Ethiopia: Promoting Economic Growth

Ethiopia: Promoting Economic Growth

Source: World bank

Overview

The International Development Association (IDA) is Ethiopia’s largest provider of official development assistance: it has committed over US$7 billion to more than 60 projects in Ethiopia since 1991, most notably for the protection of basic services, productive safety nets, energy and roads projects. IDA has worked to promote economic growth and address systemic poverty challenges across many sectors. Important results include a near two-fold increase in the number of children in primary school between 2001 and 2010, a reduction in child mortality from 204 in 1990 to 109 in 2010, increased rural access to safe water to 65.8 percent in 2010, from only 19 percent in 1990, all the while building local government capacity for service delivery and increased accountability.

Challenge

In recent years, Ethiopia has been one of the fastest growing economies in Africa. Nevertheless, its robust growth performance and considerable development gains from 2003 to 2007 came under threat in 2008 and 2009 with the emergence of twin macroeconomic challenges of high inflation and a difficult balance of payments situation. The problem was exacerbated by the high fuel and food prices in the global market.

Though Ethiopia made progress in tackling the twin macroeconomic challenges of 2008-2010, the recent surge of inflation depicts the country’s vulnerable macroeconomic condition. The annual end-of-period inflation, which stood at 16.5 percent in February 2011, increased to 39.2 percent in November 2011. Food inflation more than quadrupled going from 12.8 percent to 50.3 percent during the same period. Non-food inflation also remains stubbornly high at 24 percent, possibly due to the upward revision of fuel prices, coupled with a series of depreciations of the local currency over the past year, which in turn has led to an increase in the cost of production as well as transportation.

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

While Ethiopia’s economy is expected to continue to grow at a healthy pace, its macro situation will remain under stress in the foreseeable future.

Approach

IDA has worked to promote economic growth and address systemic poverty challenges across many sectors.

Education.
IDA’s support for the education sector—including through the General Education Quality Improvement Program (GEQIP) and the Protection of Basic Services program—has helped Ethiopia expand access to quality primary education over the last ten years. Total primary enrollment went from 8.1 million students attending primary school in 2000 and 2001 to 15.54 million in 2008 and 2009. In just a few years, there has been a considerable reduction of the gender gap for schooling. The ratio of girls to boys in primary school increased from 89 percent in 2006/07 to 91 percent in 2009/10 in grades 1-4, and 76 percent to 91 percent in grades 5-8. The gross enrollment rate for secondary school (grades 9–10) stood at 39.1 percent in 2009/10, about double the level of 2002. Educational quality, as measured by grade 5 completion rates, has also improved from 65 percent in 2006/07 to 83 percent in 2009/10, and remains a major focus for the government, IDA and their partners, through both teacher training and supply of educational materials.

The expansion of general education has occurred at the same time as a major expansion of both technical and vocational education and higher education sub-sectors, which showed an annual average increment of 21.3 percent and 21.7 percent respectively between 2003/4 and 2007/08. This rapid expansion of the education system has not been accompanied by adequate improvements in quality in some educational sub-sectors. In order to address this challenge, IDA will provide US$50 million between 2009-2013 under the General Education Quality Improvement Program, which is also financed by the Fast Track Initiative Catalytic Fund and other development partners, including the United Kingdom’s Department for International Development (DFID), Italy, the Netherlands and Finland.

Roads. Ethiopia’s development has been held back by a large infrastructure gap—it has one of the lowest road densities in Africa. IDA has invested about US$1 billion since 1991 to address that challenge. A road sector development project supported the formulation of Ethiopia’s ten-year roads program; it helped establish a dedicated road fund for financing maintenance work and build capacity at many levels. Working in partnership with other donors—including the European Commission (EC), Germany, Japan, Nordic countries and the United Kingdom—IDA helped increase both the size and quality of Ethiopia’s road network. The network increased from under 20,000 km of roads in 1991 to over 48,793 km in 2010.

Energy. Ethiopia has the potential to become the electricity generation hub of the Eastern Africa Power Pool. The country is bestowed with abundant hydro-electric generation potential. In addition, the country also has several renewable energy resources such as geothermal, wind and solar. IDA is helping Ethiopia’s energy sector to bring this potential to fruition. In the late 1990s, IDA supported the financing of Gilgel Gibe I hydro power plant with about US$200 million. This 184 megawatt (MW) plant was the largest power plant in Ethiopia until recently. IDA is now supporting Ethiopia with a credit of US$41 million to construct a transmission inter-connection with Sudan that will enable Ethiopia to realize its power export revenue generation capacity. Several other projects funded by IDA totaling about US$400 million are helping Ethiopia increase rural access to electricity. Ethiopia is now connecting more than 300,000 new consumers (about 2 million people) every year by expanding its rural grid network. In areas that are too remote, Ethiopia is providing solar-based electricity to institutions such as schools and health centers.

