percent last year and a prudent fiscal policy that keeps budget deficit lower than had been expected. However, the budget deficit has picked up to 3.5pc of the GDP, above the threshold set economies in the Eurozone.

Sharing Escolano mission's projection of robust growth next year, 8.5pc, the IMF warns the economy is confronted with the threats of "externals imbalance" that brought the nation's foreign exchange reserves down to 3.2 billion dollars in 2016/17, enough only to cover 1.8-month worth of imports. It also reckoned that the economy, believed to be at a crossroads, is not out of the woods when it comes to inflation, thus urged Ethiopia to tighten its monitory policies.

The Board says Ethiopian authorities need to continue with policy measures to reduce external imbalances (foreign debt), check on imports, diversify exports and introduce flexible exchange rate policy. The Board has urged Ethiopian policymakers to push for policy reforms aiming at containing public sector borrowing while broadening the space for private sector competitiveness, including further privatisation of the nation's valuable assets.

Describing the role the state-owned Development Bank of Ethiopia's (DBE) lending mechanism as "distortive," the Board insisted authorities need to monitor its mounting non-performing loans closely.

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