IMF Says Ethiopian Economic Growth May Slow Without Policy Shift

Ethiopia’s economic expansion may continue through next year before “tapering off” from 2015-16 because of funding gaps for public projects and foreign exchange shortages, the International Monetary Fund said.

Gross domestic product is forecast to rise to 7.5 percent in the 12 months through July 7 and 2014-15, and then ease “slightly in subsequent years under current policies,” the Washington-based lender said in an e-mailed statement today.

“Persistent shortfalls in the financing of planned infrastructure investment and a tightening of foreign exchange availability could constrain medium-term growth in the absence of policy adjustments,” according to the statement.

Ethiopia’s government follows a state-led development model that emphasizes public investment in social services and infrastructure. The Grand Ethiopian Renaissance Dam, a 80-billion Ethiopian birr ($4.2 billion) hydropower facility being built on the Blue Nile river with entirely domestic financing, is projected by authorities to cost 10 percent of GDP this fiscal year, according to the IMF.

To keep growth rates high, the government should shift policy and allow private investors a larger stake in the economy, which would help achieve objectives in its five-year Growth and Transformation Plan, or GTP, the IMF said.

“The investment requirements of the GTP are large and securing the associated financing remains a challenge,” the IMF said. “Without greater scope for the private sector, the realization of the GTP’s objectives could be elusive.”

Cutting Poverty

The economy has expanded an annual average of 7 percent since 2001-02, cutting the poverty rate by half to 30.7 percent in 2011 from 60.5 percent in 2005, leading to a higher standards of living for many citizens and reducing the unemployment rate in urban areas, according to the IMF. While spending by the government and public enterprises has been “instrumental in delivering these results,” they’ve relied on local credit and squeezed out private borrowers, the IMF said.

Growth, which registered 7 percent in 2012-13, is being driven by farming, construction and service-related industries, according to the IMF. Inflation eased to 7 percent in June from a peak of 40 percent in July 2011, while the current account deficit widened to $3 billion in 2012-13 from $2.8 billion a year earlier, as prices for key exports declined, the IMF said. Ethiopia is Africa’s biggest grower of coffee.

Ethiopia’s debt stock will remain sustainable if the government can obtain more financing on concessional terms, the IMF said. It should also consider “phasing out” a rule that forces banks to buy government bonds equivalent to 27 percent of the value of total loans they’ve disbursed, the IMF said.