ETHIOPIA

Ethiopia’s structural current account deficit worsened after 2014 to reach -11.8% of GDP in 2016.The deficit reduced somewhat over the past few years (-5.3% of GDP in 2019) on the back of declining imports. On the other hand, poor export diversification and the overvaluation of the exchange continue to put the break on the export performance. The chronic current account deficit coupled with a managed exchange rate regime (de facto a crawling peg to USD) are at the origin of the persistent foreign exchange shortages. Since 2012, the foreign exchange reserve coverage has been hovering around two months of import cover, well below the recommended levels (three to six months of import cover) by international institutions.

Most importantly, the difficulty of accessing foreign currency is one of the key impediments to attracting foreign direct investment. Depleted foreign currency reserves also translate into a large gap between the official and parallel exchange rates and increase the cost of imports. Consequently, Ethiopia has been struggling with double-digit inflation rates since the devaluation in 2017.

Ethiopia’s public debt stands at 56.6% in 2020, with an elevated external debt component in foreign currency (30% of GDP). The main debt vulnerabilities are related to rising debt-servicing needs, an overvalued exchange rate and a weak export base. Ethiopia is eligible for the 2020 G20 debt relief initiative. In this context, the Paris Club of creditor countries has agreed to suspend debt service payments. In April 2020, the IMF approved a budget support of USD411mn (under the Rapid Financing Instrument) to help Ethiopia to overcome urgent balance of payment needs. The World Bank also granted USD82.6mn in financing to Ethiopia to fight the pandemic. In the context of a growing external financing gap (estimated to  USD1.7bn for 2019/20), Ethiopia is  seeking additional financing from multilateral and bilateral donors. Finally, Ethiopia’s commitment to the reform objectives of the three-year financing agreement (ECF-EFF) with the IMF (USD2.9bn) was confirmed in August 2020 (validation of the first review of the arrangement by the IMF). Ethiopia’s engagement for reforming its economy is likely to attract further support from the international community.