(Reuters). Ethiopia's economy is expected to maintain a growth rate of 7 percent in 2012/2013, the International Monetary Fund (IMF) said, raising its earlier forecast of 5.5 percent owing to slowing inflation.

The Washington-based body's growth projection is below official estimates of 11.4 percent.

A visiting IMF team said tight monetary and fiscal policies have contributed to declining inflation, through the termination of central bank financing of the budget and significant sales of foreign exchange.

The Horn of Africa country's annual inflation rate fell for the third straight month in May to 25.5 percent from 29.8 percent in the previous month, according to official data.

“For 2011/12, the mission projects real GDP growth at 7 percent and end-year inflation at about 22 percent,” said a statement sent to Reuters.

“A similar growth rate and single digits inflation are achievable in 2012/13 if implementation of tight monetary and fiscal policies is maintained.”

The body warned Ethiopia last year that excessive monetary growth was the principal cause of its rising inflation, while private bank lending restrictions and a trickier business environment would slow economic growth.

According to IMF back then Ethiopia's budget saw a domestic financial surplus, but there was a significant recourse to central bank financing as the Treasury bill market collapsed, reflecting high negative interest rates.

“The mission recommends continuing the fight against inflation. Raising interest rates immediately would enhance the activation of the treasury bill market for liquidity management and monetary policy implementation,” said the visiting team, which left on Wednesday.

“Higher interest rates will also support domestic savings mobilisation efforts that are key for financing. In addition, the policy of no central bank financing of the budget should remain in place to send a strong signal of the government's commitment to fight inflation.”

Ethiopia has embarked on ambitious infrastructure investment projects to improve its economic competitiveness, including a multi-billion dollar plan to scale up energy generation.

Addis Ababa aims to produce 20,000 megawatts (MW) of hydro-power within the next 10 years, part of a plan to spend $12 billion over 25 years to raise power generating capability.

High coffee earnings in the past few years have also boosted the economy of Africa's biggest coffee producer, as have rising gold, oil seed and livestock exports.

Ethiopia is the world's fourth-largest sesame exporter after China, India and Myanmar.

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Following is the text of the mission statement from the International Monetary Fund visit to Ethiopia (as reported by Bloomberg):

An International Monetary Fund (IMF) mission visited Addis Ababa May 30-June 13 to conduct discussions for the 2012 Article IV Consultation. The mission met with Prime Minister Meles Zenawi, Minister of Finance and Economic Development Sufian Ahmed, Governor of the National Bank of Ethiopia Teklewold Atnafu, Economic Advisor to the Prime Minister Newai Gebre-ab, other senior officials, as well representatives of the private sector, the international community, and civil society. At its conclusion, the mission head Mr. Michael Atingi-Ego issued the following statement: “The Ethiopian economy continues to grow at a robust pace, poverty continues to fall, and inflation, while still high, has been declining. The expansion in economic activity has been supported by robust export growth and public enterprise investments. Tight monetary and fiscal policies have contributed to the deceleration of inflation, which also reflects declining international commodity prices. Monetary tightening, reflected in a contraction of base money, was achieved by terminating central bank financing of the budget and significant sales of foreign exchange. As a result of this foreign exchange intervention, gross official foreign reserves have declined to under two months of import coverage. The budget execution has been prudent, but increased domestic credit to public enterprises has been providing strong fiscal impulse. “For 2011/12, the mission projects real GDP growth at 7 percent and end-year inflation at about 22 percent. A similar growth rate and single digits inflation are achievable in 2012/13 if implementation of tight monetary and fiscal policies is maintained. “Going forward, the mission recommends continuing the fight against inflation. Raising interest rates immediately would enhance the activation of the Treasury bill market for liquidity management and monetary policy implementation. Higher interest rates will also support domestic savings mobilization efforts that are key for financing investment to achieve ambitious objectives in the Growth and Transformation Plan (GTP). In addition, the policy of no central bank financing of the budget should remain in place to send a strong signal of the government’s commitment to fight inflation. “The financing of the GTP should strike a balance between seeking to promote growth and ensuring macroeconomic stability. Given the authorities’ objective of financing long-term projects by domestic sources and the resulting strong financial real sector linkages, it will be important to increase the oversight of the financial sector to ensure its stability. On the external front, rebuilding gross official foreign reserves will provide a buffer against potential exogenous shocks given the current volatile global environment. A comprehensive monitoring of both external and domestic public debt would help maintain debt sustainability. “The IMF Executive Board is expected to complete the 2012 Article IV consultation in mid-September 2012.”