Issue No. 163

IMF Engagement with Ethiopia: A Path to economic recovery 

The International Monetary Fund (IMF) is evaluating Ethiopia's application for financial assistance to reconstruct its economy, which has been severely damaged by conflict, drought, and inflation. An IMF team is in Addis Ababa undertaking technical work in preparation for an IMF-supported program in Ethiopia. Current conversations with Ethiopian officials are focused on reform plans, and measures to help Ethiopia address its greatest challenges. Discussions have primarily focused on standard monetary policy issues the IMF has asked Ethiopia to address, such as managing exchange rates and foreign currency reserves, controlling inflation, and maintaining financial stability. The potential program would support the government’s Homegrown Economic Reform (HGER) program and help Ethiopia stabilize its economy.

The IMF has resumed its relationship with Ethiopia at a time when the government is attempting to raise funding for the nation's recovery and launch the second HGER. This second iteration is expected to cost USD 10 billion. But Ethiopian Finance Minister Ahmed Shide says that USD 20 billion will be required for a recovery program to rehabilitate war-torn Tigray, as well as parts of the Afar and Amhara regions.

The HGER, an economic reform strategy unveiled by the Ethiopian government in late 2019, aspires to unleash the nation's growth potential and catapult it toward becoming a symbol of African wealth by 2030. The initiative is based primarily on macroeconomic, structural, and sectoral reforms aimed at stabilizing the economy, lowering inflation, addressing scarcity in foreign currency, and boosting the competitiveness of priority sectors including agriculture, manufacturing, information, communications and technology, mining, and tourism. The stated goals of these reforms are poverty reduction and inclusive growth.

In 2019, the IMF obtained a staff-level agreement to approve a USD 2.9 billion loan for Ethiopia as part of a program to offer a balance of payments support for its cash-strapped economy, and technical assistance for the HGER, pending board approval. The loan was suspended, however, following the outbreak of war in Tigray. Ethiopia's Extended Fund Facility (EFF) and Extended Credit Facility (ECF) were also phased out at that time. 

IMF's re-engagement with Ethiopia follows a cessation of hostilities agreement (COHA) between the federal government of Ethiopia and the Tigrayan regional government. The IMF has said it welcomes Ethiopia’s progress towards restoring lasting peace and stability through the “cessation of hostilities agreement” and that implementation is progressing, including the restoration of humanitarian assistance and basic services to Tigray. 

Prior to resuming direct economic assistance to the Ethiopian government, the US, the largest shareholder in the IMF, and the EU have stated that three conditions must be satisfied. The first two are the cessation of hostilities, and aid to Tigray. The third is accountability for human rights violations. A ceasefire agreement negotiated in November 2022 has brought an end to hostilities and allowed some relief to reach parts of the region. In accordance with the Ethiopian Constitution and the African Union's Transitional Justice Policy Framework, the COHA also calls for "a comprehensive national transitional justice policy aimed at accountability, establishing the truth, redress for victims, reconciliation, and healing." Much more work is needed on this front.

The government has made some progress, and it is anxious for donors to return to assist in the recovery of the war-devastated economy. In September 2022, the Ministry of Justice released a discussion paper presenting options for transitional justice. This explored numerous approaches to transitional justice, including the formation of a specialized "truth and reconciliation commission," the construction of a special prosecutor's office, and the use of existing institutions. But it dismissed the idea of an ad hoc international tribunal as "neither desirable nor practical." There are serious concerns about the transparency of transitional justice if it is left in the government's hands.

There is no doubt that IMF assistance can boost Ethiopia's economy, which has been severely hit by a variety of shocks, including 6 years of drought. The net impact of these shocks has been a host of economic problems, including rising inflation, a currency crisis, a widening balance-of-payments crisis, and an increasing burden of external debt. A spike in unemployment, food insecurity, and severe shortages of essential goods have exacted a catastrophic socioeconomic and political toll on Ethiopia that must be well and properly addressed. In conclusion, the International Monetary Fund's engagement with Ethiopia provides hope for the country's economic recovery. With the proper implementation of reform measures, Ethiopia can overcome its economic challenges and achieve inclusive growth and poverty reduction.

By the Ethiopian Cable team