The Federal Democratic Republic of Ethiopia: 2013 Article IV Consultation

Context: Ethiopia's public sector-led development strategy has contributed to considerablepoverty reduction and progress toward achieving the Millennium Development Goals (MDGs) asenvisaged under the authorities' Growth and Transformation Plan (GTP). Economic growth hasbeen robust, and inflation has declined to single digits. The investment requirements of the GTPare large and securing the associated financing remains a challenge. Without greater scope forthe private sector the realization of the GTP's objectives could be elusive.

Growth and inflation prospects: Real GDP growth remains robust and is estimated by staff at7 percent in 2012/13 and projected to increase to 7.5 percent in 2013/14 and 2014/15 beforetapering-off slightly in subsequent years under current policies.1 Inflation has been brought downto around 7 percent at end 2012/13 and is projected to remain in single digits.

Policy mix: The discussions focused on policies to sustain robust and inclusive growth andstructural transformation in the context of prudent fiscal and monetary policies. Staffrecommendations centered on maintaining pro-poor expenditure, improving the investmentclimate, and adjusting the overall fiscal stance with the aim of creating greater room for theprivate sector to further leverage large public investments. Enhancing external competitivenessand building adequate foreign reserves (to at least three months of imports) through greaterexchange rate flexibility and improved productivity of the traded goods sector wererecommended to enhance resiliency. Bolstering capacity at the National Bank of Ethiopia (NBE) forthe formulation and implementation of financial sector policies to promote financial deepeningand broader inclusion were considered important for the realization of the GTP objectives.

Risks: Persistent shortfalls in the financing of planned infrastructure investment and a tighteningof foreign exchange availability could constrain medium-term growth in the absence of policyadjustments. A significant slow - down of the major emerging markets could also hamperdevelopment plans and robust growth.