AFRICAN DEVELOPMENT BANK GROUP

ETHIOPIA

STRUCTURAL ADJUSTMENT PROGRAMME

Project Performance Evaluation Report (PPER)

OPERATIONS EVALUATION DEPARTMENT (OPEV)

26 May, 2000

TABLE OF CONTENTS

Page

ABBREVIATIONS AND ACRONYMS i PREFACE ii BASIC PROGRAMME DATA iii 1. EVALUATION SUMMARY 1

1.1 Objectives and Scope 1 1.2 Implementation Performance 1 1.3 Institutional Aspects 1 1.4 Programme Impact 2 1.5 Sustainability 2 1.6 Conclusion 2 1.7 Feedback 2

2. BACKGROUND 4 2.1 Country Economic Context 4 2.2 Programme Formulation, Content and Relevance 4 2.3 Scope and Objectives at Appraisal 5 2.4 Financing Arrangements 5 2.5 Evaluation Methodology 6 3. PROGRAMME IMPLEMENTATION AND ACHIEVEMENTS 7 3.1 Loan Conditions, Effectiveness, and Implementation Schedule 7

3.2 Performance of the Borrower 7 3.3 Performance of the Bank 7 4. PROGRAMME EVALUATION AND IMPACT 8 4.1 Proposed Policies and Measures 8 4.2 Relevance of the Programme 9 4.3 Achievement of Objectives 10 4.4 Institutional Development 16 4.5 Sustainability of the Achievements 17

5. PERFORMANCE RATINGS 18 5.1 Implementation Performance 18 5.2 Bank Group Performance 18 5.3 Project Outcome 18 6. CONCLUSIONS AND RECOMMENDATIONS 18 6.1 Overall Assessment 18

6.2 Feedback 19 6.3 Recommendations 20

ANNEXES

N°. of Pages I. Performance Ratings 3 II. Retrospective Logical Framework Matrix 2 III. Recommendation and Follow-up Action Matrix 2 TABLES I Ethiopia: Programme Objectives 1 II. Ethiopia: Summary Indicators 1 III. Ethiopia: General Government Finances 1 IV. Ethiopia: Monetary Survey 1 V. Ethiopia: Balance of Payments 1 VI. Ethiopia: Expenditure on Gross Domestic Product at Current Market Prices 1 VII. Ethiopia: Education and Health as percentage of Total Expenditure 1 VIII. Ethiopia: Exchange Rate Developments 1 IX. Ethiopia: Private Investment – Approvals and Implementation 1 X. Ethiopia: External Debt 1 XI. Ethiopia: Selected Social and Demographic Indicators 1 XII. Ethiopia: Composition of Exports 1 XIII. Ethiopia: General Government Revenue 1 1

1 This report was prepared by Messrs. O. OJO, OPEV, and T. RAMTOOLAH, Consultant, following a mission to Ethiopia in March 2000. Any further matters relating to this report may be addressed to Mr. G. M. B. KARIISA, Director, Operations Evaluation Department, (Extension 4052), or to Mr. OJO on extension 4262.

ABBREVIATIONS AND ACRONYMS ADB : African Development Bank ADF : African Development Fund AR : Appraisal Report BOP : Balance of Payments CG : Consultative Group Meeting CSP : Country Strategy Paper CSRP : Civil Service Reform Programme EU : European Union EPA : Ethiopian Privatisation Agency EPCP : Economic Prospects and Country Programming Paper ESAF : Enhanced Structural Adjustment Facility FY : Fiscal Year GDP : Gross Domestic Product GOE : Government of Ethiopia GTZ : German Technical Cooperation IDA : International Development Association IFC : International Finance Corporation IMF : International Monetary Fund MEDAC : Ministry of Economic Development and Cooperation MOF : Ministry of Finance NBE : National Bank of Ethiopia PCR : Project Completion Report PER : Public Expenditure Review PPER : Programme Performance Evaluation Report SAF : Structural Adjustment Facility SAP : Structural Adjustment Programme SOE : State-owned Enterprise TA : Technical Assistance TGE : Transitional Government of Ethiopia UA : Unit of Account WMU : Welfare Monitoring Unit

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PREFACE

1. This Programme Performance Evaluation Report (PPER) reviews the Structural Adjustment Programme which the Bank, along with other donors, financed for the Federal Democratic Republic of Ethiopia during the period 1993 to 1996. The loan for an amount of UA 63.55 million was approved on 23 June 1993. The Borrower was the Government of Ethiopia (GOE) and the Executing Agency was the Ministry of Finance. The Programme was a multi-donor balance of payments support, to which the International Development Agency (IDA), the World Bank’s soft window, was the most important contributor, with 69% of the total amount, while the African Development Fund (ADF) contributed 24% on behalf of the Bank Group. 2. The first tranche of the loan was disbursed, as planned, on 14 December 1993 but there was a 23-month delay for the second and final tranche on account of delays in implementation, particularly, in the area of privatisation. The loan closing date was therefore extended from 30 June 1995 to 30 June 1996 to allow for the full implementation of the policy actions and utilisation of the loan proceeds. A very small balance of UA 0.01 million, due to foreign exchange gain, was cancelled at the request of the GOE. 3. Overall, the project was well supervised and it achieved most of its objectives. The long term objective of the programme was to facilitate the transformation of the country from central planning to a market economy, while the immediate goals of the programme were to restore economic growth to an economy battered by a combination of civil war, droughts and mismanagement of the previous regime, and contain serious imbalances in the public and external sectors. At the same time, resources were to be increasingly allocated to education and health to provide opportunities to the more vulnerable groups of society. The programme included the gradual but systematic divestiture of government assets, the liberalisation of key financial and other prices, the implementation of a major tariff reform and the removal of administrative bottlenecks, all of which would pave the way for the emergence of a dynamic private sector. 4. The relevant Operations Department prepared a Programme Completion Report (PCR) in October 1997. It concluded that the programme was largely successful with most of the goals attained. The present report examines in greater detail the response of the economy to the programme reform measures, including issues not addressed in the PCR.

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BASIC PROGRAMME DATA

A. The Borrower

Country : Federal Democratic Republic of Ethiopia Programme : Structural Adjustment Programme Loan Number : F/ETH/SAP/93/36 Beneficiary : Government of the Federal Democratic Republic of Ethiopia Executing Agency : Ministry of Finance

B. The Loan Planned Actual Amount (UA) 63.55 63.54 Date Approved June 1993 23 June, 1993 Date Signed Not indicated July 9, 1993 Effective Date August 1993 September 28, 1993 Date of First Disbursement September 1993 December 14, 1993 Date of Last Disbursement April 1994 March 19, 1996 Completion Date June 30, 1995 June 30, 1996 C. Missions to Ethiopia Mission Type Persons Man/days Identification 2 20 Preparation N/A N/A Appraisal 3 30 Launching 1 05 First Technical Supervision 1 10 Midterm Review 2 20 Financial Supervision 1 05 Second Technical Supervision 2 20 PCR 1 10

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D. Financing Plan (UA millions) Planned Actual Total Cost 291.62 262.68 ADF 63.55 63.54 IDA 181.81 182.32 The Netherlands n.a. 7.64 Switzerland 5.09 5.09 Sweden 5.09 5.09 Germany 8.73 --- Others 27.35 --- E. Performance Indicators

Implementation Performance : Unsatisfactory Project Outcome : Satisfactory Bank Performance : Satisfactory

1. EVALUATION SUMMARY 1.1 Objectives and Scope 1.1.1 In response to the near collapse of the Ethiopian economy about 1991, coupled with unsustainable internal and external imbalances, high inflation rates, negative interest rates and non-viable debt ratios, the Government of Ethiopia (GOE) initiated a Structural Adjustment Programme (SAP) for the period 1993-96 with the support of ADF, other multilateral and bilateral donors. The goals of the SAP were: the stabilisation of the economy in order to restore macroeconomic balance and reduce inflation; structural adjustment to stimulate medium and long term growth. The structural adjustment policies were aimed at encouraging the development of the private sector, fostering competition throughout the economy and promoting the process of market-determination of all prices, including exchange rate and interest rate. 1.1.2 This report evaluates the response of the Ethiopian economy to the reforms carried out in the context of the Programme. The methodology adopted consists of comparing the outcome of the programme with the objectives and targets set at appraisal. The report also assesses the developments in the economy and compares them with what was obtained prior to the programme. The sources of information and data were GOE published materials, particularly from the Ministry of Economic Development and Co-operation (MEDAC), the Ministry of Finance (MOF), the National Bank of Ethiopia (NBE), discussions with Government officials, and representatives of the donor community in Ethiopia, and Bank Group internal documents relating to the Programme. 1.2 Implementation Performance The approved loan of UA 63.55 million for the Programme was to be disbursed in two tranches of UA 35.82 million and UA 27.72 million respectively. The first tranche was disbursed as planned, but there was a long delay in the disbursement of the second tranche. A small balance of UA 0.01 million, due to foreign exchange gain, was cancelled at the request of the Government. The implementation was slow on account of the Borrower’s lack of experience with Bank Group procurement and disbursement procedures, including filling of relevant forms. The loan closing date was extended from 30 June 1995 to 30 June 1996 to facilitate the full implementation of the policy actions and the utilisation of the loan proceeds. This notwithstanding, the programme remained on course and most of the quantitative and qualitative benchmarks agreed upon at appraisal were achieved. 1.3 Institutional Aspects 1.3.1 The Borrower was the GOE and the Executing Agency was the Ministry of Finance. Government compliance with reporting requirements (regular submission of quarterly progress and annual audit reports) was, generally, unsatisfactory. But Government commitment to the programme was strong. 1.3.2 Although the Bank did not participate in the identification and design of the Programme, the background work done by the World Bank and the IMF provided it with an adequate basis for extending the loan to the GOE and it collaborated satisfactorily with IDA in undertaking the appraisal mission. The Bank detected early problems in loan utilisation and fielded supervision missions to resolve them. Overall, the performance of the Bank was satisfactory.

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1.4 Programme Impact 1.4.1 Aggregate Impact: Most of the programme goals and targets were achieved and in some cases, exceeded. The real GDP annual growth rates reached 6.1% during the programme implementation period (1993/94-1995/96) and 3.6% in the post-programme period (1996/97-1998/99), despite unfavourable weather conditions in both periods. The latter caused agricultural output to decline by 3.4% in 1993/94 and 10.3% in 1997/98. Real GDP per capita was up by an annual average rate of 3.4% and 1.1%, respectively, during the implementation and post-implementation periods mentioned above. Inflation was significantly lower compared with levels set at appraisal. Similarly, both budget and current account deficits were reduced to below levels set at appraisal. 1.4.2 Major distortions in the economy such as the overvaluation of the exchange rate and negative interest rate were removed and there was an impressive built-up of foreign reserves. The privatisation programme of state-owned enterprises (SOE’s) is generally on course, despite initial delays and the private sector is now playing an increasingly important role in the economy. 1.4.3 Sectoral Impact: The domestic price regime has been deregulated and is now determined by market forces, with the exception of petroleum prices, which are still subject to periodic administrative reviews in order to keep them in line with world market levels. Tariffs of public utilities have been adjusted upwards to reflect costs of production. All those measures have created a conducive environment for the development of private sector activity. 1.5 Sustainability The sustainability of the achievements appears likely given the commitment of the GOE at the highest political level. But beyond this current phase, the conflict with Eritrea would be the single most important factor determining the sustainability of the programme’s achievements. 1.6 Conclusion The programme goals were largely achieved and an entirely new stimulating environment, which encourages privates sector initiative, is in place. The successful implementation of the programme has laid the groundwork for the resumption of growth and the realisation of the country’s potentials. But the road ahead is still tenuous and the country will have to persevere in its reform efforts to deal with the many challenges facing it. It will continue to require external assistance for many more years, but should also try to mobilise domestic resources on its own, maintain the momentum in the area of divestiture, strengthen further the framework within which the private sector is operating, enhance the efficiency of its expenditure policy by implementing the recommendations of the annual Public Expenditure Review (PER) exercise, encourage a meaningful diversification of its exports and provide relief and economic opportunities to the most vulnerable of its people. 1.7 Feedback The main lesson learnt from the programme is, first, the imperative of political commitment to a reform Programme. This commitment to reform by the political leadership appears to be widely shared among the population at large as well as among the civil servants. The second lesson to be drawn is the relationship between adjustment and financing. No meaningful and painless adjustment can be carried out in a country in the absence of a minimum level of financing. In Ethiopia, the availability of significant resource inflow, brought about partly as a result of the confidence which

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the donor community had in the new Government, generous rescheduling arrangements, all combined to encourage the Government to pursue its reform programme with vigour. Finally, the close collaboration of all multilateral institutions contributed greatly to the success of the programme.

