Country Brief

Country Brief last updated September 2009

Development Progress

Ethiopia, with a population of about 78 million, is the second most populous country in Sub-Saharan Africa. One of the world’s oldest civilizations, Ethiopia is also one of the world’s poorest. At US$340 (average for the 2007-09 period), Ethiopia's per capita GDP is much lower than the Sub-Sahara Africa (SSA) average.

Over the past two decades, there has been significant progress in key human development indicators: Primary school enrollments have quadrupled, child mortality has almost been cut in half, and the number of people with access to clean water has more than doubled. More recently, poverty reduction has accelerated. The poverty headcount, which stood at 56 percent in 1999/00, fell to 39 percent in 2006/07.

These gains, together with more recent moves to strengthen the fight against malaria, paint a picture of improved well-being in Ethiopia. Notwithstanding the progress in critical aspects of human development, Ethiopia is a long way from achieving some of the Millennium Development Goals (MDGs) by 2015, given the country’s very low starting point.

Economic background

In recent years, Ethiopia has been one of the fastest growing non-oil economies in Africa with double digit growth and continued improvement in access to basic services. But its robust growth performance and the considerable development gains from 2003 to 2007 period came under threat in 2008 with the emergence of twin macroeconomic challenges of high inflation and a difficult balance of payments situation. The problem was exacerbated by the high fuel and food prices in the global market and failure of belg rain. These threats have moderated in recent months. The 12-month end-of-period inflation rate, after reaching a historical peak of 64% in July 2008, has fallen to -3.7% in July 2009. Although there have been some improvements in foreign exchange reserves, from barely four week of imports cover in October 2008 (US$ 764m) to the equivalent of seven weeks of imports at the end of June 2009 (US$ 1.5bn), the situation remains tenuous. The Government of Ethiopia has taken a number of steps in recent months (e.g., tightening fiscal policy and reducing government's domestic borrowing, mitigating the impact of high food prices on the poor, reducing the domestic borrowing of public enterprises, tightening money supply, and gradually depreciating the local currency) to address the macroeconomic problems.

Ethiopia's macro situation is expected to remain vulnerable, especially as the global economic crisis is now making itself felt. The economy is likely to slow down in the coming years, though the growth rate will remain respectable from a global perspective. The IMF projects the real GDP growth rate to decrease from 10.2 percent in 2008/09 to 7 percent in 2009/10. Although the overall inflation rate has fallen sharply, the non-food inflation rate remained at 15.4% in July, suggesting that the underlying inflationary tendency may remain. The current account deficit (excluding official transfers) is expected to remain around 10-11% of GDP during 2009/10.

Political background

For much of the 20th century Ethiopia was ruled by highly centralized and undemocratic governments. The ruling party (the Ethiopian People’s Revolutionary Democratic Front – EPRDF) has governed Ethiopia since 1991. Since taking power, the EPRDF has led an ambitious reform effort to initiate a transition to a more democratic system of governance and decentralize authority. This has involved devolving powers and mandates first to Regional states, and then to woredas or district authorities.

Although the formal Ethiopian state structure has been transformed from a highly centralized system to a federal and increasingly decentralized one, a number of challenges remain. The national elections in 2005 and the largely uncontested local elections in April 2008, illustrated the fragility of the democratic transition, the dominance of the EPRDF, and the weakened state of the opposition. The next round of parliamentary elections is scheduled for May 2010.

In January 2009, the Ethiopian Parliament passed legislation to regulate Civil Society Organizations (CSOs). While many CSOs had long argued for a new and coherent framework, the new law is quite restrictive in demarcating areas of operations for different types of CSOs (particularly excluding those receiving more than 10 percent of funding from external sources from many areas of activity). The Government and the Development Assistance Group (DAG), comprising bilateral and multilateral donors, have agreed that the implementation of the CSO law will be reviewed regularly through their joint High Level Forum structure.

