The IMF, which has been closely monitoring the economic situation in the Horn of Africa country, predicted in a report released on 31 May that Ethiopia's economic growth would slow to about six percent in the 2011/12 fiscal year due to high inflation.
Map of Ethiopia
While it noted “restrictions on private bank lending and a trickier business environment” had negatively impacted the Ethiopian economy, the IMF said that inflation, which the country's Central Statistics Agency estimated at 29.5 per cent in the month of April 2011, was the main factor behind the economic slowdown.
Inflation rates had reached 25.9 per cent in March 2011 compared to 16.5 in February 2011, according to the statistics agency.
Early April Ethiopia introduced a new banking rule urging private banks to allocate 27 per cent of their loans to purchase government bonds that have been launched in a bid to buttress financial efforts towards the construction of Africa’s biggest dam over the Nile river.
The hydro-electric dam is expected to cost the government around €3.3bn ($4.6bn).
"The principal macroeconomic challenge is surging inflation. While this partly reflects rising international commodity prices, excessive monetary growth has been the principal cause,” said the IMF.
The lender also indicated that recent price hikes had affected food, construction materials, and house rents. Since May, sugar and edible oil prices have risen sharply, while fuel prices have exceeded one US dollar per litre for the first time in the country.
"Going forward, the authorities are encouraged to reinforce financial sector supervision, continue implementation of the tax and customs reform plans, strengthen debt management, as well as efforts to improve the national accounts statistics," the IMF said.
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