Protracted negotiations for a financial assistance package between the administration of Abiy Ahmed (PhD) and the International Monetary Fund appear to be nearing a conclusion, though the outcome of the years-long quest for a bailout remains uncertain.
The last time the IMF approved a financial package for Ethiopia was in 2019, when western governments and development partners were eager to back the political shift of the preceding year. But the dynamics have changed considerably in the years since.
Relations between the Ethiopian government and the west were strained (at best) when it requested IMF assistance in 2021 in the midst of a civil war in the country’s north. The agreement that ended the fighting was not signed until November 2022, and statements from the IMF in the months following the peace deal had seemed encouraging.
“The economic problems are big, like not having enough food, having to help people in need, inflation, and not having enough foreign currency or some imported goods. A stable economy with strong growth would be essential to meet the social challenges, create jobs, and reduce poverty in Ethiopia,” said Julie Kozack, IMF communications director, during a press briefing held back in March 2023.
She praised Ethiopia’s “strong progress towards restoring lasting peace and stability” through the Cessation of Hostilities Agreement. The optimism was shared by others such as the then president of the World Bank, David Malpass, who said the peace deal “creates an opportunity for the international community to support much-needed economic reforms.”
However, these hopes were dampened barely a month later, when the federal government found itself entrenched in yet another protracted conflict, this time with popular forces in the Amhara region. Since its outbreak exactly a year ago, the fighting has inflicted devastating human costs, with continued civilian casualties and reports of human rights violations.
Despite renewed conflict, discussions between Ethiopia and the IMF have continued. IMF teams have recently visited Addis Ababa for technical assessments, and negotiations are ongoing, although details remain closely guarded.
An IMF mission arrived in the capital two weeks ago for the most recent round of talks, but there are obstacles to an agreement. These include the IMF’s technical requirements and concerns raised regarding severe human rights violations in the country.
One major concern is the potential misuse of IMF funds in the context of ongoing human rights abuses. This includes allegations of indiscriminate drone strikes, extrajudicial killings, and broader irregularities.
Advocacy groups, including a group of Ethiopian-born economists in the US, have urged the IMF to carefully consider these points. They acknowledge Ethiopia’s economic needs but argue that financial support could exacerbate continued human rights violations.
In a letter submitted to the IMF board of directors in Washington, a group of scholars urged the IMF to “reconsider any plans to extend financial assistance to the Ethiopian government amidst the harrowing atrocities and crimes against humanity.”
They argued that such assistance could be used to “procure weapons and inflict further harm on innocent civilians,” worsening regional instability.
The scholars also highlighted the Ethiopian government’s seemingly contradictory actions.
“It seems rather odd that the government is seeking financial assistance while it is building white elephant projects such as a new palace, and other vanity projects,” reads the letter.
The scholars called on the IMF to “not stand idly by while atrocities are committed with impunity.”
Teshome Abebe, a professor of economics at Eastern Illinois University (EIU), is one of the academics advocating against IMF support. He argues that the funds would be “fungible,”
“The current Ethiopian government has not been able to create new wealth. Instead, it is merely transferring the ownership of current wealth to a new and different group of participants,” Teshome told The Reporter.
He was one of the academics who attended and participated in a 2019 conference on national development. Teshome made a passionate presentation on how mega-cities could be realities in Ethiopia and how they could boost the economy.
The conference was titled: “Ethiopia 2050: Grand Opportunities and Challenges.”
“We had high hopes for the government. Little did we expect that it would end up tearing up society as it has and corrupting the process in due course,” said Teshome. “At any rate, a huge loan from the IMF would simply enable the further destabilization of the country, as these funds are fungible.”
How much credence the IMF will give to Teshome and his peers remains to be seen. But there are other critics whose concerns will almost certainly be taken into consideration by the Bretton Woods institution.
A few weeks ago, the US government expressed concerns over continued human rights abuses in Ethiopia. The timing of the criticism coincided with IMF preparations to send a delegation to Addis Ababa.
