Economic Overview

Ethiopia, with a population of about 82 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 countries. At US$380, Ethiopia's per capita income is much lower than the Sub-Saharan African average of US$1,165 in FY 2010 (GNI, Atlas Method).

In recent years, Ethiopia has been one of the fastest growing economies in Africa. Nevertheless, its robust growth performance and considerable development gains from 2003 to 2007 came under threat during 2008 and 2010 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.

Though Ethiopia made progress in tackling the twin macroeconomic challenges of 2008-2010, the recent surge of inflation depicts the country’s vulnerable macroeconomic condition. The annual end-of-period inflation, which stood at 16.5 percent in February 2011, increased to 35.9 percent in July 2011.  Food inflation almost quadrupled going from 12.8 percent to 46.5 percent during the same period. Non-food inflation also remains stubbornly high at 21.8 percent, possibly due to the upward revision of fuel prices, coupled with a series of depreciations of the local currency over the past year, which in turn has lead to an increase in the cost of production as well as transportation.

In an effort to control inflation and the rising cost of living, the government has been taking various measures including imposing tight cash controls on government expenditure, temporarily introducing price caps ( which has been lifted except on few consumables) on selected goods and increasing the salary of civil servants by 35-39 percent.

While Ethiopia’s economy is expected to continue to grow at a healthy pace, its macro situation will remain under stress in the foreseeable future. The economy is likely to slow down in the coming years, though the growth rate will remain respectable from a global perspective.

Political Context

For much of the 20th century, Ethiopia was ruled by highly centralized and undemocratic governments. The current 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, and kebeles, or village 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 2010, 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 May 2010 parliamentary elections resulted in a 99.6 percent victory for the ruling EPRDF and its allies, reducing the opposition from 174 to only two seats in the 547 member lower house.

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 (for example by 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.

Development Challenges

The main challenge for Ethiopia is to continue and accelerate the progress made in recent years toward the Millennium Development Goals (MDGs) and to address the causes of poverty among its population. The government is already devoting a very high share of its budget to pro-poor programs and investments. Large scale donor support will continue to provide a vital contribution in the near-term to finance the levels of spending needed to meet these challenges.  However, even if donor support is increased, using aid effectively will require Ethiopia to improve governance, empower local authorities, and become more accountable to its citizens.

Over the past two decades, there has been significant progress in key human development indicators: primary school enrollments have quadrupled, child mortality has 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 1999 and 2000, fell to 39 percent in 2004/5, and there is optimism that the current household survey will demonstrate substantial further progress.

These gains, together with more recent moves to strengthen the fight against malaria and HIV/AIDS, paint a picture of improved well-being in Ethiopia. Notwithstanding the progress in critical aspects of human development, Ethiopia needs considerable investment and improved policies to achieve some of the Millennium Development Goals by 2015, given the country’s low starting point.

The Government of Ethiopia has launched five-year plan (2010/11-2014/15), called the Growth and Transformation Plan (GTP), which is geared towards fostering broad-based development in a sustainable manner to achieve the MDGs. Over the next five years, the GTP envisions a major leap in terms of not only economic structure and income levels but also the level of social indicators. Key goals include:

• Rapid economic growth, targeted for 11 percent per year at worst and, at best, to double the size of the economy by 2015, with GDP per capita expected to reach US$698 by 2015;
• Agricultural production is to double, to ensure food security in Ethiopia for the first time;
• An increased contribution from the industrial sector, particularly focused on increased production in sugar, textiles, leather products and cement;
• Foreign exchange reserves are projected to increase and the Birr is to depreciate by 5 percent against the dollar each year;
• The roads network should increase from 49,000 km to 64,500 km by 2015;
• Power generation capacity will increase from the current 2,000 MW to 8,000 MW, and the number of customers from the current 2 million to 4 million by 2015;
• Construction of 2,395 km of railway line; and,
• Achievement of all MDGs.

