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African Economic Outlook attests Ethiopia's Socio-Economic Stride, Prudent Policies

By Hune Wuletaw
Tigrai Onlne - February 12, 2014

Ethiopia has been working to reach the middle-income status in 20 to 30 years for the last decade. Under a committed leadership and well-crafted policies of a developmental state, a double-digit annual GDP growth has been registered since 2003 under the PASDEP and a preceding poverty reduction plan.

The Growth and Transformation Plan(GTP), for 2011-2015, with almost a Trillion Birr budget and spending more than 60 percent of that on poverty oriented sectors, such as agriculture, education, health care, water and road development, "is directed towards achieving the Millennium Development Goals (MDGs), Ethiopia's long term vision and sustaining rapid, broad based and equitable economic growth anchored on the experiences that have been drawn from implementing pro-poor and pro-growth development policies and strategies undertaken since 1994".

Doomsayers have been casting doubt on Ethiopia's developmental path and the results achieved. However, now and then, Ethiopia's socio-economic stride bypassed expectatrions and delivered undeniable results. One of the latest testimony of this phenomenon is the African Economic Outlook report 2013 prepared by UNECA, AfDB, OECD and UNDP.

The report underlines that: Ethiopia's double digit economic growth over the past eight years has defied standard thinking that it should significantly reduce reliance on agriculture. The share of agriculture in GDP has fallen from 46% in 2003/04 to 40% in 2010/11, but the share of industry, including manufacturing, has also declined marginally. The share of the service sector has increased by the decline in agriculture.

The report also re-affirms the prudence of focusing on agricultural sector growth and the directions followed in that sector. That is: the Growth and Transformation Plan's aim of overhauling the economy by radically altering the agricultural sector and boosting industry through expanded investment in the sector, thereby to move from subsistence farming to commercially oriented, small-scale production, including for export.

Despite all the progress in the past decade, the sector's potential remains enormous. While the Agriculture sector's share of the GDP is about 44%, accounts for about 80% of employment and 70% of export earnings; Ethiopia has only cultivated 15% of its arable land potential so far. And, the increased productivity in the past decade has not still reached the top in sub-Saharan Africa.

This indicates that there is enormous untapped opportunities to increase both production and productivity of farmers by promoting labor-intensive modern farming practices. It also indicates the potential to put more land under cultivation both through re-settlement programs and large private commercial farms.

In its analysis of the export performance and the use of natural resources, the report indicated that: The country has never had major forestry and fishing industries and minerals account for less than one percent of GDP. Only gold is of significance. It earned the country about USD 1.7 billion in 2012. A recent survey increased estimates of gold reserves to 500 tons. The government estimated that production could rise to 40 tons a year from just over four tons in 2012. Ethiopia also has gemstones such as diamonds and sapphires; industrial minerals including potash; and other precious and base metals. Development of these resources is a cornerstone of the government's export-oriented growth strategy and means there is less reliance on agriculture for diversifying the economy. Ethiopia has licensed 250 foreign firms to prospect for minerals.

According to the report, coffee remained the leading export, accounting for 26% followed by gold 19%, oil seeds 15%, khat 8% and live animals 7%. The leading six items account for more than 80% of export earnings, indicating that diversification efforts need to be stepped up. In recent years, there has been rapid growth in non-traditional exports. Non coffee exports rose from 40% of the total in 1997 to 73.6% in 2011/12.

The report also commends Ethiopia's fiscal and monetary policies. It notes: Ethiopia also pursued prudent fiscal policy by strengthening domestic demand mobilization but at the same time maintained high expenditure growth in physical and social infrastructure.

In an effort to combat inflation, the government implemented a tight monetary policy stance. This measure, aided by slowdown in global food and fuel price inflation, saw consumer price inflation decelerate to 10.3% in February 2013 from 39.2% in November 2011. The government’s determination to hold down prices was further reflected in its prudent fiscal policy focusing on strengthening domestic resources and reducing domestic borrowing.

The report recalls that: In 2012, the government pursued its prudent fiscal policy, which was co-ordinated with monetary policy to combat inflation, while maintaining high infrastructure investment. Authorities sought to increase collection of taxes and other domestic resources, reduce domestic borrowing and increase spending to help the poor, including infrastructure investment. Domestic revenue collection has been improving in past years after tax reform measures and improved tax administration.

The government's approach interms of increasing revenue and aligning expenditures with poverty reduction objectives has paid off. The report indicates that during 2011/12, tax revenue increased by 45%. Improved domestic revenue collection enabled the government to finance 83% of its expenditure from domestic revenues.

Total government expenditure as a ratio of GDP declined, due mainly to economic growth outpacing that of expenditure. Grants as a percentage of GDP declined from 4.4% in 2009 to 3.2% in 2013 and is projected to be 2.7% in 2014.