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2. BACKGROUND 2.1 Country Economic Context 2.1.1 Since 1974, the Government of Ethiopia had operated a centrally planned economy based on socialist principles of extensive state ownership and control, large-scale regulation of economic activities and restrictive economic policies. The consequences of all these were factor market rigidities, economic distortions and a strong anti-export bias. All these combined with a debilitating civil war and drought to retard economic progress. Annual GDP growth rate averaged –1.6 per cent during 1987/88-1991/92. Military expenditures absorbed about 12-16 per cent of GDP, while fiscal deficit increased from 11.9 per cent in 1987/88 to 13.2 per cent in 1991/92. Per capita incomes were among the lowest, if not the lowest, in the world. In short, all economic aggregates pointed in the direction of a major economic collapse. 2.1.2 With the end of the civil war in May 1991, the Transitional Government of Ethiopia (TGE), which came into power, took steps to rehabilitate and reconstruct the war-damaged economy by preparing the Emergency Recovery and Reconstruction Programme (ERRP). The international community, including the African Development Fund supported the supported the programme. The Bank Group’s Economic Prospects and Programming Paper (EPCP) of 1993 felt the need for further support in the form of structural adjustment loan. The situation was made easy by the fact that the Government had successfully concluded a Policy Framework Paper (PFP) with the International Monetary Fund (IMF) and the World Bank in September 1992 and a Structural Adjustment Facility (SAF) with the IMF, thereafter. Following these positive developments, Ethiopia became eligible to participate in the Special programme of Assistance for Africa (SPA). A Consultative Group meeting (CG) held in November 1992 endorsed the reform programme and mobilised donor support for its implementation. 2.1.3 Thus, on June 23, 1993, the Boards approved an ADF loan of UA 63.55 million in support of the programme. In broad terms, the aim of the programme was the promotion of sustainable development and poverty reduction, through a fundamental transformation from a centralised planning to a market economy. The Government’s reform programme comprised a broad spectrum of macroeconomic and stabilisation measures and structural reforms all aimed at reducing internal and external imbalances, removing economic rigidities and distortions, improving the efficiency of resource use and creating an enabling environment for the development of the private sector. 2.2 Programme Formulation, Content and Relevance 2.2.1 The Government’s medium-term economic reform programme (1992/93-1994/95) was based on the Policy Framework Paper (PFP) agreed by the Government with the International Monetary Fund (IMF) and the World Bank in September 1992. The overall objective of the reform programme was to create a conducive policy environment for sustainable development, stimulate growth and reduce poverty. The reform programme focused on replacing the previous centrally planned economy with a private sector oriented, market-based economy. In this regard, the role of the state would be limited to few selected economic services while private sector development would be actively promoted. On the social front, the programme aimed at rehabilitating areas and people most severely affected by the war and the population uprooted as a result of the previous regime’s policy of villagisation and resettlement.

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2.2.2 Ethiopia’s economic reform programme encompassed a broad spectrum of macroeconomic and structural measures. The PFP detailed the policy measures and the timeframe for their implementation. However, given the long history of Ethiopia’s experience with a controlled economy, the transformation to a market-based economy would take several years to achieve. Therefore, the structural reforms would need to be stretched over several years. Moreover, Ethiopia’s extreme poverty, massive rehabilitation and reconstruction needs, and large macroeconomic imbalances make the implementation of its structural reform programme exceptionally difficult. Also, given the fact that the country’s private sector institutions and entrepreneurship are still largely underdeveloped, they are not yet capable of compensating fully for the limited (but high calibre) capacity of public agencies. Therefore, institutional capacity for managing the change from a planned to a market economy would have to be gradually built-up over time. 2.2.3 The economic reform programme was, therefore, scheduled for implementation in three phases. The first phase, which started since the beginning of 1992/93 fiscal year, focused primarily on macroeconomic stabilisation involving tightening of fiscal policy, strengthening of monetary control, and exchange rate adjustment. The second phase concentrated on the initial structural reforms intended to complement stabilisation objectives such as correction of price distortions, tariff reforms, and the stimulation of private sector supply response through the provision of an enabling environment. Although some actions had been taken in this regard in 1992/93, the substantial part of the structural reforms during this phase were implemented in 1993/94. This phase also incorporated actions to promote sustainable development focusing on the environment, population, human resource development, poverty alleviation, and gender issue. 2.2.4 In the third phase of the reform programme, reserved for after the transition period in 1994/95 and beyond, more fundamental structural reforms would be introduced. Although macroeconomic stabilisation would continue in the context of the PFP agreements, increasing emphasis would be put on issues of allocative and productive efficiency to be achieved by building competitive markets, a closer integration with the international economy, a marked shift in the boundary between public and private production, and reduction or elimination of costly controls. This phase of the reform programme would concentrate on the resolution of the land ownership issue, privatisation of public enterprises, financial sector reforms, and civil service reform. 2.3 Scope and Objectives at Appraisal

The main objective of the Structural Adjustment Programme (1992/93-1993/94), was to provide support for macroeconomic stabilisation and stimulate a strong private sector production response so as to provide employment and increased economic opportunities for the Ethiopian population, as well as reduce poverty. The macroeconomic reform measures were aimed at correcting distortions in key prices in order to improve the efficiency of resource mobilisation and allocation, increase revenue buoyancy, reduce fiscal deficit, and maintain a low and stable rate of inflation. Measures directed at promoting a strong supply response included improvements to the environment for the efficient operation of the private sector, increasing the availability of foreign exchange for its operation and expansion in order to generate increased growth and employment.

2.4 Financing Arrangements

The total cost of the programme was UA 291.62 millions. The Bank Group, through the ADF, pledged the sum of UA 63.55 out of which UA 63.54 million was fully disbursed. The World Bank, through IDA, pledged UA 181.81 million but disbursed UA 182.32 million. The other financiers were Switzerland (UA 5.09 million), Germany (UA 8.73 million) and others (unspecified) – (UA 27.35 million).

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2.5 Evaluation Methodology 2.5.1 The framework for evaluation is the set of criteria developed by the Evaluation Cooperation Group (ECG) of Multilateral Development Banks (MDBs). The criteria include the relevance of the programme, its efficacy, sustainability, its institutional development impact, Borrower performance, lender’s performance and aggregate project performance indicator. Although the development of this framework predated the Appraisal Report (AR) for the current programme, certain aspects of the framework (particularly those relating to efficacy) are well documented therein. These are described in terms of expected outcomes of key economic variables. 2.5.2 The approach of this report is to evaluate the programme from the standpoint of the evaluation criteria mentioned above. In the case of efficacy (i.e. the achievement of objectives), the programme would compare the outcome of the programme with the projections (expected outcome) specified in appendix II of the appraisal report. As for other criteria, the report would assess developments in the economy and compare them with what obtained prior to the programme. 2.5.3 This programme benefited from the use of the Method of Project Design and Evaluation (MPDE) recently introduced by the Bank. The MPDE Matrix, as developed at appraisal, is attached as Annex II.

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3. PROGRAMME IMPLEMENTATION AND ACHIEVEMENTS 3.1 Loan Conditions, Effectiveness, and Implementation Schedule Loan Conditions 3.1.1 The Appraisal Report (ETH/AMGE/93/01) contained a list of 15 conditions which were to be fulfilled before the release of the first tranche. The release of the second tranche was also subject to the fulfilment of three additional conditions. Almost all of the loan conditions were duly fulfilled by the Borrower, except the elimination of cross arrears among SOE’s and the sale of all of 29 hotels, on which doubts subsist . Loan Effectiveness 3.1.2 The loan, which was appraised from 22 January to 17 February 1993, was declared effective on 28 September 1993 and the first tranche was released on 14 December 1993. According to the PCR, all of the conditions precedent to the release of first tranche were fully complied with by the Borrower within three months of the approval of the loan. However, the utilisation of the loan was initially slow because the Borrower was unfamiliar with procurement and disbursement procedures as well as the documentation formalities involved, such as filling in of relevant forms. The situation improved, however, following a supervision mission. Implementation Schedule 3.1.3 The programme was to be implemented within a two-year period. But it suffered some delay as a result of the political transition in the country, the lack of the experience of the Borrower with Bank rules and procedures and, possibly, a too-optimistic planning schedule set at appraisal. In fact, in order to enable the country to fulfil all of the conditionalities and to accommodate the delays in the utilisation of the loan proceeds, the loan closing date was extended to 30 June 1996 and the second tranche disbursed on 19 March 1996. Incidentally, the closing date for the complementary IDA credit also had to be extended from 31 December 1994 to 30 September 1996 for similar reasons. A small balance of UA 0.01 million, resulting from foreign exchange gain, was cancelled, at the request of the government. The Borrower’s PCR was submitted to the Fund in January 1997 while that of ADF was completed in October 1997. 3.2 Performance of the Borrower Considering its inexperience in the handling of such a loan, the Borrower’s performance was satisfactory. Nevertheless, it is not certain that all the conditions were fulfilled. Two on which doubts subsist are those on elimination of cross arrears and the sale of 29 hotels. The Borrower adhered to ADF’s procurement procedures. Its performance in the area of compliance with the submission of quarterly progress reports and annual audit reports was not satisfactory. Apparently, only one progress report and the final audit report were submitted in spite of constant reminders. 3.3 Performance of the Bank The performance of ADF was also satisfactory. Despite its non-participation at the design stage, it co-ordinated very well with other donors during appraisal and implementation stages. As mentioned above, it detected problems such as utilisation of loan proceeds early on and took rapid remedial actions.

