The Federal Democratic Republic of Ethiopia
Poverty Reduction Strategy Paper Annual Progress Report

This report assesses the Annual Progress Report on the implementation of the Sustainable Development and Poverty Reduction Program (SDPRP), which is the Poverty Reduction Strategy Paper for Ethiopia. It reviews the fundamental development objectives of the SDPRP to build a free-market economic system in the country, which will enable the economy to develop rapidly, to end dependence on food aid, and to allow poor people to benefit from economic growth. It also assesses the challenges and prospects in the SDPRP continued implementation.


This report assesses the Annual Progress Report on the implementation of the Sustainable Development and Poverty Reduction Program (SDPRP), which is the Poverty Reduction Strategy Paper for Ethiopia. It reviews the fundamental development objectives of the SDPRP to build a free-market economic system in the country, which will enable the economy to develop rapidly, to end dependence on food aid, and to allow poor people to benefit from economic growth. It also assesses the challenges and prospects in the SDPRP continued implementation.

I. Introduction

1.1. Background to the Annual Progress Report

In 2002 the Ethiopian Government committed itself to the Sustainable Development and Poverty Reduction Programme (SDPRP). This is the first annual progress report on the implementation of the program. The fundamental development objectives of the Federal Democratic Republic of Ethiopia (FDRE) set out in the SDPRP were to build a free-market economic system in the country, which will enable the economy to develop rapidly, to end dependence on food aid; and to allow poor people to benefit from economic growth. The development strategy was built on four pillars:

  • a) Agricultural Development Led Industrialization (ADLI),

  • b) Reform of the Justice System and the Civil Service

  • c) Decentralization and empowerment, and

  • d) Capacity building in public and private sectors.

The main thrusts of the SDPRP are:

  • Concentration on agriculture, which is the source of livelihood for 85 % of the population and the bulk of the poor. Agriculture is a potential source of surplus to fuel the growth of other sectors of the economy;

  • Strengthening private sector growth especially in industry, to promote off-farm employment and output growth, supported by public investment in necessary infrastructure;

  • Rapid export growth, including high value agricultural products and export oriented manufacturing sectors (particularly intensified processing of high quality skins/leather and textile garments);

  • Investment in education and enhanced efforts to build capacity to overcome critical constraints to the implementation of development programs;

  • Deepening decentralization to shift decision-making closer to the grass-roots, to improve accountability, responsiveness and service delivery;

  • Improvements in governance to empower the poor & establish an appropriate framework for private sector growth and development;

  • A strong focus on agricultural research, and water harvesting, small scale irrigation and

  • Increased water resource utilization to ensure food security.

The overarching objective the government has set itself is to reduce poverty at the same time as maintaining macroeconomic stability. Government committed itself to working towards meeting the Millennium Development Goals (MDGs) of 2015. This requires real growth of 5.7% per annum until 2015 to reduce poverty by half from its current level.

Measures to improve institutions, such as the reform of the legal system, enforcing contracts, ensuring property rights, maintaining peace and stability, and improving the functioning of public services were seen as making an important contribution to growth and equity. Programs have already been initiated on capacity building, devolution and empowerment, justice system and civil service reform, anti-corruption, etc.

The FDRE remains committed to the SDPRP and is concentrating its energies on implementing it. Because this is a report on the first year of implementation, it is too early to judge the end results of the program in terms of its impact on poverty. Therefore this report is mainly concerned with the mobilization of inputs to implement the program, detailing progress made in key sectors, but also highlighting constraints.

The government was encouraged by the reception given to the SDPRP at the 2002 Consultative Group meeting, and the commitments to support the program received from the donor and NGO communities. However, the main responsibility for implementing the SDPRP lies with the FDRE government, accountable to the Ethiopian people. Nevertheless, faced with complex and deep poverty situation the government recognizes that it requires increasing levels of assistance to achieve its development goals.

1.2. Purpose of the Annual Progress Report

The Annual Progress Report has two main purposes:

  • 1) It is a tool for coordinating the implementation of the SDPRP. The SDPRP is intended to mobilize efforts in all sectors and at many levels of government, and involves far reaching innovations in the system of government. To establish the required momentum, a comprehensive internal review process has been instituted, to record progress, to identify bottlenecks and lagging sectors and to accelerate the implementation of the program where required.

  • 2) The APR is intended to provide the basis for continuing dialogue with the donor community as well as private sector and NGO community regarding progress with the SDPRP, ongoing financing requirements and tackling constraints, where joint action is required.

This report records progress where it has occurred, identifies areas where progress is lagging, and explores opportunities and challenges in SDPRP Continued implementation. Inevitably, in a comprehensive program, involving deep reforms in a number of fronts, there are variations in the speed of implementation. The most profound challenges relate to the efforts to accelerate program implementation in the context of a thoroughgoing decentralization of decision-making and control to the local level. The need to strengthen capacity, particularly at the woreda level, runs through the report, affecting all sectors.

Implementation of the program involves concrete tasks of raising the rate of development spending, including working with development partners to harmonize aid modalities, to relax constraints on aid utilization and improve absorptive capacity. Significant progress has been made in joint work with the donor community of harmonization issues, but reports on implementation indicate that difficulties have still to be overcome for the available assistance to be absorbed efficiently. Discussion of the APR should provide an opportunity to extend progress with harmonization and easing aid implementation bottlenecks.

Perhaps the greatest challenge in implementing the SDPRP relates to institutional innovations. In some areas of work, there is a complex process of “learning by doing”, involving the development of new government procedures and, perhaps most profoundly, new approaches to responsibility and accountability in decision-making. Capacity building in the public service also involves a complex range of tasks, including training, the improvement of incentive systems and the building of a stronger commitment to service.

In relation to the private sector, the government has committed itself to increasing its role and steadily improving the policy environment. Significant first steps have been made and government is committed to maintain momentum in its policy reforms and reinforcing among others the Public-Private Partnership (PPP).

In dialogue with the donor community, within the context of broad agreement about the broad goals and policies set out in the SDPRP, it will be appropriate to examine the next steps in implementation, including actions now required by both sides of the partnership to accelerate momentum.

With respect to the participatory process, broad discussions on strategy, policy and implementation issues have been held during the year on important areas of SDPRP. Industrial development strategy was discussed with the private sector and trade unions. This is key complementary strategy to ADLI - with its focus on rural transport Extensive discussions were held with the business community before the introduction of the new income tax and VAT Proclamations. Discussion on Youth Policy was also extensive especially with the youth. The New Coalition for Livelihood & Food Security for Ethiopia was very much an outcome of broad-based multi-stakeholder discussion. Multi-stake holder conference was also held on the significance of leadership in HIV/AIDS control and prevention. Broad based discussions were held at the National Population Conference organized to mark the tenth anniversary of the issuance of National Population Policy (April 1993). A draft Diagnostic Trade Integration Study (DTIS) has been completed and a conference was held in November 2003 to provide forum for different stakeholders, both government and non-state actors to review the findings and recommendations in the DTIS, which included technical assistance action plans.

The preparation of the SDPRP Annual Progress Review (APR) benefited from the dialogue with different stakeholders. The APR working draft was circulated to the donor community in Ethiopia, to the private sector and NGO community. Discussions were held to share perspectives. The APR was also presented and discussed at the Partnership Event for Livelihood & Food Security for Ethiopia held during December 1-2, 2003.

