Ethiopia has successfully secured a $3.4 billion loan from the International Monetary Fund (IMF) following significant economic reforms, including floating its currency to alleviate chronic foreign currency shortages and attract foreign investments.
Economic Reforms and Currency Devaluation
The four-year IMF financing package is designed to support Ethiopia’s Homegrown Economic Reform (HGER) Agenda, which targets macroeconomic imbalances, external debt sustainability, and fostering inclusive, private sector-led growth. As part of these reforms, Ethiopia’s National Bank abandoned its managed FX rate system, resulting in the birr depreciating by 30% to 74.73 per dollar after the central bank ceased its heavy market interventions .
IMF’s Conditions and Economic Challenges
The IMF has stipulated several conditions for the loan, including the adoption of an interest-based monetary policy to curb inflation and comprehensive fiscal reforms to enhance government revenue collection . These measures follow extensive negotiations with Prime Minister Abiy Ahmed’s administration, which aims to secure over $10 billion from the IMF and the World Bank to address the nation’s burgeoning debt crisis. Ethiopia defaulted on a $33 million international bond payment in December 2023, highlighting the urgency of the financial support .
Background and Impacts of Reforms
The Ethiopian economy has been grappling with double-digit inflation and escalating debt repayments, with external debt exceeding $28 billion as of December 2023. The new IMF lending program, initially proposed in 2019, faced delays due to armed conflicts in the Tigray region and the slow pace of economic reforms. The US, IMF, and World Bank had previously suspended support during the Tigray conflict, exacerbating an economy already strained by the COVID-19 pandemic .
Prospects and Future Steps
With the IMF’s financial backing, Ethiopia aims to stabilize its economy and pave the way for sustainable growth. The successful implementation of the HGER Agenda is crucial for restoring investor confidence and ensuring long-term economic stability. The floating of the birr is expected to improve the availability of foreign currency, benefiting importers and enabling foreign investors to repatriate profits more efficiently .