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4. PROGRAMME EVALUATION IMPACT 4.1 Proposed Policies and Measures 4.1.1 Ethiopia responded to the problems discussed in section 2 by undertaking appropriate policy measures aimed at containing imbalances in the economy, promoting the role of market forces in the allocation of resources and removing impediments to the development of the private sector. The main policy measures for achieving the country’s development objectives were macroeconomic reforms, public enterprise reforms, domestic price liberalisation, foreign trade liberalisation and private sector reform. 4.1.2 Given the imbalances inherited from the previous regime, it was imperative for the new Government to stabilise the economy and promote discipline in the conduct of economic management. For example, public sector deficit, excluding grants, was running at the equivalent of 11.2 % of GDP in 1990/91 following major increases in expenditure and low revenues. The resulting deficits were largely financed by the domestic banking system with consequential effects on price increases. As a result, the programme emphasised, in the area of public finance, the need to contain expenditures, especially recurrent, broaden the revenue base and rationalise tax rates, and severely limit domestic credit creation. In particular, the programme called for the introduction of the taxation of rental income, the broadening of the coverage of sales tax to include more taxable services and the reduction of corporate and non-corporate profit tax rates away from their then exorbitant rates of 50% and 59%, respectively. 4.1.3 Large imbalances also existed in the external sector, in part, because of very low level of exports and the unsustainably high levels of imports. The debt service ratio reached an unprecedented level of 70% in the same year and even increased further one year after, (Table X) while gross official reserves fell to the equivalent of slightly more than one week’s imports in 1989/90. 4.1.4 The overvaluation of the currency, which had existed prior to 1991/92, constituted a major distortion as it taxed exports and subsidised imports. Following the devaluation of the birr in October 1992 from its pegged rate of 2.07 to 5.0 to the dollar, it became necessary to maintain the competitiveness of the currency. The programme, therefore, called for the introduction of a market-determined foreign exchange system, with increasing private sector access to foreign exchange, the removal of all impediments to exports (eliminating export taxes wherever possible and streamlining export licenses) and the promotion of the diversification of the country’s narrow export base. Furthermore, interest rates were to be reviewed at three-monthly interval, to ensure that they remain positive in real terms in order to provide incentive for resource mobilisation, which was low prior to the programme. 4.1.5 In addition to these two key prices, the programme called for the liberalisation of the extensive price controls instituted by the previous regime. The prices of goods produced by natural monopolies were to be reviewed on the basis of opportunity costs while those of nine essential tradable commodities produced by de facto monopoly suppliers were to be adjusted on the basis of import parity plus an amount up to the prevailing duty. It was necessary to ensure that prices remain the guiding mechanism for the allocation of resources by market participants. 4.1.6 In all countries where they have been predominant, the influence of state-owned enterprises (SOE’s) had been deleterious on the economy because of their inefficiency and their negative impact on economic performance. In the case of Ethiopia, almost all enterprises, from mining to manufacturing to services were nationalised, and parastatals had become ubiquitous throughout the

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economy with the exception of agriculture, where small holders predominate alongside commercial state and private farms. The SOE’s were, for the most part, inefficient, wasteful and constituted major hindrances to the development of the private sector. It became then a matter of urgency to dismantle most, if not, all of them and to level the playing field for the private sector, in order to enable it to play an increasing role in the economy. The programme, therefore, called for the sale of government-owned houses as well as retail shops, 29 hotels and tour services (restaurants and taxi services). In addition, and in order to ensure that the private sector was able to compete with the remaining parastatals, the latter were to be subjected to a “hard budget” constraint, including a plan of action for ending all cross arrears among them and with financial institutions and government departments. In the past, the parastatals enjoyed protection from external competition through monopoly rights and high tariff walls. As part of the reform process, the protection which they enjoyed was to be removed through trade and tariff liberalisation. 4.2 Relevance of the Programme 4.2.1 In its Letter of Development Policy (Annex XI of the Appraisal Report), the Government of Ethiopia summarised its development objectives, its major goals and its strategy for the period 1992-96. The primary goal of its reform programme was the attainment of broad based sustainable economic development while containing, at the same time, the imbalances facing the economy to viable levels. Thus, it aimed for a growth rate of real per capita income of at least 5.5% per year, lowering of inflation to below 7%, containing the current account deficit to less than 8.6% of GDP and reducing the external debt service ratio to below 28.5%. 4.2.2 The Government of Ethiopia proposed a multi-phase approach to attain these objectives. During the first phase, it would focus on macroeconomic stabilisation, contain recurrent expenditure, broaden revenue base, correct key price distortions and increase the role of market signals, provide critical inputs for trade and production, initiate improvements in the economic environment for private business activity and public enterprise reform. In the second phase, it would tackle the more difficult tasks, such as civil service reform, privatisation of public assets and the overhaul of the financial system. In subsequent phases, it would deal with more complex issues such as land reform. 4.2.3 The general orientation of the Programme was to give support to policy reforms in a wide range of areas, such as prices, tariffs, public enterprise, and private sector development, in order to achieve sustainable socio-economic development in Ethiopia. This strategy is consistent with Bank’s own strategy towards Ethiopia as spelt out in the Bank’s internal documents, “Ethiopia: Economic Prospects and Country Programming Paper, 1993-95” (ADB/BD/WP/93/23 – ADF/BD/WP/93/17, 12 March 1993) and “Ethiopia: 1996-98 Country Strategy Paper” (ADF/BD/WP/96/107, 11 October 1996). In the first document, the Bank’s major objective centred around poverty alleviation. This was to be achieved through food self-sufficiency, increased social sector investment, promotion of small- and medium-scale private enterprises, rehabilitation and expansion of social and physical infrastructure and fostering economic growth with equity. Although poverty reduction continued to be the focus of Bank strategy in the second document, it was realised that the promotion of growth, as basis for poverty reduction, could not be realised without deregulating the economy and reducing the scope of government intervention. Thus, the thrust of Bank strategy was that of liberalising the economy and instituting market reforms. 4.2.4 To the extent that the programme under review focused on the stabilisation and deregulation of the economy as basis for the resumption of growth, it can be said that it is relevant to both the Bank’s and the GOE’s strategies for the country. Given the dilapidated state of the country’s infrastructure, poor state of human capital, the extent of poverty in the country, the pervasiveness of state control over the economy, the programme was well designed to promote, within a limited

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time-frame, growth-enhancing policies while reducing macroeconomic imbalances. By focusing on a four-pronged multi-phased approach, centred around enhancing the role of market forces, encouraging both domestic private sector and foreign direct investment, the gradual divestiture of government assets, and tariff reform, the programme was adequately and fully relevant to Ethiopia’s goals. 4.3 Achievement of Objectives 4.3.1 One major limitation of the evaluation methodology adopted here, is the difficulty in a multi-donor financed programme, of isolating the impact of a donor’s intervention from those of others. The Ethiopian Structural Adjustment Programme was a success when evaluated against its objectives. Thus, to the extent that the Bank was a co-financier, it can, ipso facto, claim some credit for that success. Another limitation is that it is always difficult to isolate, precisely, the effects of policy reforms on the economy. For example, it is difficult to say, with precision, that the performance of the economy was due only to the reforms or to exogenous factors such as good weather conditions. 4.3.2 These limitations notwithstanding, the approach adopted here is one of comparing programme outcomes with objectives set at appraisal. The GOE pursued the adjustment programme by implementing all of the measures contained within it, and thereby successfully laid the basis for sustainable, broad based economic growth. Simultaneously with the implementation of the programme, the Government took the critical steps of protecting the vulnerable groups in the society from the potential adverse consequences of the Programme. The policies to which it committed itself were centred around six broad areas, namely, macroeconomic reforms; foreign trade liberalisation; domestic price liberalisation; public enterprise reforms and privatisation; private sector development and the promotion of socio-economic objectives. Macroeconomic Performance 4.3.3 The quantitative targets for the programme are set out in Table I, while Table II provides, in a summary fashion, the indicators of performance of the economy. For purpose of comparison, Table II divides the last nine-year period 1990/91-1998/99 into three sub-periods (to which reference will be made thereafter), the pre-programme (1990/91-1992/93), the programme (1993/94-1995/96) and the post-programme (1996/97-1998/99). From Table II, it can be observed that almost all of the macroeconomic objectives were achieved and, in some cases, exceeded. The real GDP responded very well throughout the entire period of implementation and even thereafter, growing on average by 6.1% and 3.6% respectively. Had it not been for the drought conditions of 1993/94 and El Nino in 1997/98, the rate of growth of GDP would, probably, have been much higher. In fact, if abstraction is made of those two years, GDP grew, on an annual average basis between 1992/93-1998/99, by a healthy 8.0% and agricultural output by 6.4%. This compares more than favourably with the 5.8% annual average growth rate of GDP and 3.1% for agricultural output set at appraisal. The performance of agriculture was replicated by both the industry and the service sectors. Industry increased, on average, in the two sub-periods by 6.7% and 7.1%. The service sector grew by 8.0% and 8.6% in each of the implementation and post-implementation periods compared with the annual average rate of 6.7% set at appraisal. 4.3.4 Several factors account for this impressive performance. First, investment responded extremely well to the new stimulating and deregulated environment, including the profoundly overhauled investment and labour codes. Investment as a percentage of GDP, which had declined to 9.2% in 1991/92, increased to 18% by 1998/99 (Table VI). During the seven-year period following the implementation of the programme, it was equivalent, on an annual average basis, to 16.5% of GDP. In agriculture, the increase in investment took the form of expanded cultivated areas and

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improved technologies such as commercial fertilisers and higher-yielding seeds. As an example, the volume of fertiliser imported increased from 141,000 metric tons in 1991 to 382,000 metric tons in 1998. In the manufacturing sector, it took the form of new capital acquisition. The latter increased from 72 million birr in 1991/92 to 307 million birr in 1996/97 and that increase came principally from the private sector whose capital expenditure was up from 2.2 million birr to 126 million birr over the same period. Second, exports, which had reached an alarmingly low level in 1992, (equivalent to only 1.5% of GDP), also responded very well to the new environment by increasing rapidly to 9.2% of GDP in 1997/98 (Table V). It was equivalent, on an annual average basis between 1992/93-1998/99 to 7.1% of GDP. Table II shows the consistent increase in exports as a percentage of GDP during the three sub-periods from 2.7%, to 6.8%, to 8.7% during the post-programme. Third, productivity improved rapidly in the manufacturing sector as obstacles to performance such as unattractive investment and labour codes were improved upon. According to figures quoted by the MEDAC, labour productivity, which declined at an annual average rate of 3.4% between 1980/81 and 1990/91, increased by an annual average rate of 35% between 1991/92 and 1996/97. Finally, the return of peace and stability have also enabled the Government to focus on economic management and mobilise the people to that end. Such an atmosphere, happening as it did after a long period of instability, encouraged economic agents to produce, trade and invest. 4.3.5 In addition to GDP growth targets, inflation targets were also largely met. At appraisal, the inflation rate was expected to decline from a high of 24.2% in 1992/93 to 7 % in 1994/95, or an annual average rate of 13.7% (Table I). The outcome was far better than expected, as seen by the annual average rates of 5.2% and 0.2% in the programme and post-programme periods, respectively (Table II). Inflation was up in 1994/95 to 13.4 % mostly because of the prevailing drought conditions and unexpected increases in money supply. 4.3.6 Public sector deficit (excluding grants) declined throughout the period, except in 1993/94. In relation to the targets set at appraisal, however, the outcome can be considered a success. In the appraisal report, the deficit was expected to represent the equivalent of 21.7% on an annual average basis. Between 1992/93 and 1998/99, it was equivalent to 7.1% on that same basis and 4.3% if grants are included. Thus, in the area of public deficit reduction, it can be concluded that the programme was a success. 4.3.7 The year 1993/94 saw a sudden increase in expenditure from 19.6% of GDP to 25%. Both recurrent and capital expenditures were up, the former apparently explained by a sudden increase in interest payments. About 19% of total expenditures (recurrent and capital) was devoted to education and health (Table VII), a level which has been roughly maintained through 1999. The level of total expenditures, on an annual average basis, represented the equivalent of 24.1% of GDP between 1992/93-1998/99 compared to an annual average of 42.6% at appraisal for the years 1992/93 to 1994/95. The increase in revenue has been impressive. Table III shows that revenue increased from 2.2 billion birr (10.6% of GDP) in 1991/92 to 9.4 billion in 1998/99 (19.2% of GDP) resulting, in part, from the broadening of the tax base to include mining income, rental income and capital gains on shares, bonds and urban houses. However, an increase in import duties, from 704 million birr in 1992/93 to 2 billion birr in 1997/98 and an increase in Government income are the most important explanatory factors for the substantial increase in revenue (Table XIII). The level of revenue averaged, over the seven-year period 1992/93-1998/99, 16.9% of GDP. Domestic bank financing of the deficit was sharply curtailed, as required by the programme. 4.3.8 Ethiopia’s balance of payments is characterised by a structural deficit on the trade account, a much smaller surplus on its services account and therefore a deficit on its current account, before transfers (Table V). The latter reached an annual average representing the equivalent of 4.7% of GDP in the post-implementation period (Table II) compared to an annual average level of 19.4% of GDP set at appraisal. Exports reacted positively to the measures implemented. They increased, in