The plan also aims to reduce the infant mortality rate from the current 101 per 1000 infants to 67 per 1000 infants and cut the maternal mortality rate by more than half from 590 per 100,000 to 267 per 100,000. While extremely ambitious, the directions of the GTP are consistent with the core priorities of the World Bank’s strategy for Africa’s Future and respond to the needs of the country.  This plan will become the anchor for the Bank’s new Country Assistance Strategy.

World Bank Assistance to Ethiopia

The current Country Assistance Strategy (CAS) for Ethiopia covers the period FY 2008-2011. The CAS aims to support Ethiopia in achieving four main strategic objectives, consistent with the Government’s Plan for Accelerated and Sustained Development to End Poverty (PASDEP): (i) fostering economic growth to sustain the emerging economic ‘take-off’; (ii) improving access to and quality of basic service delivery 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 developing the private sector. It now has staff in Addis Ababa and is more actively engaged in key sectors. The Multilateral International Guarantee Agency (MIGA) is exploring new opportunities to support investment in Ethiopia.

 

Results

The International Development Association (IDA) is Ethiopia’s largest provider of official development assistance: it has committed over US$7 billion to more than 60 projects in Ethiopia since 1991, most notably for the protection of basic services, productive safety nets, and roads. The Bank has worked to promote economic growth and address systemic poverty challenges across many sectors:

Education

IDA’s support for the education sector—including through the General Education Quality Improvement Program (GEQIP) and the Protection of Basic Services program—has helped Ethiopia expand access to quality primary education over the last nine years. Total primary enrollment went from 8.1 million students attending primary school in 2000 and 2001 to 15.54 million in 2008 and 2009. In just a few years, there has been a considerable reduction of the gender gap for primary schooling—defined as the ratio of girls to boys—from 0.65 in 2000 to 0.91 in 2009 and 2010. The gross enrollment rate for secondary school (grades 9–10) stood at 39.1 percent in 2009 and 2010, about double the level of 2002. Educational quality, as measured by grade 5  completion rates, has also improved from 65 percent in 2006 and 2007 to 83 percent in 2009 and 2010, and remains a major focus for the government, IDA and their partners, through both teacher training and supply of educational materials.

Health

The Protection of Basic Services operations (1 and 2) have helped improve the provision of basic health service delivery at local level, through increased financing to district (woredas).  There are now more primary health extension workers in place and medical facilities are better equipped. As a result, the child immunization rate increased from 70 percent in 2005 to 82 percent in 2010, the percentage of births attended by trained health personnel increased from 9 percent in 2005 to 25 percent in 2009, and the percentage of pregnant women receiving iron and folate supplementation increased from 10 in 2004 and 2005 to 19 percent as of August 2009. In addition, over 23 million long-lasting insecticide-treated malaria nets were purchased and distributed between 2006 and 2008, and new malaria cases were reduced from 789,019 to 463,055.

Water and Sanitation

A number of operations have supported access to safe water sources and sanitation services, and better management of water resources. As a result, the share of citizens with access to safe drinking water increased from 53 percent in 2007 and 2008 to 66.2 percent in 2009 and 2010.   The proportion of malfunctioning rural water facilities were reduced from 25 percent in 2007 and 2008 to 20 percent in 2009 and 2010, and more than 138,000 improved community water points were constructed and rehabilitated since 2008. The proportion of households (both rural and urban) using latrines increased from 39 percent in 2007and 2008 to 56 percent in 2009 and 2010.

Roads

Ethiopia’s development has been held back by a large infrastructure gap—it has one of the lowest road densities in Africa. IDA has invested over US$1 billion since 1991 to address that challenge. A road sector development project supports the formulation of Ethiopia’s ten-year roads program; it has helped establish a dedicated road fund for financing maintenance work and build capacity at many levels.  Working in partnership with other donors— including the EC, Germany, Japan, Nordic countries and the UK —IDA helped increase both the size and quality of Ethiopia’s road network. The network increased from under 20,000 kilometers of roads in 1991 to over 48,800 km in 2010, and road density has increased from 29 kilometers per 1000 square kilometer in 2001 to 44.4 kilometers per 1000 sq kilometer by 2010.