However, the share of pro-poor spending in total expenditure has been rising and reached 70% in 2011/12 up from 67% the previous year. Aggregate expenditure is expected to increase in 2013 and 2014 with capital spending growing faster than recurrent expenditure to support implementing the government's economic transformation plan and achieving the United Nations' Millennium Development Goals (MDGs) as well as reaching targets for making Ethiopia a middle income economy by 2025.

The strong measures to improve tax administration and collection have reduced the fiscal deficit, which is within an acceptable threshold.

The African Economic Outlook report attested further that: Ethiopia’s fiscal policy framework is flexible to accommodate revenue and external financing shocks by restraining expenditure when financing shortfalls arise. But it protects spending to help the poor, particularly basic services.

Sound fiscal policies and a rapid expansion in public investment, especially in infrastructure and basic services, are expected to continue.

In its analysis of Ethiopia's debt policy, the report affirms that Ethiopia would remain at a low risk of external debt distress in 2013 and 2014. Explaining the debt policy and its status, the report indicates that: Since the debt relief granted under the Multilateral Debt Relief Initiative (MDRI) and Heavily Indebted Poor Countries (HIPC) Initiative in 2006, Ethiopia’s external debt stock has quadrupled. This is a result of a surge in public enterprises' external borrowings from non-Paris Club sources and commercial banks.

 In 2011/12, the external debt stock rose to USD 8.9 billion from USD 7.8 billion the previous year. During the same period, commercial banks' share of outstanding external debt rose to 30.28% from 30.26%. The share of Paris Club donors fell to 4.6% in 2011/12 from 6% in 2010/11 and 16.5% in 2007/08. This may continue in light of the government's ambitious investment agenda, which may pose risks to Ethiopia’s debt rating. Any non-concessional borrowing should be consistent with maintaining a low risk of debt distress.

The latest debt sustainability analyses show that, despite the growth in Ethiopia's external borrowing; it would remain at a low risk of external debt distress in 2013 and 2014. The vulnerability of debt burden indicators has, however, been on the rise.

The economic outlook report also recognizes efforts to enhance the environment for the private sector. The report notes that: Reforms to business registration and investment licensing procedures, as well as changes to regulatory institutions, have simplified rules, improved the quality of business support and considerably reduced the cost of doing business.

The time required to clear customs for export and securing a business license has been substantially cut. In 2011/12, it took only 15 days to start a business involving 9 procedures, down from 46 days and 10 procedures in 2004.

However, the report contains cautions regarding the financial sector. According to the report, Ethiopia's financial sector consisted of three public and 15 private banks, 14 insurance companies (one public and 13 private) and 31 microfinance institutions in 2011/12. The banking system is dominated by state-owned banks, mainly Commercial Bank of Ethiopia (CBE) whose assets represent about 70% of the sector. Public banks account for about 51% of bank branches, 55% of total capital, 64% of total deposits and 64% of outstanding bank loans. A recent directive requiring private commercial banks to invest 27% of their loan disbursements in 5-year National Bank of Ethiopia (NBE) bonds at an annual interest rate of 3%, while the minimum deposit rate is 5%, is likely to make conditions even more difficult between private and public banks.

The policy, regulatory and institutional frameworks for microfinance institutions are well established. There are 31 microfinance institutions helping about three million people, with ETB 10.2 billion (Ethiopian birr) in assets and ETB 7.1 billion in outstanding loans. Demand for micro-credit, however, far outstrips supply.

Nonetheless, the report acknowledged the progress made interms of public financial management. It indicated that there has been significant progress in public financial management reforms commenced in 2002. The 2010 Public Expenditure and Financial Accountability Assessment indicated that out of 28 indicators, nine have improved and none has worsened.

In an effort to achieve effective public sector service delivery, the government has sought to revamp its management. In addition, efforts to embed accountability and integrity are underway as part of an official Good Governance Package.


However, there is some way to go before a results-oriented mindset is established in the civil service. There is a high turnover of qualified staff because of the low wages. The situation is particularly critical at the regional and 'woreda' district level. Hiring and promotion is generally on merit and ethics levels in the public sector are high.

Regarding corruption, the report observes that public sector corruption is not considered pervasive. Anti-corruption campaigns are intensifying and courts have sentenced a large number of government officials. However, the Heritage Foundation's 2012 Index of Economic Freedom put Ethiopia 118th out of 183 countries on freedom from corruption. According to Transparency International, Ethiopia ranked 120th in 2011 compared to 116 in 2010.

The Economic Outlook report attests that the state has a generally good record on protecting people from crime and violence. Proposed national laws are generally circulated for public comment prior to enactment. Property and contractual rights are recognized and there are commercial and bankruptcy laws. Although there are efforts to strengthen capacity, Ethiopia's judicial system is overburdened, poorly staffed, and inexperienced in commercial matters.

The 2013 Global Competitiveness Report judged crime and theft as the least problematic factor for doing business in Ethiopia. It was ranked 22nd out of 144 countries for the cost of crime and violence and 24th for organized crime.

