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Document of
The World Bank
FOR OFFICLAL USE ONLY
Report No. 17009-ET
MEMORANDUM OF THE PRESIDENT
OF THE
INTERNATIONAL DEVELOPMENT ASSOCIATION
TO THE EXECUTIVE DIRECTORS
ON A
COUNTRY ASSISTANCE STRATEGY
OF THE
WORLD BANK GROUP
FOR
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
August 19, 1997
Country Department tor EthiopiaMacroeconomics II, AFTM2Africa Region
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents-may niot otherwise be disclosed withoutWorld Bank authorization.
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GOVERNMENT FISCAL YEAR
July 8 - July 7
CURRENCY EQUIVALENTS
Currency Unit = Ethiopia Birr (Br.)
Monthly Average Exchange Rate US$1.00 = Br. 6.73 (July 1997)
ACRONYMS AND ABBREVIATIONS
ADLI - Agriculture-Development-Led IndustrializationBOP - Balance of PaymentCAS - Country Assistance StrategyCBB - Construction and Business BankCBE - Commercial Bank of EthiopiaCG - Consultative GroupCPI - Consumer Price IndexCPPR - Country Portfolio Performance ReviewCSR - Civil Service ReformDBE - Development Bank of EthiopiaEC - European CommunityEPRDF - Ethiopian People's Revolutionary Democratic FrontERRP - Economic Recovery and Rehabilitation ProjectESAF - Enhanced Structural Adjustment FacilityESRDF - Ethiopia Social Rehabilitation and Development FundESW - Economic and Sector WorkFIAS - Foreign Investrnent Advisory ServiceGDP - Gross Domestic ProductGNP - Gross National ProductHIPC - Heavily Indebted Poor CountriesIDA - International Development AssociationIFC - International Finance CorporationIMF - International Monetary FundMFI - Micro-Finance InstitutionMIGA - Multilateral Investment Guarantee AgencyMUV . Manufactures Unit ValueNBE - National Bank of EthiopiaPER - Public Expenditure ReviewPFP - Policy Framework PaperPPA - Participatory Poverty AssessmentPSD - Private Sector DevelopmentQAG - Quality Assurance GroupSAC - Structural Adjustment CreditSIP - Sector Investment ProgramSME - Small and Medium EnterpriseSOE - State-Owned EnterpriseSSA - Sub-Saharan AfricaTA - Technical AssistanceWDR - World Development ReportWID r Women in DevelopmentWSS - Water Supply and Sanitation
Vice President Callisto E. MadavoCountry Director Oey Astra MeesookTask Team Leader Akbar Noman
FOR OFFICIAL USE ONLY
MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION
TO THE EXECUTIVE DIRECTORS ON ACOUNTRY ASSISTANCE STRATEGYOF THE WORLD BANK GROUP FOR
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
Contents
Executive Summary .............................................
I. The Context: Country Characteristics ........................................... 1I
H. Political Economy ........................................... 2
Ml. Recent Economic Trends ........................................... 2
IV. Policies and Priorities ........................................... 6Recent Economic Reforms ...... 6.....................................6The Future of Refonns ........................................... 8
V. Bank Assistance: Past Lessons and Future Rationale . ........................................... 0Past Assistance and Lessons ........................................... 10Rationale of Proposed Assistance Strategy ........................................... II
VI. Bank Group Strategy ........................................... 12Policy and Capacity ........................................... 12Infrastructure ........................................... 13Sources of Growth ........................................... 14Poverty and Human Development ........................................... 16The Sum ........................................... 17
VII. Matrix and Triggers ........................................... 18
VIII. External Environment ........................................... 19
IX. Risks ............................................ 21
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
Contents(cont'd)
FIGURES:
Figure 1: Growth Rates of GDP and PopulationFigure 2: Average Annual Growth Rates, FY93-96Figure 3: Annual Inflation RatesFigure 4: Fiscal Balance as Percent of GDPFigure 5: Broad Money Growth RateFigure 6: Investment as % of GDP, 1990-97
BOXES:
Box 1: Poverty - Characteristics and TrendsBox 2: Highlights of Structural Reforms to DateBox 3: Triggers
ATTACHMENTS:
Attachment 1: CAS MatrixAttachment 2: Economic Scenarios: The Base Case and a Higher CaseAttachment 3: Ethiopia Portfolio: Overview and Improvement Strategy
ANNEXES:
Annex Al: Ethiopia at a GlanceAnnex A2: Selected Indicators of Bank Portfolio Performance and ManagementAnnex A3: Bank Group Program Summary, FY 1998-2000Annex A4: Ethiopia - Summary of Nonlending ServicesAnnex A5: Ethiopia - Social Indicators of DevelopmentAnnex A6: Key Economic IndicatorsAnnex A7: Key Exposure IndicatorsAnnex A8: Status of Bank Group Operations in Ethiopia
MAP IBRD 26866
MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION
TO TBIE EXECUTIVE DIRECTORS ON ACOUNTRY ASSISTANCE STRATEGYOF THE WORLD BANK GROUP FOR
TlHE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
EXECUTIVE SUMMARY
1. Ethiopia, with the second largest population in Sub-Saharan Africa (SSA), has a GNPper capita of $1 10, or one-fourth the average for the Region. Pervasive poverty is manifested,inter alia, in the highest incidence of malnutrition and lowest primary school enrollment ratio inthe world. Severe infrastructural shortcomings, notably the lowest road density in SSA,contribute to the isolation and vulnerability of the poor, particularly in drought years. Povertycannot but be at the center of this CAS.
2. Nearly two decades of civil war and centrally planned economic mismanagement endedin 1991 with per capita income lower than it was in 1960. Prime Minister Meles Zenawi'sgovernment's commitment to an economic agenda in this transition economy is reflected in anexceptionally strong sense of "ownership" of economic policies and to probity in theirimplementation.
3. Over FY93-97, GDP growth averaged some 8 percent a year while inflation averagedunder 4 percent, even as prices were decontrolled. The fiscal deficit (with grants) declined from1 1 percent in FY90 to 2.1 percent in FY97 and public expenditures shifted from defense to thesocial sectors and infrastructure. The rural poor benefited significantly from this economicperformance.
4. The performance was aided by good weather and reflects success in stabilization and intransition policies whose main thrust has been reforms pertaining to: (i) price controls; (ii)private sector; (iii) divestiture; (iv) labor market; (v) exchange rate; (vi) agriculture; and (vii)fiscal management. The reforms have been reflected in a series of Policy Framework Papers(PFPs). They and their results provide a promising platform for placing the economy on a pathof sustained rapid growth and poverty reduction. Seizing that opportunity requires easing thepolicy, infrastructural and capacity constraints that are becoming increasingly operative as theeconomy approaches the next phase of development. Those requirements constitute the centraltheme of the assistance strategy. The strategy benefits from extensive consultations, includingwith the Prime Minister and his economic team, the private sector, labor unions and NGOs.
5. The key issues and priorities of our policy dialogue are as follows. Ethiopia is not yet atthe policy frontier of some of its neighboring countries or of low-income transition economies,notably with respect to private sector development, foreign investment, trade and exchangeregimes. In general there is a tendency to be excessively cautious in undertaking the next phaseof reforms that are needed now. We argue for a greater reliance on the private sector, especiallyin infrastructure, not the least because of the compelling need for more fiscal space toaccommodate the enormous needs for public expenditures. Notwithstanding progress with
ii Executive Summary
respect to the regulatory impediments to the nexus of private sector development, foreigninvestment and exports, this remains the most important area for future reforms. Alsoweaknesses in implementation capacity need to be addressed with alacrity.
6. The strategy envisages substantial lending but also emphasizes that the "knowledgebank" is to work in close tandem with the Bank Group, qua financier. Our close involvement inpolicy reforms, public expenditure reviews (PERs) and sector investment programs (SIPs) meansthat we expect the impact of our assistance to exceed the sum of its lending parts.
7. The assistance strategy falls into four clusters whose High Case elements are:
(a) Policy and Capacity: non-lending instruments will receive special attention butlending will be substantial and comprise three operations, to wit, EconomicManagement, Export Development and Financial Sector. All follow from ESWtasks and will contain a high policy content without necessarily being adjustmentcredits.
(b) Infrastructure: Large lending operations are proposed for Roads SIPs andEnergy projects. These will also have a significant poverty impact as the roadswill improve the access of the poor to markets, social services and, in times ofdrought, to food; and as rural electrification will stimulate off-farm activities.
(c) Sources of Growth: Lending and non-lending are to play an equally importantrole in this cluster, focusing on sectors with potential to make a majorcontribution to both economic growth and a broad-based, "pro-poor" pattern ofgrowth, viz. agriculture and environment; export development; and small-and-medium enterprises.
(d) Poverty and Human Development: A two-prong strategy is proposed, to wit,first, SIPs in education and health with close donor collaboration; and second, aset of projects for population, gender, food security and water supply. Ourcontributions will pay particular attention to details of design and effectiveimplementation. Aside from the free-standing projects for gender andenvironment, these two issues will cut across many of our activities.
8. Over FY98-2000, we envisage a lending program of $1,650 million in the High Case and$1,200 million in the Base Case. In the latter case, we see each of the three operations under"policy and capacity" either eliminated (Finance and Exports) or reduced to a narrow focus oncapacity building (Economic Management). The preparation of the follow-up operations to thethree SIPs is also likely to slip; the size of the road SIP reduced; and the water supply and foodsecurity projects eliminated. In the low-probability case of a significant deterioration instabilization and structural reforms, lending drops to $750 million.
9. The essential differences between the Base and High Cases are the rates of progress ofreforms and of implementation capacity. The Base Case is based on: (i) an improvement inportfolio performance; (ii) continuation of macroeconomic stability; and (iii) substantialadherence to the structural reforms in the PFP, especially with respect to private sectordevelopment and exports, and some measures reflecting more recent analytical work. We wouldshift to the High Case if, in addition, the government: (i) moves further in promoting private,
Executive Summary iii
including foreign, sector participation in infrastructure and finance; (ii) makes faster progress inderegulation of business and liberalization of the trade and export regimes; (iii) acceleratesprivatization; (iv) moves further and faster on financial sector reforms; (v) is ready to implementa food security strategy; and (vi) further improves project implementation capacity.
10. Exogenous sources of vulnerability include droughts, coffee prices, external debt (withEthiopia being a possible candidate for SHPC eligibility), and volatility in Sudan and Somalia.The domestic political risks do not seem to us to be high in the foreseeable future, although themanagement of ethnic frictions would be important in the longer term. In the near term, a biggerset of risks stems from the limitations of capacity to implement both projects and policies.
11. Key Issues for Board Consideration: The following are suggested as important ones forthe Executive Board to focus upon:
* Does the proposed multi-faceted strategy appropriately balance Ethiopia's manyneeds and demands for IDA assistance with the selectivity and focus required formaximizing the impact of such assistance?
* Are we justified in proposing substantial assistance in the form of "knowledge"even when it may not lead to lending operations and whose effects are difficult tomeasure or to predict in terms of the timing of any consequent policy actions?
* Is the emphasis on SIPs appropriate and has adequate account been taken of theirtendency to disburse slowly in the initial year or two?
* Is it appropriate for us to argue for more flexible financial stabilization policies,especially to accommodate improved capacity to absorb grants and other highlyconcessional assistance on IDA or similar terms?
Ethiopia: AnM A Land
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:~~~~~~~~~~~ .. ..... VIM 74b O D t Ij,iIn 5th.century yzantine,Lacta tiu haiu wrt d "Crail [ted thopan
arerb th-gd b of j .T erd ie For the
suffering". .~~~~~~~~~~~~~~......iiW - e t ~~~~~~~~~~~~~~~~:X -:XXXX if , *
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-Th poeeenrcmene ovigte oni to. Rom-eso that the sldi.A- ;0Embass ysen by gth-e hghan ight 0r ro tipasol fin h oni
sitting notin sucha.paltrtw asFlornc bt . i the geteme l o the.
Chisia w.l"(nl Levine... ..~~~~~~~~~~~~~~~~~~.., .. .. .. .. .. .. .. -..
Acknowledgments: This document reflects invaluable contributions of many Bank staff.Notable amongst them are Messrs. Fayez Omar and Sudarshan Gooptu of the Resident Mission,and at headquarters, Ms. Lili Liu and Messrs. Mathew Verghis and Alan Gelb. Ms. LilianCanamaso was in cheerful and conscientious charge of the production of the document. TheEthiopia country team pitched in valiantly, with particularly important contribution made byMessrs./Mmes. Anjali Acharya, Sarah Cliffe, Kathleen Jordan and Jack van H-olst Pellekaan.
ETHIOPIA
COUNTRY ASSISTANCE STRATEGY
I. THE CONTEXT: COUNTRY CHARACTERISTICS
1. Approaching 60 million, Ethiopia's population is the second largest in Sub-SaharanAfrica (SSA). Her reported per capita GNP of $110 in 1996 is less than one-fourth of the SSAaverage. Of all countries, only Mozambique showed a lower per capita income. Poverty cannotbut be at the center of this Country Assistance Strategy (CAS).
2. That poverty is pervasive hardly needs to be stressed but rather less obvious is the extentto which social indicators are below the SSA averages, as the box on poverty indicates.Particularly striking are the facts of Ethiopia having the highest reported incidence ofmalnutrition of any country and of the deviation of school enrollment even from the "norm" for acountry at Ethiopia's level of income. At under 30 percent, the primary school enrollment ratiois by far the lowest in the world: close to half of the ratio in Mozambique, the one country with alower income per head, and about two-fifths of the SSA average of some 72 percent.
3. The state of physical infrastructure, after the neglect and destruction of the civil war, isalso significantly below that obtaining typically in countries of the Region or income group.Most notably, Ethiopia has the lowest density of roads in SSA, with more than 75 percent offarms being over half a day's walk from the nearest all-weather road. The sometimesdevastating consequences of the poor state of transport and associated market fragmentation in acountry subject to periodic droughts are all too well-known.
4. The vulnerability to droughts (every 3 years on average) and the low levels ofelectrification (only 5 percent of the population have electricity) persist notwithstanding the factthat Ethiopia is the source of some 85 percent of the waters of the Nile. The large investmentsrequired to harness the Nile for hydroelectric power and irrigation are not by any means the onlyconstraint. Historical, riparian factors impinge on Ethiopia's ability to exploit what is arguablyone of the biggest assets.
5. The impressive turnaround in economic policies and performance of the past five yearsor so provides a promising platform for achieving sustained rapid growth with poverty reductionin this large country with significant implications for global poverty. But much remains to bedone to realize that promise. Those requirements are the central themes of the proposedassistance strategy which benefits from extensive consultations. These have included a day-longretreat with the Government's economic team and wide-ranging discussions with the privatesector, labor unions and NGOs.
2 Ethiopia CAS
II. POLITICAL ECONOMY
6. The civil war ended in May 1991 with the ouster of Mengistu Haile-Mariam and theDerg regime by a coalition led by the Ethiopian People's Revolutionary I)emocratic Front(EPRDF). A Constituent Assembly, elected by popular vote in June 1993, approved aconstitution in December 1994. Its noteworthy features include a framework for establishing adecentralized, democratic, federal system of government (with fairly homogenous regions, in theethnically and linguistically diverse country, constituting the federal units), as well as stateownership of land, while recognizing usership rights and leasing of land.
