The IMF has approved a program for Ethiopia of almost US$3 billion. The program is aimed at supporting the Ethiopian government’s own Homegrown Economic Reform Program, which is designed to eliminate macroeconomic imbalances and lay the foundation for sustainable and inclusive growth. The authorities want the economy to transition away from being public sector-led to one that is driven by the private sector.
Here are six key takeaways about Ethiopia’s new program.
Program Ownership:The authorities have developed their very own ambitious Homegrown Economic Reform Plan tailored to the country’s needs and preferences. They have engaged in wide-ranging outreach to discuss the economy’s future with key stakeholders and have taken important initial steps to implement reforms.
Program details: The IMF approved the Ethiopian authorities’ request for an almost US$ 3 billion loan under its Extended Credit Facility and Extended Fund Facility to back the Homegrown Economic Reform Plan. As well as helping to address the foreign exchange shortage, the program will also aim to reduce debt vulnerabilities. Other key objectives include reforming the financial sector and boosting revenue mobilization which will be supported by the provision of technical assistance and training.
Aims of the program: The program builds on the authorities’ actions by ensuring public sector borrowing is in line with lower debt levels and stronger oversight of state-owned enterprises. Monetary policy will aim to bring inflation into single digits. Exchange rate reform will address foreign exchange shortages and increase exchange rate flexibility and, combined with structural reform, will further improve export competitiveness. Revenue reforms and efforts to increase the efficiency of public investment will ensure that infrastructure and social spending needs are met while maintaining sustainable debt levels.
Protecting social spending and reducing poverty: Fiscal policy is designed to create the space for more spending to tackle poverty. Expenditures on the rural and urban poor will be increased to ensure that sufficient resources are dedicated to support the Productive Safety Net Program, one of the largest and most successful social safety net programs in Africa.
From public to private sector-led growth: The government’s investment in infrastructure and education has laid a good foundation for the transition to private sector-led growth. To generate returns from past investments, reforms are needed. These include resolving the foreign exchange shortage, improving the business environment that will boost investment and accelerate the economy’s transformation.
Creating a vibrant financial sector: The program is also aimed at building on recent financial sector reforms by improving access to credit by the private sector—this has been identified as a key obstacle to private investment. Financial sector development needs to be accompanied by stronger supervision and financial safety nets to ensure that the financial sector remains stable.