The ongoing talks between a mission of the International Monetary Fund (IMF) and senior Ethiopian government officials from the central bank and the ministry of finance, among others, in Addis Ababa on a new support program for Ethiopia come at a critical juncture as the country seeks to reconstruct its economy, which has been devastated by conflict, drought, and inflation. The mission arrived in Ethiopia last week to undertake on the ground what has been described as “technical work to prepare for a potential IMF-supported program” following a request for financial assistance the nation formally submitted to the Fund. The talks have mainly revolved around the usual monetary policy issues the IMF has urged Ethiopia to address, including exchange rate management, foreign currency reserve administration, inflation and financial stability. Government officials taking part in the discussions have sounded an upbeat tone. The sentiment is shared by IMF officials as well.
The present talks represent a continuation of the mending of ties between the two sides. In 2019 the IMF reached a staff-level agreement pending a board approval approving a USD 2.9 billion loan for Ethiopia as part of a program to provide balance of payments support for its cash-strapped economy as well as technical assistance for the government’s Homegrown Economic Reform Agenda (HGER). The loan was put on hold though after the eruption in November 2020 of a civil war in the northern region of Tigray following an attack on federal army bases in the region by combatants of the Tigray People’s Liberation Front (TPLF). The IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) windows for Ethiopia were also phased out. The IMF’s reengagement with Ethiopia comes on the back of a peace agreement the federal government of Ethiopia and the TPLF signed in November 2022 in Pretoria, South Africa. Citing a strong progress toward restoring lasting peace and stability as well as the implementation of the peace deal, the IMF signaled its readiness to support Ethiopia’s reform plans and efforts to address humanitarian and economic challenges.
There can be no denying that the availing of assistance by IMF will stand the Ethiopian economy in good stead as it has been bedeviled by multiple shocks ranging from six consecutive years of drought, the COVID-19 pandemic, domestic conflict, and the impact of Russia’s war with Ukraine. The cumulative effect of these phenomena has prompted a host of economic woes, including rising inflation, foreign exchange crunch, widening imbalance in the balance of payment, and mounting external debt stress. The surge in unemployment, food insecurity and the drastic shortage of basic commodities that have come about as a result of the plethora of shocks buffeting the economy have exacted a devastating socio-economic and political toll that needs to be dealt with decisively before it gets out of hand. If the IMF is amenable to providing the funding Ethiopia looks to finance the second Homegrown Economic Reform Agenda (HGER 2.0), the updated version of the first HGER, it can go some way toward achieving the lofty goals set in the liberalization drive.
A new economic reform blueprint unveiled by the Ethiopian government in late 2019, the HGER aspires to unlock the country’s development potentials and propel it into becoming an African icon of prosperity by 2030. The initiative primarily rests on macroeconomic, structural and sectoral reforms that aim at stabilizing the macroeconomic environment, bringing down inflation, tackling the foreign exchange scarcity and exchange rate distortions, improving the business climate and enhancing the competitiveness of the vital sectors accorded priority, namely agriculture, manufacturing, ICT, mining, and tourism. They also seek to boost job creation initiatives, public sector efficiency, transparency, and accountability through the rule of law, decentralization, and capacity building for regional and local governments. The reforms are intended to achieve, inter alia, poverty reduction and inclusive growth.
While the IMF support in the works can throw the Ethiopian economy a potential lifeline, one should not be gung ho about it either. The negative impacts of IMF loans have been widely documented. When a country applies to the IMF for a loan, its government must agree to accept conditionalities prescribed by the Fund. Critics maintain that its policy prescriptions, which it deems to be a panacea for all ills, invariably lay down remedies that are not sufficiently tailored to each country’s unique circumstances. Study after study has demonstrated that though such standard, stringent conditions are touted to help the borrowing country adopt strong and effective policies, they actually hinder economic growth and deepen and prolong financial crises, creating severe hardships for the poorest people. The experiences of several African, Asian and Latin American countries attest to this fact. Ethiopia must heed the lessons of these nations and exercise caution as it tries to convince the IMF to loosen the purse strings.