7. The first-ever national elections were held in May 1995. The EPRDF-dominatedcoalition, led by the present Prime Minister, Meles Zenawi, won the elections. Some oppositionparties boycotted the elections claiming unequal campaigning opportunities, especially access tothe electronic media. After the extensive violations of human rights under the Derg regime,there has undoubtedly been a dramatic improvement but some complaints about denial of humanrights and a level political playing field, particularly in the Regions, are given credence by mostindependent observers.
8. A summary assessment of the balance of views on the political economny of the countryas it bears on risks would seem to be as follows. The Government has a strong rural support baseand a keen sense of the importance of improving the welfare of rural residents. The opposition'ssupport is much more urban than rural. There is also an ethnic dimension to the divide.Informed observers do not see the opposition as constituting a threat to the government in theforeseeable future. In any event, over the longer term, the minimization and adroit lubrication ofethnic frictions would be needed to manage a risk to the achievement of the sustained, rapideconomic progress that the Government emphasizes and Ethiopia's poverty renclers so vital.
9. Notwithstanding the unfortunate ethnic flavor to politics, Prime Minister MelesZenawi's government can be characterized as representing a new breed of African leaders,emerging from an essentially indigenous socio-political upheaval, who are "developmental" intheir outlook, in that they accord very high priority to the pragmatic pursuit of economic goalsand to probity. The commitment of the Government to an economic agenda is reflected in anexceptionally strong sense of "ownership" of economic policies and to probity in theirimplementation. Policymakers are given to very serious consideration of policy options, do notmake policy commitments lightly and have a solid track-record of delivering on those they do.The Prime Minister himself is very keenly involved in economic managernent and has animpressive grasp of economic issues to an extent that the label of an outstanding economictechnocrat could be applied to him without much exaggeration. This was evident, for example,in the quality and length of the dialogue with the Prime Minister at the Consultative Group (CG)meeting in December 1996 (the first ever held in Africa); at periodic meetings with the RegionalVice President and the discussions at the cabinet meeting especially organized for the Bank'sChief Economist on his first mission to Ethiopia in April 1997.
III. RECENT ECONOMIC TRENDS
10. Ethiopia is in many respects a transitional economy. A policy statement of theGovernment soon after it assumed power noted that "the overriding objective should be thereplacement of the command economy by an economic system driven by market forces". Therehas been remarkable success not only with dismantling the egregious dirigisme of the Derg
Ethiopia CAS 3
regime but also with the other key objective ofthe initial phase of reforms, to wit, stabilization. Fig. 1: Growth Rates of GDP and Population
Other enunciated objectives of an inherently (percent)longer-term nature include "agriculture- 6
development-led industrialization" (ADLI), 5
export-led growth, and emphasis on physical 4 f,
infrastructure, the social sectors and food 3 2.4%
security. 21
11. The recent performance of the economy 0
contributes to confidence in the view that the 1961-70 1970-80 1980-91 1991-96
Government's goal of doubling per capita OGDP *Population
income in 15 years is not altogether a far-fetchedone, if policymakers seize the opportunity. The longer-term trend which left per capita incomein 1992 at a lower level than in 1960 (as implied by Figure 1) points to both the challenge andthe imperative of pursuing an ambitious growth target.
12. After contracting by some 3 percent in both the year the civil war ended and the one afterthat, GDP grew over the four subsequent years, FY93-96, at an average rate of around 8 percent
a year. Good weather helped but, even in the
Fig. 2: Average Annual Growth Rates drought year of 1993/94, GDP grew at about the(FY93-96 average rate for the decades of the 1970s and the
14.0°/% -.- -- ---K13UO 1980s (and adroit management of food security
prevented the sort of famines that such years10.01/6- -: -- :. .fswere prone to). The volume of exports, after8.0%/o ~ ~: SF8% - - l . i-. falling sharply in FY92, recovered quickly to
6. 00/o ~~~~~~~record an average annual growth rate of some 15percent during FY92-96 but still remained belowits peak. When deflated by the Manufactures
I Unit Value (MUV) index, exports are lower now0. .0 than in 1973. In US dollar terms, Ethiopia has
GDP Agriculture Industry SeMm f the lowest per capita exports in the world.
13. As with output growth, in contrast to the typical experience of transition economies,Ethiopia has also had outstanding success in taming inflation even as prices were decontrolled.After rising by more than 20 percent in each of FY91 and FY92, consumer prices increased at anaverage annual rate of 2.3 percent during FY94-FY97, actually falling in FY97 (Figure 3). Thefiscal adjustment that underpinned macroeconomicstabilization is shown in Figure 4. Moreover, Fig. 3: Annual Inflation Rates
domestic bank financing of the deficit has been 25.0% l
negative in the last three fiscal years and growth in 20.0%
broad money (Figure 5) has been broadly in line 15.0% 14with that in nominal GDP: increasing cumulatively 10.0% _i-oY -
by 56 percent and 61 percent, respectively, 50%
between FY93 and FY97. The international 0.0%-
reserves position has also been well-managed, -s. os0 FY92 FY93 FYS4 FY95 FY96 7
with reserves hovering in the range of 6 to 8 -10.0%|
months' worth of imports in recent years. I
4 Ethiopia CAS
Fig. 4 Fiscal Balance as Percent of GDP Fig. 5: Broad Money Growth Rate
Fiscal Years (cash basis, with and without grants)90 91 92 93 94 95 96 97 25.0%
0.0 -2.0 - 20.0%-4.0 -59-6.0 - e 15.0% -8.0 an6 a10
d10.0o e11.0 d .0%-12.0 -0-14.0- 436-16.0-.1 8.0-
FY90 FYt91 FY92 FY93 FY94 FY95 FY96 FY97
15. As fjwthe boxantsipovety indiats,th
14. Amongst other notable features of recentperformance have been the substantial shift in Fig. 6i : Investment as % of GDP, 1990-97
public expenditures from defense to the social 2e.0%
sectors and infrastructure, and the revival of 20.0%
investment led by the "non-govermment sector" 15.0%
(Figure 6), which is a combination of the privatesector and autonomous public enterprises (the data 10.0%go
do not allow "pure private" to be disentangled 5.0%
from such enterprise investments). 0.ai%
FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97
15. As the box on poverty indicates, theeconomic performance of recent years hasresulted in a significant reduction in poverty though the improvement appears to be confined tothe rural areas. In contrast to the typical African situation, the proportion of the population thatis absolutely poor in urban areas exceeds that in rural areas. Nevertheless, the bulk of the poor,as well as the most vulnerable, in terms of food security, are rural based, in particular in remoteareas isolated by the difficulty of access to roads.
16. The impressive economic performance of recent years was aided by favorable weatherand largely reflects the successes in stabilization, the correction of the gross policy distortions ofthe previous regime, and an end to the war. A continuation of that performnance is by no meansassured. The issues confronting policymakers now are the second-generation ones of: (a)facilitating the growth of a vigorous private sector; (b) striking the right balance betweenmarkets and interventionism in a low-income economy with a fairly rudimentary structure ofmarkets; (c) balancing stabilization and growth; (d) determining the speed and sequencing of thenext phase of reforms; and (e) building capacity for effective implementation. The government'sstated aim is to redress poverty by doubling per capita income in 15 years. This implies a G,DPgrowth rate of 7-8 percent a year, assuming annual population growth averaging 2.5 percentrather than the 3 percent that represents the upper end of the range of estimates of currentgrowth.
17. To achieve that economic growth objective and seize the opportunity created, there is aneed to ease the constraints of policy, infrastructural and capacity weaknesses that are becomingincreasingly operative as the economy approaches the point of departure to the next phase ofdevelopment. The reforms that have underpinned the impressive performance of the past halfdecade or so and those needed to sustain it are sketched below.
Ethiopia CAS S
.. . . . . .- . ... . . . . . . ..: - : :
-OX : P.Oerty - Characters, '1s adTin d'-s ''
.With just'about'theowes per cai ico inte wodt exte dde of 'p'ovewr i pervasive as t enaee th extreme ensitivity of ,n,y income- or 'con pti,n base- pov meau toprecisey how,t isdefe,d, whC. articur dta s s-,u an howthd". W
y it Ag. e '.''e.. .hi hp .. S ,,. .. eStuntng amngst ural hildrnour 941%si
Noninc-' o" 'm ,e, ''or ' 'f 'b' ' '''
:,,povet i'ne,,is higher in' ura areas.""Amongst 24 othr A,countriefo whc 1992 data w ere'available, non shoawed tis -hrceitco a :ihricdneo ra ovryadms ~iie coxnsiderably .owe .incid .e.n..e.T pr.ab fle in p e e c war i hioi..n i inglargemigratio ouan ap ..... e...... .... .......
. Saonl s.tress aderrticclimat.e coiu o poea- majoiko fod- iseuiy exacerae dby thi:-solation of any-of te:poor.m in. .a context.of.an extremely poor roadnetorL.. ....... E r ..ce. .tyears of good harests, communities .rep. a: shr dro ifod cosmtn duigte1a esn.-This hseasonalinseurityis reectd.itheslowimproe i .tinal ndica. t.o
* :.Rela:tedly, thee i.s-very subsantilgeogrpia, seBasonal and i.periondic varic i thme incdence of ru:a-.-.pove.ry,. bth .amongst andwithin each ofthe regins.- F.agmentationof factor:andproduct markets..:reflecting infrtructurinadequciesadverselft..... t ....o .........
~~~~~~~~~~~~~~~~~~~~~~~~~~~~.-.e.p.-n .......... e. lo -w
.- services an infrtrcture in. suh-tem s,-fo e pe, du atin l en--nn s,dsanc fro -schof healthcenter, a st. sae w .eso ....s.s........nacstsfwe. al r dfens
- the' -e : : Selected Social Indicators for Urban and Rural Areas - : -
, , -- .. ' 1 1X Y -- { -J--r *. s ---.- ..- .-- --.-- ...~~~~~~~~~~~~~~~~~~. .. . . ...
-: .- - - : h .: - . - .'e J:Female Male Female Male Access to Female Male- : : . -l. .w::: . .d-i mary i pma y liteay litecy id watr sendary seondary:
w.e- the benefImeof enrolImant ODUrban-R; enr Iment enrolIment - ss.ssm-ntcoIn ter_s .of the.ine..n. r.e:sinvi w,.r ta,-ere.is¢vidence'of asigica decJ3 er of rai
-.e.c.onomi growth an od havst Ths evdne incude pae d:ta for .9899, alei oa*mall-a.ple .. -:Such data e particularlygodsndcator ftrendsrathehno thsituio t~. i ... o.........n time. They show a reduction in.the incidene (om 52percent -to:4 percent), in t.edepthoand inthe
nseY ity of poV.ern . Froma1995 onwards, e rly s iy onte icipa verty..PPA) as indica.ted-.below. Thr fll in po. y .tho. ugh, seems o. h ben ne to he: r ae
agicltural pwrie. ibealizati ......... ... .....n growthhe r.ad qi :i ubanhsremainedstn and uaninquait - ad. U n lwas h e t rc th.
tin:-.:'-.v ',"'"'' ' ':' ' .', ,"' '-'- .,',' - .''-'',., 'cniud,'e.a
6 Ethiopia CAS
.. x....c.. t. .ti..)..
past y ear ortw,bufte ter .s all b n 17 a 19, ra bl
of0 prgrss 'inrduing urban pet probaby refltssome ' combnaio Sof a lage stoc of wa-ipa -
.jjwere :liberaize,,id:r.educt-io-0n- inpblic- setor emlyet notbl 'b in -'th army, ad a- cotn''ing restrit on'recrui0tm& tent in th,e p:ubic secto:.-.:;:,.-t400-4-''0S-.,r,esearc'fo, te197 Afan.ri a m o t r t a t ifalling prod-ucer -priceLs: for ':-staple grain ,si.nc'e'"-1994................. ,; rais'n ':-Hying sanidars Grow-th-0 ,Sin ou;^tput was -atibute0d jprincitpally to 0;timel and-f suficien ranfl, bu farer also ntedt that the demise of the
.c.o.o.p.era ve . .far ... s. ysem .adi, . .......... ........... d tional labo" , t th c ts land ei in
etensionservicesrb te t repetvly, larger td tterilds.0 Porer fa and
i00la,ndle,sst h-o.u,s,e,holds ;'-appear to .'have beeited iniecl fro the grwhinarcltrlotp isharecrop g a m ent, inc,reased .retr n leasd ad a r
many rural areas.ttemglo.T.Wr
Uj a dS cnuuniie invovdi teIP atiuedters in~ uran >poet to th inrae caiatoof0.l-' n0t'he lao for nce, own in,' part to th eln i tbeemlyetopotnte wt ttetrrssan t-00gbo0,a. the lac of. vctiocnal skills.' Po urbv,,-,scan omniisae atclalduleal drn heriy
1 ~ ~ ~ ~ ~ ~ ~ ~~4 d d kifsa a@ et m^08t
i.:fiA0i:.otae.nmos.0aeas-.l b.co 'fwXB-F SX ditSe 1em : t :I...0;
saso eincnc ofwraetngd enincby e40 r dri t at ) o ing
i:00000gh~ ~ ~ ~ ~~~~~~~. .e: ...re ....her.isnc.tv-o-
hcoaint conomic a bgeasd ca
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8 Ethiopia CAS
20. The reforms to date have evidently been far-reaching. In undertaking them theGovernment has viewed the more gradual Chinese or Vietnamese models of transition as beingmore relevant for Ethiopia than the "big bang" approaches adopted in some European countries.Whatever the merit of that view, the agenda for future reforms remains a pretty full one.
21. The continuation and consolidation of economic reforms over the medium term isreflected in the Policy Framework Paper (PFP) for the period 1996/97-98/99 and supported by athree-year ESAF arrangement with the IMF. The program calls for further fiscal consolidationand continued monetary restraint to serve the ends of macroeconomic stability and for adeepening of structural reforms. The measures envisaged include those aimed at private sectordevelopment, further liberalization of the foreign exchange and trade system, and acceleration ofthe privatization program. The aim is to achieve an average GDP growth rate of 6 percent a yearover the three years, while restraining inflation to an annual rate of around 2 percent.
22. The longer-term goal is to put the economy on a sustained growth path of the order of 8percent per annum. The economy has the potential to do so, particularly in the light of recentperformance and given how far it is from the world's technological frontier. But to realize thatpotential Ethiopia faces a historic challenge and needs to move closer to its "policy frontier".One of the most important sources of future growth is agriculture, with considerable remainingreserves of cultivable land and vast scope for increasing irrigation and land productivity. Othernotable sources stem from the nexus of private domestic and foreign investment and exports(both of natural-resource-based commodities such as coffee and hides & skins and ofmanufactures).
