IMF praises privatization, debt reduction, predicts 8.5% growth

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The tone of the IMF’s annual report, which was well known in the past for criticizing the government’s policies; sounded different during its annual evaluation this year.
On September 26th, immediately after two weeks of discussions with top government officials and relevant bodies, led by IMF staff Julio Escolano, the international financial organ issued a statement lauding the government’s reduction, of the external current account deficit, and the ambitious reform agenda announced by Prime Minister Abiy Ahmed (PhD) aimed at opening up important parts of economy to competition and encouraging private sector investment.
At the end of this past fiscal year the ruling party decided to privatize some major public enterprises and several international companies demonstrated an interest in buying shares in Ethiopian Airlines, Ethio Telecom, the logistics sector and other companies.
The IMF said the strategy to shift the engine of economic activity to private sector development while the public sector consolidates is appropriate to maintaining strong growth and the report appreciated the reduction of the external current account deficit rate this past fiscal year. However, the IMF warned that external imbalances and indebtedness remain a source of macroeconomic risk.
The government succeeded in reducing the external current account deficit to 6.4 percent of GDP in 2017/18 through policies to constrain public sector imports and borrowing and tightened monetary policy to reduce external imbalances and contain inflation, according to the report.
In the year fiscal 2016/17 the deficit was 8.2 percent of GDP and 9.1 percent a year before. Since the country’s external debt increased significantly international actors and local experts expressed concern. However, the government has applied strong budget management and is closely following the projects led by public enterprises and by the government itself. Besides that some of the expected projects for execution have also been postponed and some of loans like external commercial loans were significantly reduced in the past couple of years.
In addition the government via the Ministry of Finance and Economic Cooperation (MoFEC) has implemented a new directive that reframed the rate of providing guarantees for public projects.
MoFEC’s Public Sector Debt Statistical Bulletin issued in December 2017 indicated that the country’s outstanding external debt has reached USD 24.22 billion.
From the stated amount the debt secured via government guarantees is over USD 7.11 billion, while the growth trend has significantly reduced compared with the preceding period.
In the 2016/17 fiscal year the country/government guarantee ratio stood at USD 6.94 billion. From last year’s amount the current year’s rate as of the end of the third month of the fiscal year only grew by USD 169 million.
The mission encourages the authorities to maintain an appropriately tight monetary and fiscal policy stance, along with a more flexible exchange rate regime, and implement reforms aimed at developing the financial system and markets. “These macroeconomic policies, combined with the announced reforms, will improve competitiveness, reduce external imbalances and rebuild buffers, while raising the growth potential of the economy over the medium term,” the statement added.
According to the IMF, prudent budget execution led to a lower than planned fiscal deficit, estimated at 3.7 percent of GDP, although tax revenue continued to disappoint.
The government has undertaken strong budget management for the last fiscal year. Last fiscal year the Ethiopian Revenue and Customs Authority secured three fourths of its tax collection target. The public relation head of the authority, Efrem Mekonnen told Capital that with the collection of 150 billion birr the tax GDP ratio stood at 12.5 percent, which is below the projection under the GTP II plan. By the end of the five year plan the government looks to increase tax collection 17 percent of the GDP.
According to the estimation of IMF in 2017/18, real GDP grew by 7.5 percent, supported by a strong harvest and rapid growth in air transport and manufacturing exports. However, political uncertainty, foreign exchange shortages, and weak prices for traditional exports hampered economic activity.
This year the IMF expects serious issues that have plagued Ethiopia like the shortage of foreign currency to improve and for the economy to continue to grow.
Growth is expected to step up in 2018/9 to 8.5 percent, supported by stronger confidence as the uncertainty of the previous year recedes, and the availability of domestic and foreign direct investment improves, the report reads.
The authorities’ strategy to shift the engine of economic activity to private sector development while the public sector consolidates is appropriate to maintaining strong growth.
The final report is expected to be issued within a few months.