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nominal terms, from 319 million birr in 1991/92 to 3.6 billion birr in 1998/99 (Table V). The volume of coffee exports picked up drastically reaching 121,365 tons in 1997/98 from a low of 36,000 tons in 1991/92. According to the authorities, 80% of that came from private exporters compared to about 16% during the last years of the previous Dergue regime. Despite progress accomplished in the export of pulses and oil seeds (from 0.5% of total exports in 1992/93 to 10.1% in 1997/98, Table XII), coffee still remain the principal product, by far (70% of total exports in 1997/98), and it is very likely to remain so in the medium term. Imports increased very rapidly reaching an annual average of 18.7% of GDP during the period 1992/93 and 1998/99. As a result of large inflows of capital, (mostly donor funds), Ethiopia even managed to have a surplus on its overall balance, equivalent to an annual average of 2% of GDP between 1992/93 and 1998/99. 4.3.9 At appraisal, a target for gross reserves representing the equivalent of 7.2, 10 and 13 weeks of imports, respectively, was set for each of the three years 1992/93 to 1994/95. The outurn was far better since for each of those three years, the actual level of reserves was more than twice the targeted levels. The level of reserves represented the equivalent of 14.7, 28.3 and 30.2 weeks of imports (Tables I and V) in each of these three years respectively. It also reached impressive levels in the three years up to 1998. 4.3.10 The external debt situation of Ethiopia is summarised in Table X. The table shows that 1997/98 marked a turning point as debt service ratio declined dramatically from 40.5% to 15.7% following rescheduling operations at the Paris Club in 1997. Its stock of external debt to GDP also declined slightly from 63.9% to 61.8%. However, according to figures provided by the IMF, 1997 also marked a turning point for the worse for the country as it was forced to acknowledge, then, outstanding claims due to Russia (mostly military equipment), that caused its stock of debt to double to 143.5% of GDP. This would cause the debt service ratio to increase to 60%. Nevertheless, it seems that the country is negotiating with Russia and non-Paris Club creditors for similar rescheduling agreement terms as provided by the Paris club. If successful, this could bring about a significant decline in its overall debt service ratio. Finally, the country had been selected as a potential candidate for the Initiative for Heavily Indebted Poor Countries but it appears that the conflict with Eritrea has put the processing of its case on hold. Sectoral Performance 4.3.11 Domestic price liberalisation and other reforms in the external sector had major effects on the economy, in general, and on key sectors like agriculture and industry, in particular. As indicated above, agricultural output increased significantly during the implementation and post-implementation periods. The volume of food production increased from a long-term average of 60 million quintals in the 1980’s to 104 million quintals in 1996/97. This was the direct result of the overall policy improvement in the agricultural sector where the emphasis is now on efficiency, profit maximisation and decentralisation. The manufacturing sector also witnessed significant growth rates. Thus, the share of industry, as a percentage of GDP, increased from an annual average of 9.6% in the pre-programme period to 10.9% and 11.4% in each of the programme and post-programme periods, respectively (Table II). Price liberalisation and Exchange Rate Reforms 4.3.12 Prior to the commencement of this programme, most prices were controlled or regulated. The implementation of the programme paved the way for their liberalisation. All prices, with the exception of petroleum, have now been liberalised, in accordance with the objective of deregulating the economy and giving prime of place to market forces in the allocation of resources. Petroleum prices are adjusted periodically to reflect world prices. Tariffs of public utilities (electricity, water and telecommunications) were adjusted significantly upwards to reflect real costs of production.

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4.3.13 In the financial sector, most controls on lending and deposit rates were lifted in January 1988 and the government is now content on ensuring a floor on saving deposits. This rate stands currently at 6% (Table IV), well above the prevailing rate of inflation. In 1994/95, an auction system for Government securities was introduced to allow market forces to play a role in the determination of interest rate, consistent with the spirit of the Programme. Three categories of treasury bills (maturities of 28, 91 and 182 days) are auctioned to the public and to financial institutions. Their denominations have recently been reduced from 50,000 birr to 5,000 birr in order to broaden private sector’s participation. 4.3.14 In the foreign exchange market, the government introduced, in May 1993, a bi-weekly foreign exchange auction system, as a step towards the liberalisation of the exchange rate. For about two years, the marginal rate of the auction was used as a secondary rate for certain transactions. But in July 1995, the two rates were unified and a weekly auction introduced thereafter. Since August 1998, the Government has replaced the retail auction market by a wholesale auctioning in which commercial banks, foreign exchange bureaux and investors participate. This ensures that the competitiveness of the birr is maintained (the premium between the parallel and the official exhange rates has virtually disappeared) and the private sector has now ample access to foreign exchange. The birr has depreciated from 5.1 in 1992/93 to the dollar to 8.121 in 1998/99, or a nominal depreciation of 59% (Table VIII). More importantly, its competitiveness, as measured by the Real Effective Exchange Rate, has improved by 76% over the same period (Table VIII). The near elimination of the premium between the official and the parallel rates is an indication of the extent to which overvaluation has been reduced . 4.3.15 A major trade liberalisation was undertaken as part of the programme. Consistent with its commitments, the Government introduced export duty drawback schemes in August 1993 to encourage exports. Two versions were introduced, the first one allowing a refund of duty paid on raw materials while the second one, known as the duty free importation scheme, permits potential exporters to be exempted from duty on raw materials. Taxes and duties on exports, except coffee, have also been eliminated. License fees for coffee exporters have been reduced and the procedures for obtaining such licenses have been streamlined. Since September 1996, the 100% surrender requirement of foreign exchange on exporters had been reduced to 50% and eliminated thereafter in September 1998. They are now able to open foreign exchange accounts with commercial banks. Maximum import duties were reduced progressively from 280% to about 80% and thereafter to 30% and the number of tariff categories from fifteen to seven. The average trade-weighted tariff rate stands now at 14.9%. The granting of import licenses has been simplified and there is now only a negative list of imports which only concern such items as drugs, arms or obscene materials. 4.3.16 The impact of those measures, especially that relating to the exchange rate, was an increase in exports. Exports increased, in nominal terms, from 319 million birr (1.5% of GDP) in 1991/92 to 4.1 billion birr (9.2% of GDP) in 1997/98 (Table V). The volume of coffee exported increased from 63,400 metric tons in 1992/93 to 123,200 metric tons in 1996/97. Pulses and oilseeds went up during the same period from 1,900 metric tons to 112,600 metric tons, or from 0.5% of total exports to 10.1% (Table XII), providing impetus to the export diversification objective. Unfortunately, the performance of leather and leather products, the other non-traditional export, along with pulses and oilseeds, was disappointing apparently because of problems inherent in the leather itself. Its share of total exports declined from 14.2% of total exports in 1992/93 to 8.4% in 1997/98. The Government is, nevertheless, doing all it can to boost this sector, which offers good prospects in terms of export diversification. To this end, a Leather Technology Institute will soon be set up with technical assistance from Italy. The exports of horticulture and textile products are also being emphasised as possible product diversification. Textile technology will soon be taught at the University to provide the sector with skilled manpower.

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Divestiture actions 4.3.17 Prior to the Programme, virtually all enterprises (except those in agriculture) had been nationalised by the previous socialist regime. Those SOE’s were, for the most part inefficient and constituted a heavy burden on the budget as a result of subsidies from the Government. Furthermore, their existence was antithetical to its strategy of encouraging the emergence of a dynamic private sector. The Government therefore had to put in place a strong divestiture programme aimed at reducing, if not eliminating, their role in the economy. 4.3.18 To this end, an Ethiopian Privatisation Agency (EPA) was set up in 1994 to oversee the smooth process of privatisation. The programme, which really got under way in early 1995, is being carried out in phases. The first phase involved those enterprises relatively easy to privatise (mostly small retail trade establishments). As of the end of 1998, some 177 units, spanning the whole gamut of activities (123 retail or wholesale, 31 manufacturing, 14 hotels and restaurants, 6 in agriculture, 2 in construction and 1 in mining), and representing an equivalent of 6.6% of GDP had been sold. Preparing them for sale required little in the way of their restructuring. The Government has now relinquished almost all retail trade activities. However, in relation to its commitment under the programme, it appears that some hotels have still not been sold (14 actually compared to 29 in the programme). 4.3.19 The process of privatisation is a new one for the EPA, hence the slow progress it has made to date. One of the reasons that has slowed down the process is how to handle the case of retrenched workers. The Government has been very sensitive to this issue, given the severely restricted opportunities for meaningful employment in the country. It has organised workers into safety-net programmes and, in some cases, encouraged them to buy the enterprises with the help of loans it provided. A second reason that slowed down the process of privatisation is claims on property illegally seized by the Dergue regime. The authorities have decided that no unit will be privatised if there is such a claim pending on it. By FY 1995, EPA had received some 17,000 such claims, out of which it rejected 13,000 and investigated further the remaining ones. It expects to delegate some 1,000 cases to three regional Governments. 4.3.20 The second and considerably more ambitious phase of the divestiture programme will involve the sale of 120 large public enterprises (including breweries, food companies, tanneries, textile mills, garment factories and an engineering firm, for an average net asset value of about US$ 3 million) during 1999-2002. EPA has recently been given greater autonomy over the whole privatisation programme, following a change in the law. It is now an autonomous federal agency reporting directly to the Office of the Prime Minister whereas it was previously under the aegis of the Ministry of Finance. An additional method of disposal has been introduced (creation of joint stock companies, which should allow ownership to be broadened) and EPA is receiving technical assistance from the World Bank and the German government. The Government is now adopting a sectoral approach whereby groups of enterprises in similar activities are offered for sale at the same time, allowing for consolidation into larger holdings. Private Sector Development 4.3.21 One of the causes of the slow growth of the Ethiopian economy under the previous regime was the pervasive influence of the Government in economic activities. Such influence had been shown to be overly inefficient and thus capable of retarding growth. As a step towards the resumption of growth, the programme envisaged the encouragement of the development of the private sector which has proved, both theoretically and historically, to be more efficient than the public sector.

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4.3.22 The TGE subscribes entirely to this view ever since it came to power in 1991. Hence, it has made the promotion and expansion of the private sector one of the cornerstones of its development strategy. It emphasised the accessibility of the private sector to foreign exchange and domestic credit and therefore pushed for market forces to play as prominent a role as possible in the determination of all prices. Also, the privatisation programme is directly related to the role expected of the private sector in the Government’s vision of the economy. To this end, the Government has taken several other measures to ensure its prominence in the economic development of Ethiopia. 4.3.23 A new labour code was adopted in 1993 which radically altered the Labour Proclamation No.64/1975. The previous obligation to go through “Labour Exchange Offices” has been abolished and management has now greater flexibility in the deployment of labour resources, including hiring and firing. The investment code has been revamped at least three times in recent years to allow the country to attract significant levels of foreign direct investment. In the latest revision, a foreclosure law was enacted and made operational. Previously, foreign investors were not allowed to participate in joint ventures for an amount of less than $20 million. This minimum acceptable limit has now been removed. Similarly, investors could not participate in sole ventures in engineering, metallurgical, pharmaceutical, chemical and fertiliser industries for an amount exceeding $ 20 million. This maximum amount has now been lifted. The law prohibiting foreign participation in the telecommunications and power sectors has been abrogated. The ban on private trade in fertilisers has been lifted and a new legal and regulatory framework which allows domestic private participation was established in 1997, along with a new regulatory authority. As a result of the liberalisation of the exchange system, the repatriation of dividends and profits has now been made easier. Recently, investment concessions were extended to Ethiopian nationals living abroad by the Ethiopian Investment Authority whereby they are allowed to freely invest in local enterprises. 4.3.24 All those measures, aimed at stimulating the development of the private sector, seem to be bearing fruits. According to figures quoted by the Ethiopian authorities, the share of the private sector exports in total exports has increased from 16% during the last years of the Dergue regime to 80% in 1997/98. Similarly, the number of approved foreign direct investment projects has risen rapidly since the implementation of the programme. A total of 5,050 projects have been approved between 1992/93 and 1998/99 for a total amount of 41.5 billion birr, out of which, 1,491 have actually commenced operations for a total amount of 8.8 billion birr (Table IX). This trend should accelerate as the privatisation programme moves into higher gear. Socio-economic Impact 4.3.25 The combination of several years of internal conflict and a hostile climatic condition has made Ethiopia one of the poorest countries in the world. The extent of poverty in the country is illustrated in statistics relating to the social sector. For example, life expectancy at birth was estimated to be 49 years in 1994 compared to 56 for low income countries and 52 for sub-Saharan Africa. Only about 19% of the population have access to a clean water supply and 7% to adequate sanitation facilities. The rate of illiteracy is three times that of Kenya and twice that of Tanzania, Ethiopia’s immediate neighbours. Several years of civil war, recurring droughts, and an inefficient centralised system have all taken their tolls on the population. 4.3.26 While in the long run, economic growth is the most appropriate anti-poverty measure, it is necessary that in the short to medium term, actions be taken to ease the burden of poverty on the most vulnerable groups in society. Thus, with the resumption of economic growth, various donors, including Italians and Germans, in collaboration with the Government, have taken measures to address the poverty situation. These include targeted aid and credit to the more than 300,000 of demobilised ex-soldiers in view of either returning them to their place of origin or to secure