II. Major Highlights of Performance of SDPRP Against Set Targets

The fiscal year 2002/03 was difficult year mainly owing to the drought, which affected about 13 million people across the country. Real GDP declined by 3.8% during 2002/03. The projected GDP growth rate for FY 2002/03 was 6%. Overall agricultural value added declined by 12% owing to an about 25% drop in major crops (cereal, pulses and oilseeds) production. These crops accounted on average for about 60% of overall agricultural value added. Mostly triggered by shortfalls in agricultural production, inflation as measured by the consumer price index (CPI) surged to about 15 percent by the end of the 2002/03 Fiscal Year.

Overall, the negative growth in F.Y 2002/03, the drought affecting 13 million people and the continued world coffee price collapse are major negative factors that seriously affected people’s livelihoods and the efforts being made to enhance growth and poverty reduction in Ethiopia.

Notwithstanding these adverse circumstances, a number of achievements have been recorded in key areas. Matrix Table 1 below describes achievements for the year under review (2002/03) for key poverty-oriented sectors against the indicative and performance targets for the SDPRP period (2002/03-2004/05) as indicated in Table 13.1 and 13.2 of Chapter XI of the SDPRP,

Moreover SDPRP period targets were refined and translated in to annual targets and actions called SDPRP matrix. The goals, outcomes outputs, and the progress to date for 2002/03 and planned actions for 2003/04-2004/05 is presented in the Matrix. This is included as attachment to the APR (Annex 1). In addition, the status of HIPC triggers is shown as Matrix Table 2, which shows that targets are met.

Matrix Table 1:

SDPRP Targets and Outturns for the First Year (2002/03)

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Matrix Table 2:

SDPRP HIPC Quantitative & Qualitative Triggers and Outcomes

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III. Review of Socio-economic Conditions in Ethiopia During the 2002/03

3.1. Recent Macroeconomic Developments

Although Ethiopia’s GDP growth rate averaged 6 percent from 1991/92 to 2000/01, this positive trend was marred by wide fluctuations as a result of numerous exogenous shocks of both domestic and external origin. Such shocks hit the poorest and most vulnerable members of society the hardest, and the negative effects on consumption and savings are enduring.

The recent drought is the most severe since 1984/85. As a result, cereal production declined by about 6 percent in 2001/02 and by a further 26 percent during 2002/03. As a result real GDP growth in 2001/02 was revised downwards to 1.2 percent from 5 percent; a sharp deceleration from the 7.7 percent growth rate recorded in 2000/01. GDP shrank by 3.8 percent in 2002/03, from projected level of 6% but a recovery projected at more than 6.7 percent is expected in 2003/04 stimulated by a rise in agricultural output. Because of the drought in 2002, an estimated 13 million people needed food assistance, compared with about 4 to 5 million in need during a normal crop year. This experience has led to the development of alternative macroeconomic scenario discussed in chapter VI.

Because of the drought in 2002, an estimated 13 million people needed food assistance, compared with about 4 to 5 million in need during a normal crop year. Poorly functioning, unstable and incomplete rural markets exacerbated the drought effects. This was particularly true in the remote and drought-prone areas. Bumper crops in earlier years drove down food prices, with catastrophic effects on farmers’ income. Consequently, many farmers could not repay their debt, and did not have the means to purchase and apply modern inputs to this year’s crops. Supplying food aid to deficit areas through imports also acts to depress food prices. For this reason, donors have been requested to buy food from surplus regions to transfer to food-deficit regions insofar as this is possible, instead of importing food aid.

Despite the Government’s prudent fiscal stance and cautious monetary policy, the average annual inflation rate, as measured by consumer prices, accelerated to 15.1 percent during fiscal year 2002/03, in sharp contrast to the two previous years of falling prices, due to the decline in agricultural production.

Despite the attendant problems the emphasis on social and economic infrastructure and maintenance of macroeconomic stability was well on track during 2002/03.

On the fiscal side, spending on social and economic infrastructure sectors such as education, health, roads and agriculture and food security has also kept its momentum even under such difficult circumstances. As indicated in summary Table 1 below, spending on education as a ratio to total public expenditure reached over 16.0 percent followed by roads (10.1 percent) and agriculture and food security (7.5 percent) while defense spending has been scaled down from about 38.9 percent of total expenditure to about 11 percent of total expenditure by the end of 2002/03. Total poverty targeted spending reached over 15.1 percent (slightly lower than programmed owing to lags in disbursements from external assistance and loans) of GDP by the end of 2002/03. With regard to revenue; tax revenue averaged about 15 percent of GDP by the end of 2002/03, with only a modest 4.6 percent increase over the previous fiscal year.

On the external side, world coffee prices are still around an historic low in real terms. That, along with higher oil prices, led to a sharp fall in the terms of trade, by 33.9 percent in FY 2000/01, by another 6.3 percent in FY 00/01, and by yet another 8.9 percent (estimated) in FY 2001/02. Earnings from coffee exports, accounting for 34 percent of merchandise exports in 2002/03, fell by more than half, from USD 420 million in FY 97/98. An improvement in total export earnings has been recorded for fiscal year 2002/03 (about 7 percent), largely attributable to more robust growth of non- coffee exports (over 9.8 percent) mainly consisting of meat and meat products, oil seeds, sugar, gold and chat. During the same period, the total import bill rose by 9.4 percent to reach USD 1856 million mainly driven by increases in imports of fuel, capital goods, and food.

The external current account deficit, including official transfers declined from 5.7 percent of GDP in 2001/02 to 4.7 percent of GDP in 2002/03 where as excluding official transfers, the deficit remained at 12.1 percent. The gross official reserves rose to USD 929.4 million, enough to cover 4.5 months of imports.

Despite the Government’s prudent fiscal stance and cautious monetary policy, the average annual inflation rate, as measured by consumer prices, accelerated to 15.1 percent during fiscal year 2002/03, in sharp contrast to the two previous years of falling prices, due to the decline in agricultural production.

Summary Table 1 below describes trends in major macroeconomic indicators in recent years ending in 2002/03 Fiscal Year.

Table 1:

Trends in Macroeconomic Indicators for FYs 1999/2000-2002/03

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Source: Ministry of Finance and Economic Development* Excluding Special Program


Including official transfers

Excluding special programs

Before debt relief

However, annual average core inflation was 3 percent. The average saving deposit interest rate in fiscal year 2002/03 is unchanged from the previous year at 3 percent and the average lending rate also is unchanged at 7.5 percent. The broad money supply (M2) increased by 10.4 percent during fiscal year 2002/03 to reach Birr 30.1 billion, driven mainly by a 41.2 percent rise in net foreign assets (NFA) and a much more modest 2.6 percent rise in domestic credit.

The modest increase in domestic lending results from weak economic activity. Total credit to the non-state sector declined by 7.7 percent in 2002/03, below the targeted rise of 4.8 percent, following a 7.1 percent drop in 2001/02. Credit to the Government increased by 9.8 percent.

