By Colleen Goko
JOHANNESBURG (Reuters) -The International Monetary Fund (IMF) cautioned Ethiopia on Tuesday that its reform agenda under a $3.4 billion loan deal is facing challenges from declining donor support, despite the country’s meeting key program targets.
The IMF, in an extensive report, praised Ethiopian authorities for implementing economic adjustments, including subsidy cuts, monetary tightening and tax reforms.
However, it warned that rising risks, such as a resurgent parallel foreign exchange market and fragile security conditions, could hinder progress and complicate debt restructuring efforts.
Ethiopia remains in default and is seeking comparable debt relief from bondholders after agreeing terms in principle with official creditors earlier this year. “The outlook remains subject to downside risks given security challenges and declining donor support,” said IMF Deputy Managing Director Nigel Clarke.
Foreign aid to Ethiopia has fallen from 12% of gross domestic product a decade ago to under 4%, with further cuts anticipated as agencies like USAID scale back. The IMF noted that one in five Ethiopians required food or humanitarian assistance this year, with the United Nations response plan underfunded and many programs relying on temporary waivers.
Ethiopia has made progress in foreign exchange market liberalization, but structural issues persist, including a 2.5% central bank commission on FX sales, limited interbank liquidity, and high transaction costs. These factors have pushed the parallel market premium to 15%, the IMF said.
Inflation has dropped faster than expected, aided by tighter monetary policy and credit caps. Even so, the IMF urged Ethiopia to accelerate its transition to a modern policy-rate-based framework and improve communication to bolster credibility.
The IMF also flagged concerns over privatization delays and weaker-than-expected foreign direct investment, which could complicate efforts to rebuild reserves and close the balance of payments gap.
The IMF noted an improved export outlook, with exports of goods and services now forecast to reach 12% of GDP in fiscal year 2024/25, up from 9.6% at the time of the second review. Ethiopia received a $262 million disbursement earlier this month from its program with the IMF.
(Reporting by Colleen Goko; Editing by Leslie Adler)
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