In addition to financing projects, IDA is supporting technical capacity building of the Regional Energy Bureaus that will enable them to appraise off-grid and other renewable energy projects such as mini-hydro and biomass projects. IDA-financed projects also aim to increase the efficiency of the energy sector through various demand-side management measures. IDA has helped Ethiopia conserve energy by financing the replacement of around 5 million conventional incandescent lamps with efficient compact fluorescent lamps (CFL).

Decentralization
. Decentralization, first to the regional level in the 1990s, and now to the district (woreda) and sub-district (kebele) levels, is the centerpiece of Ethiopia’s strategy to improve responsiveness and flexibility in service delivery, increase local participation, and democratize decision-making. IDA is providing capacity-building support and financial support to local governments that is enabling them to deliver better quality basic services (health, education, water supply, etc.) to more of their citizens. As a result of such support, regions and woredas have increased basic services spending by over 100 percent since 2006, while strengthening their fiduciary systems. As of January 2011, all regions and over 90 percent of woredas are now posting their budgets in public places, and quarterly audits take place for over 90 percent of local governments nationwide.

Private sector. After the change of governments in 1991, IDA helped Ethiopia shift from a state-controlled economy to one that encourages private sector growth and job creation. IDA helped the post-Dergue government address an over-valued currency that stifled exports, reduce tariffs and taxes, and end most price controls, thereby creating a space in which Ethiopian companies can play a natural role in generating income and creating jobs. Still, more needs to be done to improve the investment climate and increase business confidence. IDA is also working with the government to strengthen its competition policy, improve the financial system, and support firms in building new technical and business management skills.

Regional cooperation. Historically, there has been tension over water usage rights between upstream Nile riparians (such as Ethiopia,) which contributes 85 percent of Nile waters, and downstream countries, such as Egypt, for which the river is the lifeblood of its economy. The Nile Basin Initiative (NBI) aims to foster cooperation among nations through which the Nile runs, and to find win-win opportunities for better management of the river. The success of the NBI so far in building cooperation among Nile countries has opened the possibility for Ethiopia to draw on the waters of the Nile in new ways, and on a larger scale. Ethiopia, with support from IDA, is also a beneficiary and active member of two key sub regional HIV/AIDS initiatives; one is the African Regional Capacity Building Network for HIV/AIDS Prevention, Care, and Treatment (ARCAN) Project and the Intergovernmental Authority for Development (IGAD) in Eastern Africa Regional HIV/AIDS Partnership Program (IRAPP) Support Project.

Since 1998, IDA has provided financing for the Tana Beles Integrated Water Resources Development Project, which aims to lay the foundation needed to accelerate sustainable growth in the sub-basins by developing enabling institutions and facilitating investments for integrated planning, management, and development. This project will be critical not only for local beneficiaries and for Ethiopia in general, but will also improve regional cooperation among Nile riparian countries. The project seeks to develop a new paradigm of institutional modernization and convergence in managing precious water resources, while also stimulating sustainable development.

In the coming years, IDA plans to continue providing financing for investments in Ethiopia that build on the political openings achieved by the NBI, in areas such as energy, irrigation, and water resources management.

Results

With the support of IDA credits and grants, the Government of Ethiopia has made important strides on a number of core sector indicators:

Results by Sector

Education:

Primary school completion rate (grade 5) increased to 83 percent in 2009/10, from 65 percent in 2006/07.
Gender parity: For grades 1-4, the ratio of girls to boys went from 89 percent in 2006/07 to 91 percent in 2009/10; grades 5-8 increased from 76 percent to 91 percent over the same period.

Health:

The child immunization rate increased from 70 (2005) to 82 percent (2010).
A total of 22.2 million long-lasting insecticide-treated malaria nets were purchased and distributed between 2006 and 2008.
About 7,000 health posts and 1,999 health centers were equipped (out of a total of 15,022 and 3,200 respectively) in the same period.

Water:

A total of 1.5 million people in rural areas and 150,000 in urban areas have been provided with access to improved water sources from 2004 to 2010.
Approximately 138,873 improved community water points were constructed or rehabilitatedbetween 2008 and 2010.

Roads:

The proportion of roads in good and fair condition as a share of total classified roads increased from 22 percent in 1997 to 60 percent in 2010.
Federal paved roads increased from 71 percent (2005 baseline) to 88 percent (as of May 2010).
Federal gravel roads increased from 61 percent to 72 percent and rural/regional roads from 67 percent to 79 percent over the same period.
Approximately 23,736 km of rural roads were constructed and 42,417 km of rural roads were rehabilitated between 2008 and 2010.