The Future of Reforms
23. The key issues and the priorities and concerns of the Government regarding the nextphase of reformns, along with an indication of the state of the Bank's very active policy dialogue,are summarized below. Particular attention is paid to the areas of differences between theGovernment and ourselves,
24. There is a special salience in Ethiopia today of the universal issues of striving for theright balance between markets and interventionism, (a central theme of World DevelopmentReport, 1997), reflecting the seriousness with which policymakers are examining these issuesand the combination of pragmatism and egalitarian concerns that guides policy. In this regard,policy thinking is especially influenced by the lessons of the East Asian experience. Much of thepolicy debate revolves around: (a) Ethiopia's more limited capacity to intervene effectively; (b)the Government's less decisive pursuit of the nexus of private sector development and exports;and (c) changes in the global context, especially the trend of a much more liberalized set ofpolicy regimes in most countries and of the altered climate for foreign investment flows. Ingeneral, our position is that these considerations argue for accelerating the pace of liberalization,whereas the Government is inclined towards a much more cautious and deliberate approach.
25. One perspective for addressing the above issue is that of public expenditures. Given theenormous needs and rightly ambitious targets with respect to the social sectors andinfrastructure, there is a compelling need for creating as much fiscal space as possible for whatthe Government has to do. This argues for increasing the role of private provision. Our annualreviews of public expenditures and preparation of proposed lending activities in support of sector
Ethiopia CAS 9
investment programs (see below) have been, and will remain, important instruments for pursuingprogress on this front.
26. While sharing the Government's concerns about replacing public with privatemonopolies and with distributional effects, we feel that: (a) there is considerable scope forinfrastructure provision that does not involve natural monopolies (partly reflecting recenttechnological changes, as in telecommunications); and (b) more scope for reliance on regulatoryor tax/subsidy policies rather than prohibitions on private investments (e.g., intelecommunications or in power projects above a certain size).
27. Telecommunications is the sector where we have probably been furthest apart from theGovernment. Despite the experience in other parts of Africa and throughout the world, theGovernment's policy is that the parastatal will remain the sole provider of all services, and willremain fully state-owned. It argues that this is the only way to ensure that the rural population isnot neglected. While we appreciate the concern with rural coverage, our view is that there arebetter ways of achieving that objective; prohibiting private finance and technology is likely tokeep all Ethiopians very poorly served with modern communications. We have agreed with theGovernment that we will prepare a policy note and help organize a study tour for policymakers.Our policy dialogue has already led to active consideration of policy in this area and at least adegree of liberalization now appears to be a distinct possibility, sooner rather than later.
28. Notwithstanding progress with respect to regulatory impediments to the nexus of privatesector development, foreign investment, and exports, this remains the most important area forfuture reforms. Our view is that reform efforts have not been as forceful and systematic as theycould have been. This in turn has been exacerbated by a disconnect between thinking at the levelof policymakers and lower-level officials in charge of implementing policies, who tend to lag farbehind. In this regard, we are also of the view that allowing foreign banks to operate, albeit in amanner that addresses the concern about the fledgling domestic private financial sector beingoverwhelmed, should be done forthwith, while the Government's position is to wait for thestrengthening of prudential supervisory capacity.
29. The liberalization of the investment code clearly needs to go further, particularly ifEthiopia is to compete successfully for foreign investment with the more attractive countries inthe Region. This, accompanied by an effective relaxation of restrictions on non-guaranteedforeign borrowing by the private sector, in turn, is vital for achieving the export ambitions of theGovernment and for a more active role for IFC, which cannot lend to Ethiopian companies atpresent.
30. While there is no gainsaying the importance of macroeconomic stability, and theliberalization of the foreign exchange, trade and financial regimes, there are also some trickyissues here about the speed and sequencing of liberalization and of possible trade-offs betweenstabilization and development (i.e., avoiding financial policies that are too tight, especially toprovide adequate scope for increased utilization of foreign financing on grant or quasi-grantterms). Amongst the more straightforward aspects which ought to be carried out quickly are: (a)improving the modalities and availability of trade finance, especially for exporters; (b)liberalizing the counterproductive controls on microcredit which have had the perverse effect ofdenying access to such credit; (c) assisting the fledgling private banks to compete moreeffectively with the state-owned ones; (d) ensuring easy access to imported inputs at world pricesfor exporters; (e) continuing the reforms of tariffs that have lowered the maximum and the
10 Ethiopia CAS
average rates and their dispersion; and (f) generally eliminating or streamlining cumbersomeprocedures for access to foreign exchange. Among the more complex issues, which warrantfurther discussion and debate, are how quickly, and in what manner, interest and exchange ratesshould be market-determined, given the thinness and imperfections of the relevant markets.
31. The careful consideration of policy options and the "ownership" that it reflects arewelcome but, in general, the Government tends to be over-cautious in undertaking the secondgeneration of reforms that are needed now. The boldness and decisiveness of the initial phase ofreforms has given way to an all-round cautiousness on virtually all fronts in the next phase. Alsoweaknesses in implementation capacity need to be addressed if the absorption of concessionalresources is to rise substantially and the economy is to move to the "frontier" of the balancebetween stabilization and growth.
32. Strengthening implementation capacity deserves very high priority, the more so onaccount of decentralization policies that have made capacity at the Regional, zonal and "woreda"levels more salient. But at the central level also implementation capacity is likely to become amore important constraint as the demands of center-regional coordination rise; as theovercoming of infrastructural bottlenecks acquires greater relevance; and as SIPs in the socialsectors are implemented. The increase in the importance of the economic role of Regionalgovernments also requires careful attention to its implications for macroeconomic management.
33. The priorities that we see and the benchmarks for reforms are indicated more specificallyin the attached matrix. In interpreting them, it is worth bearing in mind that Ethiopia is not yet atthe policy frontier of some of its neighboring countries or of low-income transition economies,notably with respect to the foreign investment, private sector development, trade and exchangeregimes. Also worth emphasizing is the fact that our analytical work and associated policydialogue are at a formative stage in several areas. Important tasks such as the studies on exports,financial sector, poverty and WID are nearing completion while the policy notes, study tours andan integrated economic report are yet to happen.
34. The IMF also has an important contribution to make in these areas. The Fund hasprovided support to a series of stabilization programs and approved an ESAF arrangement inOctober 1996.
V. BANK ASSISTANCE: PAST LESSONS AND FUTURE RATIONALE
Past Assistance and Lessons
35. During the nearly two decades of civil war, the Bank's assistance program in Ethiopiawas rather modest. After the change in regime, the Bank provided increased assistance directedinitially at post-war reconstruction and the transition from a centrally planned to a marketeconomy, including a structural adjustment credit (SAC), a recovery and rehabilitation projectand work on PFPs in collaboration with the Fund. The last CAS in May 1995 had envisagedcontinued SACs but, in the event, balance-of-payment support was not needed from the Bankafter Fund and EC financing. Attention has shifted of late to the preparation of sector investmentprograms (SIPs) in education, health, and roads, as well as projects in agriculture and energy.However, we have remained very closely involved in a wide-ranging policy dialogue. There isgreat demand from the Government for our non-lending assistance as a "knowledge bank",
Ethiopia CAS 11
including notably through public expenditure reviews (PERs) and a series of studies related toprivate sector development where the dialogue has intensified.
36. Past assistance is discussed further in Section VI, where it is related to the proposedstrategy under each of the "clusters" of activities distinguished there. Some general lessons areas follows.
37. The restructuring of several projects not only reflects the changed priorities of the newregime but also overly complex project design. Relatedly, inadequate attention was paid in somecases to procurement and disbursement matters, including familiarizing those responsible forproject implementation with Bank procedures. This, in turn, reflected a tendency at times to payinsufficient attention to implementation readiness, capacity building and borrower ownership orinvolvement in project preparation. These lessons have led to the emphasis on sector investmentprograms (SIPs) in the assistance strategy outlined below. The SIPs also reflect the lesson thatour past failure to ensure that projects are always located within a sound sector policy andexpenditure framework made them less likely to contribute to lasting success. Greater assistancein implementation, including notably through helping to build implementation capacity, is also toreceive attention through strengthening our field presence in this area, inter alia, by appointingan Operations Adviser and a SIP Specialist in the Resident Mission.
38. Another area which did not receive sufficient attention in our past assistance was high-quality analytical work as a basis for advancing our policy dialogue. Only very recently have webegun to increase the resources devoted to such "knowledge" assistance. This promises to be ahigh reward activity. The Government is open to learning lessons from the experience of othercountries but very keen to have it effectively translated to the Ethiopian context. One might evengo so far as to say that there is a resistance to policy advice that is perceived as emanating fromgeneral nostrums. We have also learnt that the style of dialogue and patience are very important.T'he process of deliberation and consideration of policy options can be, at times, slow and it issometimes important to avoid getting into a stalemate too soon.
Rationale of Proposed Assistance Strategy
39. The assistance program proposed in the following section is predicated on theGovernment's acceptance of the Bank as an important strategic partner and on exploiting whatwe consider to be a crucial juncture in Ethiopia's history which offers a real opportunity to putthe economy on a path of sustained rapid growth. We not only support the Governments' goal ofdoubling per capita income in 15 years but are of the view that it is not an impossible goal, evenif ambitious. That is as it should be: with just about the lowest per capita income in the world,arguably there is no other country where economic growth is more important for redressingpoverty.
40. The attention to details of policy design and implementation that are required forachieving the growth target and the Government's demand for the Bank's policy analysis meansthat the "knowledge bank" will work in close tandem with the Bank Group qua financier. Ourinvolvement in policy reforms, even without adjustment lending, combined with our closeworking relationship on annual public expenditure reviews and emphasis on support for sectorinvestment programs implies that the impact of our lending operations is unlikely to besignificantly diluted on account of fungibility. On the contrary, we expect the impact of ourassistance to exceed the sum of its lending parts.
12 Ethiopia CAS
41. In addition to these matters, some of the considerations that should be borne in mind inarticulating a strategy of assistance to Ethiopia have to do with some distinctive physicalcharacteristics of the country. Its large spaces are so poorly physically integrated because ofacute infrastructural shortcomings that reaching the poor with targeted interventions andintegrating product and factor markets can be exceptionally difficult, as highlighted in the Boxon poverty. Moreover, the country needs to resolve politically complex riparian issues fordeveloping what is perhaps one of its greatest natural assets, viz. the waters of the Nile. Themore so on account of the very considerable potential for raising agriculture yields and powerproduction in Ethiopia. We are not proposing any direct assistance for the exploitation of theNile in the period covered by this CAS. There are indications that a window of opportunityexists to find solutions to the long-standing impasse between the riparians regarding acoordinated development of the Nile. We have been asked by the Nile Basin Council ofMinisters to coordinate international assistance for the Nile River Basin Action Plan, whichseeks to promote such development. This could lead to win-win solutions for key riparians thatwill create significant development opportunities for Ethiopia.
42. We are also not planning any assistance specifically directed at mining. In the case oftelecommunications, while we do not propose any lending, we are working on a policy notewhich focuses on the need for increased reliance on the private sector to finance serviceexpansion and suggests options for an even-handed approach towards urban and rural areas.Other areas where we would not lend involve difficult trade-offs between more lendingoperations to alleviate poverty directly by developing human resources, on the one hand, and theneed not to spread our resources and efforts too thinly, on the other (see below).
43. The choices made in formulating the assistance strategy outlined below are informed bywhat other donors are doing. A notable case is that of an early warning system pertaining todroughts and food insecurity. In our view, this is amongst the highest priorities, particularly forthe poor, but we are not proposing any assistance because of the active role that USAID and ECare playing. In particular, we are working closely with the EC, with Ethiopia having been chosenas one of the countries for intensive collaboration between the EC and the Bank. Donorcollaboration in general is expected to be exceptionally close in Ethiopia in light of the heavyemphasis on SIPs in the proposed strategy. The education and health SIPs were the subject ofspecial sessions at the last CG meeting in December 1996 which was held in Addis Ababa.
VI. BANK GROUP STRATEGY
44. The proposed assistance aims to reduce poverty both directly and by promotingsustained economic growth, notably by creating an environment conducive to rapid privatesector and export development. This will be achieved through four clusters of activities: (i)policy and capacity; (ii) infrastructure; (iii) sources of growth; and (iv) poverty and humandevelopment.
Policy and Capacity
45. The realization of the target of annual GDP growth of the order of 7-8 percent that isrequired to achieve the Government's goal of doubling per capita income by 2012 implies twosets of necessary, if not sufficient, across-the-board, economy-wide conditions:
Ethiopia CAS 13
* Maintenance of macroeconomic stability and acceleration of private sectordevelopment, and hence increases in private investment, savings and exports, and inthe fiscal space that will be created for what the public sector should do.
* Improvements in capacity for implementing projects and policies.
46. In these areas, our base case assistance will be primarily in the form of non-lending:ESW, policy dialogue and assistance with implementation. Lending will play an important butsecondary role, at least in the sense of being predicated on success in our other forms ofassistance. Since the last CAS, and more significantly since July 1996, the dialogue between theGovernment and the Bank in the area of private sector development has improved. The CountryTeam has increasingly focused on persuasion and knowledge dissemination. This approach hasresulted in several major pieces of ESW in FY97, including: the first comprehensive financialsector study since 1990 when the old government was still in power; the first FIAS report onpromoting foreign investment; and the first-ever Bank study on export development in Ethiopia.Further, the Government has agreed to the Bank's proposal of a study tour on power andtelecommunications for policymakers and the Bank is also drafting a policy note on major policyoptions in telecommunications for the Government's consideration. In addition, the IFC hasrecently established an office in the Bank's Resident Mission, as part of IFC's Special EnterpriseFund initiative. MIGA has been assisting the Government to attract foreign investment in themining sector. These represent significant steps toward opening up the policy dialogue in theseimportant areas. Another key component is the planned study on regionalization. The study,together with PERs and sector projects, will address one central issue, that is the management ofpublic expenditures, particularly on infrastructure and the social sectors, in the context ofdecentralization.
47. The high case lending program contains three operations primarily directed at the"policy and capacity" set of objectives, viz. Export Development, Economic Management, andFinancial Sector. These all follow from major ESW tasks and policy dialogue, including asubstantial input from FIAS. All the above operations will contain a high policy content,although they will not necessarily be adjustment credits.
48. Activities in support of improving the implementation of projects and policies includethe appointment of an Operations Adviser, as well as a coordinator for the education and healthSIPs, in the Resident Mission. Indeed, the absence of a significant improvement in portfolioperformance will be a trigger for moving to the low case of total lending.
Infrastructure
49. The second cluster is based on the recognition that, to sustain the GDP growth target,especially beyond the next few years, as well as to alleviate poverty more directly, a major effortis needed to ease the severe infrastructural constraints. Our two biggest actions in this area are:
* Support to an ambitious and vital sector investment program to expand the roadnetwork, by 80 percent in 10 years, and to improve the proportion of the network ingood condition from 45-50 percent to 68 percent. This will serve to ameliorate thefragmentation of markets and isolation that work so much to the disadvantage of thepoor and improve their access to social services and to food distribution in times ofdrought.
14 Ethiopia CAS
Energy projects, which will also support both growth and distributionalobjectives-though their impact on the latter will be rather less immediate than inthe case of roads-as the rural electrification component will stimulate off-farmactivities and broad-based growth. Per capita electricity consumption in Ethiopia isone-half that in Mozambique and one-sixth that in Kenya; the shortage of electricityis a major impediment to industrial growth.
