Ethiopia’s Government Falls Short of IMF Indicative Target for Safety Net Program Contribution

Nearly two weeks before Kristalina Georgieva, the Managing Director of the International Monetary Fund (IMF), is poised to visit Ethiopia, the Fund has released its second review of the four-year economic program. Five months into the 3.4-billion-dollar Extended Credit Facility arrangement, Ethiopia has notably failed to meet just one indicative target (IT), which involved raising budgetary contributions to the Productive Safety Net Program (PSNP) from 0.1 to 0.5% of GDP. Government contributions to the PSNP of around 2.7 billion birr fell short by more than half of the target of nearly 6.5 billion set for the end of September.

While the review attributes the failure to meet the target to “necessary preparations to expand the safety net and absorb the increased budgetary envelope,” it acknowledges the necessity of expansion to mitigate the impact of reforms on vulnerable people. The fifth phase of the PSNP, lasting until 2026, was launched in 2021 with the hopes of helping up to nine million people economically vulnerable Ethiopians annually. 

However, the Project which has historically had the United States through USAID as one of its biggest funders since its inception in 2005, has been exposed to a severe financing crisis. Financial constraints and implementation challenges stemming from conflict, drought, and high food inflation have necessitated a scaling down of beneficiaries and activities. US President Donald Trump’s decision last week to suspend all foreign aid for 90 days pending a review to ensure consistency with the ‘America First Agenda’ might also contribute to additional financing pressures.

The social safety project financing by the World Bank (0.2 percent of GDP) will co-finance PSNP and help cover the funding gap of the existing PSNPs over the next 18 months.

The conclusion of the second review by the IMF’s executive board allowed for the disbursement of $248 million, bringing the total amount to $1.611 billion. Ethiopia’s government has made strong progress in implementing the Fund-supported program and addressing macroeconomic imbalances, according to a statement by Nigel Clarke, Deputy Managing Director and Board Chairman. He also urged authorities to expedite efforts to expand the PSNP to protect vulnerable households and ensure efficient use of public resources.

Some of the major economic reforms over the past seven months have included transitioning to a more flexible exchange regime policy, accelerated removal of fuel subsidies, and gradual cost-reflective increments in electricity tariffs. Increased revenue mobilization targets have also been met, with tax income soaring by 70% in the first four months of 2024/25 from the previous year. VAT reform, tax base broadening, removal of exemptions, revised excise rates, and a 92% increase in import tariff revenue a month after the Birr was floated contributed to the marked gains.

While IMF economic programs often indicate the need to protect the most economically vulnerable segments of society, they have been criticized for doing the opposite. A Human Rights Watch report published two years ago claimed that the Fund pushed policies that have a long track record of exacerbating poverty and inequality and undermining rights. The Fund’s prescription of policies, which often lead to austerity, regressive taxes, and elimination of energy subsidies are criticized by the report.