The International Monetary Fund (IMF) and Ethiopian authorities have reached a staff-level agreement to conclude the second review of the four-year, USD 3.4 billion Extended Credit Facility (ECF) arrangement. Formal approval by the IMF Executive Board would release approximately USD 251 million to Ethiopia, marking significant progress in the nation’s economic reform agenda.
Ethiopia’s ambitious reform plan, initiated earlier in 2024, aims to stabilize the economy, transition to a market-determined exchange rate, and alleviate long-standing structural challenges, including foreign exchange (FX) shortages. These reforms are essential components of the “homegrown economic reform” program, which also focuses on fiscal discipline and market liberalization.
Key Developments in Ethiopia’s Economic Reform Program
1. Advancements in Exchange Rate Reforms
One of the critical pillars of Ethiopia’s economic reforms has been its adoption of a market-determined exchange rate system. This shift has significantly narrowed the gap between official and parallel FX market rates, which had previously hindered economic activities. By October, the spread between these markets dropped below 10%, signaling enhanced efficiency in FX allocation
Ethiopia’s interbank FX market, launched earlier this year, has also seen a steady increase in activity. Paired with a domestic interbank money market, these platforms aim to improve liquidity and bolster confidence in the financial system.
2. Foreign Exchange and Debt Management
The IMF highlighted that Ethiopia’s external financing gap is estimated at USD 10.7 billion through 2027/28. The ECF plays a crucial role in bridging this gap, supported by contributions from development partners and Ethiopia’s debt treatment under the Common Framework. Approximately USD 1 billion of the total USD 3.4 billion was disbursed immediately after the program’s approval in July 2024
3. Fiscal Policy and Inflation Control
Ethiopia’s supplementary budget, approved recently, will address tight liquidity conditions while aligning with the fiscal targets outlined under the ECF. IMF staff emphasized the importance of maintaining tight monetary policy to prevent inflationary pressures during this transition. Inflation impacts from FX reforms have been subdued thus far, creating favorable conditions for sustained economic growth
Broader Implications for Ethiopia’s Economy
Ethiopia’s reforms are pivotal in addressing macroeconomic imbalances caused by years of debt accumulation, external shocks, and conflict. With a high public debt-to-GDP ratio, debt restructuring and prudent fiscal management remain key challenges. The country’s partnership with international creditors and participation in the G20 Common Framework are expected to mitigate debt vulnerabilities
The IMF’s financial support aims to catalyze additional funding from development partners, unlocking resources critical for Ethiopia’s post-conflict recovery and economic transformation. This includes investments in infrastructure, energy, and private sector development, which are essential for long-term resilience and poverty reduction.
IMF’s Statement on Progress
In a statement, Alvaro Piris, the IMF mission chief, praised Ethiopia’s progress:
“The reforms are not only addressing immediate economic concerns but are also creating a foundation for robust growth in the years ahead. Continued commitment to tight monetary policy, structural reforms, and fiscal discipline will be instrumental in achieving the program’s objectives.”
The Ethiopian delegation, led by Finance Minister Ahmed Shide and National Bank Governor Mamo Mihretu, has expressed strong commitment to the IMF-supported program. Both emphasized the importance of sustained reforms to stabilize the economy, attract foreign investment, and foster inclusive growth.
Future Prospects
Looking forward, Ethiopia faces a critical juncture as it balances reform implementation with social and political stability. Maintaining momentum in FX market reforms, securing debt restructuring agreements, and improving public financial management will be central to the success of its economic agenda.
The IMF’s review process will continue on a six-monthly schedule, with the next tranche of disbursement contingent upon Ethiopia’s adherence to agreed policy measures.
As the country progresses, its success under the ECF could serve as a model for other nations grappling with similar economic challenges, reaffirming the importance of international cooperation in fostering sustainable development.
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photo source: Google
By: Montel Kamau
Serrari Financial Analyst
28th November, 2024
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