50. Both these will represent large lending operations. In the case of roads, preparation of aproject in support of the government's SIP is in an advanced stage of readiness. This operationwill support a sector-wide expenditure program based on a coherent sector policy framework andwill involve close donor coordination and capacity building. We expect to present ahydroelectric power project to the Board in the second quarter of FY98, followed by a powerdistribution project early in the next fiscal year. We will also initiate analytical work on thehydroelectric power and irrigation potential of the Nile and the opportunity cost to Ethiopia ofnot tapping it. This will be linked to Basin-wide work that we will be doing in FY98 which willpromote international support to a limited number of activities within the Nile River BasinAction Plan, to maximize the opportunity for riparian cooperation.
51. The Bank's past work in infrastructure has provided support for the preparation of thesepr9jects. The vital Road Rehabilitation Project (US$96 million, FY93) was to repair the keytransit route between Mille and the port of Assab. The Transport Sector Memorandum(December, 1996) articulated the sector policy reforns and development strategy. The PERsprovide a framework for adequate funding of operations and maintenance for roads. To preparefor the road SIP, the Bank assisted the Government to prepare the SIP strategy and frameworkwhich were presented to a successful donors' meeting in January 1996.
52. Reforms already underway include: strengthening the Ethiopian Roads Authority (ERA)and its regional partners; increasing the involvement of the private sector in road maintenance,rehabilitation and construction; increasing road users' contribution and participation through aRoad Fund; abolishing the public transport associations system; and liberalizing transportcharges. Remaining measures, which the road SIP will support, include: privatizing parastatalfreight transport enterprises and remaining relief fleets; and amending the legal framework toclarify the role of transport associations and facilitate the activities of private entrepreneurs.
53. On energy, the Bank/ESMAP's Energy Sector Assessment (April, 1995) providesoptions and strategies for energy development in Ethiopia, and provides an analytical base forlending. The Government recently raised tariffs and proposes to raise them again tocommercially viable levels. It has also taken measures to commercialize the electric utility. On-private sector investment, the Government has accepted the need in principle but is movingcautiously in defining the exact way in which such investment would occur. To date this has notbeen a pressing issue because of the limited interest shown by private investors.
Sources of Growth
54. The third cluster will focus on the leading growth sectors or areas, emphasizing thosethat have the potential to make a major contribution to both economic growth and povertyreduction via a pattern of growth that is broad-based and "pro-poor":
Ethiopia GAS 15
* Agriculture and environment, including agricultural research and training, foodsecurity, land degradation, and medicinal plants.
* Export development.
* Small -and-medium enterprise (SME) development.
55. In this cluster, lending and non-lending play an equally important role, with major ESWtasks, particularly in the first two areas, leading to lending operations. The positive povertyimpact of these activities will include the close link between agriculture and food security andthe likely labor intensity of exports and SMEs, especially in urban areas. Export developmentmay be deemed to contribute in roughly equal measure to this cluster and to the "policy andcapacity" cluster. This is one of the areas in which IFC's new field presence will help focusresources on both policy advice and investment assistance.
56. The proposed assistance is built on past and ongoing Bank programs. In agriculture,supporting environmentally sustainable agricultural development and productivity growth iscentral to accelerating economic growth and reducing poverty. Widespread famine has in thepast exacted a devastating human toll. The need to ensure that adequate food supplies areavailable in drought years is a heavy burden on the central and regional authorities. The Bankhas assisted the Government to prepare a comprehensive food security policy paper, which waspresented to the CG meeting in December 1996. Past Bank operations have supported policyreforms including deregulation of commodity prices (except for a few essential goods), freeingagricultural marketing, and abolishing all export taxes (except for coffee) and all exportsubsidies. The current study on Agricultural Sources of Growth (draft) has identified futurereforms which would ensure the sustainability of agricultural growth, including measures toincrease agricultural yields, development of the livestock sector, and increasing security of landtenure.
57. A small-scale irrigation project was recently completed and small-scale irrigationschemes feature prominently in the Ethiopia Social Rehabilitation and Development Fund(ESRDF). The ongoing Seeds Project and Fertilizer Project (both FY95) were designed toenhance agricultural productivity and food security through a considerably wider use ofimproved seeds and fertilizers, two of the most critical yield-enhancing inputs. Landdegradation, principally caused by deforestation, soil erosion, and over-grazing, depressesagricultural yields and contributes to chronic food shortages. To address environmentallysustainable growth, the Bank worked with the Government to complete the Forestry Action Plan(1994) which, together with the National Conservation Strategy, have fulfilled IDA'srequirements for a National Environmental Action Plan. GEF projects to reverse landdegradation and to collect and conserve medicinal plants are planned, the latter to take advantageof Ethiopia's wealth in biodiversity.
58. One. central element of Bank assistance is to support the rapid expansion of Ethiopianexports, which probably constitutes the country's most central economic challenge afterproviding food security. Ethiopia has the lowest exports per person of any country in the worldtoday. Moreover, real exports (measured by the MUV index) are lower now than they were in1973. The country has historically been inward-looking in its economic orientation. It now hasno access to the sea except through ports controlled by other countries. Road links with the restof Africa have been grossly inadequate, and rail links almost non-existent. However, it is crucialthat the country rise above and overcome these adversities. A swift growth of exports is urgent,
16 Ethiopia CAS
if the country is to free itself from permanent dependence on large inflows of foreign aid and atthe same time obtain the imports of machinery, equipment, materials, components, spare parts,technical advice, and consumer goods that rapid industrialization and continued agriculturalexpansion will require.
59. The ongoing Export Development Study (draft) has identified critical constraints and putforward a comprehensive strategy for rapid expansion of natural-resource-based commodities,such as coffee, hides and skins, and minerals, as well as of manufactured exports, starting withsimple products by taking advantage of low-cost labor. The mission (April, 1997) wasprivileged to present preliminary findings to the Prime Minister, who shared with the mission theGovernment's strategic thinking on export development. The discussion focused on how tooperationalize the findings, beginning with a dissemination strategy for the report. This isexpected to lay an analytical and operational foundation for a possible project in exportdevelopment.
60. The Business Development Action Plan (January, 1995) focused on small and mediumenterprise development, which has paved the way for preparing a project in support of small-and-medium enterprises.
Poverty and Human Development
61. For more direct and immediate benefits to the poor, as well as an essential element of thefoundations for sustained growth in the longer term, we propose a two-prong strategy:
* First, support to sector investment programs (SIPs) in education and health.
* Second, a set of projects in the areas of: (a) population; (b) gender; (c) foodsecurity and (d) water supply. Other high-priority interventions in this categorypertain to nutrition, early childhood development and urban poverty (especiallysanitation and labor market skills) where resource constraints force us to makedifficult choices of abstaining from providing assistance. If other donors are notforthcoming in these areas and resources permit, we would wish to reconsiderallocating some of the IDA resources to these interventions.
62. In this cluster, our contribution will go beyond simple provision of financing to thedetails of appropriate design and effective implementation, which are of particular import inthese areas.
63. A cross-cutting concern that will run through much of our proposed activities is that ofgender. Our actions will be informed by the major ESW task nearing completion. In particular,women's health and education are to receive special attention in the two social sector SIPs, inpower distribution and in agriculture and environment projects; and the population project wouldbe of special importance for them. In addition, we propose a free-standing operation addressingsome high priority gender issues that are not easily dealt with in the course of other activities.
64. As part of the preparation for the Education and Health SIPs, the Bank and theGovernment prepared a set of social sector studies (funded by a PHRD grant) which was thebasis for the Social Sector Note (June, 1997). The studies covered three themes: a baselinemulti-sector household survey for collecting essential data on income, expenditures, and needs at
Ethiopia CAS 17
the household level; cost-effectiveness and financing of health, education, and family planning;and institutional assessments and capacity building, including assessment of the role of theprivate sector and NGOs. The Bank is also preparing a study on Women in Development.
65. The capacity of the Government to implement the Education Sector DevelopmentProgram (ESDP) is a concern accentuated by decentralization. Achieving the five-year goals inthis environment (such as attaining a 50 percent gross enrollment ratio) will be a challenge. Thelonger-term goals, such as universal primary education by 2015, will be even more challenging.The ESDP spells out in principle how the goals can be reached. The main policy issues to beresolved include our disagreement with the Government's plans to expand public vocationaleducation and training, the continuing discussion on the modalities of commercializing the text-book parastatal, and the need to manage the process and consequences of introducing locallanguages of instruction.
66. On health, there has been a gradual but significant reorientation of the budget since 1992towards facilities outside Addis Ababa, away from hospitals and towards increased purchase ofsupplies. The Health Sector Development Program (HSDP) continues this trend with itsemphasis on preventive as opposed to curative care. Policy dialogue in the preparation of theprogram will focus on enhancing implementation capacity, improving the management andplanning of pharmaceuticals and drugs, encouraging the private sector to be more active in thisarea, and the usefulness of introducing nutrition and early childhood programs.
67. As part of the preparation of a food security strategy, the Government presented a paperon the subject at the last CG meeting (December 1996). The Bank assisted in the preparation ofthe paper and will continue to provide any analytical support required for the finalization of thestrategy. As emerges from the analysis of poverty, insecurity, especially with respect to food,remains of special salience for the poor in Ethiopia, even in years of good weather.
68. Past Bank work in the water sector includes an ongoing Water Supply and RehabilitationProject (FY95) which is assisting capacity building, policy formulation, and rehabilitation ofexisting systems and will ensure long-term financial viability, in line with the Government'sregionalization policy. Policies introduced include institutional reform, development of aregulatory framework and water resource management strategy, and increased cost recovery.The dialogue in the coming months will focus on the timing of implementing full cost recovery,more active private sector participation in the sector, and actual implementation of a capacitydevelopment strategy which is under study.
The Sum
69. In sum, what we are proposing is a broad-based strategy of support on many fronts butwith a clear focus on the aim of doubling per capita income in 15 years and poverty reduction.The strategy contains a heavy dose of both lending and the assistance of the "knowledge bank".Given the policy content of our assistance and the quality of the policy dialogue we have withthe government, we would like to continue to examine the option of some of our lending taking amore explicit policy-based form and being quick-disbursing. This could either be for budgetarysupport, in case of a sufficiently enlarged capacity to accelerate the redressal of the severeshortages of public goods or, if a BOP need arises, for BOP support. In case we take this route,we propose doing a CAS Update or Note before proceeding. The operations that would
18 Ethiopia CAS
particularly lend themselves to transformation to this form of lending are the ExportDevelopment, Economic Management and Financial Sector credits or some combination thereof.
70. In support of the strategy sketched above we are aiming for a lending program of at least$1,200 million over the three years FY98-2000. This assumes that our renewed efforts tostrengthen project implementation will bear fruit, as will our policy dialogue. In case of evenfaster progress in policy reform, bearing on the nexus of private sector development, foreigninvestment and exports, and in building capacity to implement effectively both policies andprojects-notably improved portfolio performance-we envisage a high case of some $1,650million. In the unlikely event of a significant slowing down in the recent pace of reforms and theabsence of portfolio improvement, we suggest a reduction to a low case of around $750 million,focusing on smaller and easier-to-implement operations in the poverty and human developmentcluster and in infrastructure and agriculture.
VII. MATRIX AND TRIGGERS
71. The matrix (Attachment 1) and Annex A3 provide further details of how we propose toassist Ethiopia. The Bank actions in the matrix contain the full range of tasks envisaged for thehigh case with a lending program of $1,650 million over FY98-2000. In the base case of lendingamounting to some $1,200 million, we see each of the three lending operations under the "policyand capacity" cluster being either entirely eliminated (Financial Sector and Export Development)or substantially reduced to a narrower focus on capacity building (Economic Management). Thepreparation of one or other of the follow-up operations to the three sector investment programs-education, health and roads-is also likely to slip and the size of the Road SIP reduced. Inaddition, the water supply and food security projects will be eliminated. In the low-probabilitycase in which lending shrinks to $750 million, we propose trimming the lending operations underthe "poverty and human development" cluster to remain within the capacity to implementeffectively, the elimination of the power distribution project and substantial further reductions inthe size of the road SIP and in the number of operations under the agriculture sub-cluster.
72. In defining the "triggers" which will determine movement between the three cases, itshould be borne in mind that the current low level of lending does not mean that Ethiopia'spolicies in recent years have been such as to justify low case lending. Developments since thelast CAS have led to the proposed base case (US$400 million per year) which is higher than thatin the last CAS (US$250-300 million per year) but still modest in per capita terms. The countrywas in the midst of the first-ever national elections when the last CAS was presented to theBoard (June, 1995). Since that time, while the new administrative structure was gradually beingestablished by the regional governments, policymakers have been reexamining the Government'sstrategies and programs. As a result, the pipeline of traditional investment projects has beenweak as a major proportion of the proposed individual project lending, which had been agreedwith the Transitional Government of Ethiopia and was reflected in the last CAS, was eventuallyreplaced by sector investment programs. The Bank has assisted the Government in preparing theSIPs, including convening the successful road SIP donors' conference in January 1996, the CGin December 1996 when the Education and Health SIPs were presented, and a series of meetingsof donors.
73. The essential difference between the base case, which is what we are in, and the highcase, which is what we hope to be in, is the rate of progress of reforms which is a function of thepace of progress in our policy dialogue and the capacity to accelerate reforms. In the base case
Ethiopia CAS 19
what we envisage is that those areas on which there is agreement on the speed and sequencing ofreforms, especially as reflected in the PFP, will be effectively implemented as will those wherefurther dialogue and analysis have made it opportune and important to move quickly.Improvements in implementation capacity as reflected in disbursement ratios for the existingportfolio also serve as a criterion . The high case is predicated on a breakthrough in those areaswhere we are furthest apart from the Government or where the constraints to implementation areparticularly acute. The "Triggers" for determining which case will apply are outlined in Box 3.
VIII. EXTERNAL ENVIRONMENT
74. The potentially most devastating exogenous risk that Ethiopia faces, and one that herpolicymakers are most concerned with, is that of a severe drought. In popular perceptions, thisland of rich agricultural potential is all too commonly associated with famines. More moderateor localized adversity in weather conditions can also lead to significant pockets of foodinsecurity even when overall food availability is not too stringent. This reflects the inadequacyof transport and associated fragmentation of markets. Below-average rains, which occur everythree years on average, can have a substantial impact on economic growth and exports, given theheavy dependence of both on agriculture. The high level of international reserves (4-6 monthsworth of imports) maintained by the Government; the EC and USAID assistance for an earlywarning system; and our proposed operations in roads, agriculture and food security; all aremotivated in large measure by the need to manage and minimize the consequences of this sourceof vulnerability.
75. The high concentration of exports in coffee-some 62 percent of merchandise exportsand 32 percent of total export receipts-make coffee prices another important vulnerabilityfactor in the economy's growth and balance-of-payments outcomes.
