IMF Raises Ethiopia’s Economic Growth Forecast

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Ethiopia’s Finance Ministry

Ethiopia’s economy is expected to maintain a growth rate of 7 percent in 2012/2013, the International Monetary Fund said, raising its earlier forecast of 5.5 percent owing to slowing inflation.

The Washington-based body’s growth projection is below official estimates of 11.4 percent.

A visiting IMF team said tight monetary and fiscal policies have contributed to declining inflation, through the termination of central bank financing of the budget and significant sales of foreign exchange.

The Horn of Africa country’s annual inflation rate fell for the third straight month in May to 25.5 percent from 29.8 percent in the previous month, according to official data.

“For 2011/12, the mission projects real GDP growth at 7 percent and end-year inflation at about 22 percent,” said a IMF statement.

“A similar growth rate and single digits inflation are achievable in 2012/13 if implementation of tight monetary and fiscal policies is maintained.”

The body warned Ethiopia last year that excessive monetary growth was the principal cause of its rising inflation, while private bank lending restrictions and a trickier business environment would slow economic growth.

Back then, the IMF added Ethiopia’s budget saw a domestic financial surplus, but that there was a significant recourse to central bank financing as the Treasury bill market collapsed, reflecting high negative interest rates.

“The mission recommends continuing the fight against inflation. Raising interest rates immediately would enhance the activation of the treasury bill market for liquidity management and monetary policy implementation,” said the visiting team, which left on Wednesday.

“Higher interest rates will also support domestic savings mobilisation efforts that are key for financing. In addition, the policy of no central bank financing of the budget should remain in place to send a strong signal of the government’s commitment to fight inflation.”

Ethiopia has embarked on ambitious infrastructure investment projects to improve its economic competitiveness, including a multi-billion dollar plan to scale up energy generation.

Addis Ababa aims to produce 20,000 megawatts (MW) of hydro-power within the next 10 years, part of a plan to spend $12 billion over 25 years to raise power generating capability.

High coffee earnings in the past few years have also boosted the economy of Africa’s biggest coffee producer, as have rising gold, oil seed and livestock exports.

Ethiopia is the world’s fourth-largest sesame exporter after China, India and Myanmar.