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19 June, 2007
Forecasts GDP Growth at 9.5pc, Projects Inflation Declines to 15pc
The International Monetary Fund (IMF) has praised Ethiopia’s consecutive economic growth for the past three years as “the fastest in Ethiopia’s recent history”. In a statement its Board of Directors issued on Friday, June 15, 2007, the IMF said not only has the government of Prime Minister Meles Zenawi registered an annual real per capita increase of seven per cent, but also has an economic expansion that “has significantly contributed to poverty reduction and progress towards the Millennium Development Goals (MDG).”
This is pleasant news delivered from a rather cautious organisation that has a history of being very conservative when going into raptures over the 185 member countries’ economic performances. It is IMF’s first time to show generosity in its words to Ethiopia’s economic performance, breaking away from its tradition of issuing very careful statements over the past five years.
“Executive Directors welcomed Ethiopia’s recent strong and steady growth, which has also led to the fastest increase in real per capita incomes in recent years,” said the three-page statement posted on its official Web site.
However, the expansion in the economy is not without a challenge. Balancing growth with inflationary pressure, where the IMF said consumer prices rose by 19pc in February 2007, has become a major preoccupation for the EPRDF-led government. Fiscal deficit, pressure on domestic prices and an economy vulnerable to how the weather and development partners behave, are also factors that pose serious challenges to the economy.
“A critical challenge for Ethiopia is to accelerate structural reforms to buttress and sustain growth, while maintaining macroeconomic stability,” said the IMF.
The Prime Minister could not agree less. He in fact has played down his Administration’s differences with the IMF, speaking at a press conference on June 9, 2007.
“The difference of opinion between our partners and us is not as wide as it is sometimes made out to be,” he told journalists. “We agree with the IMF in that the critical issue facing Ethiopia now is how to balance growth on the one hand, and curb inflation on the other. We believe it can be done.”
IMF experts strongly believe that Ethiopia’s inflation is a result of credit expansion to the state and private sectors.
“The demand for bank credit rose sharply to finance large-scale investment projects by the public enterprises and the rapidly expanding private sector,” IMF’s latest statement said.
This has led government to increase its net domestic borrowing for budget financing from 0.2pc of the Gross Domestic Product (GDP) in 2003/04 to 3.1pc last year. This reflects a declining revenue mobilisation by the government, coupled with a reduction of budget support from Ethiopia’s development partners that is believed to be two percentage points of GDP from what the federal government had originally budgeted, according to the IMF. The federal government had hoped to get 12.1 billion Br in loans and grants from external sources during the past fiscal year.
This has led the budget deficit to remain large at 4.5pc of GDP during 2004/05, while the current account deficit widened to 10.5pc of the GDP in 2005/06, disclosed IMF. The increasing domestic demand for imports of raw materials and capitals goods has put pressure on the balance of payments of the country, reducing the country’s foreign exchange reserves from an equivalent of 3.7 months of imports at the end of 2003/04 to 2.1 months at the end of 2005/06, said IMF.
Nevertheless, IMF is very optimistic about the prospects of Ethiopia’s economic performances in the years ahead. Attributing further growth not only to gains in agricultural productivity, but also to expansion in manufacturing as well as construction, it has projected a real GDP growth of 9.5pc in the 2006/07 fiscal year. Hoping that food supply by farmers would reach the markets on time and increases on fuel get to their completion term, the IMF has forecasted inflation on commodities will decline to 15pc at the end of 2006/07.
The IMF has suggested a tightening of monetary policy by increasing interest rates on lending and issuing long-term bonds.
“The gradual move to positive real interest rates would also help to contain inflationary pressure,” the IMF advised.
The IMF still insisted the Ethiopian government limit its expenditure on projects with large import contents in order to put the pressure off the balance of payments. The IMF disclosed Ethiopia’s external current account deficit (including official transfers) was at 10.6pc of the GDP in 2005/06, although its experts are projecting it to go down by half in 2006/07.
By TAMRAT G. GIORGIS - FORTUNE STAFF WRITER