IMF OKs 4-Year $3.4B Credit Deal for Ethiopia

• The IMF Board approved an SDR 2.556 billion (about US$3.4 billion) ECF arrangement for Ethiopia. This decision will enable an immediate disbursement equivalent to SDR 766.75 million (about US$1 billion).
• The four-year financing package will support the authorities' Homegrown Economic Reform (HGER) Agenda to address macroeconomic imbalances, restore external debt sustainability, and lay the foundations for higher, inclusive, and private sector-led growth.
• The ECF arrangement is expected to catalyze additional external financing from development partners and creditors.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) approved a four-year arrangement under the Extended Credit Facility (ECF)[1] for Ethiopia in an amount equivalent to SDR 2.556 billion (850 percent of quota or about US$3.4 billion) to support the authorities' implementation of their Homegrown Economic Reform (HGER) Agenda aimed at addressing macroeconomic imbalances and laying the foundations for private-sector led growth. The Executive Board's decision will enable an immediate disbursement of SDR 766.75 million (equivalent to about US$1 billion), which will help Ethiopia meet its balance of payments needs and provide support to the budget.

The authorities' economic program, supported by the four-year ECF arrangement, envisages a comprehensive policy package to stimulate private sector activity and increase economic openness to promote higher and more inclusive growth. Strengthening social safety nets to mitigate the impact of reforms on vulnerable households is a critical component of the authorities' reform program. Key policies include: (i) moving to a market-determined exchange rate to help address external imbalances and relieve FX shortages; (ii) combating inflation through modernizing the monetary policy framework, eliminating monetary financing of the budget, and reducing financial repression; (iii) creating space for priority public spending through mobilizing domestic revenues; (iv) restoring debt sustainability, including through securing timely debt restructuring agreements with external creditors; and (v) strengthening the financial position of state-owned enterprises to tackle critical macro-financial vulnerabilities.

"This is a landmark moment for Ethiopia," said IMF Managing Director Kristalina Georgieva. "The approval of the ECF is a testament to Ethiopia's strong commitment to transformative reforms. The IMF looks forward to supporting these efforts to help make the economy more vibrant, stable, and inclusive for all Ethiopians."

The program is expected to help catalyze additional external financing from development partners and provide a framework for the successful completion of the ongoing debt restructuring.

"This is a landmark moment for Ethiopia," said IMF Managing Director Kristalina Georgieva. "The approval of the ECF is a testament to Ethiopia's strong commitment to transformative reforms. The IMF looks forward to supporting these efforts to help make the economy more vibrant, stable, and inclusive for all Ethiopians."

The program is expected to help catalyze additional external financing from development partners and provide a framework for the successful completion of the ongoing debt restructuring.

Following the Executive Board discussion, Ms. Antoinette Sayeh, Deputy Managing Director, and Acting Chair, made the following statement:

"Ethiopia has been facing significant economic pressures amid a series of large shocks, high inflation, low international reserves, and unsustainable debt. In response, the authorities have launched a comprehensive reform program, to be supported by the ECF-arrangement. It is focused on addressing macroeconomic imbalances, restoring external debt sustainability, and implementing wide-ranging reforms to promote a robust, inclusive, and sustainable economy.

"The recent measures to decisively tackle macroeconomic imbalances, including moving to a market-determined exchange rate, removing current account restrictions, and modernizing the monetary policy framework to control inflation, are critical steps forward. Supportive macroeconomic policies, including the elimination of monetary financing of government deficits, monetary policy tightening, and prudent fiscal management, will need to be sustained to keep inflation in check, ensure a successful implementation of the market-determined exchange rate, and durably address exchange rate shortages.

"The authorities' policies are well calibrated to protect the vulnerable and mitigate the socio-economic impacts of the reforms. They will significantly increase the budget allocation to the targeted cash transfer program (PSNP). Temporary subsidies on fuel and fertilizers are also part of the fiscal package, and will need to be unwound gradually over time. Continuing to widen the reach and impact of the social safety-net programs will be important.

"The authorities are advancing reforms to ensure the sustainability of public finances. Raising fiscal revenues and reaching a comprehensive external debt treatment, including of official debt under the G20 Common Framework, are crucial in this regard.

"Strengthening public investment management, including spending related to climate change and post-conflict reconstruction, is also important. Transparency and the management of fiscal risks, particularly those related to extrabudgetary units and large state-owned enterprises, should be enhanced. Power sector reforms including tariff adjustment are also vital.

"The recent recapitalization of Commercial Bank of Ethiopia tackles a key macro-financial vulnerability. Reforms to improve financial sector governance and steadily reduce financial repression will be essential. Strengthening the NBE's mandate and governance arrangements will help build the NBE's credibility and capacity to fulfill its mandates.

"The authorities' ambitious and comprehensive home-grown structural reform agenda will focus on better governance and public service delivery, competitiveness, and the business climate, to stimulate private sector-led growth and contribute to poverty reduction and raising living standards.

"The IMF extends its deepest sympathies to the Ethiopian people regarding the recent landslide that occurred in the Gofa Zone in the south of the country that led to tragic loss of life, and wishes the authorities the best in their response and recovery efforts.

Annex

After decades of rapid growth and improvements in living standards in Ethiopia, a series of shocks led to severe economic pressures, and the public investment-led growth model has reached its limits. Recognizing the urgent need for reform, the authorities have requested a four-year arrangement under the ECF with the Fund to help meet balance of payments needs and provide support to the budget and the implementation of the Homegrown Economic Reform Agenda (HGER).

Program Summary

The economic program envisages a comprehensive policy package to stimulate private sector activity and increase economic openness to promote higher and more inclusive growth. Strengthening social safety nets to mitigate the impact of reforms on vulnerable households is critical component of the authorities' reform program. Key policies include:

• Moving to a market-determined exchange rate to help address external imbalances and relieve FX shortages.
• Combating inflation through modernizing the monetary policy framework, eliminating monetary financing of the budget, and reducing financial repression.
• Creating space for priority public spending and addressing debt vulnerabilities through mobilizing domestic revenues.
• Restoring debt sustainability, including through securing timely debt restructuring agreements with external creditors.
• Strengthening the financial position of state-owned enterprises to tackle critical macro-financial vulnerabilities.

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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[1] The Extended Credit Facility (ECF) provides medium-term financial assistance to low-income countries (LICs) with protracted balance of payments problems. The ECF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT). https://www.imf.org/en/About/Factsheets/Sheets/2023/Extended-Credit-Facility-ECF