In regard to Population and employment, population has been growing at a high rate since the early 1950’s, when it rose to more than 2% growth per year. Currently the population is estimated at about 68 million with a 2.73 % growth rate per annum (2000-2005). Continued growth at that rate will result in the population doubling over a generation (27-28 years), and the growth rate may be higher than estimated. The challenge of such high growth rates is indicated by the low percentage of the population that has completed primary education, the existing unemployment problem, land degradation and the increasing food insecure population in many areas.

Unemployment manifests itself mainly in the form of underemployment. Open unemployment is concentrated in the urban areas. Youth unemployment is a major social problem. To address and enhance the contribution of the Youth to sustainable development Youth Policy has been formulated with broad based participation. Currently the Policy is under review for approval by the Council of Ministers.

3.2. Fiscal, monetary and Foreign Exchange Policy

The Government has a strong track record in sound macroeconomic management and reaffirms its commitment to maintaining macroeconomic stability by pursuing sustainable fiscal policies, and a monetary stance that is non-inflationary, even as it seeks to vigorously promote economic growth and poverty reduction. Despite the severe drought and continued deterioration of the terms of trade, most performance benchmarks have been met. At the same time, reflecting current realities, the targeted average real GDP growth rate has been revised down to about 6 percent. The Government’s current plan calls for reducing the external current account deficit, including official transfers to about 6.2 percent of GDP (or 10.6 percent if official transfers are excluded) by 2005/06.

The Government will continue to maintain a cautious expenditure policy, while making every effort to increase poverty-reducing spending. The budget for poverty-targeted outlays (health, education, agriculture, roads) is estimated to have increased to 17.6 percent of GDP.

With the establishment of the inter-bank foreign exchange market in October 2001, the Government moved towards allowing greater market determination of the exchange rate. During fiscal year 2002/03, a total of 588 trades valued at USD 160.4 million were carried out in the inter-bank foreign exchange market, an increase of USD 56.4 million over the previous year.

The Birr has continued to depreciate in the daily inter-bank foreign exchange market at a 0.45 percent annual depreciation of the average weighted inter-bank exchange rate during fiscal year 2002/03, a considerable deceleration from the 2.58 percent depreciation rate recorded during the previous fiscal year.

More recently, there has been a revival in disbursement of Loan to non-government sector. During fiscal year 2002/03, and reflecting its increasing importance in the economy, the private sector took 87 percent of total loans disbursed, while the public enterprise and cooperative sector absorbed 5.5 percent and 7.5 percent respectively. However total credit to the nongovernment sector declined by 7.7 percent compared with 2001/02. On the supply side, private banks have been steadily gaining market share. Their share of total new credit rose from 36.6 percent in fiscal year 2000/01, to 44.1 percent in fiscal year 2001/02, and to 57 percent in fiscal year 2002/03. Most of the new loans went to domestic trade (30 percent), foreign trade (22.3 percent) and industry (13 percent). At the same time, the agricultural sector, which accounts for nearly half of GDP, received only about 10 percent of total new loans.

The banking system, as in 2001/02, is faced with excess liquidity in 2002/03, although there are increased sales of government securities. The banks excess reserve increased to 12.8% in end 2002/03 from 8.1% at end 2001/02 in reflecting weak credit demand emanating from overall economic growth decline in 2002/03

There has been a significant liberalization of interest rate policy. All interest rates are market-determined, except for the saving deposit rate, which is set at 3 percent. Given that the core inflation rate is 3 percent, the fact that interest rates are now in the 3-14 percent range is considered adequate. The term structure of interest rates has not changed significantly during fiscal years 2001/02 and 2002/03. Since the directive allowing banks to pay interest on demand deposits, the demand deposit rate has remained steady at 0.75 percent. The average interest rate on time deposits rose slightly, from 3.47 percent in fiscal year 2001/02 to 3.6 percent in 2002/03, due to modest competition among banks to attract deposits of longer-term maturity. The minimum and maximum lending rate remained unchanged at 7.5 percent and 13 percent respectively. The average lending interest rate stood at 10.5 percent.

3.3. The Impact and management of the Drought

3.3.1. Spatial Distribution of Drought And Number of People Affected

The 2002/2003 FY saw one of the most widespread and severe emergencies ever to strike Ethiopia. This crisis was particularly serious, because of its wide geographic spread, especially to traditional non-food deficit areas of SNNPR, Arsi in Oromia and East Gojam in Amhara.

In the year 2002/03, frequent needs assessment were conducted by the DPPC in conjunction with donors, NGOs, United Nations agencies and regional authorities. Consecutive appeals have been issued in January, August, September and December of 2002, and in March and April of 2003. Through all of these efforts, the dangers of drought had been averted through the Early Warning System. However, the January 2002 appeal was based on the assumption that the relief needs would decline as of July 2002 as it was hoped pastoralists, particularly in Afar and Somali would become self-supporting following the March - May rains. Despite early positive projections, rains failed in many of the pastoral areas and the failure of the Belg (small season) crop (with significant damage to long-cycle crops, particularly in the eastern and southern lowlands) deprived the affected populations of access to food during a critical period of the year.

The most recent estimates suggest that 13.2 million people were in need of food assistance in 2003, compared with about 5 million in a normal crop year. Food assistance needs for 2003 have been estimated at 1.85 million metric tons of cereals. As of end- October 2003, 1.77 million metric tons have been pledge and 1.44 million metric tons delivered.

Overall, the food security situation both in the cropping and pastoral areas was very poor. For the affected populations, household food production collapsed, while cereal price hikes, and falling livestock prices eroded purchasing power. Relief requirements in January 2003 were estimated to total 1,461,679 MT, including 1,329,344 MT of cereals, 128,070 of blended food and 12,000 MT of oil. Further upward revisions in the estimated population in need of food aid were made in April 2003, with 12.6 million people estimate to be in need of immediate assistance, and the food requirement rose to 1.54 million MT, and 81USD million in non-food assistance. Regarding donor response 1,680,165 MT food aid has been pledged of which 1,077,276 MT is delivered up to end of June 2003. Similarly, unparalleled response for non-food needs has been made.

Relief distribution has been mainly implemented by the DPPC and NGOs. In 2002 from July to December about 322,013 MT and from January up to June 2003, 388,471 Mt food was allocated and transported to all regions by DPPC and 99,604 MT and 412,879 Mt of food in 2002 and 2003 respectively was distributed by NGOs. In total, about 1.23 million MT of relief food has been distributed during the reporting period in various regions, including grain, oil and supplementary food. The largest contributions came from USAID and EU.

During the reporting period the Emergency Food Security Reserve (EFSR) provided 1,017,828 MT of grain on loan to the Disaster Prevention and Preparedness Commission (DPPC), World Food Program and Non-Governmental Organizations, from its strategic warehouses located nearest to the drought prone areas. 879,579 MT of grain that had been provided earlier on loan has been repaid. The draft terms of reference for the study to be conducted on the optimum stock of the EFSR, are being prepared jointly by the EFSRA and EU (the funding agency).

3.3.2. Longer-term responses to drought

The increase frequencies and the broadening of the effect of the drought has sharpened the sense of urgency in Ethiopia. Realising this and that Ethiopia cannot continuously rely on food aid, Government has launched a major new initiative, the New Coalition for Food Security for Ethiopian. This is discussed in the section on food security.