World Bank assistance to Ethiopia

The current Country Assistance Strategy (CAS) for Ethiopia covers the period FY 2008-FY 2011. The CAS aims to support Ethiopia in achieving four main strategic objectives, consistent with PASDEP: (i) fostering economic growth, in order to sustain the emerging economic ‘take-off’; (ii) improving access to and quality of basic service delivery, in order to sustain the emerging basic service ‘take-off’;(iii) reducing Ethiopia’s vulnerability to help improve prospects for sustainability; and (iv) fostering improved governance to support progress on the previous three objectives and empower citizens.

The Bank’s lending and non-lending activities aim to support Ethiopia in sustaining high levels of investments in key areas (both physical and human capital as well as institutional capacity building), while addressing priority policy issues to maximize the impact of such spending.

After eight years of absence, the International Finance Corporation (IFC) has re-established its role in helping growth become more private sector-led. It now has staff in Addis Ababa and is more actively engaged in key sectors. Multilateral International Guarantee Agency (MIGA) is exploring new opportunities to support investment in Ethiopia.

Accra Agenda for Action

Official Development Assistance (ODA) to Ethiopia has been increasing steadily since 2000. A large number of donors are active in Ethiopia, with external aid averaging more than $2 billion per year between 2005 and 2008. Both the Government and a majority of international partners are keen to deepen of the harmonization process in the spirit of the Paris Declaration (2005) and Accra Declaration (2007). Ethiopia is a pilot country for the OECD DAC harmonization agenda. Partners are currently considering how to build on this progress in light of the Accra Agenda.

The Bank, with UNDP and one bilateral donor, is one of the rotating co-chairs of the Development Assistance Group (DAG), the main forum for donor coordination in Ethiopia. Under the DAG, efforts are underway to make strong progress on the implementation of commitments in the Paris (or Accra) Declaration, including joint ESW (much of the Bank’s major analytical work has already been prepared jointly with partners) and joint missions. Much of the collective effort is focused on furthering harmonization through a few major multi-donor programs and policy areas of importance.

The World Bank has taken the lead on developing a set of multi-donor programs to reduce transaction costs, align support with the country’s decentralized model, and enhance the predictability of aid. These instruments allow for large-scale leveraging of IDA support. Such approaches are used in: the Protection of Basic Services (PBS) program; the Public Sector Capacity Building Program (PSCAP); the Productive Safety Nets Program (PSNP); the Water Supply, Sanitation, and Hygiene Universal Access Program (WaSH-UAP); and the Sustainable Land Management (SLM) program.

For more traditional projects, such as roads, action plans are being implemented to harmonize implementation procedures (e.g., common environmental assessment procedures) with a focus on three priorities – disbursement procedures and financial reporting, monitoring and evaluation, and procurement (starting with standard documents for goods, works, and consulting services for national competitive bidding).

Debt sustainability

On April 2, 2004, Ethiopia reached its Completion Point under the Enhanced HIPC initiative. In addition to the net present value (NPV) of US$1,275 million in HIPC debt relief announced at Decision Point, the Executive Boards also approved a topping-up of debt relief by an additional US$707 million in NPV terms.

On March 28, 2006, the World Bank’s Board of Executive Directors approved 100 percent cancellation of Ethiopia’s debt to IDA, as part of the Multilateral Debt Relief Initiative (MDRI). The Executive Board of the IMF had already approved cancellation of debt owed to the Fund under MDRI in December 2005, and the African Development Bank also approved debt relief under MDRI in April 2006.

Immediately following the debt relief, Ethiopia’s debt burden was significantly reduced. However in recent years, the debt burden has begun to increase again. The 2009 Debt Sustainability Analysis (DSA) indicates that Ethiopia’s risk of debt distress is moderate, though the level of risk has increased since 2008. The rapid rise in public enterprises financing and weak export growth in 2008/09 have put the debt level in terms of exports close to the ceiling. In 2008/09, the NPV of external debt to export ratio reached to 137 percent while domestic debt reached 18 percent of GDP.

¹Some data in this brief is presented in terms of the Ethiopian Fiscal Year (EFY), which ends on July 7. In this case, 1995/96 refers to the period from July 8, 1995 to July 7, 1996.