Mereja.Forum

The IMF’s Second Review, Who Really Benefits?



By Kebour Ghenna

https://borkena.com/2025/02/20/ethiopia ... -benefits/

February 20, 2025

This past week some of my Readers have asked me to comment on the IMF’s Second Review of Ethiopia’s economy, just as I did for the first one. So, here is my take:

Mr. IMF, with all its experts and geniuses, won’t change course.

Like a doctor with one prescription for every illness, it has arrived once again with its favorite cure:

• Cut spending!

• Float the exchange rate!

• Let the market work its magic!

The problem? Ethiopia’s economy isn’t suffering from a mild fever that a little IMF “discipline” will fix. It’s standing on the edge of a cliff, and the IMF just handed it a parachute…with a few holes in it.

Let me start with the exchange rate experiment. On July 29, 2024, Ethiopia took the plunge. The Birr was set “free” – or at least, as free as a currency can be when there’s barely enough foreign exchange to keep it afloat. The result?

A crash landing.

The Ethiopian Birr lost over 100% of its value against the U.S. dollar in just a few weeks. The official exchange rate and the parallel market rate finally met – not because they found stability, but because they were both sinking like bricks in a lake.

The IMF cheered.

This will increase competitiveness!

they said.

Bondholders (the investors and institutions that hold Ethiopia’s USD 1bl sovereign debt) were cautiously optimistic. A market-based exchange rate meant more predictable debt payments.

But the Ethiopian Economics Association (EEA) wasn’t buying it. In their Quarterly Macroeconomic Updates, it argued that Ethiopia doesn’t have a systemic problem – just a liquidity crunch.

Its take? The forex shortage was temporary and shock therapy devaluation was unnecessary.

Who was right?

Let’s see… inflation skyrocketed, import costs doubled, and Ethiopian families – who never asked for an IMF “rescue” – suddenly found that a bag of flour now costs two bags of money.

Alongside the great currency crash, Ethiopia got another IMF classic:

Tighten your belt!

The government was told to cut subsidies, reduce spending, and make sure creditors get paid.

Never mind that Ethiopia isn’t Argentina, Egypt, or Nigeria, where similar policies have already gone horribly wrong. Never mind that Ethiopia is dealing with post-war reconstruction, drought, inflation, and political instability.

Nope. The IMF prescription is the same. One-size-fits-all. But who really wins when Ethiopia “tightens its belt”?

Bondholders…. For them, “fiscal responsibility” means getting paid first, while Ethiopia struggles to buy medicine, food, and fuel.

But even they had concerns. Ethiopia’s external debt hit $28.8 billion by mid-2024, and with the currency devalued by over 100%, those debt payments just got twice as expensive.

Some investors, still haunted by Zambia’s 2020 default, wondered if the IMF plan was just a way to keep Ethiopia alive long enough for creditors to escape before the inevitable crash.

Also, in the same week, the National Bank announced that inflation is down, But at what cost?

Ethiopia’s falling inflation rate is largely a result of banks restricting lending and high interest rates reducing aggregate demand. While this may be seen as a positive sign of stabilization, it is equally a symptom of economic distress rather than a successful policy outcome.

• The IMF’s silence on this development could reflect its preference for structural analysis over short-term monetary trends.

• Economists would argue that forced austerity and suppressed demand are driving disinflation, not a true economic recovery.

• If the credit crunch continues for too long, Ethiopia risks entering a stagnation phase, where low inflation is paired with economic contraction.

The critical question remains: how long can the Ethiopian economy sustain this balance before growth collapses under the weight of restricted credit and suppressed demand?

The Free Market Fantasy

The IMF and Ethiopia’s policymakers seem to believe in the magical power of the free market – so much so that they:

• Removed nearly all forex restrictions

• Eliminated surrender requirements

• Allowed exporters to keep more of their foreign currency –

The hope? More dollars in circulation would “naturally” stabilize the exchange rate.

The reality is that Ethiopia’s forex shortage isn’t a regulatory issue – it’s a structural problem.

The country’s economy relies on coffee and oilseeds, which – even in a good year – aren’t exactly gold mines of foreign exchange.

Meanwhile, the IMF conveniently left out two crucial details from their report:

1. Gold and coffee exports have actually increased, bringing in more foreign exchange than before.

2. Banks, restrained from lending due to high interest rates, have helped curb inflation.

Did these factors lessen Ethiopia’s liquidity crisis?

Possibly. But the IMF ignored them anyway.

Why? Because acknowledging them would mean admitting that Ethiopia’s problems aren’t just about “bad policies” – they’re about economic structure.

Economists – not hypnotized by IMF dogma – would say Ethiopia should have done the opposite:

3. Gradual Exchange Rate Adjustment – Instead of shocking the economy, Ethiopia should have phased in devaluation, while building reserves and negotiating trade deals to soften inflation.

4. Strategic State Intervention – The government shouldn’t step back; it should step in—ensuring forex goes where it’s needed: key industries and essential imports.

5. Debt Renegotiation, Not Just Austerity – Ethiopia should push for debt relief or restructuring, just like Zambia, Ghana, and Chad. Why suffer alone?

6. Export Diversification, Not Just Liberalization – Ethiopia can’t solve its forex crisis by floating its currency. It needs to build manufacturing, agro-processing, and tech industries.

The Verdict: A Road to Nowhere?

The IMF’s Second Review tells a predictable story – one where economic “reform” means making the poor pay for the mistakes of policymakers.

• Bondholders want their money.

• The IMF wants Ethiopia to follow the script.

• Ethiopian economists warn of disaster.

And yet, here we are – repeating history.

Ethiopia deserves better. It needs an economic strategy based on national priorities, not IMF checklists. A true “home-grown” reform would:

• Build industries.

• Protect vulnerable communities.

• Ensure economic sovereignty.

If Ethiopia stays on the IMF’s path, we know where it leads – just ask Argentina, Egypt, or Zambia.

Maybe, just maybe, it’s time for Ethiopia to chart its own course

Editor’s Note: Views in the article do not necessarily reflect the views of borkena.com