Press Release No. 01/11
March 20, 2001 International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

The Executive Board of the International Monetary Fund
(IMF) approved in principle a three-year arrangement
for Ethiopia under the Poverty Reduction and Growth
Facility (PRGF)1 for SDR 87 million (about US$112
million) to support the government's 2000/01-2002/03
economic program.

A final decision by the Executive Board is pending
discussion of Ethiopia's interim Poverty Reduction
Strategy Paper (PRSP) by the World Bank's Executive
Board, which is expected today. A final decision will
enable the release of a first loan under the PRGF
arrangement in an amount equivalent to SDR 17.4
million (about US$22 million) immediately.

In commenting on the Executive Board's discussion,
Shigemitsu Sugisaki, Deputy Managing Director and
Acting Chairman, said:

"The authorities' medium-term framework for
macroeconomic stability within a comprehensive interim
Poverty Reduction Strategy Paper (PRSP) provides a
sound basis for development of a full PRSP, for Fund
concessional assistance, and for moving toward a
decision point under the enhanced HIPC Initiative. The
interim PRSP seeks to promote rapid, broad-based, and
equitable growth. Preparations for a full PRSP are
underway and a key challenge is to broaden the policy
dialogue to include all stakeholders.

"The PRGF-supported program for 2000/01 sets
realistic, albeit ambitious, objectives to achieve
higher GDP growth, contain inflation, and rebuild
international reserves. These are essential to foster
sustained poverty reduction over the long term. The
central reforms under the program will focus on public
finances and the financial sector. Most important will
be the reorientation of spending from defense toward
poverty alleviation, and maintaining a durable peace.

"To attain the program objectives, it will be crucial
for the authorities to maintain public finances on a
sustainable path, improve monetary management and the
functioning of financial markets, and carry out
structural reformsnotably to improve governance,
transparency, accountability, and public sector
efficiency.

"Ethiopia's eligibility for debt relief under the
enhanced HIPC Initiative has been endorsed in
principle. A final decision on the timing of the
decision point and the granting of interim relief will
be taken later this year once Ethiopia has established
a performance record under the new PRGF, and made
further progress on the preparation of a full PRSP in
close consultation with social partners," Mr. Sugisaki
said.

ANNEX

Program Summary

Ethiopia's progress with market-oriented reforms
during the 1996/97-98/99 program was notable, although
uneven. However, adverse external circumstances and
the border conflict with Eritrea increasingly hampered
the government's efforts to consolidate stabilization
gains. In 1999/2000, Ethiopia's economic situation
deteriorated sharply as a result of severe drought, a
major worsening of its terms of trade associated with
lower coffee export prices and the steep rise in
petroleum import prices, as well as the impact of the
border conflict.

In the second half of 2000, Ethiopia resumed its
economic reform efforts after considerable progress
had been made toward restoring peaceful conditions
with Eritrea. The government reconfirmed and updated
its development strategy formulated in the mid-1990s
in the second five-year National Development Program
(NDP). Its mid-term economic strategy focuses on
poverty reduction by fostering rural development,
expanding and improving a comprehensive food security
program, and building conditions for high and
sustainable growth. The first annual program envisages
real GDP growth rates of 7-8 percent in
2000/01-2001/02 and seeks to maintain consumer price
inflation close to 5 percent. The external current
account deficit is expected to decline initially only
modestly from 7.5 percent of GDP in 1999/2000 to about
6 percent a year in 2000/01 and 2001/02 before
resuming a downward trend, starting with a deficit of
5 percent of GDP in 2002/03.

In the immediate period ahead, the government's
strategy is to reconcile the country's security needs
with the requirement to finance both the emergency
programs for reconstruction and demobilization and to
improve priority public services, all within a
sustainable fiscal framework. For the next three
years, fiscal policy's two main objectives are to
redirect resources from defense-related expenditures
toward poverty-reducing outlays (while addressing the
country's post-conflict recovery needs), and to lay
the foundation for strong tax revenue mobilization.
The government envisages that a rapid recovery in
nonmilitary core expenditure would accelerate
investment spending. Overall expenditure is targeted
to decline by 5 percentage points of GDP during the
program period to 28 percent in 2002/03. The revenue
strategy calls for an increase in tax revenue of 2.5
percentage points during the three-year period. Tax
policy reforms will focus on streamlining income
taxes, improving the efficiency of the incentive
system, and strengthening indirect taxation. These
actions would culminate in the introduction of a
value-added tax in January 2003.

Monetary policy attaches high priority to keeping
inflation in the low single digits. Progress in fiscal
consolidation, supported by substantial disbursements
of foreign aid, would allow for adequate growth in
domestic credit to the private sector, which, in turn,
would set the stage for private sector-led growth and
facilitate the rebuilding of international reserves.
The net domestic assets of the national bank would be
the key aggregate in steering monetary policy, but
developments in other monetary aggregates would also
be followed closely.

The structural reforms under the program focus on
financial and external sector reforms in addition to
capacity building, and judicial and civil reforms. The
government's plans for comprehensive financial sector
reforms aim at modernizing monetary management;
improving interbank operations; strengthening the
soundness of smaller banks; and upgrading the
management of the largest state-owned bank, the
Commercial Bank of Ethiopia. The country's integration
into the global economy will be fostered by taking
mutually reinforcing steps to further liberalize the
foreign trade and exchange regimes, allow market
determination of the exchange rate, and promote export
development. Balance of payments projections assume a
reversal of the recently unfavorable conditions.
Renewed reform policies and the expeditious
post-conflict reconstruction and reintegration efforts
should lead to growing investor confidence and
sustained foreign support.

Any external borrowing during the program period will
be contracted only at highly concessional terms, with
the goal of keeping the external debt burden
manageable. In the immediate post-conflict period, the
debt burden (after traditional relief mechanisms) will
rise by 2002/03 to 266 percent of exports of goods and
nonfactor services (net present value terms) from 243
percent in 1999/2000, because of the immediate large
external borrowing needs. Subsequently, the debt ratio
would decline to 179 percent by 2009/10 and to an
average of 129 percent during 2010/11-2019/20. Given
the highly concessional borrowing terms, the
debt-service ratio (under traditional debt-relief
mechanisms) would fall from 19 percent in 1999/2000 to
15 percent in 2002/03, to 9 percent by 2009/10, and to
an average of 7.5 percent during 2010/11-2019/20. The
program assumes that the interim HIPC Initiative debt
relief would allow a gradual increase in the
government's poverty-targeted spending of US$46
million (0.7 percent of GDP) in the second fiscal year
and US$77 million (1.1 percent of GDP) in the third
fiscal year. HIPC Initiative debt relief is critical
for allowing the needed expansion in poverty-targeted
outlays.

In the Interim Poverty Reduction Strategy Paper, the
government outlined the main elements of its existing
poverty reduction strategy, which centers around
promoting economic growth and increasing the
income-earning capacity for the poor. Within one year,
the government is expected to complete the formulation
of a broad overall poverty reduction strategy with the
participation of elected officials, civil society,
nongovernmental organizations, and development
partners.

Ethiopia became a member of the IMF on December 27,
1945. Its quota2 is SDR 133.7 million (about US$172
million), and its outstanding use of IMF credit
currently totals SDR 59.14 million (about US$76
million).

Source: Read Ethiopia: Selected Economic and Financial
Indicators, 1995/96-2002/03 1/