3.4. Assessment of Poverty Status

During the first year of SDPRP, there was no new survey conducted to provide information to assist to measure short-term changes in poverty. However, as noted earlier the severe drought affecting millions and resulting in 3.8% decline in GDP growth as well as the continued suppressed coffee prices, indicate conditions have probably worsened for the majority.

The poverty analysis based on the 1999/00 HICE & WM surveys, which has been incorporated in the SDPRP document, showed the number of people below the poverty declined by about 3% compared to the results based on the 1995/96 HICE Survey data sets. Owing to the realization of participatory poverty assessment (PPA) to complement results from quantitative analysis, the design of the PPA study is already completed and the study is due to be conducted during the 2003/04 fiscal year.

Micro level studies conducted by the Save the Children-UK entitled “Destitution in the Northern High Lands-Amhara Region, November 2002” and “Ethiopia: Risk and Vulnerability Assessment, August 2003” conducted by the World Bank based on the 1999/2000 HICE Survey have shown that poverty in the country is deep and wide in a sense that half of the population remains persistently poor and another 14% who are not poor now have a high probability of falling into poverty in the future with a single large shock. The most pervasive of the risks are community wide risks such as weather, malaria & the newly emerging HIV/AIDS and idiosyncratic health shocks.

The continued collapse of the world coffee price in the last four years highly affects the peasant sector (small farmers) who are the dominant feature of Ethiopia’s coffee production which accounts for 95% of the total coffee production. So the persistence of this shock, will make a large fraction of Ethiopian households lose the return on their long-term investment (perennial coffee trees) and deepen already high poverty levels. The Shock also affects the urban population by collapsing the business environment for coffee productions and also the coffee sector employs which accounts over 25% of the country’s active population (directly or indirectly) migrates to the towns & deepen the poverty of the urban population.

3.4.1 Growth and Poverty

It is to be recalled that for the preparation of the SDPRP, a study was initiated on sources of Growth, Growth and Poverty Linkages. In 2002/03 this study is made to continue to through new dimensions.

The source of growth study used growth accounting exercise based on a Cobb-Douglas production function estimated using data for the last four decades. A number of conclusions can be drawn from the preliminary results of this study. First, both the short and long run growth models employed show the dominant role of labour in accounting for the positive growth in the period under analysis (in the rage of 0.70-0.90, while capital being about 0.30). Second, the contribution of capital, although disappointing in the first two regimes (Imperial and Derg), seems to pick up in the 1990s. Third, over the entire period, the average contribution of capital is negligible while that of labour and factor productivity is generally positive and significant.

Finally, the contribution of factor productivity, although not impressive (being negative in some of the drought years), is in general positive. The major conclusion that could be made from this is that growth in Ethiopian is predominantly explained by labour.

The study also shows other interesting features of growth in Ethiopia. First, rainfall variability appears to be the significant variable in explaining variability in growth. In most of the cases, a good rainfall is accompanied by a bumper harvest and higher growth rate. Terms of trade movement and change in real exchange rate are also the other significant variables in explaining growth variability while change in inflation rate and aid is found to be insignificant in explaining growth variability.

The study complemented this macro-data-based analysis by using micro data of rural households of year 2000. The implication of the micro-data based finding for the time series-based (macro) model is that the ‘dominant’ contribution of labor observed in the latter might have resulted from the omission of the land variable in the model. Thus, we have also estimated the production function using only labor and oxen (as a proxy for capita). This has resulted in a very high coefficient (0.83) for oxen, the labor coefficient being 0.39-thus supporting our hypothesis about the importance of land as omitted variable.

Since the micro-data based growth accounting exercise is focused on rural (agricultural) areas, the study also examined the same issue in the manufacturing sector (which has nine sub-sectors). The result shows that capital is not an important explanatory variable in the case of wood and textile producing sectors. On the other hand it is found to be very important in the tobacco, food processing and leather industries. In general, the values of the capital share ranges from 0.19 to 0.74. The difference in the value of the capital share may suggest that the contribution of total factor productivity or efficiency (TFP), capital and labor for growth in output is different in each manufacturing sub-sector. Specifically, a higher value of the capital share suggests that the contribution of TFP is lower). The result also shows that except for food and tobacco producing sectors, the average the capital share value of 0.25 is acceptable given that the remaining seven sectors have somehow closer value to the average.

The source of growth study has also used a Social Accounting Matrix (SAM) and an Input-output (IO) table for 1995 to examine the interrelation between different sectors. The result of such analysis makes it clear that the multiplier effects of the agricultural sector is very strong when a SAM based model, as opposed to IO model is used. This is because agriculture, through its demand effect, has strong multiplier effect on the economy. The SAM framework offers a perspective on what the likely constraints of output growth might be, if not its predictability. Although the framework is static and assumes output is demand constrained, it is helpful to pinpoint at the linkage between the industrial and agricultural sectors. From the preliminary investigation we noted that: (a) the multiplier effect of agriculture is better than the industrial sector once the analysis is carried in a SAM, as opposed to IO, analytical framework, (b) identification of sources of growth from the perspective of macroeconomic and sectoral interaction reveals that agricultural growth is dependent on the total multiplier effect of the industrial sector. In particular, food processing, textile and non-metal industries have the highest linkages.

3.4.2 Social Impact of the Introduction of the Value Added Tax (VAT)

The newly introduced VAT has a uniform rate of 15 percent on most goods and services, with a zero rate on exports and exempted goods and services. The scope of exempted goods and services differs from that under the sales tax. Under the new VAT, the main items exempt are sales of used dwellings, financial services, medical and educational services, electricity, kerosene, water, and transport services.

This is a preliminary study done with the help of IMF technical assistance. Further detailed study is being conducted. The result indicated here are therefore, preliminary. It needs substantive review and drawing firm conclusions by the Government.

One characteristic of the Ethiopian economy is the high percentage of population that consumes home-produced goods and services. Thus, this portion of the economy is not exposed to indirect taxes. In the 1999/2000 HICE survey, consumers were asked if their expenditure was made in the form of cash or in kind. In-kind payment broadly incorporates home-produced and consumed goods and services as well as goods and services received free, in trade, or as gifts from outside the household. Thus, goods and services in-kind were taken as a proxy for home-produced goods in which indirect taxes is not applied on them.

The simulation results were finally crosschecked with the available national data on tax revenues. Since the latest available sales tax revenue collection was for 2001/02, this figure was inflated to 2002/03 values using the nominal GDP growth rate between 2001/02 and 2002/03. From this adjusted figure and the aggregate sales tax revenue from the simulation, the estimate of “home-produced” goods that is not subject to the VAT stood at 26.6 percent of consumption. This ratio was applied uniformly across all the households to establish the amount of VAT and sales tax.

The tax incidence of the VAT was analyzed on the basis of the baseline model. The national average effective VAT rate is estimated at about 4.8 percent. As indicated in Table 2 below, households in the sixth decile face the lowest effective rate at 4.2 per cent, while the tenth decile (the richest expenditure group) faced the highest at 5.8 per cent. The analysis conclusively indicated that the VAT is progressive at the national level. However, because it has fewer exemption and only one rate, it is less progressive that the sales tax it replaced.

