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NewsIMF weighs Ethiopia's funding request

IMF weighs Ethiopia’s funding request

Soon, talks will start on a new program for the country

The International Monetary Fund (IMF) is reviewing Ethiopia’s request for financial assistance to reconstruct its economy, which has been devastated by conflict, drought, and inflation.

The two sides are warming up to begin talks to launch new programs for the Horn of Africa nation.

The IMF’s reengagement with Ethiopia comes as officials seek to secure financing for the country’s rehabilitation and start the second Homegrown Economic Reform Agenda, which aims to avert macroeconomic woes, including forex shortage and inflationary pressure.

Last week, Finance Minister Ahmed Shide announced that USD 20 billion will be needed to launch a recovery program to rebuild the war-ravaged Tigray region and parts of the Afar and Amhara regions. For the second “homegrown” economic plan to be put into action, about USD 10 billion is needed.

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Admitting the need to provide support for Ethiopia, the IMF said “Ethiopia has been subject to multiple shocks, including six consecutive years of drought, the COVID-19 pandemic, domestic conflict, and the impact of Russia’s war against Ukraine.”

“The economic problems are big, like not having enough food, having to help people in need, inflation, and not having enough foreign currency or some imported goods. A stable economy with strong growth would be essential to meet the social challenges, create jobs, and reduce poverty in Ethiopia,” said Julie Kozack, director of communications at the IMF.

The Communications Director praised “the strong progress toward restoring lasting peace and stability through the Cessation of Hostilities Agreement” in a virtual press briefing on March 23, 2023.

“Implementation has progressed well, including the restoration of humanitarian assistance and basic services in Tigray. IMF staff have ongoing discussions with the authorities on the reform plans and how we can support their efforts to address humanitarian and economic challenges,” Kozack said, adding that the Fund has received a request for financial assistance.

The IMF is now conducting the technical work to prepare for a potential program discussion, according to her. For experts, this is a big development, given that it comes at a time when the government faces a critical shortage of foreign currency and an increase in debt that must be serviced.

“It is indeed a very positive development, and I expect concrete discussions on a new program to take place in the coming weeks. The good progress in implementing the ceasefire agreement has definitely played a role,” said Patrick Heinisch, an economist who closely follows macroeconomic developments in Ethiopia.

Heinisch expects the IMF team to not only design a new program for Ethiopia but also conduct a new debt sustainability analysis that serves as a basis for debt restructuring calculations.

“We will also see fresh impetus on the debt restructuring front. The IMF and World Bank have both hinted at the need for more progress regarding the implementation of the Common Framework,” Heinisch said.

In a blog published on March 21, 2023, the president of the World Bank, David Malpass, urged international partners to accelerate the debt restructuring process for Ethiopia, Zambia, and Ghana, mentioning the high risk of debt distress these countries face.

“Ethiopia’s implementation of the peace agreement creates an opportunity for the international community to support much-needed economic reforms. Another important step is a prompt agreement with the IMF,” he remarked. This, according to him, could help to unlock an agreement under the Common Framework which will put the country back on a path of debt sustainability.

Ethiopia’s debt restructuring would be among the agenda items to be discussed in the upcoming IMF and World Bank “Sovereign Debt Roundtable,” scheduled for April 3, 2023.

“However, even with a new IMF program in place, in the case of Ethiopia the debt restructuring process is not straightforward. The issue of the participation of private creditors as well as China’s role in the process will have to be discussed as well,” remarked Heinisch.

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