On July 29, 2024, the International Monetary Fund (IMF) announced a new Extended Credit Facility program that would support Ethiopia in alleviating foreign exchange shortages during the country’s transition to a market-based exchange rate. The program aims to boost exports, stimulate investment and attract more foreign direct investment. One of the topics of the European Chamber in Ethiopia’s monthly CEO networking event that was held on October 10, 2024, focused on ‘The FX Regime Change in Ethiopia & Its Broader Implications’, with a presentation by Rasmussen Tobias, IMF Resident Representative to Ethiopia.

European Chamber in Ethiopia’s latest CEO networking event discusses the IMF’s four-year Extended Credit Facility program that aim to support Ethiopia’s transition to a market based foreign exchange rate.

The IMF representative stated that the Extended Credit Facility program is part of the IMF’s concessional lending facilities for low-income countries, which is an interest free loan. The four-year program, with a total financing of 3.4 billion dollars, is part of the IMF’s support to Ethiopia’s Homegrown Economic Reform Plan. A billion dollar was dispersed immediately after approval and the remaining part will be dispersed in tranches over four years following program reviews that will be conducted periodically to assess the country’s progress in meeting the reform targets. The Extended Credit Facility is part of a broader support program, totalling $10.7 billion, which has been split roughly three ways with the IMF, the World Bank and creditors.

IMF had a similar program in late 2019, which wasn’t successful for different factors including the COVID-19 pandemic and local conflict in Ethiopia. Following the peace agreement in late 2022, there was renewed focus on economic and macroeconomic reforms, culminating in the recent release of the second version of the plan.

The program has five primary objectives. The first is to address the foreign exchange challenges, particularly the pressure on the balance of payments caused by the exchange rate disparity. There was a significant gap between the official and parallel market exchange rates. The goal was to transition to a more market-oriented exchange rate system, reducing the discrepancy between official and parallel market rates.

The program’s second objective is to assist the government in modernizing its monetary policy framework through support to the central bank. The third objective is to enhance government revenues through improved tax collection. The IMF representative noted a significant decline in tax revenue as a share of GDP. Last year, Ethiopia’s tax revenue stood below 7% of GDP, well below international standards. The program aims to increase this ratio by 4 percentage points over four years. To achieve this, Ethiopia recently published a medium-term revenue strategy focusing on enhancing tax administration, broadening the tax base, eliminating loopholes and removing exemptions to help improve revenue.

In its fourth objective, the program focuses on supporting the reform of state-owned enterprises with a focus on financial aspects. Significant progress has been made in reducing the borrowing of state-owned enterprises, strengthening their management through oversight systems, particularly at Ethiopian Investment Holdings, and converting some of these loans into government debt to improve the balance sheet of the Commercial Bank of Ethiopia.

The foreign exchange reform has led to economic changes, such as increased fuel prices due to the depreciation of the exchange rate. To mitigate the impact on vulnerable households, the program’s fifth objective emphasizes the allocation of funds for subsidies to phase in price increases gradually and expand funding for the Productive Social Safety Net Program (PSNP). The program also aims to enhance transparency and public financial management to modernize Ethiopia’s fiscal practices.

The IMF representative mentioned that the past ten weeks have witnessed remarkable progress with Ethiopia’s historic exchange rate reform successfully narrowing the gap between the official and parallel market rates. This transition, often characterized by volatility in other countries, has been remarkably smooth. He said inflationary pressures have been less severe than anticipated. August’s inflation rate continued to decline from 19% in July to 17% in August. While some prices have risen, the overall transition to a market-based exchange rate has been smooth and successful. However, the representative acknowledged the presence of persistent challenges such as limited foreign exchange access by businesses. Despite these obstacles, significant progress has been made and the four-year program offers ample opportunity for further improvements. In conclusion, the representative stated that the IMF has recently completed an initial review of the program and is encouraged by the progress.

The CEO networking event was attended by members of the European Chamber in Ethiopia and featured a remark by the newly appointed EU Ambassador to Ethiopia, Her Excellency, Sofie From-Emmesberg.