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permanent employment. Some Governmental organisations and NGO are working with handicapped children in providing them with basic amenities and rudimentary education. The problem of the 100,000 or so street children throughout the country remains a threat to social security. 4.3.27 As part of this programme, a Welfare Monitoring Unit (WMU) has been set up in the Ministry of Economic Development and Co-operation to monitor the poverty situation very closely and to allow the Government to better target resources to those that are in most urgent need. To that end, the Central Statistical Authority conducts regular household surveys on consumption, expenditure and income as well as other welfare indicators related to education and health, which are then processed by the WMU. The latest findings for 1995/96 confirm the widespread level of poverty especially in rural areas although some regions fare better than others. 4.3.28 The Appraisal Report programme did not make explicit reference to the issues of women and the environment, presumably because these issues were not considered as important then as they are today. This notwithstanding, it is obvious that the vagaries of weather, which for years have affected the country, has had an adverse effect on the environment and therefore on agricultural performance. In the area of gender, the Government has created a Women’s Affairs Department in the Ministry of Labour to oversee matters relating to women. Family planning services are in place to educate women about the merits of small family sizes. Although there is no direct evidence, it can be inferred that women, as a group, have benefited from the programme insofar as the agricultural sector, in which they are predominant, has shown marked improvement. 4.4 Institutional Development 4.4.1 The challenge of implementing the programme has paved the way for the establishment of key institutions necessary for the execution of the programme. In several cases, it resulted in the strengthening of existing ones and in others, in building human capacities. For example, the EPA was created for the purpose of effecting the privatisation of SOE’s. The World Bank and a German group (GTZ) provided the technical assistance to guide the EPA through this process. However, the local EPA staff had decided right from the inception of the privatisation programme in 1994 to build a strong human capital base through a process of learning by doing and, as much as possible, relying on technical assistance (TA) only for cases that in-house staff cannot handle. To this end, the agency is providing training facilities to its staff while at the same time, compiling administrative and procedure manuals for them. 4.4.2 Other areas of institutional development can be found in new activities taken over by some institutions as a result of the programme. For example, by supervising the Treasury bill auctions and by managing the weekly foreign exchange auctions, the capacities of the Ministry of Finance and the National Bank of Ethiopia have been strengthened respectively. The process of learning by doing by these institutions has been helpful in terms of institutional development. Similarly, the participation of Ethiopian nationals in the Public Expenditure Review has strengthened the capacities of those officials. Furthermore, the Government is working on a project to set up a stock exchange in Addis Ababa. To this end, the International Finance Corporation (IFC) has just finalised the selection of consultants who will prepare a detailed business plan for the implementation of the project. It is expected that the Stockholm Stock Exchange will provide institutional input to the project. The consultants’ report is expected in July. 4.4.3 Finally, the reform of the Civil Service, which was part of the programme, has gone some length in making it more efficient in the discharge of its responsibilities. In order to effect the reform, a task force was established in 1994 to identify its main weakness and propose solutions. A report was published after a 16-month study and a Civil Service Reform Programme (CSRP) was

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proposed and approved thereafter in March 1996 by the government. It has been decided to implement the CSRP in incremental phases and so far, the recommendations with respect to expenditure management and control have been put in place with the assistance of the World Bank. As far as human resources management are concerned, the necessity to improve job classification, performance appraisals and the recruitment and promotion process have been decided upon but not yet implemented. 4.5 Sustainability of the Achievements 4.5.1 The Ethiopian economy has responded well to the package of reforms contained in the programme. Coming as it did from a very low income level, the achievements have been impressive. The hitherto centrally controlled economy has given way to free enterprise. Prices have been deregulated and a conducive environment has been created for the development of private enterprise. The economy is thus poised for the continuation of current growth momentum. 4.5.2 But the sustainability of current achievements hinges on continued political commitment, continued donor support, the cessation of on-going border conflict with Eritrea and the gradual reduction in poverty. There is abundant evidence that the Government is committed to the cause of reform. The society is more open now and the leadership does not show any indication of a possible policy reversal. Thus, in the short to medium term, there is hope for continued political commitment, which in turn would guarantee the sustainability of the achievements. 4.5.3 Government commitment to policy reforms is further strengthened by its new Policy Framework Paper 1998/99 – 2000/01 and its recently declared Vision 2015. By the declarations in the Framework Paper, the Government has rededicated itself to further reforms. Similarly by the vision, it commits itself to the eradication of poverty in 2015, through universal primary education and universal primary health care, and food security for the entire population. Furthermore, it pledges itself to the further development of the private sector by the creation of an even more appropriate conducive environment. 4.5.4 But all these could be undermined by the current border conflict with Eritrea. This is putting strains on macroeconomic management, resource flow and costs of transportation, estimated at a cost of about 1.3% of GDP, as Ethiopia now has to use the port of Djibouti. In the area of macroeconomic management, resources are now being diverted to the war effort, as seen by an increase in defence-related expenditures to 8.1% of GDP compared with 2 % during the pre-war years. The budget deficit, which had remained sustainable so far, is now reaching worrisome levels. Thus, according to projections undertaken in the context of the Public Expenditure Review (PER) exercise, the fiscal deficit, after grants, is projected to reach, in 1999/00, 5.8% of GDP which, given lower expected external financing, would lead to an increase in domestic financing to 4.2% of GDP. Equally worrisome is the increase in defence outlay that is being undertaken to the detriment of capital expenditures in education and health. On the external front, the current account deficit, (which is already high at 7.8% of GDP in 1998/99), could increase further as a result of declining exports, which, combined with conflict-related suspension of disbursements from the Bretton Woods Institutions and depletion of external reserves, could then cause the deficit on the overall balance to increase. All these could put pressures on the monetary authorities. While the Ethiopian Government has reacted with calm to the situation, it has taken measures which could be interpreted as policy reversals. For example, it has introduced a 10% surcharge on imports in December 1999 and, since February 2000, it requires importers to deposit 100% of the domestic equivalent of the value of their imports. While such measures are insignificant compared to the wide-ranging reforms put in place, the aggravation of the conflict and the perceived sense of injustice on the part of the authorities towards the international community, could cause them to react further in ways that could jeopardise the programme.

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4.5.5 Finally, the sustainability of the achievements could be threatened by the poverty situation in the country. Ethiopia is by all accounts a very poor country. Over the years, the people have waited in vain for improvements in their standard of living. Under a military regime, social discontent could be suppressed. But this is not likely to be so in an open and democratic system which now prevails in Ethiopia. Thus the revolution of rising expectations could cause social discontent and therefore warrant a reversal of present policies. In the long run therefore, the sustainability of present achievements might not be guaranteed unless the extent and depth of the poverty situation are reduced. 5. PERFORMANCE RATINGS The performance ratings are based on the analysis of the information contained in Chapters 3 and 4. The outcome of the ratings is contained in Annexes I and II. 5.1 Implementation Performance Implementation performance of the programme was rated unsatisfactory mostly because of the delay in the implementation schedule. 5.2 Bank Group Performance The Bank overall performance is rated satisfactory especially because of its level of supervision missions. 5.3 Project Outcome The outcome of the programme was satisfactory. However, the social situation still remains precarious, as seen by the large number of people threatened by famine in some drought-prone regions of the country. 6. CONCLUSIONS AND RECOMMENDATIONS 6.1 Overall Assessment 6.1.1 The programme goals were largely achieved and an entirely new and more conducive environment for the resumption of growth established in the country. Macroeconomic imbalances in both the public sector and the external accounts were contained and inflation brought down to an annual average rate of 0.2% during the post-period implementation (1996/97-1998/99) from an annual average rate of 17.3% in the three-year period before the programme (1990/91-1992/93). Similarly, real GDP grew by an annual average rate of 6.1% during programme implementation (1993/94-1995/96) and 3.6% in the post-implementation period, despite unfavourable weather conditions during both periods. Major distortions in the economy such as the overvaluation of the exchange rate and prevalence of negative interest rates have been removed. There has also been a significant build up of foreign reserves. The divestiture of the many public enterprises, hitherto pervasive throughout the economy, is making satisfactory progress and the private sector is playing an increasing role in the economy. Absolute poverty, widespread among at least half of the population, is receiving the utmost attention on the part of the Government, at the highest level.

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6.1.2 These impressive achievements, coming as they did in a relatively short period of time, should not mask the fact that the country still faces some daunting problems, the most difficult of which being, perhaps, the inability to ensure a minimum level of food security throughout the country. Indeed, it is a bitter irony that, for all of the positive economic developments happening over the last eight years, a large segment of its population is presently going through famine-like conditions in some drought-prone parts of the country. An emergency appeal has been launched in January 2000 by the Disaster Prevention and Preparedness Commission which estimate that some 8 million people are in need of food aid amounting to 821,835 metric tons at an estimated value of US$206 million (some 20% of Government revenue). While the scale of the disaster is nowhere near those that shocked the world in the 1970’s and the 1980’s, the present crisis is a reminder of the imperatives of moving the economy away from rain-fed agriculture. 6.2 Feedback Lessons Learned - Government 6.2.1 On all accounts, the outcome of the Programme was a success. This result would not have been possible without strong commitment on the part of the political leadership. Right from the outset, the TGE demonstrated its willingness to open up the country politically and economically. It also decided, in the spirit of openness, to involve the citizens through open dialogue and participation. For example, it was after an extensive national debate in November 1991 that the TGE adopted a policy paper called the Transitional Period Charter, which encapsulated its approach to economic management. This Charter was to set the stage for the implementation of several reform package, of which the present programme is a part. 6.2.2 The successful outcome would also not have been possible without the existence and participation of strong institutions. The ability of the Civil Service, after years of civil war and social dislocation, to implement this and other programmes of economic management, is a testimony to the imperatives of creating and preserving strong national institutions. Lessons Learned – Bank 6.2.3 The programme would not have been successful without adequate Bank supervision. This allowed the correction of implementation problems which could have adversely affected outcome, if left unattended. It is to the credit of the Bank that it was able to field two technical and one financial supervision missions to Ethiopia in the course of the Programme. But the Appraisal Report was silent on the potential effects of liberalisation in Ethiopia on its neighbours. Yet such effects could be beneficial in the wider context of integration among African countries. Lessons Learned – the Donor Community 6.2.4 The successful outcome of the Programme can also be attributed to the generosity of the donor community (through financial flows) and the co-ordination among all the donors. Without adequate financing, the Programme would have been more painful in terms of lost output, and so on. Finally, without adequate co-ordination, particularly among the key financiers, the implementation of the programme would have been more difficult.