Julie Kozack called the conflicts in Amhara and Oromia “distressing and concerning” during a press briefing on March 7, 2024.
“We’re closely following these developments and we note the concern from the United States,” said the Communications Director.
It is unclear the extent to which the ‘concerns’ will impact the IMF’s decision.
Most importantly, the IMF’s own technical requirements that beneficiary countries must meet to qualify for a bailout and determine the size of the loan matters. These preconditions typically focus on a country’s economic policies.
Although the details of the discussion have not been disclosed, the IMF has been advocating for Ethiopia and similar countries to embrace market-based exchange rate systems, among others.
Indicating that the discussions are ‘technical in nature,’ Tobias Rasmussen, the IMF resident representative in Ethiopia, in an unpublished interview with The Reporter Newspaper, noted that the IMF is ‘working towards implementing the Homegrown Economic Reform plan comprehensively’.
Rasmussen further indicated that the IMF ‘recommends adopting a market-determined exchange rate’. The recommendation will most likely lead to devaluation, experts say.
However, it remains uncertain whether currency devaluation is a precondition set by the IMF in its financial package negotiations with the Ethiopian government.
Patrick Heinisch, an economist specializing in emerging markets at Helaba Bank, predicts that currency devaluation is “likely” one of the conditions imposed by the IMF. He explained that, based on the experiences of other countries, the IMF typically requires exchange rate flexibility.
The organization has a history of pushing countries to devalue their currencies and adopt a market-based exchange rate. Countries like Pakistan, Egypt, and Malawi have previously been pressured by the IMF to devalue their currencies in exchange for loan programs.
Egypt was compelled to devalue its currency in March 2024 to qualify for the additional USD five billion (out of the total of USD eight billion it secured) bailout loan. Similarly, Malawi depreciated its currency by 44 percent in November 2023 to secure financial assistance.
Pakistan devalued its currency, the Rupee, to obtain a USD 6.5 billion loan program and, subsequently, in May 2023, the IMF demanded further devaluation as a precondition for the bailout. This led to a surge in inflation rates, with the exchange rate of the Pakistani Rupee against the US dollar rising from 229 at the end of 2022 to 307 in September 2023, causing inflation to soar from 20 percent in 2022 to 38 percent in May 2023.
Heinisch outlines two potential scenarios for Ethiopia: either a significant one-time devaluation to align with the shadow market rate, or a quicker depreciation compared to the current gradual trend.
For Alemayehu Geda, professor of economics at Addis Ababa University, the prospect of unifying the two market rates is virtually impossible. He argues the parallel rate will only jump in response to any attempts to catch up to it. Alemayehu observes the prevalence of the parallel exchange market comes down to a structural trade deficit problem.
Heinisch emphasizes that Ethiopia’s dwindling forex reserves leave the government with few options and argues that the current exchange rate is unsustainable and can only be maintained through significant restrictions.
He predicts that, given Ethiopia’s limited choices, the most probable outcome would be a faster depreciation rate, serving as a compromise between the government and the IMF.
Ethiopia is facing a severe shortage of foreign currency and a substantial debt burden. The government has struggled to secure new loans and has requested creditors for debt restructuring.
In November 2023, Ethiopia’s creditors granted a temporary suspension of debt service. However, they imposed a four-month deadline for Ethiopia to reach a staff-level agreement with the IMF.
Failure to do so by tomorrow- March 31, 2024, will result in the expiration of the temporary debt service suspension. This would compel Ethiopia to resume servicing debt.
The ongoing discussions with the IMF are crucial for the administration, as it urgently requires financial support and must reach an agreement to secure it.
Traditionally, currency devaluation is believed to lead to a current account surplus (more export and less import) and a capital account surplus (more capital inflow). It is believed to reduce imports and boost exports.
