IMF Wraps Ethiopia ECF Review, Concludes 2025 Article IV

• The IMF Executive Board completed the third review under the Extended Credit Facility (ECF) arrangement for Ethiopia, allowing the authorities to draw the equivalent of about US$262.3 million (SDR 191.7 million).
• The Ethiopian authorities have made a significant progress in implementing fundamental macroeconomic reforms under the ECF, approved in July 2024. Economic indicators have improved markedly, with better-than-expected results for inflation, export growth, and international reserves.
• Sustained reform momentum is essential to consolidate recent gains and foster a more favorable environment for investment. Priorities include improving foreign exchange (FX) market functioning, boosting domestic revenues, restoring external debt sustainability, and enhancing fiscal transparency.
• Medium-term economic growth prospects are promising, though downside risks remain.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded today the 2025 Article IV consultation with Ethiopia [1] together with the third review of the 48-month Extended Credit Facility (ECF). The Board's decision allows for an immediate disbursement of about US$262.3 million (SDR 191.7 million), which will help Ethiopia meet its balance of payments and fiscal financing needs. The completion of the review brings total disbursements under the arrangement to about US$1.873 billion.

The ECF arrangement for a total of SDR 2.556 billion (850 percent of quota) or about US$3.4 billion at the time of program approval on July 29, 2024 (see Press Release 24/291 ) supports the Ethiopian authorities' Homegrown Economic Reform Agenda (HGER) in addressing macroeconomic imbalances and laying the foundations for private sector led growth.

All quantitative performance criteria were met. There was overperformance in the accumulation of net international reserves, resulting from strong gold exports. There was no new provision of advances from the National Bank of Ethiopia to the government, accumulation of external arrears, or contracting of non-concessional external debt.

Recent FX policy measures to enhance transparency, reduce costs for market participants, ease restrictions on current account transactions, and strengthen prudential regulations contribute to improving FX market efficiency. Continued policy efforts will be critical to cement the impressive gains from the FX market reform, maintain competitiveness, improve reserve coverage, and gradually tackle the remaining FX restrictions. Maintaining tight monetary and financial conditions and a prudent fiscal policy stance are important for managing inflation.

Measures to mobilize domestic revenues, enhance social safety nets, phase out fuel subsidies, strengthen SOEs, and improve fiscal transparency continue to show encouraging results. Maintaining a prudent approach to spending, timely tax revenue reform implementation, and further development of market-based domestic financing instruments are warranted.

The authorities continue their efforts to restore debt sustainability, and are taking steps to secure a debt treatment. Progress made in negotiations with the Official Creditor Committee (OCC) under the Common Framework is welcome. The authorities are making good faith efforts to reach an agreement with their external commercial creditors on terms comparable to the OCC terms, and consistent with program parameters. The financing assurances received and adjustment efforts made are consistent with IMF policy requirements and program parameters.

Following the Executive Board discussion, Mr. Nigel Clarke, Deputy Managing Director and Chairman of the Board, made the following statement:

"The authorities have made strong progress in implementing their economic reform agenda in the first year of their Fund-supported program. Growth has been resilient and inflation has fallen. The exchange rate reform has corrected real exchange rate misalignment and increased foreign exchange (FX) availability. Measures to modernize monetary policy, mobilize domestic revenues, enhance social safety nets, strengthen SOEs, and anchor financial stability continue to show encouraging results. However, the outlook remains subject to downside risks given security challenges and declining donor support. In that context, maintaining the reform momentum will be important to consolidate gains to support private-led diversified growth and poverty reduction.

"The National Bank of Ethiopia's efforts to deepen the FX market and tackle distortions are welcome. The authorities should remain ready to adopt new measures if growth in FX supply weakens and parallel market spreads widen again.

"Maintaining tight monetary and financial conditions is important for containing inflation. Next steps to develop the monetary policy framework include moving decisively to using the NBE policy rate as the primary operating target of monetary policy and enhancing communication and analytical capacity.

"Building on the strong start, revenue mobilization is critical to create space for social and development spending. Next steps are income, excise, and property tax reforms and efforts to broaden the tax base and enhance customs administration. Continued prudence in spending and domestic bond market development are important.

"Securing a debt treatment will help restore debt sustainability and meet financing needs. Continued avoidance of non-concessional borrowing, except financing for the Koysha dam project, and careful evaluation of new concessional debt, will help contain debt vulnerabilities.

"Steady reduction of financial repression and strengthening financial sector oversight will underpin financial sector stability and support for private sector-led growth. Close monitoring of credit developments and risks, and banks' net open foreign exchange positions are important.

"Implementation of the reformed legal framework for the NBE, including filling the vacant NBE Board positions in line with the requirements of the new law, will support its autonomy. Strengthening NBEs financial position, in due course, will also help ensure it can realize its policy mandate."

Executive Board assessment ^[2] :

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities' significant progress in advancing the homegrown economic reform agenda supported by the Fund program, and welcomed the strong macroeconomic outcomes achieved. Noting the downside risks, including potential social discontent, security challenges, and climate shocks, Directors emphasized the need to maintain the reform momentum, with technical assistance from the Fund and development partners, to consolidate gains and support a more favorable investment environment and diversification. Ensuring societal support for the envisaged reforms and contingency planning would be crucial for the program's success.

Directors encouraged continued efforts to transition to an interest rate based monetary policy framework with a flexible exchange rate and stronger monetary transmission. They called on the authorities to further deepen the FX market and improve its efficiency, including through the planned removal of the remaining restrictions. Directors underscored the need to maintain tight monetary and financial conditions to contain inflation. They urged the authorities to implement the reformed legal framework for the National Bank of Ethiopia (NBE), including to strengthen its autonomy by filling the vacant NBE Board positions with well qualified candidates. Directors encouraged continued efforts to reduce financial repression and strengthen financial sector oversight to enable the financial sector to support private sector-led growth.

Directors highlighted the need for continued revenue mobilization to meet social and development needs, rebuild fiscal space, and address debt vulnerabilities. Noting Ethiopia's low tax-to-GDP ratio by regional standards as well as the challenges posed by the continued decline in ODA, Directors stressed the importance of implementing the National Medium-Term Revenue Strategy. They also emphasized the importance of improving spending efficiency, including phasing out fuel subsidies while strengthening safety nets, along with efforts to develop the domestic bond market. Directors also encouraged continued progress on SOE transparency and accountability reforms.

Directors welcomed the Agreement in Principle with the Official Creditor Committee (OCC) to secure a debt treatment under the G20 Common Framework and looked forward to the signature of a Memorandum of Understanding that would be consistent with program objectives. Good faith efforts to also reach agreement with external commercial creditors on terms comparable to the OCC terms should continue.

Directors stressed that strengthening governance, enhancing transparency, and reinforcing the AML/CFT framework will be critical to improve the business climate and investors' confidence, and thus support private sector-led diversified growth. Continued efforts to improve the quality and availability of economic statistics with the support of technical assistance is also important.

It is expected that the next Article IV consultation with Ethiopia will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Ethiopia Selected Economic Indicators, 2021/22-2028/29

1/ Public and publicly guaranteed external debt, which includes long-term foreign liabilities of NBE and external debt of Ethio-Telecom. Does not include expected debt relief.

2/ Projections from 24/25 include impact of CBE recapitalization

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings-up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.