76. Ethiopia is also a heavily-indebted country as indicated by the following estimates,which exclude the ruble-denominated debt owed to Russia. External debt outstanding amountedto 83 percent of GDP in FY96. The stock of debt at end-1995 was 425 percent of exports in netpresent value terms. Scheduled debt service amounted to about 34 percent of exports of goodsand non-factor services and 26 percent of government revenues in FY96. Notwithstanding therecent Paris Club rescheduling on Naples Terms and ongoing discussions on the resolution ofEthiopia's ruble-denominated debt problem, the extemal debt burden may well remainunsustainable. A stock-of-debt operation under the HIPC initiative is receiving consideration. Adebt-sustainability analysis is to be undertaken jointly by the Government, the Bank and theFund.
Since the disbursement ratio refers to the flow of disbursements during a year to the stock ofoutstanding commitments at the beginning of the year, it can be sensitive to the precise timing of Boardapprovals of projects, e.g., large lending operations approved towards the end of a fiscal year are likely todepress the disbursement ratio in the following year on account of the usually slower disbursements in theinitial phase of a project. Hence, the disbursement ratio target pertains to the existing portfolio but we willalso pay close attention to disbursements in future operations though, of course, any targets for them willdepend on the specifics of the new operations.
.
20 Ethiopia CAS
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Ethiopia CAS 21
77. Bank and IMF staffs' understanding of the preliminary agreement reached betweenRussia and the Chairman of the Paris Club in the context of the recent Denver Summit has thefollowing implications for Ethiopia's ruble-denominated debt. After bilateral reconciliation ofdebt data between Russia and Ethiopia, there will be: (i) an upfront discount of 80 percent ofthis debt; and (ii) the remaining 20 percent will be subject to treatment consistent with NaplesTerms i.e., Russia will forgive up to 67 percent of the face value of this portion of the debt andapply an appropriate market interest rate to the remaining 33 percent. The combined effect ofthese two sets of actions will be a debt reduction of 93 percent in net present value terms. TheParis Club is working with the Russian authorities to finalize the implementation arrangementsas soon as possible. Thereafter a formal announcement will be made.
78. Ethiopia's external financing is likely to be predominantly from official sources duringthe foreseeable future. Attracting significant levels of non-debt creating inflows, such as foreigndirect investment, offers a prospect for reducing this dependence over time. Other externalfactors that impinge on Ethiopia stem from the political volatility in two of its neighbors, Sudanand Somalia, and are discussed below in the section on " Risks".
IX. RISKS
79. The political risks do not seem to us to be high in the foreseeable future, at least in termsof their likely impact on the economy. The principal sources of such risks are: (a) the tensionswith Sudan worsening to the point of armed clashes or acts of sabotage; (b) the political chaos inSomalia spilling over into the border region of Ethiopia; and (c) a slowing down of the progressin improving human rights and building democratic institutions or opposition activities that havea negative impact on the country's image and hence ability to mobilize concessional aid. Overthe longer term, the management of the political risks acquires greater significance.
80. In the near term, a higher set of risks is likely to stem from the limitations of institutionalcapacity. Thus, notwithstanding our efforts to build capacity, the ability to implement projectsand policies effectively and speedily may constrain the achievement of the goals of theGovernment's economic strategy and of our assistance. Part of the problem stems from theattitudes of a long-entrenched bureaucratic tradition, in some respects going back to the days ofthe monarchy, which sees its role much more in terms of "control" rather than "facilitation" ofprivate initiatives. There is also the inevitable risk of slippages in economic management but, inour judgment, it is unlikely that these will be of a sufficiently serious nature to put us in the lowcase. The risk of the high case not being realized is, of course, ipsofacto, a significant one.
James D. WolfensohnPresident
By: Gautam S. Kaji
Attachments
Washington, D.C.August 19, 1997
ETHIOPIACountry Assistance Strategy
Attachments
Attachments:
1. CAS Matrix
2. Economic Scenarios: The Base Case and a Higher Case - Selected Indicators
3. Ethiopia Portfolio: Overview and Improvement Strategy
4. Standard Annexes
ETHIOPIA: COUNTRY ASSISTANCE STRATEGY FY98-00
........................ ... ~~~~~~~~~~~~~~~~~~~~~~~~~........
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
GDP growth of 7-8% per annum.Maintain a policy (i) Stabilization (i) Stabilization (i) Stabilization (i) Stabilizationframework conducive to * Remarkable success with * Strike right balance between financial * Maintain solid performance on - PFP update andputting the economy on a macroeconomic stability raises questions policies to achieve stability with rapid macroeconomic stability collaboration with the IMF.growth path of of reconciling enormous need for public growth and poverty reduction. * Inflation rate in single digits. * CEM7-8% that will double per expenditure on social sectors and * Increase utilization of grants and highly * Continue policy of no or limited recourse * PERscapita income in 15 years infrastructure with maintenance of concessional extemal assistance. to bank borrowing for financing the fiscal * PSD activities outlinedand substantially reduce stability and a sustainable debt burden * Seek eligibility for HIPC initiative: if deficit. Increase utilization of extemal below.poverty. Relatedly while raising public savings. do not qualify for that, obtain Paris concessional assistance for financing the - Debt sustainability analysisstrengthen the capacity to * Regionalization complicates task of Club reschedulings. deficit. for HIPC eligibility.effectively and flexibly macroeconomic management. * Increase reliance on private provision * Aim to maintain substantial intemational * Regionalization studyimplement policies and * Improved disbursement of concessional of social and infrastructural services. reserves; in case of adverse exogenous . Economic Managementprojects. A key element is assistance would ease fiscal constraint. * Clarify and smoothen functioning of shock, reserves not to fall below 4 months Projectthe development of the * As implementation capacity constraints financial relations between the Federal of imports (except when necessitated to * Study Tours and Policyprivate sector. are eased and economic growth is and Regional Govemments. prevent famines resulting from severe Notes on private provision
increasingly constrained by droughts). of services.infrastructural shortcomings, achieving * No recourse to public or publiclythe right policy stance for stability and guaranteed external borrowings ongrowth would become more challenging commercial terms.and require increased private provisionof infrastructure.
(ii) PSD (ii) PSD (ii) PSD.Private sector decimated by etatist * Remove regulatory barriers to entry and * Relax investment code restrictions. * CEM
policies of previous regime requires lower costs of doing business. * Strengthen facilitation capacity of national * Study Tours to countriesmore help to accelerate revival. * Liberalize investment code to facilitate and regional investment authorities. with little or no regulatory
* Despite some progress, regulatory domestic and foreign investment. * Eliminate sector ministries' duplication of barriers to entry.regime remains overly complex and a * Ease restrictions on foreign currency regulatory functions. * Follow-up to FIAS study.barrier to entry. transactions. * Streamline, deregulate private investment * Economic Management
* Lack of clarity of land tenure constrains * Liberalize trade regime. licensing and approval. Projectfarming. * Provide security of land tenure . Complete 2nd round divestiture of 50 PEs. * Financial Sector Note
* Urban land auctions recently introduced * Liberalize access to land Accelerate privatization to cover larger * Financial Sector Projectbut not functioning well enough. * Accelerate privatization. PEs in the tradable sector. * TA in land lease policy
* Private investment and savings still * Improve modalities of EPA privatization design andremain too process. implementation.modest. * Simplify/liberalize foreign exchange
* Trade and foreign exchange regimes bureau operations.need further liberalization * Eliminate foreign currency declarations
* Financial sector not sufficiently for visitors.developed; in particular constraint of * Liberalize export proceeds retention.tenn credit and micro credit.
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
*Foreign investors not encouraged . Improve functioning of financial sector. * Liberalize current account. * Implementation assistancesufficiently. Concems with natural * More flexible interest rate policy. * Remove ban on non-guaranteed foreign with respect to recentlymonopolies and "urban bias" of potential * Attract foreign participation in banking borrowing by the private sector. approved IDF grant toforeign investors exaggerated and system. * Reduce variance of import tariffs and strengthen privatizationinsufficiently addressed by tax/subsidy * Strengthen central bank. liberalize import licensing. agency and acceleratepolicies rather than direct controls. * Promote exports (as sketched below) * Substantial increase in private investment. privatization.
* Exports are a vital ingredient for the including measures pertaining to * Revise structure of interest rates, widening * Policy dialogue at highestgrowth strategy; their promotion is foreign exchange and trade loan-deposit spreads and allowing banks levels and policy notes.closely intertwined with PSD. (More liberalization. greater discretion in setting rates. * Expand IFC involvementsspecific export issues are noted below * Remove ceilings on interest rates for especially if debt financingunder "Sources of growth"). micro credit that are so low as to prevent for the private sector is
access. permitted.* Open at least some banking activities to . Export Development Study
foreign banks and allow them to make and Project (see below).equity investments.
* Reform state-owned banking sector.* Substantially relax restrictions on foreign
investments, including in infrastructure.* Streamline leasehold access - adopt 90 day
limit for approvals. Increase frequency andefficiency of lease auctions in urban areas.
. Extend lease auction system forcommercial farming and tourism
* Facilitate mortgageability andtransferability of lease titles.
(iii) Capacity (iii) Capacity (iii) Capacity (iii) Capacity• Antiquated civil service is reasonably . Strengthen capacity for effective design * Adopt comprehensive action plan for * Follow-up discussions with
competent by the standards of low- and implementation of policies and addressing capacity constraints. Prime Minister by workingincome countries and fairly honest. But projects. * Launch campaign to raise awareness in the closely with thedeep-seated attitudes favor "control" * Communicate better the Govemment's bureaucracy of the reforms program and to Government to draw upover "facilitation" of private activities. economic strategy. change attitudes. comprehensive program for
* Insufficient attention to details of design * SIPs to serve to economize and * Effective implementation of the grant for across-the-board capacityand implementation of policies and strengthen capacity. building capacity in the PM's office. building.projects. * Periodic reviews to focus on realization . Meeting of the "Project Managers Club" * IDF grants for building
* Inadequate understanding at the lower of agreed project objectives and targets; held on a quarterly basis. capacity, including civillevels of the thinking of the top political identify and remove bottlenecks. . Disbursement ratio on existing portfolio service reform.leadership and the spirit of the reform * Improve coordination between the rises from around 14% in FY97 to 17% by * Establish post ofagenda. central and regional governments. FY98; 18% in FY99 and 21% in FY00. Operations Advisor in
* Lack of adequate systems of project . Complete the ongoing restructuring of Resident Mission.management. and excessive emphasis on projects in FY98. * Co-chair (with MEDAC)budget control rather than on the * Consistency between the policies meetings of the "Projectrealization of project goals and targets enunciated and their implementation in Managers Club".
* Decentralization of responsibilities to practice. * Support to SIPs, includingregional govemments increases the synchronizing as far asimportance of capacity constraints at the possible implementation I;Pregional and sub-regional (zonal and arrangements amongst (IQWoreda) levels. Also need to enhance donors. iability to handle effectively fenancial dnrrelations between the central and Cregional govemments. tA
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
* No IDA financed projects to be rated * CPPR and its follow-up.unsatisfactory on either development * Provide adequate resourcesobjectives or implementation (currently 3 for supervision.projects are so rated). * Conduct workshops and
* Faster utilization of concessional aid (at provide training onleast 75% grant element) not to be procurement,constrained by financial programming disbursements andtargets (either fiscal or BOP current auditing.account) * Avoid over-complex
project design and havethem ready forimplementation by the timeof Board presentation.
* EDI courses in the field onstrengthening project andpolicy management.
* Capacity building to berecurring theme of projectdesign, especially for SIPs.
* Economic ManagementProject.
* Regionalization study
............................................
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
Strengthen physicalinfrastructure of transport, * Infrastructural deficiencies compounded * Adequate public expenditures. * Road network to increase by 80% in 10 * Roads SIPenergy and telecommuni- by neglect and destruction during civil * Optimize reliance on private sector for years and proportion in "good" condition * Energy 11 (Gilgel Gibe)cations to sustain economic war. service provision to create more fiscal from 45-50% to 68%. * Power Distribution Project.growth target. * Lowest density of roads in Africa, per space for what the Govemment should * Power generation to increase by 644 Gw/h * Policy Notes and StudyRoads, in particular, are capita availability of energy and be doing. and dependable capacity by 184 Mw by Tours.needed for providing the telecoms also well below African * Strengthen capacity of public utilities 2002, when the Energy 11 project is * PERs.poor with access to markets, averages. engaged in infrastructure provision. completed. * Nile studysocial services, and targeted * Insufficient operations and maintenance * Appropriate cost-recovery and * Meet 100% of new connections requestsinterventions (especially funding. mechanism for monitoring the once the Power Distribution Project isdisaster relief) and to * Public utilities and agencies face performance of public utilities. completed.facilitate their participation managerial, technical staff and cost- * Enhance transparency of regulatory * Ease restriction on private investment inin both economic growth recovery/ pricing constraints. mechanisms for tariff settings. power and telecommunications.and direct poverty * Insufficient involvement of domestic and * Strengthen supervising capacity and * Establish Road Fundalleviation measures - 75% foreign private sector. tax/subsidy policies to minimizeof farms more than half a reliance on controls and prohibitions.day's walk from nearest * Strengthen policy, planning androad financing functions in sector ministries. eII
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
l Sources of growth studyFocus on areas/sectors that (i) Agriculture! rural development (i) Agriculture/rural development (i) Agriculturel rural developmentwill be crucial to achieving * Given the weight of agriculture in output * Expand extension and agricultural * Trend agricultural growth rate of 5%. (i) Agriculture! ruralthe GDP growth target and and employment, its development is research. * Increased use of fertilizer and improved developmentyield a pattem of growth vital for overall performance of the * tmprove efftcient functioning of seeds. * Ensure effcient/ effectivewhich will be particularly economy, including of industry and markets for inputs and outputs . Expanded domestic consumption and implementation of seedsconducive to the poor exports. including increasing the proportion of exports of livestock products. and fertilizer projects.sharing in the benefits of . Rapid agricultural growth possible with fo.b. or retail prices reaching farmers. * Reduce regional variance in food prices. * Agriculture/ruralgrowth. This entails special wider use of existing and new a Increase crop and livestock yields. * Reduce proportion of farms more than development studyattention to accelerating technology. * Clarify land-tenure rights and establish half-a-day's walk from nearest all-weather . Agriculture/ ruralgrowth in agriculture, * Further expansion of areas under rainfed market-based leasing systems to road from 75% to 50% over 5 years, and development Projectexports and small & agriculture has limits and can increase facilitate land allocation. 25% over 10 years. * Agriculture Research andmedium enterprises. soil degradation. . Develop and begin implementing Training Project.
.Very considerable potential for increased detailed plans for cost-effective . Food Security Project (seeirrigation. Even without adversely irrigation schemes with careful below)affecting lower riparians of the Nile and attention to their environmental impact. * Roads Project.also in the non-Nile sources of irrigation. * Free non-IDA resources forA wide range of options and scale of Nile investmnents.potential schemes. * Land degradation project
* Livestock/ mixed crop agriculture (GEF)presents growth opportunities in very * Medicinal plants projectpoor regions and serves to alleviate soil (GEF)degradation.
. Wide range of agro-ecological zonesoffer opportunities for diversification ofoutput and exports.