20

6.3 Recommendations Government 6.3.1 A major recommendation which flows from the analysis above is that the Government must remain committed to the cause of reform, as the cost of policy reversals could be high. Policy reforms have brought great benefits to the economy. If they are not to be eroded, the Government must rededicate itself to the continuation of reforms. Bank 6.3.2 The successful outcome of the programme is traceable, in part, to the Bank’s effective implementation and supervision. A major recommendation in this regard is, therefore, that the Bank should intensify its programme supervision efforts. It was noted that the Bank did not participate in the upstream preparatory work on the design of the programme. In future, the Bank should position itself to participate in these initial, and highly useful, design work. Furthermore, the Bank’s participation in the annual Public Expenditure Review (PER) exercise, now in its seventh year, is highly commendable and is to be pursued with equal vigour. It should use whatever leverage it has to ensure that the authorities implement the recommendations arising out of this very useful and interesting work, in which, in fact, some of the Government’s own senior civil servants participate. Donor Community 6.3.3 Ethiopia is a very poor country and its stock of debt is relatively high. If the country is to break from the vicious circle of poverty, it must be given some debt relief. It has demonstrated courage and commitment in reforms and it is therefore deserving of debt relief. Similarly, it requires adequate resource flow to supplement internal revenue mobilisation efforts.

Annex I Page 1 of 3

PERFORMANCE RATINGS FORM IP 1 IMPLEMENTATION PERFORMANCE

No COMPONENT INDICATORS MARK (1 to 4)

REMARKS

1 Adherence to Time Schedule 1 Implementation schedule was exceeded by more than 1 year

2 Adherence to Cost Schedule N/A

3 Compliance with Covenants 3 There was full compliance with covenants.

4 Adequacy of Supervision and Reporting

3 Supervision was adequate but reporting was not.

5 Satisfactory Operations (if applicable)

3 The entire operation was satisfactory

TOTAL 10

Overall Assessment of Implementation Performance

2.5 Unsatisfactory

Key: 1: Highly Unsatisfactory 2: Unsatisfactory 3: Satisfactory 4: Highly satisfactory

Annex I

Page 2 of 3 FORM BP 1 BANK PERFORMANCE

No COMPONENT INDICATORS

MARK (1 to 4)

REMARKS

1 At Identification 3 Bank identified this programme in its 1993/95 EPCP

2 At Preparation of Project 2 Bank did not participate in the preparation. It merely adopted the PFP.

3 At Appraisal 3 Bank participated jointly with the World Bank and other donors

4 At Supervision 4 Supervision was adequate.

TOTAL 12

Overall Assessment of Bank Performance

3 Satisfactory

Annex I Page 3 of 3

FORM PO 1 PROJECT OUTCOME

No COMPONENT INDICATORS MARK (1 to 4)

REMARKS

1 Relevance and Achievement of Objectives 3.25 The programme was relevant and it achieved most of its goals

i) Macro-economic Policy 4 Policies were relevant and adequate

ii) Sector Policy 3 Sector policies, particularly price liberalisation were well formulated and relevant.

iii) Physical (incl. Production) N/A

iv) Financial N/A

v) Poverty Alleviation & Social & Gender 2 The social situation remains precarious

vi) Environmental N/A

vii) Private sector development 3 The progress made in this area is quite satisfactory

viii) Other (Specify) ---

2 Institutional Development 3 The programme has made significant contribution to institutional development

i) Institutional Framework including Restructuring

3 The public sector has been reformed and restructured

ii) Financial and MIS including Audit Systems N/A

iii) Transfer of Technology N/A

iv) Staffing by qualified persons (incl. turnover) Training & Counterpart staff

3 There are no serious staffing constraints

3 Sustainability 3 The Government is committed to the goals of the reform but sustainability could be undermined by the border conflict with Eritrea.

i) Continued Borrower Commitment 3 Government is strongly committed

ii) Policy Environment 3 The environment is now more conducive to policy reforms

iii) Institutional Environment 3 The institutional environment has been strengthened with the creation of new institutions

iv) Technical Viability and Staffing 3 There are no significant human capacity constraints

v) Financial Viability including Cost Recovery Systems

N/A

vi) Economic Viability N/A

vii) Environmental Viability N/A

viii) O & M facilitation (availability of recurrent funding, foreign exchange, spare parts, workshop facilities)

N/A

4 Economic Internal Rate of Return N/A

TOTAL 9.25

Overall Assessment of Outcome 3.1 Satisfactory.

Annex II Page 1 of 2

Project MPDE Matrix – ETSAL

Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification (MOV) Important Assumptions Input: 1. Improvement of the overall efficiency of the economy in the context of a liberalised economy.

1.1 Real GDP growth rate of 6.0 per cent per annum

during the medium term, 1992/93 to 1994/95. 1.2 Decline in inflation rate from 21% in

1991/92 to 7.0 per cent by 1994/95.

1.1 National Accounts compiled by the Ministry of

Development and Co-operation (MEDAC). 1.2 Published Price index by the National Bank of

Ethiopia.

1. Strong Government commitment

to the reform programme. 2. No unexpected exogenous shocks

Project Objectives: 1. To attain macroeconomic stabilisation and promote private sector development.

1.1 Reduction in fiscal deficit (after grants) from

10% of GDP in 1991/92 to 8% by 1994/95 1.2 Elimination of domestic bank financing of the

deficit which was 7.3% of GDP in 1991/92 by 1994/95.

1.1 Summary of Government Finance compiled by

the Ministry of Finance 1.2 Summary of Government Finance.

(Project Objective to Goal) 1. Strong Government commitment

to fiscal discipline 2. No unexpected external shocks

Outputs: 1. Enhanced revenue

generation. 2. Improved public

expenditure management. 3. Liberalised foreign

exchange system.

1.1 Increase in revenue effort from 15.3% of GDP in

1991/92 to 22% by the end of 1994/95. 2.1 Shift in public expenditures from directly

productive activities and military spending to provision of social services and infrastructural development by 1994/1995.

2.2 Elimination of budgetary support for operational deficit to parastatals by 1993/94 and beyond.

3.1 Devaluation of the Birr by 59 per cent in dollar

terms by October 1992. 3.2 Introduction of auction exchange rate system by

1 May, 1993.

1.1 Revenue data compiled by the Ministry of

Finance 2.1 National Budget 3.1 National Bank of Ethiopia Notice of the Public. 3.2 National Bank of Ethiopia Notice to the Public.

(Output to Project Objective): 1 Training and administrative

improvements in the Inland Revenue and the Customs Authorities.

2. Expenditures are rationalised and made to conform to the recommendations of the Public Expenditure Review.

Annex II Page 2 of 2

Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification (MOV) Important Assumptions

Output: 4. Rationalised import tariff regime. 5. Improved foreign exchange reserves. 6. Divested government-owned houses, retail shops and

hotels.

4.1 Completion of the classification of imported

items under the harmonised system by end of 1993/94.

4.2 Conversion of specific import duties into ad valorem rates by end of 1993/94.

5.1 Rise in gross reserves from 1 month of import

over in 1991/92 to 3.3 months by 1994/95. 6.1 Completion of action plan to sell government-

owned houses to the private sector by end of 1993/94.

6.2 Divesting of 121 state-owned retail shops and 29 hotels to the private sector by 1994/95.

4.1 Report of the tariff study. 4.2 Report of the tariff study. 5.1 Data compiled by the National

Bank of Ethiopia. 6.1 Report on Transfer of

government-owned houses to the private sector.

6.2 Report of the National Privatisation Agency.

Activities: 1. Carry out the initial public expenditure review exercise

(PER) 2. Implement the recommendations of the PER in

1994/95 fiscal year and ensure fiscal discipline in budgetary allocation and execution.

3. Introduce aution-based foreign exchange system 4. Announce tariff reform plan and implementation time-

table 5. Implement the action plan for the transfer of

government-owned houses to the private sector. 6. Implement the initial diverstiture actions concerning

retail shops and 29 hotels.

Total Cost: UA Million ADF 63.55 IDA 182.32 The Netherlands 7.64 Switzerland 5.09 Sweden 5.09 Total 262.68

1.1 Report of the PER 2.1 1994/95 Budget document 3.1 National Bank of Ethiopia, Notice

to the Public 4.1 Report of the tariff study 5.1 Annual reports of the Office for

the Sales of government-owned houses

6.1 Annual reports of the National Privatisation Agency.

(Activity to Output): 1. Government commitment to a timely implementation of agreed measures (this condition applies to all the activities.

Source: Appraisal Report

Annex III Page 1 of 2

RECOMMENDATION AND FOLLOW-UP ACTION MATRIX:

MAIN FINDINGS AND CONCLUSIONS RECOMMENDATIONS FOLLOW-UP ACTIONS RESPONSIBILITY

Formulation and Project Rationale

1. The programme was necessary and useful The country must persevere in its reform efforts Monitor closely macroeconomic Government to the country. It has set the stage for material and durable improvements in the lives of its people

developments and overall social conditions of the people

2. The programme was generally well formulated Ensure that similar programmes are as well Examine possibility of improving further Operations Department and with goals and objectives defined in formulated with goals and objectives properly indicators of performance Borrower measurable terms and targets set for most of the Defined performance indicators.

3. Bank did not participate in the design Depending on resource management and The Bank could consider the possibility Operations Department of the programme Availability, the Bank should make its presence of joint missions at the design stage

felt at the design stage with other multilateral institutions

4. Programme formulation ignored the effects of Future programmes should anticipate the The implications for economic integration Operations Department adjustment on economic integration effects of adjustment in a country on its should be built into future programmes

Neighbours

5. Conditions for tranche release were too Streamline the conditions and concentrate on New programmes should be monitored Operations Department numerous and repetitive four or five strict suspensive ones along those lines

Project Implementation

1. The original life of the project was exceeded There is need to ensure that the project Keep as much as possible to timetable Operations Department and by one year is not over ambitious in its timing and set in appraisal report Borrower

once agreed upon, be adhered to closely

2. The Borrower was not conversant with Bank Inform and educate Borrowers of Bank procedures Ensure that Borrower is now familiar Operations Department and procurement rules and other procedures in the and rules before implementation. Organise with all Bank procedures Borrower Beginning regular seminars along those lines

Annex III

Page 2 of 2

Compliance with Loan Conditions and Covenants

GOE fully complied with the covenants but Bank should ensure that all reporting Supervision and audit missions should Operations Department reporting was not satisfactory: there were no Requirements are adequately met with be dispatched as much as possible to regular submission of quarterly progress and alert Borrower to reporting requirements annual audit reports.

Performance Evaluation and Outcome

1. The programme was largely successful and Government should persevere and deepen its Monitor economic policies to ensure Operations Department and most of the objectives were met and most of the reform programme that there are no policy reversals or Borrower targets exceeded. slippages

2. The foundation has been laid for sustained The Government should intensify its efforts at Strengthen the macroeconomic unit of Government and higher growth rates in the economy but the reform. In particular, it should accelerate its MEDAC by providing training and equip- country still faces daunting problems Privatisation programme, allocate increasing ment to the team

amount of resources to education and infrastructure, open up the economy further and implement the recommendations of the PER exercise.

