Ethiopia needs to move from public sector to private investment-driven growth to keep success
Despite Ethiopia's achieving robust economic growth, while keeping inflation below 10% and improving social indicators, the International Money Fund says the country must now replace its public sector-led growth strategy with a private investment-led model for sustainable growth.
"The sustainability of the current public sector-led growth strategy was threatened by several downside risks – including external financing of the public investment programme, decliningfor export commodities, and weather-related shocks," IMF said. "Mitigating these risks will necessitate greater policy coherence and appropriate structural reforms going forward, to help shift the toward private sector-led, sustainable growth."
IMF agreed that Ethiopia's macroeconomic performance continues to be strong, with robust economic growth supported by higher agricultural production and large public sector and.
Inflation remains contained and the fiscal stance at the general government level is cautious, although public enterprisesto provide an expansionary impulse, IMF said.
Public and publicly guaranteed external debt is estimated to have increased to about 23% of GDP from 20.5% in 2012/13, the Fund said.
IMF said tight monetary policy has supported achieving the National Bank of Ethiopia's (NBE) inflation objective in 2013/14. Base money, the nominal anchor of monetary policy, increased by 17.5% in April 2014, driven mainly by claims on the government.
The current account deficit is estimated to have widened from $2.8bn (£1.7bn, 6% of GDP) in 2012/13 to $3.5bn in 2013/14 (7.1%). It was financed largely by concessional and non-concessional inflows as well as by(FDI).
IMF said Ethiopia's economic outlook remains encouraging. The 2014/15 budget planthe general government deficit at 3% of GDP and maintains a strong pro-poor focus. Monetary policy, anchored on base money, is geared toward maintaining inflation in single digit.
The public debt to GDP ratio is expected to rise, reflecting large disbursements associated with implementation of investment projects under the Growth and Transformation Plan (GTP).
The fund, however, underscored the need for continued fiscal prudence in order to achieve the GTP goals while increasing the private sector's involvement.
It has called for stepped-up efforts to increase domestic revenue — by broadening the tax base, improving customs and tax administration, andtax exemptions.
The IMF has welcomed Ethiopia's planned implementation of a new high-level oversight mechanismto carefully monitor the and financial position of public enterprises and any contingent liabilities.
The fund said monetary restraint is required in the wake of food and energyshocks and domestic demand pressures stemming from large public investments.
IMF also recommended strengthening liquidity management and monetary transmission through enhanced interest rate flexibility and the adoption of a broader set of monetary policy instruments.