IMF’s Conditionalities Fail to Bring About Fundamental Reforms in Ethiopia

In the post-Cold War era, many social and economic reformers in developing countries with undemocratic or pseudo-democratic regimes look up to the IMF and World Bank as potentially powerful forces to exert pressure on authoritarian politicians to effect necessary economic reforms. The IMF and World Bank derive the clout to do so from the vast amounts of financial resources which they are themselves capable of dispensing and from the policy of major donor governments to use the approval or non-approval of these financial institutions as a basis for their own foreign aid programmes, thus extending the influence of the IMF and World Bank far beyond the financial resources they command.

The IMF’s relations with Ethiopia are conducted in a context no different from this general policy framework. A few months back, the EMF suspended its ESAF (Enhanced Structural Adjustment Facility) for Ethiopia on the ground that the country had failed to meet some of the conditionalities which had been agreed between the two parties. Now, after its latest round of negotiations with the Ethiopian government from around the middle of June to the beginning of July, 1998 the IMF has lifted the ESAF suspension. What is the reason for the change of heart?

Private sources indicate that both parties have made concessions to make a compromise solution possible. The IMF is reported to have lifted its demands to have the Commercial Bank of Ethiopia broken up into three or four separate banks and let its accounts be scrutinized by independent external auditors while the Ethiopian authorities are said to have agreed to transfer operations of a purely commercial nature now being carried out by the National Bank of Ethiopia to commercial banks. The lifting of the ESAF suspension puts the country on course for a 30-rnillion -dollar IMF aid package in the near future once the Executive Board of the IMF puts its seal of approval on the re-negotiated agreement.

The IMF’s conditionalities have never really been strict enough to bring about fundamental economic reforms in Ethiopia. Often, as is the case in this latest instance, the IMF has been flexible to the point of fickleness. Why did it go to the extent of suspending ESAF in the first place if it was going to relent so generously? Worse still, the IMF’s terms and conditions are almost exclusively focused on merely financial matters, including the rate of inflation, the rate of exchange, fiscal and current account deficits. Important though these variables are, they however are not as important as the fundamental real-sector development issues in the country. Asked why he was always talking only about exchange rate policy and had never said a word about the land policy, a former IMF expert on the Ethiopian economy replied, “Land policy is not the IMF’s area of competence”. As the name of the fund would suggest, this may be a clever way to wriggle out of the question, but there is no monetary economics without economics and no economics without land! Apparently the question should have been addressed to the World Bank which is supposed to deal with overall economic policy issues. If that is the case, then the two international institutions should work much more closely than at present to make their joint conditionalities strict enough to force authoritarian governments to introduce not just monetary and financial reforms but also fundamental, real-sector transformations.

In the recent past, the IMF’s core conditionalities associated with its ESAF for Ethiopia have been related to the following:

  • restrictions on the growth of domestic credit both to the private sector and the government;
  • maintaining foreign reserves at some prescribed level;
  • deregulating petroleum and fertilizer prices;
  • customs tariff reduction
  • privatization
  • improving national economic statistics, particularly those on prices and the balance of payments
  • Other less emphasized conditionalities include:
  • tax on interest income
  • tax on NGO’s imports
  • introduction of VAT
  • use of privatization proceeds for investment or debt reduction
  • revision of the investment code
  • increasing auctioning of urban land leases and streamlining in land auctions
  • increasing rents on government-owned housing;
  • selling government-owned houses to the private sector and compensating previous owners of nationalized houses;
  • increasing energy and water tariffs
  • increasing fees for government health services
  • abolishing the existing export-proceeds surrender requirement

As may be discerned from the above enumerations, some of the core conditionalities encourage policy-makers to formulate prudent monetary and financial policies but they do not address any of the fundamental real-sector development policy problems the country is facing. Petroleum price deregulation and privatization may be necessary in any private-sector-driven economic policy context. However, in a situation where more fundamental development problems have not been tackled, their impact on a large number of people is likely to be negative in the short and medium term. By comparison, on the less emphasized fist of IMF conditionalities, a few of the fundamental development policy problems have been mentioned, including revision of the investment code, improving land lease auctions and privatization of government-owned houses. At the same time, less popular policy measures (some of which have already been implemented) such as increasing rents on government-owned houses, raising school and health fees and introducing a tax on interest income have been featured.

What we can conclude from the above observations may be summarized as follows:

  • The IMF’s core conditionalities do not address the basic economic development policy problems of the country;
  • In the absence of a determined effort to tackle the country’s fundamental policy problems, many of the IMF’s core and less emphasized conditionalities such as credit restriction, deregulation of fertilizer prices, privatization, increasing rents on government-owned houses and raising water and electricity charges, all of which have actually been implemented have given rise to widespread public resentment without any prospect of recompense in the foreseeable future in terms of real improvements from fundamental reforms.
  • The government has been more willing to implement RAF conditionalities that promise to raise its revenue than those with the potential to effect basic economic transformations. Hence, the general outcome so far has been that the IMF’s terms and conditions have not succeeded in exerting the necessary pressure on the government to affect fundamental economic reforms. In fact, the vacillating nature of the Fund’s policy stance has at times emboldened the Ethiopian authorities to treat it with lack of seriousness. IMF experts and negotiators working on the Ethiopian economy often congratulate themselves on having helped formulate an economic policy in Ethiopia that has brought about reasonably high GDP growth, price and exchange rate stability and sustainable fiscal and current account deficits and the like. In reality however, several of these claims are statistical figments of the imagination fed into computers.

Confronted with such counterarguments, RAF experts respond with a stiff upper lip: “It could have been worse!” The point is, it could have been a lot better!

What to do? Simple. Let the IMF and World Bank work together more closely than is the case at present to include in the core IMF conditionalities issues related to the following:

  • creation of a land market
  • restitution of nationalized houses and other properties to former owners or their legal heirs, and paying adequate compensation where this is not possible for technical and other reasons;
  • abolition of politically affiliated business enterprises, particularly those with monopoly and quasi-monopoly influences;
  • a significant reduction in the exorbitant increases in government-owned houses made by the Addis Ababa Administration;
  • a reduction in the rental-income and capital-gains taxes
  • the removal of incompetent and unqualified persons from key positions in the civil service and their replacement by more efficient personnel.
  • allowing foreign participation in the banking and insurance sub-sector.
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