3. Significant inroads were made in capacity These achievements should be sustained and Monitor developments in the area of Borrower and Operations building and institutional development intensified. Emphasise training whenever and institutional reform Department

wherever possible

Sustainability

1. Sustainability appears likely because of Maintain close policy dialogue among all those Make the goals Government set itself Government and donors Government commitment Concerned for 2015 "realisable"

2. War with Eritrea could undermine the Seek quick and peaceful resolution to conflict Monitor effects of conflict on the economy Government Sustainability of achievements

Table I

Ethiopia: Programme Objectives (real growth rates, unless otherwise stated)

1991/92 1992/93 1993/94 1994/95 Av. 92-95GDP -9.6 6.5 5.5 5.5 5.8Agriculture -8.7 2.9 3.1 3.3 3.1Industry -4.9 15.8 4.7 5.0 8.5Services -4.1 10.8 4.5 4.8 6.7GDP per capita -7.9 3.5 2.5 2.5 2.8Consumption per capita 0.8 0.5 2.8 2.7 2.0Inflation (nominal) 21.0 24.2 10.0 7.0 13.7Money Supply (nominal) 13.3 19.6 15.9 11.0 15.5

In percent of GDP: Gross Investment 9.6 13.0 13.2 13.1 13.1Domestic Savings -1.2 -3.0 -3.8 -3.9 -3.6National Savings 1.8 1.9 2.0 2.7 2.2Revenue 15.3 19.8 20.8 22.0 20.9Expenditure 28.5 43.1 42.7 42.0 42.6Fiscal Deficit (including grants) -13.2 -23.3 -21.9 -20.0 -21.7Fiscal Deficit (excluding grants) -10.0 -11.8 -10.0 -8.0 -9.9Exports 7.3 8.1 8.6 8.5 8.4Imports 18.1 20.1 21.1 20.2 20.5Current Account -8.0 -16.2 -21.1 -20.9 -19.4

Gross Reserves (Weeks of Imports) 4.1 7.2 10.0 13.0 10.1

Source: Appraisal Report, Annex VII

Table II

Ethiopia: Summary Indicators (rates of growth, unless otherwise stated)

Pre-programme Average Programme Average Post-Programme Average 1990/91 1991/92 1992/93 90/91-92/93 1993/94 1994/95 1995/96 93/94-95/96 1996/97 1997/98 1998/99 96/97-98/99

Real GDP (factor cost) (millions of birr) 10,868.1 10,471.5 11,724.3 11,021.3 11,910.4 12,644.3 13,990.3 12,848.3 14,767.8 14,834.5 15,553.0 15,051.8 Growth rate real GDP -4.2 -3.6 12 1.4 1.6 6.2 10.6 6.1 5.6 0.5 4.8 3.6 o/w Agriculture 5.2 -2.7 6.1 2.9 -3.7 3.4 14.6 4.8 3.5 -10.3 4.2 -0.9 Industry -19.1 -7.1 28.5 0.8 6.9 8.1 5 6.7 7.2 6.8 7.2 7.1 Services -12.7 -4.2 17.4 0.2 7.9 9.3 6.9 8.0 7.1 10.3 8.3 8.6 Inflation 20.9 21 10 17.3 1.2 13.4 0.9 5.2 -6.4 2.3 4.8 0.2 Money Supply (M2) 18.7 13.2 16.8 16.2 10.2 20.7 11.8 14.2 5.5 12.8 5.8 8.0 Agriculture as percentage of GDP 56.3 56.8 53.8 55.6 51 49.7 51.6 50.8 50.7 45.7 44.8 47.1 Industry as percentage of GDP 9.4 9.1 10.4 9.6 11 11.2 10.6 10.9 10.8 11.6 11.7 11.4 Services as percentage of GDP 34.3 34.1 35.8 34.7 38 39.1 37.8 38.3 38.5 42.7 43.5 41.6 GDP per capita (birr) 226 212 231.7 223.2 229.5 237.2 255.9 240.9 262.7 254.9 264.1 260.6 GDP per capita (birr):percentage chge -6.6 -6.2 9.3 -1.2 -1.0 3.4 7.9 3.4 2.6 -3.0 3.6 1.1 In percent of GDP: Gross Investment 10.4 9.2 14.2 11.3 15.2 16.4 16.9 16.2 17.0 17.6 18.0 17.5 Savings 3.4 3.0 5.6 4.0 5.0 7.4 7.0 6.5 9.9 7.4 2.4 6.6 Revenue (including grants) 16.5 13.2 13.7 14.5 17.4 20.8 21.3 19.8 22.6 21.5 21.5 21.9 Expenditure 25.3 20.2 19.6 21.7 25.0 24.7 24.1 24.6 24.2 24.9 26.0 25.0 Fiscal Deficit (including grants) -8.8 -7.0 -5.9 -7.2 -7.7 -3.9 -2.9 -4.8 -1.5 -3.4 -4.5 -3.1 Fiscal Deficit (excluding grants) -11.2 -9.6 -7.6 -9.5 -11.1 -7.3 -5.7 -8.0 -5.2 -6.3 -6.9 -6.1 Exports 3.0 1.5 3.6 2.7 5.0 8.4 6.9 6.8 9.4 9.2 7.4 8.7 Imports 11.1 8.7 13.6 11.1 16.7 19.3 23.4 19.8 18.0 19.2 20.6 19.3 Current Account (excl. transfers) -6.3 -3.9 -6.2 -5.5 -6.0 -4.2 -10.2 -6.8 -2.8 -3.6 -7.8 -4.7 Gross Reserves (weeks of imports) 4.5 10.0 14.7 9.7 28.3 30.2 41.0 33.2 26.7 17.0 15.4 19.7

Source: MEDAC, NBE and staff calculations

Table III

Ethiopia: General Government Finances (in millions of birr, unless otherwise stated)

1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99Revenue 3,142.6 2,706.7 2,207.9 3,191.2 3,939.1 5,912.8 6,966.1 7,877.4 8,412.9 9,413.8Grants 401.4 463.3 543.0 466.1 987.2 1,131.7 1,096.8 1,504.0 1,273.3 1,149.5Total Revenue and Grants 3,544.0 3,170.0 2,750.9 3,657.3 4,926.3 7,044.5 8,062.9 9,381.4 9,686.2 10,563.3Recurrent expenditure 3,842.9 3,640.1 3,253.5 3,434.5 4,399.6 5,215.7 5,582.3 5,717.1 7,081.4 8,486.4Capital expenditure 1,440.1 1,214.1 951.8 1,784.9 2,694.3 3,156.5 3,562.6 4,299.9 4,146.6 4,307.3Total expenditure 5,283.0 4,854.2 4,205.3 5,219.4 7,093.9 8,372.2 9,144.9 10,017.0 11,228.0 12,793.7Deficit (excluding grants) -2,140.4 -2,147.5 -1,997.4 -2,028.2 -3,154.8 -2,459.4 -2,178.8 -2,139.6 -2,815.1 -3,379.9Deficit (including grants) -1,739.0 -1,684.2 -1,454.4 -1,562.1 -2,167.6 -1,327.7 -1,082.0 -635.6 -1,541.8 -2,230.4Revenue only/GDP (%) 18.7% 14.1% 10.6% 12.0% 13.9% 17.4% 18.4% 19.0% 18.7% 19.2%Revenue and grants/GDP (%) 21.1% 16.5% 13.2% 13.7% 17.4% 20.8% 21.3% 22.6% 21.5% 21.5%Recurrent exp/GDP (%) 22.8% 19.0% 15.6% 12.9% 15.5% 15.4% 14.7% 13.8% 15.7% 17.3%Capital exp/GDP (%) 8.6% 6.3% 4.6% 6.7% 9.5% 9.3% 9.4% 10.4% 9.2% 8.8%Total exp/GDP (%) 31.4% 25.3% 20.2% 19.6% 25.0% 24.7% 24.1% 24.2% 24.9% 26.0%Deficit excl grants/GDP (%) -12.7% -11.2% -9.6% -7.6% -11.1% -7.3% -5.7% -5.2% -6.3% -6.9%Deficit incl grants/GDP (%) -10.3% -8.8% -7.0% -5.9% -7.7% -3.9% -2.9% -1.5% -3.4% -4.5%Financing/GDP (%) External loans 2.8% 2.1% 1.4% 2.7% 6.0% 3.7% 3.8% 1.8% 1.7% 2.7% Domestic sources 7.1% 6.0% 5.6% 3.2% 1.7% 0.2% 1.8% -0.2% 2.2% 2.6% o w banking system 7.1% 6.0% 5.6% 4.2% 3.3% 0.9% -0.3% -2.0% 1.3% 0.9%

Source: MEDAC, NBE and staff calculations

Table IV

Ethiopia: Monetary Survey (in millions of birr, unless otherwise stated)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 Net Foreign Asset 288.3 403.1 810.3 3764.6 4659.2 6235.9 5551.2 5724.2 6387.4Domestic Credit 8937 10106 12167 12744 13873 15411 17146 18931 20157 Claims on Govt 6022 7034 7825 9616 9024 7888 8797 9372 9841 Claims on others 2915 3072 4342 3128 4849 7523 8349 9559 10316Other Items (net) 1263 1498 2455 4910 4529 5991 6185 6034 6836Broad Money (M2) 7962.3 9011.1 10522 11599 14003 15656 16512 18621 19708.4Narrow money (M1) 6134.8 6845.3 7711.9 8373.2 9909 9917.4 9979.3 10970 11660.8 Currency in circulation 3820.8 4315.8 4885 5158.9 5843.3 5656.9 5176.3 4750.4 5219.7 Demand deposits 2314 2529.5 2826.9 3214.3 4065.7 4260.5 4803 6220 6441.1Quasi Money 1827 2166 2810 3226 4094 5737 6531 7650.5 8046.9 Savings deposits 1679 2002 2459 2845 3649 4984 5699 6484.6 7203.8 Time deposits 148 164 351 381 445 753 832 1165.9 843.1% change from previous year Net Foreign Assets 520.0% 39.8% 101.0% 364.6% 23.8% 33.8% -11.0% 3.1% 11.6%Domestic Credit 12.1% 13.1% 20.4% 4.7% 8.9% 11.1% 11.3% 10.4% 6.5%Broad Money (M2) 18.7% 13.2% 16.8% 10.2% 20.7% 11.8% 5.5% 12.8% 5.8%Narrow money (M1) 22.9% 11.6% 12.7% 8.6% 18.3% 0.1% 0.6% 9.9% 6.3%Quasi Money 22.9% 11.6% 12.7% 8.6% 18.3% 0.1% 0.6% 9.9% 6.3%Interest (min) on savings na na 10.0 10.0 10.0 11.0 10.0 7.0 6.0Bank lending rate na na 15.0 15.0 15.0 16.0 15.0 10.5 na

na = not available Source: NBE and staff calculations

Table V

Ethiopia: Balance of Payments (in millions of birr, unless otherwise stated)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99

