Country Brief

Country Brief last updated August 2008

Development Progress

Ethiopia, with a population of 72.7 million in 2006, is the second most populous country in Sub-Saharan Africa. One of the world’s oldest continuous civilizations, Ethiopia is also one of the world’s poorest. At US$200, Ethiopia's per capita GDP is much lower than the Sub-Sahara Africa (SSA) average.

Since 1991, there has been significant progress in key human development indicators: Primary school enrollments have tripled, 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 46 percent in 1995/96¹  and 44 percent in 2000/01, fell to 39 percent in 2005/06.

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

Ethiopia is experiencing an unprecedented spell of economic growth. Ethiopia’s economy has averaged over 11 percent annual growth over the last four years, and growth of 8.8 percent is expected for 2007/08.

Despite the good growth performance, optimism should be tempered with caution due to a number of near-term risks to sustainability. First, inflation has been in double digit figures for the last three years, with food prices growing at an annualized rate of 24 percent in recent months. Second, Ethiopia has benefited from a long spell of good weather, but this is unlikely to last indefinitely. Third, the cost of oil imports has nearly tripled in the last three years; with hard currency reserves having been reduced to only two months of imports, a further increase in oil prices could be detrimental to the balance of payments situation. Over the longer term, sustained growth will require enhanced efforts to strengthen agricultural productivity and improve the climate for private investment.

Political background

The current political landscape remains colored by the aftermath of the May 2005 parliamentary elections. While the country is peaceful and opposition leaders have been released from jail, the rifts exposed and deepened during this time are largely unhealed.

Still, the government has been making steady progress on the governance agenda. The government’s recently completed second Poverty Reduction Strategy (called the Plan for Accelerated and Sustained Development to End Poverty, or PASDEP) now includes enhanced plans over the medium-term to accelerate local empowerment and increase transparency and accountability.

With the support of the Bank and other donors through the Protection of Basic Services program, the government is following through on its commitment to avoid political bias in providing basic services, improve local accountability (e.g., posting local government budgets in public places, unprecedented disclosure of budget information on the government website, establishment of a Parliamentary Public Accounts Committee chaired by the Opposition); strengthen fiduciary standards (audits, procurement, financial management, and fiscal reporting); and continue to devote an increasing share of expenditures to pro-poor services.

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, building on the framework set forth in the 2006 Interim Country Assistance Strategy (ICAS).

The Bank’s lending and non-lending activities will be structured 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 IFC plans to increase its role in helping growth become more private sector-led by reestablishing its presence on the ground and beginning more active engagement in key sectors. MIGA too is exploring new opportunities to support investment in Ethiopia.

Harmonization

Official Development Assistance (ODA) to Ethiopia has been increasing steadily since 2000. A large number of donors are active in Ethiopia, with 25 bilateral and multilateral donors averaging more than $5 million per year in ODA from 2000-2006. Both the Government and a majority of international partners are keen to proceed with the deepening of the harmonization process in the spirit of the Rome Declaration (2003) and the Paris Declaration (2005). Ethiopia is a pilot country for the OECD DAC harmonization 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, made up of about 30 bilateral and multilateral agencies. Under the DAG, efforts are underway to make strong progress on the implementation of commitments in the Paris 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 instruments to reduce transactions 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 include: 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.

Following debt relief through HIPC and MDRI, the net present value of external debt relative to GDP and exports has fallen to 6 percent and 36 percent, respectively. This is far below the thresholds that signal unsustainability. Domestic debt is relatively small at 28 percent of GDP and new external debts have been contracted mostly on concessional terms, conducive to debt sustainability.

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.