News Brief No. 02/23

News Brief: IMF Completes Second Review Under Ethiopia's PRGF Arrangement and Approves US$30 Million Disbursement

March 18, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Ethiopia's performance under the Poverty Reduction and Growth Facility (PRGF) arrangement.¹

The Board also approved an augmentation of the PRGF arrangement by SDR 13.37 million (about US$17 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. The Board also granted a waiver of the non-observance of the performance criterion on net domestic assets of the National Bank of Ethiopia. As a result of today's decision, Ethiopia will be able to draw a total of SDR 23.80 million (about US$30 million) immediately.

Ethiopia's PRGF Arrangement was approved on March 22, 2001 (see Press Release 01/11) for SDR 86.9 million (about US$109 million). So far, Ethiopia has drawn SDR 34.76 million (about US$44 million).

After the Executive Board's discussion on Ethiopia, Mr. Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, stated:

"Ethiopia's performance during the first annual program under the Poverty Reduction and Growth Facility (PRGF) arrangement has been commendable. Most of the performance criteria and benchmarks were observed. Thus, despite a deteriorating external environment, real GDP growth for 2000/01 rose to an estimated 7.9 percent, inflation turned negative as a result of a bumper cereal crop and large inflows of food aid, and the external current account deficit fell to 4.2 percent of GDP. The economic situation remains fragile, but the authorities are committed to consolidating the macroeconomic gains and pushing ahead with their reform program.

"Fiscal performance was better than programmed in 2000/01, as lower spending more than offset a small shortfall in revenue. Several measures were implemented to strengthen tax administration and the tax system, and expenditure was re-oriented from defense to the social sectors and poverty alleviation. As a result, poverty-targeted outlays increased. In the monetary and exchange rate areas, steps were taken to start sterilizing excess liquidity, adopt indirect monetary policy instruments, and move toward a market determination of interest and exchange rates. The wholesale foreign exchange auction was replaced by an interbank foreign exchange market in October 2001.

"The policies to be implemented in the second annual program (October 2001- September 2002) should sustain economic performance, despite the continuing difficult world economic environment. Real GDP is projected at 5.8 percent in 2001/02 and 6.0 percent in 2002/03. The external current account is projected to widen to 7.1 percent of GDP in 2001/02 before narrowing to 6.2 percent in 2002/03. To mitigate the impact of the continued deterioration of the terms of trade for Ethiopia and of the events of September 11, 2001, the Fund is augmenting Ethiopia's access under the PRGF arrangement by 10 percent of quota (SDR 13.37 million). The overall fiscal deficit, including grants and special programs, is to be limited to 9.1 percent of GDP in 2001/02, and 7.8 percent in 2002/03. Further progress is to be made in tax administration reform and in preparation for the introduction of the value-added-tax by January 2003. The authorities plan to cut defense spending further, while poverty-targeted outlays will increase. A comprehensive plan to enhance budget formulation, execution, and reporting will be carried out.

"Reforms are to be implemented to strengthen the financial sector and improve its competitiveness, particularly to improve the financial situation of the largest state-owned bank, the Commercial Bank of Ethiopia. Other structural reforms to be pursued in 2001/02 include public sector capacity-building, privatization and other efforts to attract foreign investment and develop the private sector, and further strengthening of the legal and regulatory framework," Mr. Sugisaki said.

¹ 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 each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. In the case of Ethiopia, a full PRSP is in preparation. 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.