Decentralization

Decentralization, first to the regional level in the 1990s, and now to the district (woreda) and sub-district (kebele) levels, is the centerpiece of Ethiopia’s strategy to improve responsiveness and flexibility in service delivery, increase local participation, and democratize decision-making.  IDA is providing capacity-building support and financial support to local governments that is enabling them to deliver better quality basic services (health, education, water supply, etc.) to more of their citizens. Total basic services spending by regions and woredas have almost doubled, from US$505 million in 2004 and2005 to US$1,149 million in 2008 and 2009. Accountability and fiduciary systems are also being strengthened in parallel to increased funding: last year quarterly audits took place for 95 percent of local governments nationwide (730 out of 770), and all regions and 90 percent of woredas posted their budgets in places accessible to the public. 

Private sector

After the change of governments in 1991, IDA helped Ethiopia shift from a state-controlled economy to one that encourages private sector growth and job creation. It helped the post-Dergue government address an over-valued currency that stifled exports, reduced tariffs and taxes, and ended most price controls, thereby creating a space in which Ethiopian companies can play a natural role in generating income and creating jobs.

Still, more needs to be done to improve the investment climate and raise business confidence. The Bank is also working with the government to accelerate privatization of public enterprises, strengthen competition policy, improve the financial system, and support firms in building new technical and business management skills.

Regional cooperation

Historically, there has been strong tension over water usage rights between upstream Nile riparians, such as Ethiopia, which contributes 85 percent of Nile waters, and downstream countries, such as Egypt, for which the river is the lifeblood of its economy.  The Nile Basin Initiative (NBI) aims to foster cooperation among nations through which the Nile runs, and to find win-win opportunities for better management of the river.  The success of the NBI so far in building cooperation among Nile countries has opened the possibility for Ethiopia to draw on the waters of the Nile in new ways, and on a larger scale.

IDA provided financing for the Tana & Beles Integrated Water Resources Development Project, which aims to lay the foundation needed to accelerate sustainable growth in these sub-basins by developing enabling institutions and facilitating investments for integrated planning, management, and development. This project will be critical not only for local beneficiaries and Ethiopia in general, but will also improve regional cooperation among Nile riparian countries. It seeks to develop a new paradigm of institutional modernization and convergence in managing precious water resources, while at the same time stimulating sustainable development.  In the coming years, IDA plans to continue providing financing for investments in Ethiopia that build on the political openings achieved by NBI, in areas such as energy, irrigation, and water resources management.

Improving governance to maximize aid effectiveness

After dialogue within the country and with development partners, including the World Bank, the government committed to a series of governance reforms in its current poverty reduction strategy. These reforms include: civil  service  and public sector capacity building; financial management; human rights and conflict prevention; democratic representation; access to information; the justice system; decentralization; and civil society participation.  The Bank is supporting the government in implementing these reforms through programs that seek to protect basic services and build capacity in the public sector. The Bank is taking a lead role in interventions to help strengthen key areas of economic governance— such as building institutional capacity for decentralization, supporting private sector growth, and improving transparency and accountability, including social accountability.

Partners

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 $3billion per year between 2008 and 2010.  Both the government and the majority of international partners are keen to deepen the harmonization process in the spirit of the Paris Declaration (2005) and Accra Agenda for Action (2008).  Ethiopia is a pilot country for the Organization for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) harmonization agenda, and for the European Union’s initiative on donor division of labor.  Partners are currently considering how to build on this progress in light of the Accra Agenda.

The Bank, with the United Nations Development Programme (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 under way to make strong progress on the implementation of commitments in the Paris and Accra Declarations, including joint economic and sector work (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 in 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 International Development Association (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); the Sustainable Land Management (SLM) program; and the Agricultural Growth 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).