. Rich in biodiversity
(ii) Exports (ii) Exports (ii) Exports (ii) Exports. Substantial potential for raising exports . Further liberalization of trade and * Assure speedy access to free-trade status . Export development study
unutilized on account of long-standing foreign exchange regime, including for all direct and indirect exporters. * Export Developmentneglect of "outward orientation" in retention rights for foreign exchange . Provide easy access to preshipment export Projectdevelopment strategy and of earnings. finance (e.g., allowing import finance . FIAS study and follow-upinfrastructural bottlenecks. * Maintain competitive foreign exchange based on foreign commercial credits). on PSD
. Export proceeds retention, access to rate. * Remove hindrance to exports caused by . IFC to examine support forforeign loan finance and duty-drawback * Encourage private sector. export price "guidance" by the central export ventures.schemes and custom procedures are . Improve availability of export finance. bank (NBE).ineffectual or inefficient. . Provide quick access to land for exporters
* Inadequate availability of financing for (via improving land lease and supplyexporters. system).
* Segmentation of coffee production, * Put in place simplified procedures fordistribution, marketing and exporting various forms of export-oriented foreign/acts to dampen coffee exports. Ethiopian firm collaboration not limited to
* Exporters of manufactures need access to equity investment.inputs at world prices, to preshipment * Liberalize export restrictions, such asfinance, land and infrastructure. allowing free entry to all stages of coffee
*Price "guidance" by the National Bank production and exports. O inhibits exports. t
Key IssueiObjectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
(iii) Small and medium enterprises (SMEs) (iii) Small and medium enterprises (iii) Small and medium enterprises (SMEs) (iii) Small and mediumRealizing considerable potential (SMEs) * Rapid growth of SME sector, enterprises (SMEs)
constrained by overly cumbersome * Remove entry barriers for SMEs. * SME projectregulations, inadequate access to finance * Provide financing and training to * Support financial sectorand to underdeveloped business skills entrepreneurs. reforms pertaining to(after decimation of private sector in overly tight and rigidprevious regime). ceiling on micro-credit.
Reformn law on micro-finance institutions.
* Business developmenttraining.
Key Issues/Objectives Diagnosis Strategy/Actions Progress Benchmarks Bank Group Instruments
Improve human capital and * Lowest per capita income manifested in * Rapid economic growth with a pattem . Double per capita income over 15 years * Poverty Analysisprovide direct and wide-spread poverty. that accelerates benefits to the poor. led by agriculture, exports and SMEs and * Urban Market Studyimmediate benefits to the * Vulnerability to drought and extreme * Generate employment opportunities. improve infrastructure. . Education SIPpoor as foundation for food insecurity. * Ensure food security. * Commence implementation of a food * Health SIPsustained long-term * Exceptional locational variance in . Reduce malnutrition. security strategy. * WID Studydevelopment. incidence and depth of poverty reflecting * Increased emphasis on education. * Prevent famines, including by * WID Project
very inadequate infrastructure, especially * Improve health status. strengthening early warning systems. . Population Projectroads. * Improve women's status. * Primary enrollment ratio of 50% by 2002 * Water Supply Project
* Exceptionally high incidence of urban . Reduce population growth rate. (25% in backward areas). * Social Sector Notepoverty, reflecting in part, migration on * Achieve 70% primary health care * Assistance in finalizationaccount of dislocation due to civil war. coverage by 2002. of food security strategy.
* Educational attainments extremely low. * Child malnutrition to be reduced from * Food Security Project* Heavy burden of disease and high 60% to 30% by 2004.
mortality. * Contraceptive prevalence rate increase* Highest incidence of malnutrition in the from present 7% to 15-20% by 2004.
world. * Reduce male/female differential in* Gender bias manifested in, inter alia, educational enrollments.
school enrollment and labor force * Legal changes pertaining to women'sparticipation. status.
* Very high fertility rates (TFR), with verylow contraceptive use.
I
Economic Scenarios: The Base Case and a Higher Case -- Selected Indicators
Prel.Act. Est. BASE CASE HIGHER CASEFY96 FY97 FY98 FY99 FY02 FY05 FY98 FY99 FY02 FY05
Growth rate of real GDP at market prices 12.4% 5.6% 6.0% 6.0% 6.0% 6.0% 7.0% 7.0% 8.0% 8.0%Agriculture 17.5% 4.3% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.5% 5.5%Industry 8.5% 8.4% 8.5% 8.5% 8.5% 8.5% 13.2% 13.2% 17.5% 17.5%
Inflation 1/ 0.9% -6.3% 0.9% 2.2% 2.2% 2.2% 1.1% 2.7% 3.0% 3.0%
Growth rate of real exports 8.9% 25.1% 14.7% 5.6% 6.0% 6.0% 17.0% 6.3% 8.0% 8.0%Growth rate of real imports 29.0% 6.9% 3.9% 6.7% 6.0% 6.0% 4.6% 8.0% 8.0% 8.1%Import elasticity 2/ 2.3 1.2 0.7 1.1 1.0 1.0 0.7 1.1 1.0 1.0
Gross investment/GDP 3/ 20.5% 20.5% 21.0% 21.5% 22;1% 22.7% 22.0% 22.9% 28.0% 29.2%Non-government investment/GDP 13.1% 12.9% 13.3% 13.8% 14.2% 14.8% 14.0% 14.8% 19.5% 20.3%Goverunent investment/GDP 7.4% 7.6% 7.7% 7.7% 7.9% 7.9% 8.0% 8.1% 8.5% 8.9%
ICOR 1.30 2.91 3.41 3.45 3.62 3.72 2.90 3.10 3.40 3.60
BOP current account balance/GDP 4/ -9.7% -8.9% -9.1% -8.4% -8.8% -9.5% -8.8% -8.3% -9.1% -10.1%ReservesinmonthsofimportsofGNFS 6.4 5.1 5.2 5.0 4.7 4.3 5.4 5.1 4.5 4.2
Fiscal balance/GDP 5/ -8.3% -5.5% -5.0% -4.6% -5.0% -5.0% -5.3% -5.4% -5.0% -4.5%Total revenue/GDP 17.6% 17.5% 17.7% 17.9% 18.5% 19.0% 17.9% 18.5% 19.1% 20.0%Total expenditure/GDP 25.9% 23.0% 22.7% 22.5% 23.5% 24.0% 23.2% 23.9% 24.1% 24.5%
Total debt stock1GDP 6/ 82.6% 81.8% 78.9% 71.6% 59.4% 52.7% 78.3% 70.1% 56.3% 48.8%Scheduled debt service/exports of G & S 6/7/ 33.7% 43.3% 22.6% 22.5% 16.2% 11.2% 22.2% 22.0% 15.0% 9.9°/O
1/ Period average CPI represented as Addis Ababa retail price index.2/ Goods only.3/ Calculation based on nominal price data.4/ Excluding official transfers.5/ Excluding extemal grants. t6/ Excluding Russian ruble-denominated debt.7/ In FY97, the Ethiopian Airlines debt was paid off early. II
AttachmentiPage 1 of 3
Ethiopia Portfolio: Overview and Improvement Strategy
Current Status
1. During FY97, 14 IDA operations were under implementation. The onlyadjustment credit in that portfolio and two of the 13 investment credits closed during thecourse of the year. The total amount approved for the 11 credits that comprise theportfolio now was $796 million, of which $459 million remained undisbursed as of endJune 1997.
2. Historically Ethiopia's portfolio has been small, and though hampered by civilwar and weaknesses in policies and capacity, its performance has been reasonably good.Since the current Government came to power in 1991, seven new operations have becomeeffective. The Government has worked with the Bank to restructure the portfolio toreflect its priorities and to improve portfolio performance. Notwithstanding the increasedattention to portfolio issues, disbursement performance has been uneven and generallysluggish. This though reflects in large measure limited capacity and some transitoryfactors, including the restructurings which in the short term have had the effect ofslowing down disbursements while the restructurings are underway.
Portfolio Trends
3. Since FY94, the restructuring of five projects has been completed, and for another(Calub Gas) has been initiated. The number of operations has fallen from 18 in FY94 to11 by the end of FY97. A rather large energy project (Gilgel-Gibe) is almost ready to goto the Board and an important shift is ongoing in the preparation of projects, frominvestment projects of the traditional variety to sector investment programs (SIPs). Thefirst SIP in a sector and the initial set of SIPs in a country take a significantly greater timeand effort to prepare than more conventional projects. Three SIPs are expected to go tothe Board in FY98-99, viz . those for roads, education, and health.
Portfolio Performance
4. Following the application of new Regional guidelines, calling for higherstandards, the number of projects rated unsatisfactory was increased from one in March1997 to four currently. Ratings of some of the other projects are being reviewed. Oneproject-National Fertilizer-is considered "at risk" in the QAG ratings, though recentprogress in sorting out performance problems of the project offers promising prospects.
5. The disbursement ratio for investment operations has declined from 24.9 percentin FY94 to 13.6 percent by the end of June 1997, but this mostly reflects the fact that thequick-disbursing, Economic Recovery and Rehabilitation Project (ERRP) has closed.
AttachmenUPage 2 of 3
Excluding that credit, the disbursement ratio for the usual investment projects hasstagnated around 14 percent (except for a dip in FY96). This disappointing performancehas been receiving a great deal of attention and the actions taken or forthcoming areoutlined below. Before doing so, it should be noted that the reasons for the lack ofimprovement have included: (a) priority being given to utilization of donor cofinancingfor the Ethiopia Social Rehabilitation and Development Fund (ESRDF); (b) the ongoingrestructuring of three projects (Market Towns, Second Addis and Calub Gas); and (c)delays in effectiveness of, and ongoing policy discussions bearing on, the Water Supplyand National Fertilizer projects.
6. The efforts to improve portfolio performance have begun to bear fruit in the threesectors in which we have both ongoing operations and proposals for a major expansion inthe form of SIPs. Thus after disbursing a total of $15 million in the four preceding years,the Roads Rehabilitation project had disbursed $11 million in the first eleven months ofFY97 (however, disbursements remain below expectations). Over the same period,Education VII had disbursed $13 million compared with $33 million in the precedingeight years (an annual average of barely more than $4 million). Similarly, disbursementsfor the Family Health project amounted to $7 million in the first eleven months of FY97,compared with cumulative disbursements up to that time of $15 million (an annualaverage of less than $2 million). In all three cases, the pick-up in disbursements reflectedthe special attention being paid to implementation capacity as these sectors gear up toimplement SIPs.
7. A generic set of constraints to better portfolio performance has been the weaknessof capacity for handling procurement and contract supervision, combined with overlycentralized decision-making that inhibits implementing agencies from quick and flexibleactions to avert or overcome delays. The timely closure of project accounts and auditcapacity also leave something to be desired.
Improvement Efforts
8. Apart from the restructuring of the portfolio, the Government has been makingefforts on several fronts to improve the quality of the portfolio. One factor that hastended to slow down implementation is the decentralization of economic power to theregional governments. Efforts to clarify the respective roles of the regional and centralgovernments are ongoing. Implementation staff are beginning to work in closer contactwith the Bank's Resident Mission for early detection of problems in procurement anddisbursement.
9. The Bank is also engaged in concerted efforts to improve portfolio performance.A Country Portfolio Performance Review (CPPR) undertaken in June 1996 led to anumber of follow-up actions. The CPPR found that the root causes of inadequate projectimplementation are the lack of adequate systems for project management and centralizeddecision-making. Specific suggestions were made for strengthening procurement,
Attachment 3Page 3 of 3
disbursement, auditing and overall monitoring. The CPPR also proposed that a "ProjectManagers' Club" be set up to follow up and coordinate actions on these suggestions; aCountry Procurement Assessment Review is planned for FY98.
10. The specific measures instituted in FY97 to improve portfolio performance haveincluded the following:
* Quarterly meetings between the Country Director and individual task teamleaders (TTLs) to monitor project performance and react promptly toemerging problems. The first round of such meetings took place in February-March and the second round in May-June.
* In the field, a Project Managers' Club has been established and two meetingsheld so far. Both were chaired jointly by the Minister for EconomicDevelopment and Cooperation and the Bank's Resident Representative andattended by heads of project implementation entities and representatives ofthe concerned ministries. These quarterly meetings focus on follow-upactions required on the generic and specific implementation issues identifiedduring the CPPR and the latest supervision mission for each project.
* The capacity of the Resident Mission to pre-screen disbursement andprocurement documents has been strengthened. A major concern raised bythe CPPR and subsequently in the meetings of the Project Managers' Club isbeing addressed by organizing, in the field in March 1997, the first of what isenvisaged as a series of workshops on financial management and the Bank'sprocurement and disbursement guidelines.
3 Substantial administrative budget resources have been allocated in FY98 tofortify the efforts to improve portfolio performance. These will include thecreation of a new post of an Operations Adviser in the Resident Mission; theappointment of a field-based implementation coordinator for the SIPs ineducation and health; continuation of the aforementioned training workshops;and carrying out of a Country Procurement Assessment Review.
11. These measures are in addition to the portfolio management and capacity buildingefforts built into each individual operation, such as the restructuring of the electricityauthority under Energy II, the financial and procurement training under ESRDF, andassistance for strengthening contract management capacity under the forthcoming RoadsSIP. Indeed such capacity building for implementation is an important part of therationale for the emphasis on SIPs in proposed lending. Design of future operations is totake into account capacity limitations and the timing of new projects will be influencedby their implementation readiness.
12. Another CPPR to review these actions to improve implementation and suggestfurther steps is planned for FY98.
ETHIOPIACountry Assistance Strategy
Standard Annexes
Annexes:
Al Ethiopia at a Glance
A2 Selected Indicators of Bank Portfolio Performance and Management
A3 Bank Group Program Summary, FY 1998-2000
A4 Ethiopia - Summary of Nonlending Services
A5 Ethiopia - Social Indicators of Development
A6 Key Economic Indicators
A7 Key Exposure Indicators
A8 Status of Bank Group Operations in Ethiopia
Annex AlPage 1 of 2
Ethiopia at a glancePOVERTY and SOCIAL Shn 1w-
Ethopa Ae Irmancw Devlpnweb_dl
Population mid-1996 (miMons) 58.1 600 3,229GNP percapita 1996 (US$) 110 490 500 1.1e.aqneyGNP 1996 (bflIons USQ) 6.4 294 1,601
Average annual growth, 1990-98
Populaton (%) 2.5-3.0 2.7 1.7 7 N GLabor force (%) 2.3-2.9 2.6 1.7 GNP A Groaa
Most rwent effsniat (latest year avalable sc 1989) capita enrolment
Poverty: headcount index (% of populthon)Urban population (% of total popuflaon) 13 31 29Life expectancy at birth (year) 49 52 63Infant mortality (per 1,000 lye bfrths) 112 92 6B Accon to aseChid malnutrition (% of chilkn under'5) 47Access to safe water (% of population) 27 47 53Illiteracy (% of populatfon age 15+) 65 43 34Gross primary enrollment % of schoo-a populaton) 27 72 105
Male 33 76 112 -Low4ncoweg'opFemale 21 65 98
KEY ECONOMIC RATIOS (%) and LONG-TERM TRENDS
1975 1i" 1115 19".Economic rto
GDP (fbilons USS) .. 8.7 5.4 6.1Gross domestic investment/GDP .. 9.0 16.3 20.5Exports of goods and servirestGDP .. 8.2 t4.4 12.8 OGross domestic savingstGDP .. 1.0 6.6 7.6Gross national savings/GDP .. 3.4 14.1 14.2
Current account balance/GDP .. -5.S -4.1 -9.7Interest payments/GDP .. 0.6 1.1 IA Sav nga Invea*inentTotal debt/GDP .. 30.3 95.9 SZ2Total debt service/exports 7.3 28.4 19.1 33.7Present value of debt/GDP .. .. 63.1 .Present value of debt/exports .. .. 425.0 .. debbdne
19755 -646 1 1 189 1"74-(average annuelgrovwfh)GDP .. 2.3 5.4 12.4 6.0GNP per capita - -0.3 3.1 9.5 3.5 Low _hooco 9goupExports of goods and services .. -2.2 10;2 6.9 6.6
STRUCTURE of the ECONOMY
(% of GOP) 1917 1918 1995 189 Growth raw of oulputamd etnt(%)Agriculture .. 53.2 .. .. .Industry .. 12.7 .. ..