Tony Addison, a professor of economics at the University of Copenhagen, is among those who believe currency devaluation helps a country in this regard. He argues that maintaining an overvalued exchange rate (like in the case of the Birr) is detrimental in the long term.
The rationale behind this argument lies in the fact that when a country devalues its currency, its goods and services become cheaper for foreign buyers, stimulating export demand. Conversely, a devalued currency makes imported goods and services more expensive for domestic consumers, encouraging them to buy locally-produced goods.
For instance, China often devalues its currency to make its exports more competitive globally, leveraging its vast manufacturing industry.
However, not everyone agrees with the idea that devaluation automatically leads to increased exports and decreased imports.
Researchers like Professor Alemayehu and Yisehak Teka, a financial consultant, argue against this assumption.
Alemayehu posits that such an IMF policy will not bring the stated objective of raising exports and cutting imports.
“We have supply problems in exports; 85 percent of our imports are with inelastic demand, fuel alone being about 20 percent,” said Alemayehu.
These analysts argue that devaluation might not necessarily lead to increased exports and lowered imports. They contend that for devaluation to boost exports and curb imports, both import and export demand should be responsive to price and demand changes – a concept known as elasticity.
They highlight that most of Ethiopia’s imports are crucial raw and intermediate materials essential for processing or finishing export goods. In fact, Ethiopia mainly imports essential items such as food, fertilizer, fuels, and capital goods that are necessary for production. These goods are inelastic, as a rise in their costs would not affect demand.
The other unpleasant reality facing Ethiopia is that it heavily depends on imported capital and essential goods, which makes the idea of substituting them domestically in the short term far-fetched, argue experts.
Goshu Desalegn, a PhD research fellow at the Hungarian University of Agriculture and Life Sciences, fears that devaluation could inflate the costs of crucial imported materials needed for export industries.
The side effect of such a policy, foresees Alemayehu, would be galloping inflation.
“I would expect the doubling of the current inflation rate if they attempt to unify it, just in the first round, and it’ll go steeply after that. Like in Sudan, before the war,” cautioned the Professor.
He told The Reporter he had prepared a model for the scenario.
“It will carry a huge social cost in a country where 70 percent are below the poverty line of 50 birr per day,” said Alemayehu.
With manufactured products accounting for less than five percent of Ethiopia’s total exports, the majority comprises agricultural commodities with inelastic demand. Export commodities like coffee, oil seeds, gold, khat, pulses, and flowers, fall into this category.
Demand for these primary goods would not increase significantly even if they become cheaper due to devaluation. For instance, Ethiopia’s major export item, coffee, has already saturated traditional export destination markets (price decrease results in a minimal increase in demand).
According to many economists, devaluation could worsen Ethiopia’s debt situation. With a large external debt in US dollars, devaluing the Birr would increase the amount needed to repay the debt, raising borrowing costs and intensifying financial strain.
Goshu warns that devaluing the Birr carries risks. He further argues that conflict and instability deter foreign investors, undermining Ethiopia’s appeal for FDI. A depreciating currency can signal economic instability, prompting investors to withdraw capital, leading to capital flight and harming the economy.
Alemayehu suggests a gradual step-by-step devaluation by allowing banks to offer close to the parallel rate for remittance exchanges, as well as for non-traditional exports, and taking it from there.
He points to Ghana, which took eight solid years to unify its official and parallel exchange rates without inflation, as an example. But, Alemayehu cautions, this can only happen with institutional reform at the central bank.
Uncertainties cloud the potential for IMF support in Ethiopia. The exact amount of money being discussed remains undisclosed. Some available reports mention USD 3.5 billion, but sources close to the issue suggest a much higher figure, possibly exceeding USD 10 billion in total under various packages. However, The Reporter’s attempts to verify the exact amount from official channels, both government and IMF, have been unsuccessful.
Different stakeholders anxiously await news on the IMF’s response to Ethiopia’s request for different reasons. Many hope for a limited approval that prioritizes addressing the critical humanitarian situation.