10 December 2018

Ethiopia Benefits From Reforms

Ethiopia is reaping the benefits of widespread political and socio-economic reforms with the economy expected to maintain a robust growth.

The International Monetary Fund (IMF), which concluded consultations with Ethiopia, says the conducive political climate that has been created by Prime Minister Abiy Ahmed is catapulting the country's growth significantly.

After a relative lull last year when Ethiopia recorded a 7.7 per cent gross domestic product (GDP) growth, this year GDP growth is projected to accelerate to 8.5 per cent supported by stronger confidence as the political uncertainty of previous years recedes.

The stability on the political front has resulted in exponential rise in external financial inflows, increase in foreign direct investments (FDI), easing of external financing constraints and foreign exchange shortages.

"As the political climate settles and investment recovers, growth is expected to recover to 8.5 per cent this fiscal year and the current account deficit should continue to narrow," said the IMF.

It added that despite the positive developments, a ballooning public debt burden and large external imbalances are major constrains to future growth.

In particular, the IMF observed that Ethiopia is facing a huge burden of servicing the massive public debt considering that payments are expected to increase in the coming years as grace periods on non-concessional loans expire.

The country's public debt has increased from 57.2 per cent of GDP in the 2016/17 financial year to 60 per cent in the 2017/18 financial year, totalling $26 billion.

"While debt is sustainable in the medium term, Ethiopia remains at high risk of debt distress," noted the IMF.

To mitigate the debt risks, the country needs to reduce public sector borrowing, particularly on non-concessional loans, and raise tax revenues and exports to reduce vulnerabilities.

Notwithstanding the debt burden, Ethiopia's economy is on a strong footing anchored by PM Abiy reforms that include opening of the institutional space to political opposition, signing a peace agreement with Eritrea and ongoing plans to open key economic sectors to domestic and foreign private investment and competition.

Economic activity in the country will be supported by continued growth in manufacturing and services sectors, particularly expansion of air transportation.

The IMF expects Ethiopia's medium-term economic growth to converge to around seven per cent supported by rising FDIs, continuing investment in infrastructure and rising productivity levels as export-oriented industries take root while others start operations.

Inflation, which is currently at a high of 11.5 per cent is expected to steadily decline to per cent by end-2019.

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