Bloomberg News

Ethiopia’s ‘Distorted’ Monetary Plan Needs Reform, IMF Says

October 13, 2011

(Updates with IMF comment in third paragraph.)

Oct. 13 (Bloomberg) -- Ethiopia’s “highly distorted” monetary policy requires urgent reorganization because it is stunting growth and undermining macroeconomic stability, the International Monetary Fund said.

The Horn of Africa country’s five-year economic-development plan that starts in the fiscal year beginning July 8, 2010, and targets annual growth of 11.2 percent is “very ambitious,” the Washington-based lender said. The IMF projects output for the period will range from 6 percent to 8 percent a year.

“The main concerns stem from heavy financing needs that have not been secured, insufficient prioritization and the limited role envisaged for the private sector,” the IMF said in an e-mailed report today. “High and rising inflation and entrenched negative real interest rates also threaten Ethiopia’s macroeconomic stability.”

The coffee-producing nation’s commodity-dependent economy grew 8 percent last year, versus 10 percent in 2010, the fifth- fastest in sub-Saharan Africa after the Democratic Republic of Congo, Zimbabwe, Botswana and Nigeria, IMF data showed.

Expansion may slow to 6 percent in the fiscal year through July 7, 2012, from an estimated 7.5 percent last year, because of rising inflation, restrictions on private-bank lending and a difficult business environment, the IMF said on May 31.

Unrealistic

Ethiopia’s goal to reduce inflation to less than 10 percent, from 40.1 percent in September, won’t be easily achievable mainly because the central bank’s monetary policy is unsuitable to tackle rising prices, the IMF said today.

“Single digit-inflation projections in the plan appear unrealistic as long as a loose monetary policy and a heavy dependence of public-sector financing on bank credit continues,” the lender said.

The development plan envisions Ethiopia increasing crop production, boosting infrastructure and improving electricity generation to meet its growth goals.

Ethiopia plans to ramp up debt offerings to finance its planned 5,250-megawatt Grand Ethiopian Renaissance Dam, after raising 7 billion birr ($407.5 million) in bond auctions in the past six months, Communications Minister Bereket Simon said on Sept. 27. The 80 billion-birr hydropower project to build Africa’s biggest power plant is being funded domestically to demonstrate how Ethiopia’s economy is reviving, Simon said.

--Editors: Jennifer M. Freedman, Digby Lidstone

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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