Interms of Natural Resource Management & Environment, the report underlines that the government has sought to mainstream environment issues in the development process, through its Community Based Participatory Watershed Development and Sustainable Land Management programmes.

A green economy strategy, Climate Resilient Green Economy, was launched in 2011, addressing climate change adaptation and mitigation, while pursuing the goals of economic growth, zero net emissions and building resilience. The Climate Resilient Green Economy Facility was launched in September 2012, to support the government's vision of becoming a middle income economy with low carbon growth by 2025.

 Assessing the works in social and human development areas, the document notes that Ethiopia has made significant progress in reducing poverty and is on track to meet five of the eight Millennium Development Goals (MDGs): poverty, universal education, child health, combating AIDS and global development. It could still meet the targets for gender equality, maternal health and environmental sustainability.

The government’s poverty-focused spending has improved access to basic services. Impressive results in health service expansion have been achieved. Contraceptive prevalence increased to 29% in 2011/12 from 15% in 2005 and the coverage of antenatal visits reached 34% from a baseline of 28%. The rate of deaths among under-fives declined from 123 per thousand live births in 2005 to 88 in 2010. Infant mortality dropped from 77 to 59 during the same period.

There is a clear focus on poverty-related health issues such as communicable diseases, and health problems that affect mothers and children. There has likewise been progress on water and sanitation services. By 2010, the proportion of the rural population with access to potable water rose to 65.8% from 46% in 2006. The government aims to reach universal access to water supply in 2015.

Primary school enrolment rates increased from 68% in 2004/05 to 85% in 2010/11. The completion rate of grade eight students increased from 48% in 2009/10 to 49% in 2010/11, not yet high enough to achieve the education goal. Literacy rates have risen since 2004 from 38% to 47%. There is a parallel drive to expand vocational training and tertiary education to provide students with skills needed by the economy.

The government has enacted policies, strategies and programmes to tackle HIV/AIDS. A National Task Force on HIV/AIDS was established, which designed medium-term prevention and control programmes focusing on education and information, condom promotion, surveillance, patient care and HIV screening laboratories at health centres.

The HIV/AIDS prevalence rate is estimated at 2.3% of the population. But Ethiopia has scaled up its effective coverage and services and has a commitment to reach universal access to HIV prevention, treatment, care and support. Primary health service coverage reached 96% in 2010/11 from 89% in 2009/10. There has been progress in controlling malaria and tuberculosis. In 2005, only 2% of households had an insecticide-treated net against malaria. By 2010, all malaria-prone areas had a net. In 2010, 90% of children aged under-five slept under insecticide-treated bed nets, compared to 5% in 2003. Over the same time the death rate from malaria declined by 55% and hospital admissions by 54%. There is now an 84% success rate in treating tuberculosis.

Spending on initiatives to counter poverty rose by 70% in 2011/12, continuing a longstanding effort. As a result poverty in Ethiopia has declined at an annual average of 2.32% since 1995. The proportion of people living below the poverty line fell from 45.5% in 1995/96 to 29.6% in 2010/11. The government target is to reduce the rate to 22.2% by 2015. Similarly, the national Gini coefficient declined to 0.298 in 2010/11 from 0.3 in 2004/05.

Labour market regulations are enforced for an increasing number of workers. Active labour market programmes (linking micro- and small-scale enterprises with public works like cobblestone works, urban housing construction) are improving in quality and coverage, although weaknesses remain. The government created more than 1.1 million jobs in 2011/12.

Highlighting the efforts to improve the welfare of children and gender equality, the report observed that: The government has ratified various International Labour Organisation conventions, including one on the worst forms of child labour. However, enforcement of these conventions, especially on child labour, remains weak.

The government has sought to implement gender equality in all policies, with joint planning between individual ministries and the Ministry of Women’s Affairs. This has reduced gender disparities, especially in education.

Ethiopia recorded a near 40% improvement in its gender parity index in primary school enrolment from 1991 to 2010, and is near gender parity at primary school level. At the secondary level, gender parity index moved from 0.67 in 2007 to 0.82 in 2010.

Maternal mortality fell sharply from 510 deaths per one hundred thousand live births in 2005 to 350 in 2010, due in part to a concerted effort to make family planning services more widely available. The percentage of married women using a modern method of contraceptive went from 14% in 2005 to 27% in 2011. Access to health care for women remains low, however, as only 10% of Ethiopian women give birth with a skilled health worker in attendance.

Other gender equality indicators are promising. The percentage of parliamentary seats held by women was 28% in 2012, up from 8% in 2005. Adolescent birth rates fell from 109.1 births per thousand women aged 15-19 in 2002 to 79 in 2010. The government has reviewed discriminatory laws and made genital mutilation and other forms of violence against women punishable crimes.

Nonetheless, the report notes that there are still areas however where the government must make a more concerted effort to improve the status of women. The participation rate of women in business and in decision making is low. The literacy level of women is markedly lower than for men (63% for men and 47% for women).