News Brief No. 02/99

News Brief: IMF Completes Review Under Ethiopia's PRGF Arrangement and Approves US$14 Million Disbursement

September 24, 2002

The Executive Board of the International Monetary Fund (IMF) has completed the third review of Ethiopia's performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. As a result, Ethiopia will be able to draw up to SDR 10.43 Million (about US$14 million) under the arrangement immediately.

Ethiopia's PRGF arrangement was approved on March 22, 2001 (see Press Release No. 01/11) for SDR 86.9 million (about US$115 million). On March 18 2002, the Board decided to increase the PRGF arrangement by SDR 13.38 million (about US$18 million) to help mitigate the impact on the balance of payments of a continued deterioration of the terms of trade and the events of September 11. So far, Ethiopia has drawn SDR 58.56 million (about US$77 million).

The PRGF is the IMF's most concessional facility for low income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Board's discussion on Ethiopia, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, stated:

"Ethiopia's performance during the first annual program under the PRGF arrangement was good, and the second annual program remains on track. Real GDP growth remained strong at an estimated 5 percent in 2001/02, while inflation remained negative as a result of food surpluses following the bumper crop in 2000/2001. However, since July of 2002, Ethiopia has suffered from a drought, which is affecting food production and causing food shortages in some regions, as well as a rebound in cereal prices. The authorities have subsequently requested additional food assistance from donors.

"All the quantitative and structural performance criteria and benchmarks under the PRGF arrangement for December 2001 and March 2002 were met, with the exception of that concerning the revision of the regulation governing banks' provisioning for nonperforming loans. This regulation was amended in August 2002 to bring it more in line with international best practice.

"The fiscal deficit (including grants and special programs) increased considerably in 2001/02, as a result of the accelerated implementation of special programs and capital and poverty-targeted expenditure. Several tax policy measures were implemented. Defense outlays were cut further. Broad money for the first nine months of 2001/02 increased by less than programmed. Several measures were taken to improve the soundness of the financial sector. The wholesale foreign exchange auction began to operate more efficiently and was replaced by an interbank foreign exchange market in October 2001. The exchange rate regime and policy remain adequate.

"The policies to be implemented in the remainder of the second annual program should sustain economic performance. Real GDP growth is currently projected to rise to 6 percent in 2002/03, but is likely to be affected by the recent developments. Average consumer price inflation is expected to rise to 4.5 percent. The external current account deficit is projected to increase somewhat in 2002/03, as official transfers decline to a more sustainable level.

In the fiscal area, the overall deficit (including grants and special programs) is to be limited to 9.7 percent of GDP in 2002/03. Progress with tax administration reform will continue, and the value added tax is to be introduced in January 2003. On the spending side, a cautious stance will be pursued, with defense spending maintained at the nominal level of the previous year, while poverty-targeted outlays will be increased. The planning, tracking, and reporting of public expenditure will be further strengthened.

"Reforms are to be implemented to strengthen the financial sector and improve its competitiveness. A financial audit of the Commercial Bank of Ethiopia is to be undertaken, with a view to preparing a restructuring plan. Other structural reforms are to be pursued in 2002/03 to foster agriculture growth and private sector development, improve public expenditure management and control, and build institutional capacity in the public service," Mr. Sugisaki said.