Trouble ahead with Ethiopia's balance of payments - IMF

Addis Ababa, September 30, 2009 -- The International Monetary Fund (IMF) has a troubling outlook on Ethiopia’s position of balance of payments for the coming Ethiopian fiscal year, it says.

Despite strong growth performance over the past six years, the economy is now getting into a tough row, with a widening trade deficit, hence the toll on foreign exchange crunch, the IMF said.

“The Ethiopian authorities face a challenging immediate macro economic situation, notwithstanding … the important progress made in raising living standards and reducing poverty,” the IMF said in this report issued on Wednesday, September 23, 2009. “Ethiopia is facing a difficult external environment.”

This comes as a result of low level foreign currency reserve constraints and the fight to keep inflation at bay in the domestic economy. Ethiopia’s balance of payments has been under heavy pressure over the past two years as a result of escalating cost of imports - from 1.4 billion dollars in 2002-03, to 6.1 billion dollars in 2008-09 - and a slow growth on its exports, remittances and foreign direct investments.

This is all bound to get worse, according to the IMF.

Balance of payments, an economic measurement, is used to summarize all international economic transactions for a country during a specific time period, usually a year. It is determined by a country’s exports and imports of goods, services, and financial capital, as well as financial transfers.

The global recession will have taken its toll on the country’s earnings from export, remittance and foreign direct investment in the coming year, while the IMF also projected a fall in official development assistance. The IMF also sees a possible increase on the global oil prices, which was a development that literally ate up the nation’s reserve last year.

IMF’s projection has come at a time when macro economic policymakers at the federal government are struggling to tame inflation down and build the nation’s foreign exchange reserves.

The IMF attributed the ballooning expansion in the trade and balance of payments deficit largely to an increase in the public sector expenditure. This, in turn, has led to the rise in the budget deficit from 2.3pc of the gross domestic product (GDP) to three per cent, according to the IMF report. Nonetheless, the Ethiopian government always maintains the claim that its budget deficit is at less that 1.5pc of the GDP.

“We are not surprised,” said a senior economic advisor to the government in his reaction to the IMF latest report. “It [the report] is neither good nor bad. It is what we have expected.”

The IMF and the government have differing views on what should be included when budget deficit is calculated; the government does not agree that borrowing by public enterprises should be considered as state borrowing.

Policymakers pledged to implement conservative fiscal and monetary policies in order to reverse this. They have imposed lending caps on all the commercial banks operating in the country.

“Our programme focuses on entrenching low inflation and building international reserves through appropriately tight fiscal and monetary policies supported by the necessary exchange rate flexibility,” Sufian Ahmed, minister of Finance and Economic Development (MoFED), and Teklewold Atnafu, governor of the National Bank of Ethiopia (NBE), wrote to the IMF on August 7, 2009.

Source: Addis Fortune