The estimated progressivety of the VAT depends entirely on the shares of consumption of exempt items and items obtained in kind. Although the magnitude of these two groups taken together is higher for the lower deciles, the implication for each of the groups is different. The analysis also indicated that the percentage of in-kind transactions stays well above 50 per cent for all but the last decile. This adds to the progressivety of the VAT. The study has also considered the distribution effects of exempt items. It is worth noticing that mostly the households in the highest decile consume the exempt goods and services.

Table 2:

Tax Incidence of VAT by Deciles

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This study has also compared the incidence of the VAT with that of the incidence of the sales tax. According to the study, the effective sales tax rates are lower than the effective VAT rates as many of the goods and services had lower rates under the sales tax than the VAT. On average, households faced an effective tax rate of 3.88 percent, which is 18.7 percent lower than the rate under the VAT (4.77 per cent). In other words, the replacement of the sales tax by the VAT has increased the tax payment burden for the average household.

The study also indicated the increase in tax burden (as a percentage of household expenditure) owing to the shift from the sales tax to the VAT. The VAT is more efficient, although it does shift some of the relative burden of the tax on the poor. The study may seem to indicate that the replacement of the sales tax with the VAT has had an adverse impact on the poorest 40 percent of the population. However, the impact is small (about one percent of their consumption). As this is only half of the story the study also indicated that if the additional revenue is spent primarily on the poor (primary education and health care), the net incidence will be mitigated or reversed.

Distributional analysis for food and non-food items was conducted separately. The share of food expenditure is above two-thirds for most of the households in the survey. As the average share of in-kind expenditures is higher for food than for non-food items, the effective VAT rates on food is lower. The share of exempt and in-kind expenditures in the non-food category does fall as income increases, so the effective tax rate increases monotonically from lower to higher deciles, with the national average being about 5.2 per cent.

About 17 percent of Ethiopians lived in urban areas in 20024, but this share has been growing rapidly since the 1990s. This fact is important, because the incidence of the VAT on rural households is very different than the incidence on urban households for two reasons: income levels are higher in urban areas and the share of in-kind expenditures is much larger in rural areas. For example, the average expenditure in the richest decile is almost 2.5 times higher in the urban areas than in rural areas, but the incidence of the VAT is more than three times higher for urban households in this decile. On average, urban dwellers face an effective VAT rate of 7.8 percent, while rural dwellers pay 4.0 percent in VAT.

3.4.3. The Impact of the Continuous Decline in International Coffee Prices

This is not a formal PSIA, but rather an assessment of the situation of coffee sector. In the future, it requires due attention for deeper analysis.

Coffee prices have been declining sharply since the mid-1990s, reaching its twenty years low, with little prospect of a long- term recovery. This has shattered livelihoods. Following the slowdown in coffee prices in world market, the overall decline of prices at farm gate level has seriously affected the livelihoods of smallholder coffee farmers. More than 95 percent of coffee production in Ethiopia comes from smallholder coffee farmers. Many farmers have been forced to sell assets that they had purchased on coffee boom years. They are reducing household food consumption, and rural poverty and inability to pay tax and debts has increased. They are pooling children out of schools. The total impact of the decline in prices has been very damaging at farm household level.

The decline in coffee farmers income meant businesses in towns in coffee growing regions of the country have also been seriously hit resulting in loss of urban employment and income and erosion of livelihoods. Seasonal labourers who normally depend on seasonal coffee picking and coffee processing industries to supplement subsistence agriculture have lost their income opportunities and joined the food insecure households.

According to Oxfam report, the price of coffee has fallen appallingly low and the long-term prospects are grim (Oxfam, 2002). Coffee farmers, the majority of whom are poor smallholders with land holdings less than 0.5 hectares, sell their coffee beans for much less than their production cost. They are unable to pay for their children’s education and get basic medicines. They are also obliged to cut back on their daily food consumption, eating only one meagre meal a day or go without it.

At the same time, the whole economy is suffering as coffee, which constitutes the lion’s share of the country’s foreign exchange earnings, is in trouble. Coffee traders are also at risk and some of them are going out of business. Banks, too, are facing an increasing number of defaulters on their loan.

At the national level the impact is massive. A simple calculation indicated that, Ethiopia has lost about 814 million US Dollar in export revenue over the last five years. Besides, owing to the price crisis the government had withdrawn coffee taxes estimated at 16 million US Dollars. This brings the total direct loss to 830 million Us Dollars. This is very big sum for poor country like Ethiopia. This money could have accomplished the following:

  • Establishing fully equipped 2000 primary schools (grades 1 to 8) and fully equipped 1252 Health Centres or;

  • Establishing about 10 High standard Hospitals or;

  • Establishing more than 100 well equipped and facilitated High Schools or;

  • Construction of Two Hydropower plants that can produce about 360 Megawatts or;

  • Construction of about 3,600 kilometres of feeder roads in the nation.

From this, it not difficult to see how households are thrown into destitution, how development works for sustained growth and poverty reduction jeopardized-of course its implication on debt sustainability.

Highlight of some of the important measures the government has undertaken to address the problem include the following:

  • The government has abolished the 6.5 percent export tax levied on export coffee and has exempted farmers and traders from the withholding tax of 5 percent;

  • Recently, the National Bank of Ethiopia has waved the coffee price setting practice to create flexibility in foreign trade negotiation of coffee exporters;

  • The government is also investigating as to how to improve coffee extension service and raise the yield and quality of coffee;

  • There is an attempt to diversify the market, particularly the specialty, organic and fair trade markets;

  • The Export Promotion Agency is making efforts to play a crucial role by investigating new markets, solving some of the administrative bottlenecks faced by exporters and by reducing the marketing chain.

  • Similarly, other export sector related incentive schemes such as foreign exchange retention scheme and permitting external loans and suppliers’ or foreign partners’ credit facility have been introduced to expand and/or improve coffee production and processing;

  • The formation of cooperative union is also another attempt envisaged to solve the problem. To minimize the financial problem of cooperative unions, the formation of a cooperative bank is under process;

  • Establishing a coffee development fund is also in the pipeline

However, given the magnitude of the crises and devastating impact of the price fall, these moves alone will not be expected to solve the crises, nor address the problem adequately.

More than any thing else unfair trade practices such as those in coffee sector, have increasingly marginalized poor farmers and governments in coffee producing countries from the envisaged benefits of globalisation, and that the international community has a moral obligation to pay utmost attention to the crises and weak voices of the poor coffee farmers and struggling economies such as Ethiopia.

IV. Overview of Developments in the Pillars of SDPRP

4.1. Agricultural Development Led Industrialization (ADLI) Strategy

ADLI is a long-term strategy, during the first stage, and agriculture is to play a leading role in the growth of the economy. The immediate need is agricultural development to increase food security. Given the limited domestic market, over the medium term when food security has been improved, agriculture has to be made internationally competitive, with surplus agricultural output being increasingly oriented towards exports. To achieve this, the strategy emphasizes technical progress in agriculture and agro-processing, output diversification, and greater market interaction. The following section sets out the steps that have already been taken to do this.

While the strategy emphasises the leading role for agriculture, linkages with other sectors are seen as crucial in building inter-sectoral links, the strategy recognises the key role of non-state actors, particularly the non-peasant private sector in processing agricultural products and in agricultural marketing. The success of the strategy will depend on enhancing the private contribution, both domestic and foreign, to agricultural development, and promoting cooperatives, which are also important in marketing and, along with other micro-finance institutions, in rural finance.

