Monday, May 20, 2024

Seeking financial assistance on favorable terms

Ethiopia’s participation in the 2023 Spring Meetings of the World Bank Group and the International Monetary Fund (IMF) held from 10-16 April in Washington, D.C., U.S. signals a positive step forward in the context of the improvement of relations between the country and international lending institutions. The ties had cooled following the launch of what the Ethiopian government called a law enforcement operation in the wake of an attack on federal army bases located in the northern region of Tigray by combatants of the Tigray People’s Liberation Front (TPLF) in November 2020. Although Ethiopian authorities and an IMF team reached a staff-level agreement in 2019 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 shelved after the eruption of the civil war. The broader debt re-profiling it asked for under the Group of 20’s Common Framework, an initiative for restructuring government debt aimed at low-income countries also hit a snag due to the conflict. Ethiopia is now back in the good graces of the Bretton Wood institutions though thanks to the signing of a peace deal in November 2022 that ended the war.

Ethiopia and the IMF have been sounding an upbeat tone on a host of subjects regarding the latter’s support for HGER II, the updated version of the first HGER, in talks they have been holding since March after the nation formally submitted a request for financial assistance to the Fund. Describing HGER II as “an ambitious reform program that aims to address key macroeconomic vulnerabilities and unleash Ethiopia’s considerable economic potential”, the IMF has said progress has been made in discussing the scope of its support for the reform program. Though the level of the backing it is willing to provide has not been officially disclosed to date, reports indicate that Ethiopia is applying at least for a USD 2 billion loan. The thematic areas of the talks have focused on the slate of topics the IMF has habitually called on Ethiopia to address, including, but not limited to, exchange rate management, foreign currency reserve administration, inflation, financial stability, and debt restructuring.

The talks between Ethiopia and the IMF could not have come at a more pivotal moment as the country seeks to reconstruct its economy. According to an IMF estimate, Ethiopia is expected to face a USD 6 billion funding gap until 2026. The USD 2 billion financing it could potentially provide would go some way towards filling the huge funding hole. Ethiopia’s economy has been battered by a raft of shocks for the best part of the past decade. The perfect storm of six consecutive years of drought, the COVID-19 pandemic, domestic conflict, and Russia’s war with Ukraine has had a devastating impact in the form of skyrocketing inflation, foreign exchange crunch, a debilitating debt stress, and a yawning trade deficit. The concomitant food insecurity, drastic shortage of basic commodities, and chronic unemployment has forced the majority of Ethiopians to endure a terrible hardship the kind of which they have rarely faced before.

 

The multi-pronged challenges ravaging the Ethiopian economy need to be accorded particular attention by all stakeholders. This requires the facilitation of wide ranging forums wherein the general public is empowered to participate in the effort to find lasting solutions. Trying to craft or implement a solution that does not take into due consideration the views of citizens who are invested in the future of the nation is bound to misfire and be a monumental waste of time, money and energy. It is incumbent on each and every Ethiopian to be mindful of the fact that failure to get a handle of Ethiopia’s macroeconomic instability with alacrity will push the country over the edge. We must do everything possible to rein in the problem before it gets out of hand.

There can be no arguing that the any support the IMF provides to Ethiopia can help it tackle the economic woes it has been ailing from for some time. Nevertheless, Ethiopians should not be over the moon if the lender were to approve loans in view of the massive funding gap that would remain. Moreover, as we have said time and again we need to be wary of the well documented negative impacts of such loans. A country that wants to borrow from the Fund must comply with the standard, stringent preconditions it imposes if the loan is to be approved. The one-size-fits-all policy prescriptions it dispenses have been shown to be not sufficiently tailored or sensitive to each country’s unique circumstances. Although the preconditions have been held up as panaceas that incentivize the borrowing country adopt strong and effective policies, they actually hamper economic growth and precipitate conditions that harm the poorest people. Examples abound across Africa, Asia and Latin America. It’s unforgivable for a nation endowed with considerable natural resources to wallow in poverty and be the poster child for aid dependence. That is why it must take it up on itself to embark on the fundamental political and economic reforms needed to stand on its own feet even as it seeks to secure financial assistance on favorable terms.

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