Manufacturing .. 7.2 .. .. /Services .. 34.1 .. a
Private consumption .. 64.6 82.4 61.1 .@General govemment consumpton .. 14.4 10.6 11.3Imports of goods and services .. 16.2 23.9 25.7 GDI G W
1976-4 1U9 1998 1996(average annual growth) ao p and bnpeds (%JAgriculture .. 2.5 3.4 17.5 inIndustry .. -2.6 8.1 8.5 r
Manufacturing .. -3.1 9.0 9.2 t I N40-Services .. 5.4 7.2 7.1 40-
Private consumption .. 2.9 3.9 9.0 aGeneral govemment consumption .. -4.9 2.7 17.9 40
Gross domestic investment .. 6.0 13.6 41.2 4rImports of goods and services .. 0.5 6.9 29.0 ElpoZ * 1 _Gross national product .. 2,2 6.0 12.9
Note: 1996 data are preliminary estimates.*The diamonds show four key Indicators in th country (In bold) compd wIth om-o avge. n da ae maiag the diemond will
be incomplete.
Annex AlPage 2 of 2
Ethiopia
PRICES and GOVERNMENT FINANCE1975 1985 1996 1996
Domesc pdbes Inflation (%)(% change) 25
Consumer prices 6.6 19.1 13.4 0.9 20
lmplicit GDPmp deflator .. 29.5 14.0 11.3 1\
Goveniment finarce s
(% of GDP) oCurrent evenue .. 16.8 17.1 17.6 91 92 93 94 9s 96
Currentbudgetbalance .. -2.7 1.5 1.0 - GDPdef. --- CPI
Overag surplus/deficit (exd. grants) .. -11.3 -8.0 -8.1
TRADE1975 1985 1995 1996
(mlflons US$) Export and Import levels (mill. US$)Total exports (fob) 230 359 454 410 1,600
Commodity 1: Coffee .. 225 288 273 1,400
Commodity 2: Leather and leather products .. 46 60 49 1200
Manufactures .. .. . 1,000 T
Total imports (cMf) 276 975 1,064 1,413 i 4.AFood t. 283 181 215 400.
Fuel and energy 4.16 16 1 00CUapitindgoeondes'gY ~~~~ ~~~186 169 215 200-
Capitalgoods .. 249 334 460 _ _ _ _ _ _ _ _ _ _ _ _ _ _
Export price index (1987=100) .. 96 116 96 90 91 92 93 94 95 9s
Impotpriceindex(1987=100) .. 101 105 109 nExports nImportsTermsoftrade(1987=100) 95 110 88 1
BALANCE of PAYMENTS1975 1985 1995 1996
(milns US$)Exports of goods and services 330 549 784 783Imports of goods and services 409 1,082 1,273 1,646Resource balance -79 -533 -488 -863
Net income -17 -33 -60 -43Net current transfers 45 193 459 446
Current account balance,before ofllcial capital transfers -52 -373 -237 -592
Financing items (net) 45 420 146 515Changes in net reserves 7 48 -56 -55
Memo:
Reserves including gold (mill. US$) 315 216 550 878Conversion rate (locaVUSQ) .. 2.1 6.3 6.3
EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996
(miOons USS) Composition of total debt, 1996 (mill. US$)Total debt outstanding and disbursed 344 2,027 5,221 5,059
IBRD 69 49 0 0
IDA 73 437 1,494 1,666
Total det service 25 159 155 278 B
IBRD 9 7 4 0 16
IDA 1 6 23 31
Composition of net resource flowsOfficial grants 35 514 475Offical creditors 65 276 194 165 DPrivate creditors -3 59 -49 -70 3393Foreign direct investment 19 0 7 0Portfolio equity 0 0 0 0
World Bank programCommitments 71 32 142 156 A-IBRD E-Bilateral
Disbursements 26 50 89 191 B-IDA D- Other mulliateral F- PrivatePrincipal repayments 4 7 16 19 C-IMF G-Short-temnNotflows 22 43 73 172
Interest payments 6 7 11 12Net transfers 16 36 62 160
Development Economics
Note: Social indicators (except for population data), as well as data on trade, balance of payments, and debt, indude Entrea.
Annex A2Page 1 of 1
Ethiopia - Selected Indicators ofBank Portfolio Performance and Management
Indicator FY 7994 FY 1995 FY 1996 FY 1997 FY 1998
Portfolio Assessment
Number of projects under implementation a 18 15 14 14 11Average implementation period (years) b 6.00 4.84 4.40 5.40 5.77
Percent of problem projects x C
by number 27.8 20.0 0.0 28.6by amount 20.1 14.5 0.0 26.5
Percent of projects at risk a d
by number n/a n/a n/a 28.6by amount n/a n/a n/a 26.5
Disbursement ratio (%)e 24.9 18.3 11.0 13.6Disbursement ratio excl. quick-disbursing credit (%) f 13.7 14.3 9.1 13.2
Portfolio Management
CPPR during the year (yes/no) Y Y Y N YSupervision resources (total US$ thousands) 826.7 525.6 676.7 1033.3Average supervision (US$ thousands/project) 46.1 35.0 48.3 73.8
Memorandum item Since FY 80 Last five FYs
Projects evaluated by OEDby number 34 10
Percent rated U or HUby number 32.4 30.0
a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the
year: investment projects only.f. Investment project, excluding ERRP which was a quick-disbursing operation though classified as an investment
project.
AnnexA3Page 1 of 3
Ethiopia - Bank Group Program Summary, FY 1998-2000
Proposed IBRD/IDA Base-Case Lending Program, FY 98-00O
High Case Base Case Strategic rewards Implementation'FY Project US$(M) US$(M) (HIML) h risks (HIMIL)
FY 98 Energy II 200 200 H MRoads III - SIP 300 300 H MAg. Research and Training 60 60 H L
Subtotal 560 560
FY99 Food Security 150 0 H MHealth - SIP 100 100 H MEducation - SIP 100 100 H MPower Distribution 80 80 H MFinancial Sector 50 0 H HExport Development 50 0 H MAddis Capacity Building 10 0 M HWID 5 5 M L
Subtotal 545 285
FY 00 Roads IV - SIP 300 250 H MWater Supply Sector 60 0 H MEconomic Management 40 15 H HRegional Towns 40 0 M HPopulation 30 30 H MLand Degradation 20 20 H MMedicinal Plants 20 20 M MCapacity Building/CSR 10 0 H MSmall & Medium Enterprises 25 20 H M
Subtotal 545 355
Total FYV98-0 1,650 1,200
a. This table presents the proposed program for the next three fiscal years.b. For each project, in the High Case, an indication is provided of whether the strategic rewards and implementation risks are
expected to be high (H), moderate (M), or low (L).
Annex A3Page 2 of 3
Ethiopia - IBRD/IDA Lending Program
Past Current Plannedfor High CaseCategory 1994 1995 1996 1997 1998 1999 2000
Commitments (US$m) 74.8 142.2 155.7 0.0 560.0 545.0 545,0
Sector (%)aAgriculture & Environment 0.0 15.5 0.0 0.0 10.7 27.5 7.3Education 0.0 0.0 0.0 0.0 0.0 18.3 0.0Electric Power & Energy 99.3 0.0 0.0 0.0 35.7 14.7 0.0Industry 0.0 84.4 0.0 0.0 0.0 0.0 4.6Multisector .7 .1 0.0 0.0 0.0 18.3 9.2Population, Health & Nutrition 0.0 0.0 0.0 0.0 0.0 18.3 5.5Public Sector Management 0.0 0.0 0.0 0.0 0.0 0.0 0.0Social Sector 0.0 0.0 77.1 0.0 0.0 1.0 0.0Transportation 0.0 0.0 0.0 0.0 53.6 0.0 55.0Urban Development 0.0 0.0 0.0 0.0 0.0 1.8 7.3Water Supply & Santitation 0.0 0.0 22.9 0.0 0.0 0.0 11.0
TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Lending instrument (%)Adjustment loansb .7 .1 0.0 0.0 0.0 0.0 0.0Specific investment loans and others 99.3 99.9 100.0 0.0 100.0 100.0 100.0
TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Disbursements (US$m)Adjustment loansb 105.2 73.5 75.8 .1 0.0 0.0 0.0Specific investment loans and others 146.8 78.9 53.5 63.5 82.0 90.0 105.0
Repayments (US$m) 14.7 15.6 13.4 14.5 15.2 17.0 16.8Interest (US$m) 9.0 10.4 11.2 11.4 11.7 12.2 12.1
a For future lending, rounded to the nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggregate sectors.b Structural adjustment loans, sector adjustment loans, and debt service reduction loans.
Annex A3Page 3 of 3
Ethiopia - IFC and MIGA Program, FY94-97
PastCategory 1994 1995 1996 1997
IFC approvals (US$m) a 0.00 0.00 0.00 0.00
Sector (%)
TOTAL 100.00 100.00 100.00 100.00
Investment instrument (%)Loans 0.00 0.00 0.00 0.00Equity 0.00 0.00 0.00 0.00Quasi-Equity b 0.00 0.00 0.00 0.00
Other 0.00 0.00 0.00 0.00
TOTAL 100.00 100.00 100.00 100.00
MIGA guarantees (US$m) 0.00 0.00 0.00 0.00MIGA commitments (US$m) 0.00 0.00 0.00 0.00
aExcludes AEF projects.bIncludes quasi-equity types of both loan and equity instruments.
Annex A4Page 1 of 1
Ethiopia-Summary of Nonlending Services
Product Completion FY Audiencea Objective
Recent completionsPER 97 97 G, D, B A, CSocial Sector Note (Green cover) 97 G, D, B AFinancial Sector Study (White cover) 98 G, B A, CTelecom Policy Note (White cover) 98 G, B A, CExport Development Study (White cover) 98 G, D, B A, CSources of Agricultural Growth Study (White Cover) 98 G, D, B, P A, B, CRural Poverty (White Cover) 98 G, B AUrban Poverty (White Cover) 98 G, B AParticipatory Poverty Assessment (White Cover) 98 G, B ALabor Market Study (White Cover) 98 G, B AImproving the Investment Approval Process (FIAS) 97 G, B, D A, C
PlannedPER 98-99-2000 G, D, B A, CRegionalization Study 99 G, D, B A, CNile Basin Study 99 G, B A, CEnergy Policy Note 98 G, B A, CWID Study 98 G, D, B, P A, BCEM 99 G, D, B, P A, BBusiness Development Tours 98 G A, CAg./Rural Dev. Study 2000 G, D, B, P A, B, CNational Accounts Statistics 98 G, B A, CPortfolio Management 98 G, B A, CHIPC 98 G, B,D CPolicy Reform Grants (Privatization, Civil Service, 98 G, B A, CWID, Water Resources)Environment Study 2000 G, B, D CPoverty Monitoring 99, 2000 G, B, D A, CInvestment Promotion Studies 98-99 G, B, D C
a. Government (G), Donor (D), Bank (B), Public dissemination (P).b. Knowledge generation (A), Public debate (B), Problem-solving(C).
AnnexA5Page 1 of 2
ETHIOPIA: Social Indicators of Development
MeOt SU r r%cei grosy NetLatSw scak mc ,s Xghar
Uniteo adxua Sahaman Low. umeIndicator mesYure 1970-75 19804S 1989-94 Aftik income group
Priority Poverty IndicatorsPOVERTYUpper poverty line local ctrr.
Headcount index % of pop. ..
Lower poverty line local eurr. ..
Headcount index % of pop. .. ..
GNP per capita USS .. 1 130 500 390 1.670
SHORT TERM INCOME INDICATORSUnskilled urban wages local curr.. .. ..
Unskilled rural wagesRural terms of urade
Consumer pice index 1987-=100 38 114 203Lower income
30Urban .. 126 191Rural
SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. ..
Gross enrollment ratiosPrimarv % school age pop. 24 35 23 71 105 104Male 32 42 27 77 112 105Female 15 28 19 64 98 101
MortalitInfant mortality per thou. live binhs 155 159 120 92 58 36Under 5 monality .. .. 200 161 101 47
ImmunizatonMeasles fe age group .. 12.0 37.0 51.4 86.2 77.4DPT .. 6.0 44.0 53.5 89.1 82.0
Child malnutrition (under-5) .. 37.3 46.9 *- 38.2Life expectancyTotal years 43 43 49 52 63 67Female advantage 1.0 3.2 3.7 3.5 2.4 6.4
Total feniliry rate births per woman 5.8 7.0 7.5 5.9 3.3 2.7Matemal mortality rate per 100,000 live birhfs 2.000 2.000 1.528
Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. .. ..
Social security coverage % econ. active pop. .. ..
Access to safe water total % of pop. 8.0 15.7 17.5Urban 58.0 69.0 70.0Rural 1.0 9.0 11.2
Access to health care .. 44.0 55.0
Population growth rate GNP per capita growth rate bvelopment diamondb(average amuel, percent) (averge annual. percent) D
41
2 1 rl -5W =5 ° ~~~~~^~~L I per pnGmas°-~~~~~~~~~~~~~~~~ 'I +- -S.
-21 -101970-75 198085 1989-94 1970.75 1980485 1989-94 to ew
Ethiopia- Low-income - ALoiame
a See the technical o p.387. b. e dewvldopment diad b ed on fourkey indicato showa the ava cg velof deveop ? in the cannycompared with its income grop. See t inrodcion.
Annex A5Page 2 of 2
Meot Samn. eg!neree p Ncrtae an w ecist S gher
Unit of esthmat Sakaran Law nesIndkator mwanre 1970.75 19804S I-94 Afria incomne fF0
Resources and ExpendituresHUMAN RESOURCESPopulabtion (mt1994) thousands 32,9S4 43,350 54,890 571,902 3,182.221 1,096.881Age dependency ratio ratio 0.94 0.92 1.04 0.94 0.66 0.63Urban % of Pop.. 9.5 11.5 13.2 30.6 283 55.9Population growth rate annual % 2.6 2.8 3.0 2.8 1.7 1.3Urban 4.5 4.6 4.6 4.9 3.2 2.7
Labor force thousands 14,775 18,535 23,495 2,250 1,590,533 488,647Agriculture % of labor foc 90 88 86 65 67 36Industry 2 2 2 9 14 26Female * 42 42 41 41 39 40Labor participation ratesTotal % of pop. 45 43 43 44 50 45Female - 19 IS IS 37 41 36
NATURAL RESOURCESArea thou. sq. km 1,221.90 1.221.90 1,097.10 24,273.33 40391.42 40,594.43Density pop. per sq. kn 26.97 35.48 44.84 22.90 77.44 26.66Agriculturnl land % of land aea 53.93 53.66 53.34 50.61 52.42 41.05Change in agricultural land annual % -0.08 -0.08 40.09 0.01 0.16 -138Agricultural land under irrigation % 0.27 0.27 0.28 0.86 17.84 11.40Forests and woodland thou. sq. km _ 145.52 141.65 5,323.14 7,632.00 5,969.25Deforestation (net) % change. 1980-90 .. .. 0.27
INCONIEHousehold incomeShare of op 20% of households % of income .. 41 ..