To improve the performance of the grain marketing system, the Warehouse Receipt and Inventory Credit System was recently established to address the problem of high seasonal price variability, poor storage and transport infrastructure, and limited access to commodity finance. This project will provide smallholder farmers with low-cost financing, thereby enabling them to sell their grain during periods when prices are high, rather than immediately after the harvest when farm gate prices are usually at their lowest level. The first phase of this project has been completed and a technical task force made up of representatives from relevant public and private bodies formed. The task force will focus on insurance and performance guarantees, grading standards and grain handling, the warehouse receipt system (paper or electronic), market information, the food aid and warehouse system, and the development of commodity exchange systems. A regulatory body to control and coordinate the credit system is in the process of being established.

Another critical area is the improvement of the efficiency of the inputs markets. To ensure a successful harvest in 2003/04, externally financed Government intervention in fertilizer and seed markets was required. Following the drought, a series of actions have been agreed upon which will gradually improve the competitiveness and efficiency of the fertilizer market. These include (i) a reduction in the proportion of extension staff involvement with fertilizer delivery and credit administration from 30% in 2004 to zero in 2006, (ii) complete phasing out of Regional Government fertilizer credit guarantees by 2006; (iii) training 80% of cooperatives’ to access bank credit by 2006, (iv) the introduction of a warehouse receipt system, (v) increased credit provision by micro finance institutions. In addition the Government will, (vi) conduct a study to evaluate options for improving the importation and distribution of fertilizer, with implementing the findings of the study in 2006.

Improving the rural financial services is a key component of the strategy to bring about the shift from subsistence farming to small-scale market oriented agriculture, and to expand and diversify the range of non-farm productive activities. To strengthen the rural credit system and to respond to credit demand from poor rural households so that they can adopt improved agricultural production technologies and undertake off-farm and non-farm income-generating activities, the Government is undertaking rural financial intermediation program (RUFIP) to be managed by the Development Bank of Ethiopia. Within the cooperatives sub-sector, Government will promote the establishment of 3,375 RUSACCOs as self-reliant, member-owned and managed, community-based financial intermediaries.

On implementing Rural Policies and Programs, the immediate need is expansion of agricultural production to enhance food security both improving food supplies and raising the incomes of rural households. In implementing the rural development strategy a key element is the more effective mobilization of human and natural resources, particularly through decentralization and the empowerment of the grass-root level communities for participation in all development interventions.

The structural transformation objective is aimed at accelerating growth through sustained increase in agricultural productivity accompanied by industrial development. Towards this end, in agriculture, actions have focused on developing and implementing menu based extension package; producing the necessary human resources through agricultural TVET; overcoming market constraints; provision of rural financial services; rural road to expand access; improving land tenure security; and the development of cooperatives.

Elements of the Rural Development Policies and strategies include modernization of the research and extension system, which must be demand-driven, and creating a favourable environment for commercial agriculture. To promote agricultural growth, a number of improved appropriate technology packages are being prepared and disseminated to smallholders through menu-based extension packages at household level to enhance commercialisation of smallholder agriculture.

With regard to land tenure, four regions (Tigray, Amhara, Oromya and SNNP) have already issued rural land proclamations and established land administration institutions to enhance land tenure security, in a view to provide farmers with a more flexible and transferable user rights and with incentive to invest in upgrading the productivity of rural land. Another four regions will enact rural land proclamations in the coming two years. Giving higher regard for the specificity of each region, harmonization of the best practices will be made in year 2004/05.

With regard to fertilizer and seed inputs, in order to improve the competitiveness and efficiency of the fertilizer marketing chain, a set of actions are designed to take place in 2003/4, which include conducting a study to explore the options for reforming the market structure for the import and distribution (including wholesale and retail) segments of the fertilizer market.

In order to establish a sustainable agricultural input credit administration system, amongst other measures, regional government guarantee for input credit, which is currently 70% of the total annual fertilizer sale (equivalent to 194,0000 MT), will be incrementally reduced to completely phase it out by 2006.

In an effort to promote fertilizer use with more responsive technical advisory service, number of extension personnel disengaged from agricultural input delivery system and credit administration is currently increased to 70%, with a complete disengagement by 2006.

A total sale of 159,220 quintal of improved seeds has been realized in the reporting period and planned to increase to 180,236 quintal by year 2003/04. With regard to agricultural productivity, average productivity for major crops stood at 21 qt/ha.

With regard to development of agricultural cooperatives, given the key role cooperatives play in facilitating marketing and rural financing in rural areas. Amongst other factors, reforming and strengthening cooperatives lead to improvement in the functioning and efficiency of agricultural input and output markets. To this effect, 23 new primary and 6 new secondary cooperatives have been established, other 786 restructured under the New Cooperative Proclamation, and one cooperative bank established. Besides, the study and design for establishment of one cooperative training institution is under way. In respect to human resource development, 3,111 cooperative personnel received short-term training during the year under review.

In regard to introducing menu-based extension, packages have been developed with the intention of moving from piece meal approach to integrated approach. In this connection, about 36 menu-based integrated packages focusing on livestock development, crop production and natural resources management have been developed and implemented during 2002/03.

In an attempt to implementing these packages, the four major regions: Oromiya, Amhara, SNNPR, and Tigray have embarked upon conducting household socio-economic survey prior to interventions. Tigray and Amhara regions have already taken measures to implement the program on 91, 593 households & the remaining two regions; SNNP and Oromyia have finalized preparations to embark upon implementation on 60,515 households for which they have completed the socio-economic surveys.

Parallel to this, the national agricultural extension intervention program is underway in all regions following the routine extension program. About 4.1 million farmers have been involved in the program. Nine proven technologies are tested for adaptation and popularisation. Out of the 4.1 million extension program beneficiaries, 2.5% is considered as women farmers. What next? What a remains is assembling and packaging of best technologies and practices and provision of training for extension staff to take off implementation.

In the area of water harvesting, the technique is considered to be one of the major interventions to overcome the challenges of household food insecurity in the country. In this regard, efforts are underway to construct water-harvesting structures across the country. Water harvesting schemes are generally viable, with an economic rate of return of 32.7%, and an annual earning of about ETB 6,400 household/annum.

Accordingly, 139,462 different types of water harvesting structures with different capacities have been constructed in the four major regions. These structures are at household level and are meant for life saving irrigation for field crops as well as for vegetable gardening where conditions are favourable.

Formulation of Comprehensive Development Plan: A comprehensive development plan for crop and livestock aimed at transforming the subsistence mode of agricultural production system into market oriented production system have been prepared and ready for implementation in the four major regions. The development plans prepared include:

  • Cotton comprehensive development plan

  • Coffee ” ” ”

  • Pulse crops ” ” ”

  • Spices and oil seed crops comprehensive development plan

  • Dairy comprehensive development plan

  • Fishery ” ” ”

  • Honey ” ” ”

  • Meat and live animals

Areas for the intervention of the plans have been identified and preparation is underway to conduct training program for development agents.