Trade balance -1,558.2 -1,491.7 -2,668.8 -3,321.1 -3,711.2 -6,255.5 -3,562.2 -4,506.4 -6,465.2 Exports 572.1 319.2 949.9 1,419.2 2,835.1 2,607.1 3,891.5 4,141.6 3,636.3 Coffee 268.5 168.3 537.0 718.0 1,799.0 1,724.0 2,307.4 2,889.5 2,112.7 Others 303.6 150.9 412.9 701.2 1,036.1 883.1 1,584.1 1,252.1 1,523.6 Imports 2,130.3 1,810.9 3,618.7 4,740.3 6,546.3 8,862.6 7,453.7 8,648.0 10,101.5 Fuel -237.4 -249.3 -821.1 -725.6 -993.3 -922.2 -1,140.9 na Na Other -1,892.9 -1,561.6 -2,797.6 -4,014.7 -5,553.0 -7,940.4 -6,312.8 na NaNet services -62.0 27.4 -36.0 173.2 333.0 415.0 718.7 699.3 456.4 Travel -10.1 -8.5 -5.8 -10.6 -15.4 -34.4 -65.7 22.6 -151.2 Other transportation 135.6 200.9 420.1 634.3 793.3 749.7 685.1 561.4 457.7 Government 68.8 65.8 84.7 91.0 95.6 145.2 371.9 456.7 378.5 Investment income -206.5 -178.7 -348.7 -351.4 -424.2 -460.7 -140.7 -256.0 -281.2 Other -49.8 -52.1 -186.3 -190.1 -116.3 15.2 -131.9 -85.4 52.6Net goods & services -1,620.2 -1,464.3 -2,704.8 -3,147.9 -3,378.2 -5,840.5 -2,843.5 -3,807.1 -6,008.8Private transfers 413.9 653.7 1,057.9 1,434.3 1,944.9 1,980.0 1,671.6 2,186.5 2,171.8CA (excl. pub transfers) -1,206.3 -810.6 -1,646.9 -1,713.6 -1,433.3 -3,860.5 -1,171.9 -1,620.6 -3,837.0Public transfers 604.3 893.5 1,708.7 1,447.7 2,560.2 2,474.2 1,453.0 1,793.0 1,598.9CA (incl. pub transfers) -602.0 82.9 61.8 -265.9 1,126.9 -1,386.3 281.1 172.4 -2,238.1Non monetary capital 330.2 -238.1 -45.4 1,233.2 186.6 -30.1 -395.3 801.4 1,780.8 Public long term 301.7 -27.3 514.0 961.0 308.9 422.1 -723.6 329.4 1,735.7 Short term 28.5 -210.8 -559.4 272.2 -122.3 -452.2 328.3 472.0 45.1Net errors & Omissions 140.6 -270.6 -515.6 635.6 -275.2 1,141.2 -1,271.6 -1,128.5 145.7Overall balance -131.2 -425.8 -499.2 1,602.9 1,038.3 -275.2 -1,385.8 -154.7 -311.6Financing: o/w 131.2 425.8 499.2 -1,602.9 -1,038.3 275.2 1,385.8 154.7 311.6 Monetary auth. -324.9 -136.3 -403.7 -2,900.7 -1,942.0 -526.5 610.4 -205.1 -256.9 Arrears 456.1 562.1 -372.1 961.7 536.3 780.7 762.9 359.8 316.1 Debt relief 0.0 0.0 1,275.0 336.1 367.4 21.0 12.5 0.0 252.4 Cancellation 0.0 0.0 0.0 81.6 148.8 21.0 0.0 0.0 180.6 Rescheduled 0.0 0.0 0.0 254.5 218.6 0.0 0.0 0.0 71.9CA (excl pub transfers)% GDP -6.3% -3.9% -6.2% -6.0% -4.2% -10.2% -2.8% -3.6% -7.8%CA (incl. Pub transfers)% GDP

-3.1% 0.4% 0.2% -0.9% 3.3% -3.7% 0.7% 0.4% -4.6%

Overall bal./GDP (%) -0.7% -2.0% -1.9% 5.7% 3.1% -0.7% -3.3% -0.3% -0.6%Exports/GDP (%) 3.0% 1.5% 3.6% 5.0% 8.4% 6.9% 9.4% 9.2% 7.4%Imports/GDP (%) 11.1% 8.7% 13.6% 16.7% 19.3% 23.4% 18.0% 19.2% 20.6%Reserves (weeks of imports) 4.5 10.0 14.7 28.3 30.2 41.0 26.7 17.0 15.4

CA = Current Account Source: NBE and staff calculations

Table VI

Ethiopia: Expenditure on Gross Domestic Product at Current Market Prices (in millions of birr, unless otherwise stated)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 Government Consumption 3,165.8 2,107.8 2,818.8 3,155.2 4,021.2 4,239.7 4,526.3 6,251.4 7,315.4Private Consumption 15,369.1 18,059.0 22,358.5 23,747.5 27,346.7 31,042.3 32,831.2 35,472.2 40,677.3Total Consumption 18,534.9 20,166.8 25,177.3 26,902.7 31,367.9 35,282.0 37,357.5 41,723.6 47,992.7Total Investment 1,996.4 1,911.1 3,792.1 4,293.7 5,569.0 6,404.4 7,049.1 7,926.1 8,847.1Gross Domestic Saving 660.4 625.2 1,494.1 1,426.2 2,517.1 2,652.6 4,107.6 3,311.3 1,157.6Gross Domestic Expenditure 20,531.3 22,077.9 28,969.4 31,196.4 36,936.9 41,686.4 44,406.6 49,649.7 56,839.8Resource gap -1,336.0 -1,285.9 -2,298.0 -2,867.5 -3,051.9 -3,751.8 -2,941.5 -4,614.8 -7,689.5GDP current market prices 19,195.3 20,792.0 26,671.4 28,328.9 33,885.0 37,934.6 41,465.1 45,034.9 49,150.3Govt Consumption/GDP (%) 16.5% 10.1% 10.6% 11.1% 11.9% 11.2% 10.9% 13.9% 14.9%Private Consumption/GDP (%) 80.1% 86.9% 83.8% 83.8% 80.7% 81.8% 79.2% 78.8% 82.8%Total Consumption/GDP (%) 96.6% 97.0% 94.4% 95.0% 92.6% 93.0% 90.1% 92.6% 97.6%Total Investment/GDP (%) 10.4% 9.2% 14.2% 15.2% 16.4% 16.9% 17.0% 17.6% 18.0%Saving/GDP (%) 3.4% 3.0% 5.6% 5.0% 7.4% 7.0% 9.9% 7.4% 2.4%

Source: MEDAC, NBE and staff calculations

Table VII

Ethiopia: Education & Health as % of total expenditure

1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 Total recurrent expenditure 4,399.6 5,215.7 5,582.3 5,717.1 7,081.4 8,486.4 o w education 741.0 863.5 941.0 1,025.8 1,115.0 1,240.0 Health 280.7 310.2 328.1 331.5 394.3 455.8Total education & health (recurrent) 1,021.7 1,173.7 1,269.1 1,357.3 1,509.3 1,695.8Education & health/total recurrent exp. (%) 23.2% 22.5% 22.7% 23.7% 21.3% 20.0%Total capital expenditure 2,694.3 3,156.5 3,562.6 4,299.9 4,146.6 4,307.3 o w education 256.0 269.2 441.9 421.9 436.7 440.1 Health 68.5 120.0 153.9 251.8 276.9 220.0Total education & health (capital) 324.5 389.2 595.8 673.7 713.6 660.1Education & health/total capital exp. (%) 12.0% 12.3% 16.7% 15.7% 17.2% 15.3%Total educ. & health (recurrent+capital) 1,346.2 1,562.9 1,864.9 2,031.0 2,222.9 2,355.9Total recurrent & cap expenditure 7,093.9 8,372.2 9,144.9 10,017.0 11,228.0 12,793.7Education & health/total exp. (%) 19.0% 18.7% 20.4% 20.3% 19.8% 18.4%

Source: MEDAC and staff calculations

Table VIII

Ethiopia: Exchange Rate Developments

1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 (Period average; 1990=100)

Effective exchange rates Nominal 50.3 44.9 41.4 43 43.1 43.5 41.2Real 60.6 51.6 52.5 48.2 48.7 49.3 47.7

Annual % change;- = depreciation Nominal -53.1 -10.7 -7.9 3.7 0.2 1.0 -6.2Real -55.0 -14.8 1.7 -8.2 1.2 1.1 -2.3

Birr per US $, end of period 5.100 6.220 6.320 6.320 6.801 7.089 8.121Birr per US $, period average 4.269 5.788 6.254 6.330 6.496 6.861 7.526

Source: IMF, Recent Economic Developments, July 13, 1999

Table IX

Ethiopia: Private Investment - Approvals and Implementation

Approved Investment

Commenced Operation

Fiscal year Number Million birr Number Million birr 1992/1993 543 4,082 123 1,908 1993/1994 523 3,533 149 731 1994/1995 686 5,237 314 2,525 1995/1996 905 6,514 399 2,104 1996/1997 794 6,806 243 745 1997/1998 894 10,093 194 629 1998/1999 705 5,205 69 141 1999/2000 (1st qter) 159 1,386 1 1 Total 5,209 42,856 1,492 8,785

Source: Ethiopian Investment Authority

Table X

Ethiopia: External Debt (in millions of birr, unless otherwise stated)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 External Debt Disbursed 7497.9 6551.4 18778.5 25722.2 27731.5 27088 26509.61 27916.88

Drawings (gross) 926.7 566.4 1282.8 2378.8 1568.3 1611.3 1205.54 1045.29Repayments (1) -295.6 -126.5 -319.1 -400.4 -431.6 -488.5 -1627.75 -422.29Debt Servicing (2) 785.5 837.4 1145.4 1832.5 1760 1714 2719.35 1122.77 Principal 625 649.8 768.8 1417.8 1259.4 1189.3 2319.11 766.09 Interest (3) 160.5 187.6 376.6 414.7 500.6 524.7 400.24 356.68Debt Service Ratio 69.9 82.5 53 56.9 36.7 34.5 40.5 15.7External debt/GDP (%) 39.1 31.5 70.4 90.8 81.8 71.4 63.9 61.8

(1) on cash basis; includes repayments of Trust Fund Loans and repurchases from IMF (2) on accrual basis; includes repayments of Trust Fund Loans and repurchases from IMF (3) includes IMF charges and interest

Source: NBE

Table XI

Ethiopia: Selected Social and Demographic Indicators

1970-75 1980-85 1994

Population characteristics Total population (million) 33.0 43.4 54.0 Urban population (% of total) 9.5 11.7 14.0 Population growth rate 2.6 2.8 3.1 Life expectancy (years) 41 41 49 Infant mortality (per 1000) na na 120 HIV population (1) (million) na na 1.45 Illiteracy rate (% of adults > 15 years old) na na 65 o w female na na 75 Male na na 54

Labour force Total labour force (million) 14.8 21.9 36.6 Agriculture (%) 90.0 88.6 89.3 Industry (%) na 1.6 1.8 Trade (%) na 3.8 2.4 Public administration (%) na 5.3 1.0

Education Gross enrolment ratio (%) (1) Primary 24 37 29 Junior secondary na na 19 Senior secondary na na 9 Tertiary na na 1

(1) Gross enrolment ratio is defined as the ratio of currently enrolled students, regardless of their age, to the total eligible population in the relevant age group

Source: IMF, Recent Economic Development, July 13, 1999; World Bank, Ethiopia-Social Sector Note, February 1998; MEDAC-Survey of the Ethiopian Economy, September 1999

Table XII

Ethiopia: Composition of Exports (in percent of total exports)

1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Coffee 56.6 56.6 63.5 66.5 59.3 69.8Pulses 0.4 1.7 3.6 3 2 2.5Oilseeds 0.1 2.7 1.8 1.6 1.9 7.6Leather and leather products 14.2 12.5 13.2 12.4 9.6 8.4Petroleum products 3.2 4.4 3.4 2.4 2.1 0.2Chat 6.9 6.7 6.1 6.7 5.6 6.6Gold 15.6 11.4 3.6 2.6 10.7 0

Source: IMF, Recent Economic Developments, July 13, 1999

Table XIII

Ethiopia: General Government Revenue (in millions of birr, unless otherwise stated)

1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Tax revenue 2207 3078 3879 4724 5357 5268 o/w Direct taxes 738 946 1312 1754 1904 1869 o/w Income & Profit tax 694 900 1,231 1649 1745 1656 Land use fees 44 46 81 105 159 213 Indirect taxes 1469 2132 2567 2970 3453 3399 o/w Sales & Excise taxes 746 834 946 1156 1290 1181 Import duties 704 1251 1420 1694 2025 2037 Export taxes 19 47 201 120 138 181Non-tax revenue 985 862 2034 2243 2172 2832 o/w Government investment income 444 507 1443 822 1149 1400Privatisation receipts 0 0 0 0 347 313Total revenue 3192 3940 5913 6967 7876 8413

(In percent of total revenue)

Tax revenue 69.1% 78.1% 65.6% 67.8% 68.0% 62.6% Direct taxes 23.1% 24.0% 22.2% 25.2% 24.2% 22.2% Indirect taxes 46.0% 54.1% 43.4% 42.6% 43.8% 40.4%Non-tax revenue 30.9% 21.9% 34.4% 32.2% 27.6% 33.7%Privatisation receipts 0.0% 0.0% 0.0% 0.0% 4.4% 3.7%

Source: IMF, Recent Economic Developments, July 13, 1999