IMF Concludes First ECF Review for Ethiopia

• The IMF Board completed the first review under the Extended Credit Facility (ECF) for Ethiopia, allowing the authorities to draw the equivalent of about US$340.7 million (SDR 255.6 million). The ECF was approved by IMF Board in July 2024 and forms part of a US$10.7 billion support package from development partners and creditors for Ethiopia.
• The Ethiopian authorities have shown strong commitment to their homegrown economic reform program. Implementation of ECF-supported reforms is advancing well.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the first review of the 48-month Extended Credit Facility (ECF) for Ethiopia. The Board's decision allows for an immediate disbursement of about US$340.7 million (SDR 255.6 million), which will help Ethiopia meet its balance of payments needs. The completion of the review brings total disbursements under the arrangement to about US$1.363 billion.

Ethiopia's ECF arrangement for a total of SDR 2.556 billion (850 percent of quota) or about US$3.4 billion at the time of program approval on July 29, 2024 (see Press Release 24/291 ) is aimed at supporting the authorities' Homegrown Economic Reform Agenda (HGER) to address macroeconomic imbalances and lay the foundations for private sector led growth.

All quantitative performance criteria and four out of five structural benchmarks for the first review have been met. The emergency liquidity assistance framework has been finalized prior to Board approval with a slight delay from end-September target date.

The implementation of the authorities' economic program, including the transition to the new exchange rate regime, has been commendable. The spread between the formal and parallel market exchange rates has narrowed to low levels, with little sign of disruption to the broader economy. The supply of foreign exchange is picking up, helping alleviate acute foreign exchange shortages. Nonetheless, some unmet foreign exchange demand persists as economic agents are still adjusting to the new FX regime.

Steady implementation of the HGER reform plan will be key to macroeconomic stability and stronger economic growth. Continued tight monetary policy and elimination of monetary financing of the government will be key to durably reducing inflation. Expanding social safety nets is critical to mitigating the impact of reforms on vulnerable people. Maintaining momentum on domestic revenue mobilization and structural reforms in the SOE sector is essential to creating sufficient space for social and developmental capital spending.

The authorities continue their efforts to restore debt sustainability. Financing assurances and adjustment efforts are consistent with IMF policy requirements and program parameters.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Chairman of the Board, made the following statement:

"Ethiopia's program under the ECF has made a solid start, and the transition to a more flexible exchange rate has progressed well. Transitional one-off arrangements to address the foreign exchange (FX) backlog from past fuel imports are in place, relying principally on market participants with an additional contribution from the National Bank of Ethiopia (NBE). As economic agents adjust to the new FX regime, reform momentum and clear communication will need to continue to ensure a fully successful and sustained switch to a floating exchange rate.

"Continuing to restrict NBE's FX interventions and additional policy measures to support FX market development will be critical to enhance market efficiency and deepening. Prudent macroeconomic policies, including continued tight monetary policy and the elimination of monetary financing of government deficits are essential to reducing imbalances and shoring up macroeconomic stability.

"Implementation of the early stages of the authorities' monetary policy reforms and the shift to an interest-rate based regime has been encouraging, including the steady uptake of NBE open market operations. The authorities should step up efforts to improve monetary policy transmission, including by enhancing treasury bill market functioning. Close supervision and enforcement of net open position regulations for banks will help address financial sector vulnerabilities.

"The authorities have embarked on ambitious and comprehensive tax mobilization reforms, which will be guided by the recently approved National Medium-Term Revenue Strategy. The new VAT law further streamlines exemptions, expands the revenue base, and strengthens administration and compliance framework. Sustained tax revenue mobilization reforms are critical for creating sufficient space for social and development spending needs. The authorities are implementing plans to expand the targeted social safety net (PSNP), which will deliver cost-effective and efficient support to vulnerable people and mitigate the social impact of the FX reform.

"Amendments to the law governing the NBE tabled in Parliament include important improvements to the NBE's mandate, functions, and powers. Robust lender-of-last resort provisions and legal safeguards to central bank autonomy and governance will also be important.

Continued steps to secure debt treatment is crucial to restore debt sustainability. The progress made on debt restructuring negotiations under the Common Framework is welcome. The authorities are working to reach an agreement on debt treatment with official creditors by the time of the second program review. Negotiations with commercial creditors should follow on comparable terms. The authorities plan to develop a debt management strategy with Fund technical assistance."

Ethiopia Selected Economic Indicators, 2021/22-2028/29

1/Public and publicly guaranteed external debt, which includes long-term foreign liabilities of NBE and external debt of Ethio-Telecom. Does not include expected debt relief.

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