International Monetary Fund (IMF) revises growth projections amid COVID-19 crisis in Ethiopian

International Monetary Fund (IMF)

The International Monetary Fund (IMF) slashed the projected economic growth of Ethiopia for the second quarter of the year 2020 from 6.2 percent to 3.2 percent because of the impacts of the on-going COVID-19 crisis. The third quarter of the same year is also projected to see a decline of growth from 6.1 percent to 3.7 percent.

In its country report on Ethiopia, released on May 6, 2020, the Fund observed that, “Given the late spread of the pandemic to Ethiopia, the shock would materialize mostly in Q2 and Q3 of 2020—spreading the negative impact on GDP across two fiscal years. Staff revised growth projections from 6.2 and 6.1 percent to 3.2 and 3.7 percent in 2019/20 and 2020/21, respectively, despite significant policy support. The recovery would start gradually in Q4 2020, with real GDP remaining below pre-shock projections throughout the medium-term.”

While indicating that there will be significant decline in imports because of “weak domestic demand and lower projected inflows,” the Fund indicated that the current account balance of the country is projected to strengthen. Again, the drop in foreign direct investment coupled with the delay in privatization, the overall balance of payments is projects to weaken creating additional financing gap of USD 1.7 billion for 2019/2020.

Although these assessments seem to be gloomy, the IMF expects the economy to spring back to normalcy by 2020/21 in relation to the growing imports and exports. This, however, will result in a deteriorated trade balance.

“But an improved services balance and stronger remittances will mitigate the impact on the current account. Privatization revenues will help contain the additional financing gap, which is projected to reach USD 731 million,” the report assesses.

The tax revenues are also expected to drop by a third of the Gross Domestic Product (GDP) compared to the previous year because of the severity of the shock.

In addition to warning that the Commercial Bank of Ethiopia’s (CBE) asset quality remains concerning “amid large SOE [state owned enterprises] exposures”, the call from borrowers from both private and public banks to delay payments “could translate into weakening asset quality and intensified liquidity pressures going forward.” The report also stressed that “Structural weaknesses in CBE’s balance sheet should be dealt with through a comprehensive solution that addresses debt sustainability challenges at its SOE borrowers.”

With a request from the authorities, the IMF has provided support for Ethiopia to withstand the impacts of COVID-19 with a recent one being USD 411 million that the board approved for Ethiopia.

As recommendation, the report urged the government to ensure adequate commercial bank liquidity buffers, closely monitor the impact of COVID-19 on financial stability, the need for continued vigilance is needed to ensure that the single digit inflation objective will be achieved as planned and increase the pace of exchange rate depreciation.

Until May 8, 2020, Ethiopia registered 194 Novel Corona Virus infection cases with the highest daily increase of 25 infections registered on May 7, 2020. So far, 30,306 people have been tested for the virus. Out of the total infections, 95 have fully recovered while the active cases are 93. The pandemic has also claimed the lives of four people. [Reporter]