News: IMF hints sending program negotiation team to Ethiopia come fall “provided conditions are right”

By Getahun Tsegaye @GetahunTsegay12

Addis Abeba – The International Monitory Fund (IMF) has briefed creditor’s committee meeting under the G20 common framework on Tuesday 19 July and hinted at sending “program negotiation mission” to Ethiopia between “late September to early/mid October” this year, “provided conditions are right,” according to a document seen by Addis Standard.

“This will mean Ethiopia will see a new program by 2024, and that will give confidence to creditors to restructure [Ethiopia’s] debt,” an economic analyst who is closely following the development told Addis Standard.

A team from the IMF, led by Sonali Jain-Chandra, was in Ethiopia for a technical staff visit between 13 -17 June. The Fund told creditors on Tuesday that the visit laid “the groundwork for starting program negotiations in the fall.”

Ethiopia’s creditors’ committee met this week to discuss on the possibilities of restructuring its debts under a common framework set up by the Group of 20 economies. But the results of the meeting are not public as of the publishing of this news. A week before the meeting of creditors, Dr Eyob Tekalign, Ethiopia’s State Minister of Finance, met with William Roos, the Co-Chairperson of the Paris Club, and received an update on Ethiopia’s request for debt treatment under the G20 Common Framework.

The Ministry of Finance subsequent said that “Mr Roos briefed the Ethiopian delegation on the promising progress by the creditor’s committee and assured that all of the bilateral creditors who are part of the committee stand ready to support Ethiopia’s request.” The committee has met three times chaired by France and the People’s Republic of China prior to the meeting this week.

The IMF’s document presented at the meeting pledges the Fund “is committed to supporting Ethiopia,” but cautioned that the “timeline is not fully in Fund staff’s and management’s hands – moving fast will require assurances from donors, and financing assurances from creditors for debt relief, and support from the Fund’s Executive Board.”

The Fund also discussed “key milestones on the way toward new Fund financing” and outlined four steps: 1) update macro framework to reflect recent developments; identify financing needs as well as need for a debt operation in co-ordination with the World Bank, taking into account uncertainty and risks; discuss with donors how financing gaps can be filled. 2) Mission to form staff-level agreement on policies with the authorities that reflect a level of ambition consistent with the level of access sought. 3) Present to creditors envelope for debt restructuring consistent with supporting IMF Board approval (closing financing gaps and reducing debt distress). And 4) Board meeting.”

The Fund’s outlook on Ethiopia’s economy says it “remains under pressure with high inflation, widening imbalances, and threadbare foreign exchange reserves.” It expects Ethiopia’s deficit to widen to 4.1 percent of GDP, compared to 2.8 percent in 2020/21 to which lower tax revenues (1.8 pp of GDP below the 9 percent of GDP in 2020/21), a shortfall in grants, and higher recurrent spending for defense and reconstruction (0.8 percent of GDP above 2020/21 levels) were mentioned as main drivers. The “first 10 months of 2021/22 saw trade balance worsen by 30 percent year on year,” the IMF said, with official disbursements (both grants and loans) slowed down considerably amid the civil war. “Inadequate [Forex] reserves projected to further decline below 1 month of imports by end June 2021.”

It recognized the formation of a committee by the government in mid-June to negotiate with Tigrayan authorities, and Tigray’s willingness to negotiate for peace as a positive step.

But challenges remain, it says, as some tensions persist, “particularly given risks of fighting with Amhara regional forces, ethnic tensions in Oromia, and escalation of hostilities with Eritrean troops. Security challenges are unlikely to disappear entirely in the near future,” it observed. Furthermore, key development partners “have noted that further progress is needed to fully normalize their bilateral relations, including by restoring basic services and providing greater amounts of fuel to Tigray, and taking further concrete steps toward accountability for human rights violations.”

The 2019 Extended Credit Facility -Extended Fund Facility (ECF-EFF) had a financing gap of $8.4 billion, with the Fund filling around $3 billion of the gap. But “given the current macro-conjuncture, the new program is likely to have a larger financing gap.”

The new program will therefore fill part of the financing gap, and the remaining will have to be filled with the help of development partners, including other International Financing Institutions (IFIs), and debt treatment via Common Framework for Debt Treatments (CF). “The program will have to be fully financed with adequate burden sharing.” AS