Access to land (resettlement): In the past decades demand for access to productive land became an agenda by the vulnerable and food insecure households. In response to the chronic food insecurity problems, most of the households opt to find way out from such a dire situation. In response to this desperate move by the population and chronic food shortages faced by millions, the government has initiated a pilot resettlement (access to land) programme during the past two years. About 45 thousand households were resettled voluntarily in Amhara, Oromiya, and Tigray regions during 2002/2003. Similar effort is underway in SNNPR.

Enhancing Capacity in the Agriculture Sector: Over the medium term, to increase the impact of the agricultural development program, the human resources in the agricultural sector need to be substantially enhanced. For this purpose, 25 agricultural training centres have been upgraded to Agricultural TVET Colleges, 4 at Federal and 21 at regional level and currently about 28,000 students are receiving training in five agricultural fields namely plant science, animal science, animal health, natural resource and cooperatives.

4.2. Decentralization and Empowerment

The District Level Decentralization Program aims to devolve power to districts, promoting accountable and responsive local government and enhancing democratic participation. Empowerment at the grassroots is seen as a key to the improvement of service delivery. The District level program started in 2001 by legal and administrative measures to devolve powers from the regional and zonal administrative levels to districts (woreda administrations) in four regions (Tigray, Amhara, Oromiya and SNNP Regional states). This second wave of decentralization has been accompanied with initial steps to build capacity in the districts.

The legal base for division of power between districts and Regional states was incorporated in the 2001 revised constitutions of the four Regional states. Parallel with the legal changes, the district level decentralization program in the Ministry of Capacity Building, in cooperation with the Regional states & MOFED, undertook preliminary studies on institutional, administrative, personnel and fiscal aspects of decentralization and on capacity building needs. Based on these studies and with further refinement at the regional level, institutional structures in 430 districts of the four regional states have been set-up.

Districts have been given greater economic and political power to implement development plans based on locally determined priorities, consistent with national SPRDP goals. District cabinets have been formed with functional representation from key sectors/public bodies, with 18 to 24 sectoral public bodies/offices organized to discharge public service delivery responsibilities. A pool arrangement system has been introduced to deploy staff from zone and regional to districts levels to reduce the cost of decentralization and improve efficiency.

Untied block grants from regional governments to the districts have been introduced along with improvements of the planning, budgeting, financial disbursement, accounting, reporting and monitoring systems. As of 2001, functional assignments of zones and districts were reorganized with the shift of financial power to districts over their own expenditure by 2002. Budgets of districts have been endorsed by district cabinets and approved by councils.

During 2003, attention has focused on identifying gaps and launching capacity building activities in the districts. One ongoing activity is the refinement and consolidation of the legal framework for operations at the district level. For this purpose, an overall assessment has been made of the capacity building efforts of the public bodies involved in district level activities, through field visits and by contacting various agencies to identify capacity building activities which require support. Gaps relating to the enactment of laws and regulations covering some functions have been identified and the need for consultancy support has been recognized. Terms of Reference have been formulated for short-term consulting support through the CBDSD project.

A working manual is being prepared to ensure accountability and transparency of public institutions, and to improve relationships and interactions at the district level. TOR have been developed to hire local consultants for this work, which is scheduled to be undertaken starting 2004. A draft manual for community-grass roots participation at the district level has been prepared. The manual has been drafted with feedback from the Regional States. The document is currently with different stakeholders for comment.

Short-term training is being supplied in responding to the priority needs of districts. In response to the shortage of skilled manpower, seven areas of training were identified to enhance the knowledge of existing and newly transferred staff. Training has been offered to at least seven staff members per district in 430 districts of the four Regional States. The training has been carried out by trainers at concerned sectoral agencies, lasting seven to ten day in specific planning fields, action plan preparation, pre-implementation, project planning and implementation, reporting and monitoring etc. It was originally planned to train 4730 personnel at the total cost of Birr 6.1million. However, 7948 personnel have been trained at the cost of Birr 5.6 million.

Currently, a five-year program action plan has been produced for the District Level Decentralization Program and as part of the preparation for PSCAP. In order to identify additional gaps and learn from the experience of the four Regional States, rapid assessment will be undertaken in sample districts by expatriate and domestic consultants using IDA funds. TOR for this activity has been formulated and consultants are to be recruited.

There are short and long-term challenges in moving decision-making power closer to the people. As part of the learning-by-doing process, change has been introduced in the four regional states, However, there are still difficult challenges to be faced related to the development of human skills, budget requirements, elaboration and refinement of legal provisions, restructuring of offices, classification on some issues such as reporting and participatory decision making. This is an area, which will require continuing commitment over some years both from the government and development partners.

Decentralization has started operating at Woreda level since the on set of the 2002/03 FY. Obviously, the process is not without transitional difficulties. The first difficulty was the mismatch between what some Woredas got through the block grant and their existing obligation. To overcome the mismatch additional transfer mechanisms were introduced to manage the transition in a practical manner. There are also indications for refining assignment of responsibilities between regions and Woredas. Fiscal reporting also experienced some delay. The process also brought out the urgency of capacity building to realize the objectives of devolution to Woredas. Given the fundamental devolution that took place, it is understandable and is expected to face short-term constraints. Overall, however, the process is being managed well, and when problems are faced, Regions are handling them in a flexible and practical manner. Since the process is evolving, continuous assessment will be made to identify problems and take corrective measures.

4.3. The Justice System and Civil Service Reform

4.3.1 The Justice System Reform Program

Strengthening the capacity of the judicial system is intended to help protect individual rights, uphold the rule of law and contribute to good governance. A capable and efficient justice system is indispensable to economic development and democracy. The overarching goal of the justice reform program is to create an environment to expedite social and economic development by maintaining the rule of law and respect of human and economic rights. The existing system is unequal to this task due to a lack of capacity in the administration and operation of the system and insufficient human resources. As a result there are delays due to protracted court adjournments; law enforcement organs cannot provide the level of protection of human and democratic rights envisaged in the constitution; and the legislative process and oversight of the judicial process are deficient. The reform program addresses these weaknesses.

The program has started to formulate its strategic approach to strengthening the institutions, designing new working system and procedure and developing human resources. The program office has set out an annual working plan focusing on:

  • Equipping the justice system reform program with human resources and materials

  • Undertaking a comprehensive justice system reform program study

  • Starting to implement the Court Administration Reform program

  • Providing training for judges, prosecutors, and the police force.

  • Improving working conditions for the police force and public prosecutors

  • Establishing a judicial training center at the federal level.

  • Finalizing the revised drafts of penal and criminal procedure codes, Administration procedure codes to parliament for approval.

Implementation has begun in a number of areas, including recruitment of staff, initiating work on a national comprehensive justice system reform program study, recruitment of international consultants, and negotiation of international funding. A beginning has been made with court reform, with appoint of steering committees, opening of some regional project offices2, procurement of modern equipment for courts to improve service.

Training programs have included:

  • Awareness training for higher officials of the Courts on the reform program

  • Managerial skills training for 92 Presidents and vice presidents of supreme and high courts of the regions

  • “Training of trainers” courses for 50 trainees from regional courts.

  • Computer literacy training for 270 court clerks and secretaries.