Sharm of bottom 40% of households . 21 ..Share of bottom 20% of households .. 9 _*
EXPENDITUREFood % of GDP .. 43.3 ..
Staples .. 21.1 ..
Meat, fish. milk, cheese. eggs .. 94 ..Cerealimport thou. metrictornes 67 741 1,047 14,051 36,922 68.936Food aid in cereals 54 869 994 S.079 8,516 5.771Food production percapita 1987=100 114 99 9 102 115 102Fertilizer consumption kglha 0.5 1.1 2.3 5.3 58.5 46.3Share of agriculture in GDP % of GDP .. 49.5 53.1 19.5 27.6 14.0Housing % of GDP _ 12.1 __Average household size persons per household 5.0 .. _.Urban 4.0 *-
Fixed investment housing % ofGDP 3.9 3.0 _.Fuel and power % of GDP 6.3 ..
Energy consumption per capita kg of oil equiv. 15 17 21 251 373 1,602Households with elecaicity
Urban % of households _ .. _Rural
Transport and communeatlon % of GDP 7 73 _.Fixed investrnent transport equipment 1.2 1.6 __Total road length thou. km 23 38 28
INVESTMENT IN HUMAN CAPfTAL
Population per physician persona 86,100 78,936 _ _ .. 3.064Population per nurse .. 5,402 _ ..Population perhospial bed 3,500 3.384 4,141 1316 1.034 592Orl rehydyration theapy (under-5) % of cases .. 68 37 38EducationGross enrom atiosSecondary % of school ae pop. 6 12 11 24 48 63Female * 4 9 11 23 42 62
Pupil-teacher ratio: prinary pupils per teacher 44 48 27 40 39Pupl-teacher atio secondary 34 43 32 _ 20Pupils reaching grade4 of cohort 59 39 - -Repeat e: pimry oftotile al 12 _ _ -.llieracy % of pop. (ap 1S4) 96 38 65 S3 35Famale % of fem. (age l5+) - - 75 54 46
Newsoapetr ciatiok Per thou. pop. 2 1 1 12 .. 236
Wotid Bank Inematlal Ecmomies Dqunnt April 1996Except for demogrpic esmas and a dat all informadon prior to 1992 Indude Eizea
Annex APage 1 of 3
Ethiopia - Key Economic Indicators
Actual Estimate ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997 1998
National accounts(as % GDP at currentmarket prices)
Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 55.3 61.6 55.6 50.8 .. .. 51.0 50.4
Industry 9.4 8.1 9.5 9.0 .. .. 6.1 6.3
Services 29.1 25.9 29.6 33.1 .. .. 34.7 35.0
Total consumption 100.0 96.9 93.8 95.0 93.2 92.4 92.1 92.5Gross domestic fixed 7.1 9.4 14.8 15.1 16.3 20.5 20.5 21.0investment
Government investment 4.3 3.4 5.0 9.0 7.2 7.4 7.6 7.7Non-government investment 2.8 6.0 9.8 6.1 9.1 13.1 12.9 13.3(includes increase instocks)
Exports (GNFS) a/ 5.7 4.6 8.3 11.4 14.4 12.8 15.4 15.0Imports (GNFS) 12.8 10.9 16.9 21.5 23.9 25.7 27.9 28.2
Gross domestic savings 0.0 3.1 6.2 5.0 6.8 7.6 7.9 8.1Gross national savingsb/ 1.9 7.6 10.4 10.2 14.1 14.2 11.9 12.1
Memorandum itemsGross domestic product 9573 9812 6252 4907 5447 6125 6237 6401(US$ million at currentprices)Gross national product per 130.0 130.0 140.0 110.0 100.0 110.0 110.0 110.0capita (US$, Atlas method)
Real annual growth rates(%, calculated from 1981prices)Gross domestic product at -6.7% -3.2% 12.0% 1.7% 5.4% 12.4% 5.6% 6.0%market pricesGross domestic income -6.4% -1.0% 10.6% 0.0% 6.2% 12.2% 4.9% 4.8%
Real annual per capita .growth rates (%, calculatedfrom 1981 prices)
Gross domestic product at -9.4% -6.0% 8.7% -1.3% 2.3% 9.1% 2.5% 3.0%market pricesTotal consumption -3.5% -7.1% 1.0% -5.1% 0.7% 6.8% 1.0% 1.6%Private consumption 1.3% -1.1% -0.5% -6.4% 0.9% 5.9% 0.1% 1.8%
(Continued)
Annex A6Page 2 of 3
Ethiopia - Key Economic Indicators
(Continued)
Actual Estimate Projected
Indicator 1991 1992 1993 1994 1995 1996 1997 1998
Balance of Payments(US$m)
Exports (GNFS) a/ 543.0 452.6 506.6 557.7 784.3 783.3 957.8 941.9Merchandise FOB 276.4 153.8 222.3 280.5 453.9 410.2 563.9 523.0
Imports(GNFS)a/ 1226.1 1074.2 1262.3 1101.4 1272.6 1646.2 1748.6 1806.0Merchandise FOB 1029.3 875.2 1051.2 915.0 1063.6 1412.6 1500.1 1551.3
Resource balance -683.1 -621.6 -755.7 -543.7 -488.3 -862.9 -790.8 -864.2Net current transfers 261.4 526.4 354.9 333.8 459.1 445.7 274.7 330.4(including official currenttransfers)Current account balance -265.7 41.0 -204.6 -92.5 190.5 -201.5 -206.1 -225.2(after official capital grants)
Net private foreign direct 0.0 0.0 0.0 0.0 0.0 0.0 0.0 35.9
investmentLong-term loans (net) 345.4 260.2 312.7 185.9 145.0 66.8 -117.5 43.9Official 131.8 179.8 339.2 218.8 194.0 165.0 105.0 1.0Private 213.6 80.4 -26.5 -32.9 -49.0 -98.2 -222.5 42.9
Other capital (net, including 67.2 -235.4 85.6 136.0 -279.2 189.5 379.7 173.2errors and omissions)Change in reserves c/ -146.9 -65.8 -193.7 -229.4 -56.3 -55.0 -56.1 -27.8
Memorandum itemsResource balance (% of -7.1% -6.3% -12.1% -11.1% -9.0% -141% -12.7% -13.0%GDP at current marketprices)Real annual growth rates(1981 prices)Merchandise exports -23.8% -46.8% 83.90/% 17.1% 10.2% 8.9% 25.1% 14.7%(FOB)Primary -29.2% -32.7% 58.1% 23.9% 63.2% -3.2% 54.8% 14.7%Manufactures
Merchandise imports 10.7% -17.2% 21.0% -12.7% 6.9% 29.0% 6.9% 3.90/o(CIF)
Public finance(as % of GDP at currentmarket prices)Currentrevenues 13.6 10.7 11.6 13.5 17.1 17.6 17.5 17.6Current expenditures 18.9 15.8 14.5 16.5 15.6 16.7 12.8 12.6
(Continued)
Annex A6Page 3 of 3
Ethiopia - Key Economic Indicators(Continued)
Actual Estimate Projected
Indicator 1991 1992 1993 1994 1995 1996 1997 1998
Current account surplus (+) -5.2 -5.1 -2.9 -3.0 1.5 1.0 4.8 5.1or deficit (-)Capital expenditure 6.1 4.6 8.2 12.0 9.6 9.3 10.2 10.2Foreign financing 4.6 3.5 7.9 12.2 7.7 6.8 7.6 5.7
Monetary indicatorsM2/GDP (at current market 40.1 42.9 38.0 40.9 42.3 40.4 39.2 39.4prices)Growth of M2 (%) 18.7 9.9 16.2 14.4 24.2 8.7 4.0 8.2Private sector credit growth -3.7 13.6 -43.6 57.8 133.6 210.5 119.4 155.6total credit growth (%/6)
Price indices (1981=100)Merchandise export price 89.0 93.1 73.1 78.8 115.7 96.0 105.5 85.3indexMerchandise import price 95.4 98.0 97.2 97.0 105.4 108.5 107.8 107.4indexMerchandise terms of trade 93.3 95.0 75.2 81.3 109.8 88.5 97.9 79.5indexReal exchange rate 134.7 118.6 59.2 51.7 49.8 48.9(US$/LCU) d/Real interest ratesConsumer price index e/ 20.9% 21.0% 10.0% 1.2% 13.4% 0.9% -6.3% 0.9%(% growth rate)GDP deflator f 19.2% 5.9% 17.3% 4.5% 14.0% 1.3% 1.4% 1.8%(% growth rate)
a. "GNFS" denotes "goods and nonfactor services."b. Includes net unrequited transfers excluding official capital grants.c. Includes use of IMF resources.d. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.e. Period average CPI represented as Addis Ababa retail price index.f. Derived from data at market prices.
Annex A7
Ethiopia - Key Exposure Indicators Page 1 of 1
Actusl Estimatw ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997 1998
Total debt outstanding and 4198.3 4343.3 4661.3 5001.0 5221.4 5058.8 5102.8 5053.0
disbursed (TDO) (US$m) a/
Net disbursements (US$m) a/ 346.2 230.1 313.3 205.9 137.0 66.8 -73.5 83.9
Total debt service (TDS) 136.5 108.4 94.9 111.3 155.0 277.9 432.9 221.4
(US$m) a/
Debt and debt service indicators(%/6) b/
TDO/XGS c/ 767.4 947.1 908.5 885.1 646.0 614.3 510.5 515.6
TDO/GDP 43.9 44.3 74.6 101.9 95.9 82.6 81.8 78.9
TDS/XGS 24.9 23.6 18.5 19.7 19.2 33.7 43.3 22.6
Concessional/TDO 73.3 74.9 76.9 77.9 79.1 84.4 85.3 86.2
IBRD exposure indicatorsIBRD DS/public DS (%) 7.2 7.6 7.2 3.9 2.6 0.0 0.0 0.0
Preferred creditor DS/public 36.5 40.4 47.3 49.4 40.9 21.2 25.5 33.0DS (%) d/ e/IBRD DS/XGS (%) 1.6 1.7 1.3 0.7 0.5 0.0 0.0 0.0
IBRD TDO (US$m) f/ 19.8 12.4 6.9 3.5 0.0 0.0 0.0 0.0of which present value of 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
guarantees (US$)Share of IBRD portfolio (%) gl ... ... ... ... 0.0 0.0 0.0 0.0
IDA TDO (US$m) 882.7 964.0 1189.0 1391.0 1494.0 1666.0 1800.0 1868.0
IFC (US$m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Equity aiid quasi-equity hl 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
MIGAMIGA guarantees (US$m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital.
b. Excluding Russian ruble denominated debt.c. "XGS' denotes exports of goods and services, including workers' remittances.d. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF and
the Bank for International Settlement.e. In this case, IMF debt service is included in Public DS.f Includes present value of guarantees.g. Data for 1991-94 is negligible.h. Includes equity and quasi-equity types of both loan and equity instruments.
Status of Bank Group Operations in EthiopiaIBRD Loans and IDA Credits in the Operations Portfolio
Difference Last ARPP
Original Amount in US$ Millions Between expected Supervision Rating b/
Loan Fiscal and actual Development Implementation
Project ID or Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements a/ objectives Progress
CreditNo.
Number of Closed Loans/credits: 59
Active LoansET-PE-711 C19130 1988 GOVT. OF ETHIOPIA FAMILY HEALTH 0.00 33.00 0.00 10.30 9.91 S S
ET-PE-721 C18730 1988 GOVT. OF ETHIOPIA EDUCATION VII 0.00 70.00 5.94 19.66 20.60 S S
ET-PE-712 C21610 1990 GOVT. OF ETHIOPIA SECOND ADDIS URBAN D 0.00 35.00 0.00 22.57 19.48 U S
ET-PE-722 C21030 1990 GOVT. OF ETHIOPIA MARKET TOWNS DEV 0.00 40.20 0.00 18.61 14.24 U S
ET-PE-759 C23510 1992 GOVT. OF ETHIOPIA EMERG. RECOV. & RECO 0.00 1S0.00 0.00 6.64 7.32 S U
ET-PE-734 C24380 1993 GOVT. OF ETHIOPIA ROAD REHABILITATION 0.00 96.00 0.00 66.24 62.44 S S
ET-PE-758 C25880 1994 GOVT. OF ETHIOPIA CALUB ENERGY DEV. PR 0.00 74.31 0.00 69.57 28.99 U U
ET-PE-752 C27410 1995 GOVT. OF ETHIOPIA NATIONAL SEEDS PROJE 0.00 22.00 0.00 19.53 9.81 S S
ET-PE-753 C27400 1995 GOVT. OF ETHIOPIA NAT. FERTILIZER PROJ 0.00 120.00 0.00 87.63 -14.28 S S
ET-PE-764 C28420 1996 GOVT. OF ETHIOPIA WATER SUPPLY DEV&REH 0.00 35.73 0.00 32.36 7.42 S S
ET-PE-771 C28410 1996 ESRF 1 0.00 120.00 0.00 105.92 7.93 S S
Total 0.00 796.24 5.94 459.02 173.86
Active Loana Closed Loans Total
Total Disbursed (IBRD and IDA): 328.27 1,368.70 1,696.97of which has been repaid: 0.00 197.79 197.79
Total now held by IBRD and IDA: 790.30 1,095.69 1,885.99
Amount sold : 0.00 6.04 6.04Of which repaid : 0.00 6.04 6.04
Total Undisbursed : 459.02 7.79 466.81
a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter
based system will be used (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory) : see proposed Improvements in Project and
Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
IV
Annex ASPage 2 of 2
EthiopiaSTATEMENT OF IFC's
Committed and Disbursed PortfolioAs of June 30, 1997
(In US Dollar Millions)
Committed DisbursedIFC IFC
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic
Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Approvals Pending Commitment
Lan Equi Qua Partic
Total Pending Commitment: 0.00 0.00 0.00 0.00
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6' other information shown6'an this map do not (Timpy,oIe port of Th Wrid Bank Group, ,L
any judgment on the legal CIi<maStatus of any territory, or any endorsement lor acceptance of such Jboundaries.
KILOMETERS 0 50 100 150 200 250 300 350 400
I ~ 4° , / ) KEY MILES 0 50 100 150 200 250 4'
34_ LAKE 40-42 44' 46- 48°KEUhG8AN'DA TURKANA 46'I4I