No double digit growth for at least five years
The International Monetary Fund (IMF), in its latest round of the Article IV consultations with Ethiopian authorities, has advised the National Bank of Ethiopia (NBE) to halt financing the government and the policy bank, the Development Bank of Ethiopia (DBE).
The Executive Board of Directors of IMF have concluded their consultations under Article IV and have suggested a number of measures to be considered by the government of Ethiopia. And to that effect, the directors have commended the tight monetary policy the central bank has been implementing over the years, while calling for restrictive measures to reduce outlays for State-owned Enterprises (SoEs).
“Phase out Central Bank financing of the government and the Development Bank of Ethiopia (DBE),” they suggested. According to Article IV report, “Continuous efforts are needed to modernize the monetary policy framework and further develop financial markets to deepen inclusion.” The IMF board of directors also suggested the adoption of flexible and market driven interest rates as opposed to the existing partially controlled floating system NBE works with. The IMF indicated that the market-based flexible interest rate system is one of the priorities the government of Ethiopia is advised to step into.
Based on the recommendations of the IMF directors, Ethiopian authorities need to consider an immediate valuation over the Commercial Bank of Ethiopia (CBE) and its asset quality status. Prime Minister Abiy Ahmed (PhD) last year stated that CBE, the largest SoE bank, had extended credits as high as 400 billion birr and the bulk of the credit financing is outstanding.
“Immediate priorities also include an asset quality review of the Commercial Bank of Ethiopia, and a strategy to address the DBE’s non-performing loans and develop a sustainable financing model,” the Fund advised. It is to be noted that DBEs non-performing loans accrued reaches some 40 percent.
Despite policies that helped register sustained economic growth and reduced poverty rates, huge public investment and debts that have contributed to higher rates of publicly–guaranteed debts, currently are narrowing to 57 percent of GDP due to tight fiscal and monetary policies.
Commending the government of Ethiopia for its Home Grown Economic Reform Program, the Fund, however, was not shy of expressing its concerns. The directors have welcomed the ambitious plan of the government that seeks to invest some USD 10 billion in three years and in turn adjust macro-economic imbalances, structural mishaps and sectoral reforms. Yet, they have expressed the possibilities of facing high implementation risks married with external vulnerabilities and political uncertainties.
Hence, they have “Underscored that steadfast determination, strong communication, and social protection would be key, to obtain a broad-based public buy-in. They also urged the authorities to seek additional debt profiling from external creditors to improve debt dynamics.”
Projecting the GDP growth, IMF’s figures have indicated that double digit growth is will no more be realized at least for five years. This year’s growth is expected to be around 6.2 percent while next year is anticipated to be at 6.1 percent. Between 2022 and 2024, the growth projectile is estimated to be 7 to 8 percent.
Following restrained public expenditure measured and tight monetary policy in place, the outcomes will contribute to gradually reduce the inflation rate which currently hangs around 20 percent in consumer price indices. The growing external financing inflows are expected to boost the foreign reserve status to reach to USD four billion this year, able to cover two months of imports, and likely swelling to USD 11 billion in 2024.
