ADDIS ABABA – Ethiopia’s economy will recover and expand by 8.7 percent in 2021/22 fiscal year, after shrinking to 2 percent in the current fiscal year due to the impact of the Covid-19 pandemic, the International Monetary Fund (IMF) said on Tuesday.
“The COVID-19 pandemic continues to create significant health, social and economic challenges in Ethiopia,” said IMF in a statement issued after its staff team visited the East African nation.
The Fund, however, said authorities’ wide-ranging policy responses have mitigated some of the impact of the crisis while supporting macroeconomic stability.
The fiscal response included an increase in expenditures and some tax policy measures to address the health crisis, social needs and support the economy.
The injection of liquidity by the central bank provided needed support to the banking system and firms that were adversely affected, according to the IMF.
The economic impact of the pandemic was felt late in 2019/20 FY, resulting in relatively robust growth of 6.1 percent but with the effects continuing in 2020/21 FY.
“Looking forward, economic growth is projected to be 2 percent in 2020/21 due to the lingering impact of the pandemic, and is expected to rebound to 8.7 percent in 2021/22, consistent with a global recovery,” the Fund said.
IMF also observed that inflation has decreased since its peak of 23 percent in April 2020 but remains high at just over 19 percent, driven largely by persistently high food prices.
Risks to the economic outlook are tilted to the downside, amid uncertainty regarding the magnitude and duration of the pandemic, as well as other risks including political uncertainty and the locust infestation experienced in some parts of the country, according to IMF’s team assessment.
“A modest fiscal expansion is envisaged this fiscal year to accommodate the humanitarian assistance and reconstruction needs,” the team noted.
At the same time, the authorities are now moving to enhance domestic revenue mobilization.
“On social spending, the indexation of benefits for the rural and urban poor to general inflation is expected to improve the adequacy of benefits in these programs,” they said.
Greater prudence in borrowing by state-owned enterprises combined with reforms to improve governance and oversight of SOEs and the adoption of the plan to address legacy SOE debt will support the sustainability of public finances, the team projected.
“The growth of reserve money is projected to return to a path consistent with reducing inflation to the central bank’s single digit objective,” they said. “Financial sector reforms have progressed, with the development of a treasury bill market reducing the need for monetary financing of the budget”.