(Bloomberg) -- Sign up to our Next Africa newsletter and follow Bloomberg Africa on Twitter
Ethiopia is set to receive $2.9 billion from the International Monetary Fund, adding further impetus to Prime Minister and Nobel laureate Abiy Ahmed’s economic reform agenda.
Having reached a preliminary agreement for the loans, all that remains is approval by the Washington-based financial agency’s executive board that meets Dec. 18. Together with $1.2 billion from the World Bank and a further $1 billion in the pipeline, the two institutions will now cover about 60% of the funding for Abiy’s plan, dubbed Homegrown Economic Reform, the ruling party-affiliated Fana Broadcasting Corp reported.
Abiy has made rapid changes to Ethiopia’s once tightly regulated political and economic space since coming to power last April, with plans to open up state-owned industries, from telecommunications to finance and power, to more foreign investment.
“This IMF deal is one of the biggest ideological shifts I’ve seen in Africa this decade,” Charlie Robertson, Rennaisance Capital’s global chief economist, said in a note to clients. “This immediately matters to bidders for telecom licences in Ethiopia, holders of the illiquid single sovereign Eurobonds and private equity groups who’ve already invested in the continent’s second-largest country by population, attracted by two decades of very high growth.”
While the Horn of Africa nation boasts the continent’s fastest-growing economy and drew a record $13 billion of inflows in Abiy’s first year in office, it’s grappling with inflation of 20.8% -- a five-year high -- and spends as much as $700 million a year on grain imports to cover food shortages. That’s putting a strain on foreign-exchange supplies already limited by large current-account deficits and debt.
In July, the IMF cautioned that the government could face difficulties servicing its debt obligations, and urged it to increase revenue and boost export growth by “creating room for higher levels of domestic and foreign private investment.”
Moody’s Investors Service assesses the country’s debt at four levels below investment with a negative outlook. Fitch Ratings and S&P Global Ratings are one notch lower.
The funding package “undermines my view that Ethiopia will be downgraded within 12 months,” Robertson said. “It also means Ethiopia should be neutral rather than underweight as per our weighting recommendation earlier this week.”
Political Risk
The reforms Abiy is undertaking come against a backdrop of ethnic tension and widespread violence, partly triggered by political reforms. His unbanning of opposition and rebel groups has stoked political fragmentation and long-suppressed rivalries among ethnic communities.
The country is scheduled to hold general elections in 2020, which Abiy has vowed will be free and fair. In November, the ruling Ethiopian People’s Revolutionary Democratic Front coalition that was made up of four regional parties, merged to form the Prosperity Party.
“I think that political risks should still be the biggest concern for anyone considering investing in Ethiopia,” John Ashbourne, Africa economist at Capital Economics, said in an emailed response to questions. “The political system is fragile, and I think it is probably too soon to say whether the formation of the PP will create a sustainable ruling party.”
To contact the reporter on this story: Samuel Gebre in Abidjan at sgebre@bloomberg.net
To contact the editors responsible for this story: David Malingha at dmalingha@bloomberg.net, Hilton Shone, Paul Richardson
©2019 Bloomberg L.P.
Advertisement