[dehai-news] (IMF) IMF Lends Ethiopia $50 Million to Help Absorb Price Shocks

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From: Biniam Tekle (biniamt@dehai.org)
Date: Mon Feb 02 2009 - 14:35:00 EST

IMF Lends Ethiopia $50 Million to Help Absorb Price Shocks

By Jiro Honda
IMF African Department

February 2, 2009

   - Ethiopian economy hit hard by 2008 commodity price shocks
   - Authorities commit to significant macroeconomic policy adjustment
   - Loan to help Ethiopia build reserves, generate other external resources

The IMF approved a $50 million loan for Ethiopia to help its economy adjust
to the steep increases in international prices of fuel, fertilizer, and
cereals in 2008.

The price increases considerably weakened Ethiopia's international reserves
position and contributed to inflationary pressure.

The IMF Executive Board's approval of the loan, based on sound policy
commitments from the authorities, will help the East African country rebuild
international reserves and catalyze financing from other international

Recent reversal of some international commodity price hikes suggests that
the exogenous shocks to Ethiopia's economy may prove temporary.
Nevertheless, the authorities, while pursuing macroeconomic adjustment,
intend to take advantage of this opportunity to rebuild foreign exchange
reserves to levels covering 1.8 months of imports by the end of the current
fiscal year, in line with their medium-term objective.

Ethiopia's loan was approved under the rapid-access component of the Exogenous
Shocks Facility <http://www.imf.org/external/np/exr/facts/esf.htm>.
"Together with stepped-up assistance from Ethiopia's other international
partners, the IMF's financial support under the Exogenous Shocks Facility
will help to mitigate the risk of an erosion of Ethiopia's gains in poverty
reduction in recent years." said IMF Deputy Managing Director Takatoshi

*Policy commitment*

To mitigate the impact of exogenous shocks on the balance of payments,
address domestic economic imbalances, and protect Ethiopia's most vulnerable
people, the authorities have taken or intend to take key policy measures

   •* Eliminate domestic fuel subsidies*. The fuel subsidy was abolished in
   October 2008 by adjusting regulated domestic prices to import parity. From
   now on the authorities will review domestic fuel prices monthly, adjusting
   them as needed but keeping a margin above world prices in order to repay the
   debt of the Oil Stabilization Fund.

   •* Mitigate the impact of high food prices.* In late 2008 the government
   imported wheat equal to more than 3 percent of domestic crop production and
   distributed it to low-income families and flour mills at import cost—well
   below domestic prices. It is prepared to do so again if necessary.

   •* Significantly tighten fiscal policy and eliminate domestic
borrowing.*In the revised 2008/09 budget, general government domestic
borrowing is
   targeted at zero —down from 2.7 percent of GDP in 2007/08—by containing
   expenditures and enhancing revenue mobilization through administrative
   measures such as integrating the three revenue agencies.

   •* Reduce domestic borrowing by public enterprises*. Such borrowing will
   be kept to 4-8 billion birr, 1.1-2.2 percent of GDP, in 2008/09, down from
   4.4 percent in 2007/08, by limiting investment activities and also by
   repaying the debt of the Oil Stabilization Fund. The authorities have
   established an inter-agency committee to monitor key public enterprises and
   public institutions.

   •* Tighten monetary policy.* The National Bank of Ethiopia plans to
   reduce broad money growth to less than 20 percent in 2008/09 from about 23
   percent at the end of the previous fiscal year. It also intends to closely
   monitor and control money creation arising from its net lending to the

   *• Increase exchange rate flexibility. *Reflecting this commitment, the
   official exchange rate against the U.S. dollar depreciated by 5 percent on
   January 15, 2009. This, together with a similar-size depreciation on
   January 2, brings the cumulative depreciation since end-2008 to over
   10 percent.

*Partners to raise support*

Tighter economic policies to adjust to the shocks and domestic imbalances
are expected to significantly slow Ethiopia's economic growth in 2008/09.
Given the intensifying global economic downturn, the planned adjustment path
is also subject to considerable risks and uncertainties, particularly
because Ethiopia is highly dependent on external resource flows from
remittances, aid, and foreign direct investment.

Stepped-up donor assistance will help to soften the impact by providing
financing for capital projects and foreign exchange for essential imports.
This, along with lower import prices, should make it possible to rebuild
foreign exchange reserves over the medium term. Ethiopia's international
partners have recognized the country's difficult situation and plan to
substantially raise concessional project financing and budget support.

*Implementation key to success*

Kato stressed that forceful implementation of Ethiopia's adjustment policies
is essential. This would not only ease the pressures on the balance of
payments and domestic prices, but also lay the basis for sustainable
economic growth.

"In the current global economic environment, there are significant risks
that exports, remittances, and foreign direct investment may fall short of
expectations. If this proves to be the case, additional policy tightening
will be needed to preserve the viability of the balance of payments." Kato
stated.* *

*Comments on this article should be sent to imfsurvey@imf.org*

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