Photograph — Reuters

The International Monetary Fund (IMF) has commended Ethiopia’s government for its steadfast commitment to implementing homegrown economic reforms. This acknowledgement took place during a conversation between IMF Managing Director Kristalina Georgieva and a delegation from the Ministry of Finance and the National Bank of Ethiopia. Kristalina Georgieva tweeted that she was “impressed by [Ethiopia’s determination] to advance Ethiopia’s homegrown economic reform agenda. Discussed how the IMF can support.”

What is the Homegrown Economic Reform?

The Homegrown Economic Reforms is also known as the Reform Program. It was launched under the administration of Prime Minister Abiy Ahmed in 2019. The reform program highlights the importance of the private sector to the national economy and the key role it plays in growing the business environment.

The objectives of the reform agenda include securing macro-economic stability in order to support ongoing rapid economic growth, readjusting the respective roles of the public and private sectors within the economy and connecting with both new and existing sources of growth. The three key pillars are the macro-financial, structural, and sectoral levels. While the crucial sectors include agriculture, manufacturing, mining, tourism, information, communication and technology.

Ethiopia before the Homegrown Reforms

Economic growth in Ethiopia was weak and highly unstable, prior to the mid-2000s. Ethiopia’s economy demonstrated a remarkable increase in real GDP, with a growth of approximately 10½ per cent and an average annual per capita growth of 7.6 per cent from 2004 to 2017.

Ethiopia after the Homegrown Reforms

As a result of the reform program, the government has adopted the Movable Property Security Right Proclamation No. 1147/2019. This legislation empowers financial institutions to accept movable assets as collateral when granting loans. These assets include a wide range of items, such as inventories, agricultural products, intangible assets, security rights in warehouse receipts, and others. The overarching goal is to broaden the accessibility of bank loans to small and medium-sized enterprises.

In April, the Ethiopian government and the International Monetary Fund (IMF) had advanced their conversations regarding the fund’s backing for the country’s domestically initiated economic reform initiative.

The reform program has largely prioritized private investment, marking a shift in the program’s approach to economic leadership. It introduced the private sector as the new driving force behind the economy, challenging the long-standing dominance of public investments. To reduce government ownership in enterprises, a new investment proclamation and regulation have been adopted, replacing a decades-old law.

Some of the major restrictions on foreign investment were loosened. These measures include the adoption of a negative listing approach, which has led to a decrease in the number of sectors closed to foreign investment. The new investment laws have introduced streamlined processes for issuing, renewing, and cancelling investment permits, and favourable mechanisms for addressing grievances and settling disputes. Also an extended range of services through a comprehensive one-stop-shop, among other enhancements.

Challenges facing the Homegrown Economic Reforms

But it has not been all smooth sailing for the country under the homegrown economic reform. The main objective of the reform agenda was to maintain a stable exchange rate. Nevertheless, the government has faced considerable difficulties in accomplishing this plan within an environment characterized by elevated inflation.

Over the past few years, the domestic currency, known as the birr, has steadily depreciated against major international currencies, especially the US dollar.

The COVID-19 pandemic and internal conflicts in the country have also impeded the progress of the reform agenda as many goals outlined are yet to be delivered. Unfortunately, average annual inflation has risen above 20% since 2019, reaching 33.7% in 2021/22, with food inflation soaring to 40.2%. However, as of May 2023, the general inflation rate dropped to 30.8%, while food inflation saw a decrease to 28.5%.

Prime Minister Abiy emphasized how challenging reducing the inflation has been, attributing it to the prevailing global climate of escalating prices. The government allocated nearly 100 billion birr this year for subsidizing fertilizer and fuel, forming part of its efforts to stabilize the inflation.

It’s important to acknowledge that the reform process is ongoing, and challenges persist. However, Ethiopia’s homegrown economic reform has set the stage for sustainable growth. As the program continues to evolve and adapt, the country remains on a path to greater economic stability and development.

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