Energy:

The number of towns and rural villages with electricity access was 648 in 2004/05, has increased to 5,163 in 2009/10.

Information and Communications Technology (ICT):

The monthly cost of an internet connection (including 600 minutes) fell 33 percent between 2008 and 2010. The monthly cost of a 2 Mbps ADSL broadband connection has fallen by 77 percent over the same period.

Bank Contribution

The International Development Association is Ethiopia’s largest provider of official development assistance: it has committed US$7.6 billion to 60 projects in Ethiopia since 1991, most notably for the protection of basic services, health, HIV/AIDS, productive safety nets, food security, and roads. In March 2006, the World Bank’s Board of Executive Directors approved 100 percent cancellation of Ethiopia’s debt to IDA, as part of the Multilateral Debt Relief Initiative (MDRI). Debt relief measures have freed resources for programs that benefit the poor. As of March 2011, IDA’s portfolio in Ethiopia consists of 26 operations, with a total IDA net commitment of US$3.66 billion, out of which 1.79 billion has been disbursed. Social protection is the largest sector, with 35 percent of the IDA portfolio, followed by transportation (20 percent), energy (15 percent), agriculture (9 percent), and water and sanitation (8 percent).

Partners

Official development assistance (ODA) to Ethiopia has been increasing steadily since 2000. A large number of donors are active in Ethiopia, with 25 bilateral and multilateral donors averaging more than US$2 billion per year in ODA from 2000-2008. Both the government and a majority of international partners have been keen to proceed with the deepening of the harmonization process in the spirit of the Rome and Paris Declarations.

The Bank, with the United Nations Development Programme (UNDP) and one bilateral donor, is one of the rotating co-chairs of the Development Assistance Group (DAG), the main forum for donor coordination in Ethiopia. Under the DAG, efforts are underway to make strong progress on the implementation of commitments in the Paris Declaration, including joint research (much of the Bank’s major analytical work has already been prepared jointly with partners) and joint missions. Much of the collective effort is focused on furthering harmonization through a few major multi-donor programs and policy areas of importance. The target of channeling at least 66 percent of donor support through program-based approaches has been surpassed, with 85 percent of IDA assistance flowing through the eight approved programs by fiscal year 2010.

The World Bank has taken the lead on developing a set of multi-donor instruments to reduce transaction costs, align support with the country’s decentralized model, and enhance the predictability of aid. These instruments allow for large-scale leveraging of IDA support. Such approaches include: the Protection of Basic Services program; the Public Sector Capacity Building program; the Productive Safety Nets program; the Water Supply, Sanitation, and Hygiene Universal Access program and the Sustainable Land Management program. For more traditional projects, such as investments in roads, action plans are being implemented to harmonize implementation procedures (such as common environmental assessment procedures) with a focus on three priorities – disbursement procedures and financial reporting, monitoring and evaluation, and procurement (starting with standard documents for goods, works, and consulting services for national competitive bidding).

Toward the Future

For the remainder of the current Country Assistance Strategy (CAS) period (until fiscal year 2012), IDA will continue to support the government’s objectives of (i) fostering economic growth, (ii) improving access to and quality of basic services, (iii) reducing vulnerability and (iv) fostering improved governance, as outlined in its Plan for Accelerated and Sustained Development to End Poverty (PASDEP) and Growth and Transformation Plan (GTP). Through its programs, the Bank will continue to address the deeper and complex issues of supporting bottom-up initiatives that are becoming increasingly necessary as a complement to a traditionally strong state. The GTP will form the basis for the Bank’s next CAS.


Beneficiaries

A couple of examples that will help illustrate how IDA funds are transforming the lives of ordinary Ethiopians: 10-year-old Senait who lives in Sele Kebele in the Oromia region is among the beneficiaries of the Protection of Basic Services (PBS) project. “Memar ewodalehu [I love to learn!]” she says with bright eyes. Going to school has become the highlight of her life. The ‘older’ classroom she studied in lacked proper light and ventilation. She was excited to start studying in her new classroom and was eagerly awaiting the completion of the facilities there. As a nationwide program, PBS has helped improve the lives of more than 70 million rural Ethiopians: not least among them are children like Senait who now have access to services denied to them before.

Access to health services has also increased. Twenty-three-year-old Birhane Wolde Giorgis has worked as a Health Officer for the past year at the health center that serves the Debre Libanos woreda – consisting of about 50,000 people. On a very busy day, the health center receives as many as 40 patients. The new wing of the health center–which took five months to build with a PBS grant–provides basic maternal and childcare facilities. As a result of increased confidence in the services provided at the health center, the number of visitors has more than doubled from 200 cases per month two years ago to over 500 visitors currently.

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