IMF Projects 8.5pc Growth in GDP, Hails Ethiopia for Reducing Deficit in Current Account

Ethiopia will see an impressive expansion in its economy in 2018/19, estimated to grow by 8.5pc in a gross domestic product (GDP), the IMF projected. Although not in the double-digit as Ethiopian authorities often claim, there are few countries in the world growing by this rate.

The IMF, whose team has had a two-week consultation with Ethiopian authorities, praised Ethiopia for cutting its deficit in the current account down to 6.4pc of the GDP, in 2017/18. 

Current account deficit is a measurement of the difference in the value of what a country exports against what it imports. The IMF attributes the reduction to measures taken to limit imports by the government for infrastructure, reduced borrowing, contain inflation and tight monetary policy.

The IMF team, led by Julio Escolano, was here in Addis in mid-September 2018, and returned earlier this week. The team met with senior government officials, including Prime Minister Abiy Ahmed (PhD); Abraham Tekeste (PhD), minister of Finance & Economic Cooperation (MoFEC); and Yinager Dessie (PhD), governor of the National Bank of Ethiopia (NBE).

The statement it issued, pending a more extensive report to be submitted to its board of directors soon, described Ethiopian authorities` decision to tighten budget expenditure as “prudent.”  

However, although lower than expected, the federal government runs a budget deficit of 3.7pc of the GDP, higher than the three per cent fiscal deficit advised by the European Union economic zone.

“Political uncertainty, foreign exchange shortages, and weak prices for traditional exports hampered economic activity,” the IMF noted in its report. “Tax revenue continued to disappoint.”

The IMF foresees the political uncertainty of last year to recede soon and an increase in domestic and foreign investments. It calls Prime Minister Abiy`s administration desire to shift the engine of economic activities to the private sector while the public sector consolidates an “appropriate” measure to maintain steady growth.

“The mission supports the ambitious reform agenda announced by the Prime Minister aimed at opening up important parts of the economy to competition and encouraging private sector investment,” says the IMF.

Seeing mounting external debt and imbalances as a risk to macroeconomic stability, the IMF urged the administration to reduce public sector borrowing and bring inflation back to target, while recommending for tight monetary and fiscal policy stances. 

It also insisted Ethiopia to introduce a more flexible exchange rate regime, and introduce reforms in the financial system and markets.

“These macroeconomic policies, combined with the announced reforms, will improve competitiveness, reduce external imbalances and rebuild buffers while raising the growth potential of the economy over the medium term,” the IMF says.