A year ago, the International Monetary Fund released a report called “Article IV Consultation for 2018,” which states that Ethiopia should contract new debts at concessional terms only. These kinds of debts are soft loans that have terms either with low-interest rates, extended return periods, or both combined.
The executive board of the International Monetary Fund (IMF) had approved a $2.9bn financial support for Ethiopia the previous week. The board announced that the approved three years’ financing package aims to support Ethiopian Homegrown Economic Reform.
What is Ethiopian Homegrown Economic Reform?
According to the prime minister, the reform aims to spur Ethiopia to become a symbol of prosperity in Africa by 2030. The agenda is about leveraging the achievements of the past decade with techniques including private sector development, correcting macroeconomic imbalances, creating new opportunities and sources of growth.
Additionally, the reform mainly focuses on manufacturing, mining, agriculture, tourism, and ICT. The agenda identified foreign exchange imbalances, the burden of external debt, the private sector’s limited access to finance, and inflation as challenges the Ethiopian economy is facing. The reform agenda aims to address these challenges by microeconomic, structural, and sectoral reforms.
On what basis does the IMF approve financial assistance?
The IMF said that the request for a $2.9bn loan was approved based on its Extended Credit Facility (ECF) and Extended Fund Facility (EFF). ECF provides financial assistance to countries with an extended balance of payment problems. And the IMF provides EFF when a country faces payment problems because of structural weakness, which needs time to address. The IMF determines the amount of loan from 100 percent to 400 percent of the country’s IMF quota annually under ECF and 145 percent to 435 percent under EFF.
Ethiopia has received 700 percent of its IMF quota. According to the IMF, there are five goals of the IMF-supported program with Ethiopia. It requires addressing foreign exchange shortage and a more flexible exchange rate regime, strengthening oversight and management of state-owned enterprises; boosting domestic revenue mobilization and expenditure efficiency; reforming the financial sector to support private investment, and modernize the monetary policy framework; and reforming the supervisory framework and financial safety net.
Controversiality of the IMF
The IMF has been the overseer of the world financial system since 1944. It has been criticized and credited with its support for financial stability. The fund had been working on developing countries for years, including Brazil, Argentina, Indonesia, and Mexico.
Some scholars criticize the IMF as guilty of failed development policies implemented in some of the developing countries in the world. The Council On Foreign Relations quoting Nobel Prize-winning economist Joseph Stiglitz’s book wrote that “many of the economic reforms the IMF required as conditions for its lending such as fiscal austerity, high-interest rates, trade liberalization, privatization, and open capital markets have often been counterproductive for target economies and devastating for local populations.”
Whereas, some economists argue that during the 2000s, the IMF’s support for economic reforms allowed countries to recover from crises and helped them to sustain growth.
Ethiopian prime minister Abiy Ahmed (Ph.D.) is an optimist about the support from the IMF. “Borrowing from the IMF is like borrowing from [your] mother,” Abiy said recently on a peace conference in Addis Ababa. He explained that the IMF gives Billions of dollars while expecting us to pay back in 20 or 30 years with a low-interest rate.