Other activities have included the preparation of a Medium-Term National Capacity Building Strategic Program (PSCAP), coordinating and assisting the federal and regional state government organs involved in the justice sector to prepare their own five-year working plans for the PSCAP. A beginning has also been made with measures to promote the efficiency of police force and prosecutors, relating to police investigation systems (such as forensic laboratory and other facilities), integrated information and communication system analysis and design of prosecution office. Constraints on implementation have included capacity limitation in the area. There is human and infrastructural constraints on the functioning of courts at all levels of government.

4.3.2 Civil Service Reform

The Civil Service Reform Program is an important building block of the SDPRP, as an honest and effective civil service is essential both for the delivery of public services and for the creation of an enabling environment for buoyant economic growth. The five major areas on which reform focuses are: service delivery; expenditure management and control; human resource management; ethics and top management systems.

Over the last six years, a number of studies have been completed on improvements in the effectiveness, efficiency and accountability of the civil service and now being implemented.

Key Implementation Measures:

The Civil Service Law (Proclamation 262/2002) came into effect in January 2002. A supporting legal instrument, the Discipline and Grievance Procedure (Regulation 77/2002) dealing with discipline and grievance cases arising from the breach of the law was also approved by the Council of Ministers. Following the approval of the law by the federal parliament, most regional states have adopted their versions of the civil service law.

Staff of federal institutions including judges of the Supreme Court, first instance courts and administrative tribunals, were given orientation on the Civil Service Law and Discipline and Grievance handling procedures. About 45% of the targeted group has received training. Training has increased the awareness among civil servants of their rights and responsibilities. Training is being continued during FY 2002/2003. There were some delays in the development of some procedures by the Federal Civil Service Commission (FCSC), but that has not seriously hampered the implementation of the Civil Service Law.

The Civil Service Code of Conduct: Development of the code of has been going on for the same time and currently the draft Code is being finalized for submission to the Council of Ministers. First phase training on ethics to representatives of federal and regional civil service institutions took place from April to October 2002. Civil service reform offices of federal institutions have continued to carry out training on ethics as part of their 2002/2003 action plans. Although the delay in the adoption of the code delayed application of sanctions, the Ethics Officers appointed in each federal institution closely monitored the ethical behaviour by civil servants.

Medium Term Pay and Employment Policy: Progress has been made on the technical aspects of medium-term pay and employment policy. Although the long-term option is to adopt a points rating system, the existing job classification method is to continue for the short-term. To complete the policy, advice is being sought from an international pay specialist.

A total of 22,620 job descriptions were collected from 104 federal and pilot regional civil service institutions. These were clustered into 21 major occupational groups and 235 sub-occupational groups, and over 1100 classes. Draft guidelines on class and position classification have been completed. The targeted date for the completion of the reform work is set for June 2004.

The first labour market survey was conducted in 1999 and the second in 2002, concurrently with the family budget survey. A draft policy paper on pay, benefits and conditions of work has been finalized. There is considerable overlap between the Job Evaluations and Grading and Remuneration and Conditions of Service (RCS) projects, which requires integration. Remuneration reform is to be finalized in June 2004.

Service Delivery Policy: The Service Delivery Policy was adopted by the Council of Ministers in 2001. Federal Civil Service institutions have started implementing the policy and most regional states have adopted similar policies. Most federal civil service reform offices have established Customer Services and Complaints Handling units and have finalized the preparation of service standards. They have started receiving and handling client feedback report cards. Encouraging results have been registered and growing client satisfaction has been observed. However, the capacity to implement the policy needs to be strengthened.

Service Delivery & Performance Improvement Plan (SDPIP)

The implementation of the SDPIP (and PSIP) is at its initial stage. The CSRP Office has made some improvements to the draft operational manual prepared by Price Waterhouse Coopers (PWC). Currently revision work is underway to address some key issues raised in the consultation process. The draft manual is to be submitted for discussion at a workshop planned for the near future, and implementation is to be launched soon after the workshop.

It is important to underscore the significance of the PSIP as a civil service wide performance management system (including, the focus on self-scrutiny for attitudinal change, business process reengineering and restructuring. Six key federal ministries together with their affiliated agencies have been selected to undertake service improvement measures on critical service areas to bring about immediate results. In this regard the experience of MOTI and Ethiopian Investment Authority is instructive that Institution needs to be transformed to be responsive, efficient and effective. The following example corroborates what has been already said:

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Human Resource Management Information System (HRMIS): Personnel data on 31,577 federal civil servants have been automated as planned. However, installation of the wide area network (WAN) and roll-out of HRMIS across federal institutions could not be carried out due to administrative bottlenecks which resulted in delay of the disbursement of the budget allocated for the activity. The expected time of completion is now set for mid 2004. The more comprehensive aspect of HRMIS is only at the developmental stage, as it requires completion of other HRM reform measures. ICT Policy until recently was under the ICT Capacity Building Program of the Ministry of Capacity Building (MoCB). Recently the Council of Ministers has approved the transfer of the program to an ICT Development Authority, which will be accountable to MoCB.

4.4. Capacity Building

A number of important developments stands out prominently during the first year of the SDPRP implementation in the context of enhancing capacity at both federal and sub-national levels: the Public Service Capacity Building Program (PSCAP) and developments in Information Communication Technology (ICT).

PSCAP is a federal specific purpose grant designed for capacity building with the objective of enabling federal, regional and local institutions to deliver efficient and effective services. It is also instrument to empower citizens through public participation in local democratic institution and create government environment conducive to value creation.

PSCAP comprises six public sector capacity building sub-programs i.e. Civil Service Reform, District Level Decentralization, Tax Systems Reform, Justice System Reform, urban management and ICT. During 2002/03 preparation of a five year PSCAP Action Plan was carried out for federal and reform across the sub programs.

With regard to PSCAP, the success of woreda and municipal decentralization efforts depends on the development of a robust intergovernmental fiscal framework consisting of appropriate fiscal instruments that can meet the recurrent, capacity building or performance, as well as the investment needs of the local government sphere. The introduction of the Public Service Delivery Capacity Building Program (PSCAP) as a federal specific-purpose, performance-based program represents a significant step in leveraging additional capacity building resources to encourage more efficient and effective use of the regional subsidy and woreda block grant. Progress has been made in preparing plans and operational manual for PSCAP.

With regard to ICT, recognizing the potentials of ICTs for all-round national development, the Government through the MOCB has brought ICTs as one of the national mainstream activities within the overall National Capacity Building Program. The Government has realized that introductions of ICTs will facilitate state transformation and the devolution process and is believed to make differences to the cultural, social and economic transformation of the society. As ICTs cut across all sectors, in all aspects it constitutes an essential building block for the realization of the intended socioeconomic transformation and realization of poverty reduction objectives. Thus, the Government’s vision in this regard is to “Develop And Exploit ICTs as an Accelerator for the Attainment of National Development Objectives and Global Competitiveness”.

The ICT program is designed to make available the required inputs ranging from those necessary for the formulation and design of national policy and strategies to the building up of national information and communication infrastructures.

School Net is a strategic component of sector development program related to education; and woreda Net is part of government administration and service delivery component that emerged as major initiative within the overall capacity building strategy and agenda of the government. School Net initiative represents an ambitious and determined effort by the government to use ICTs to immediately tackle urgent problems of quality and access of secondary school education.

In this connection, the government has procured services and products for the installation of broadcasting system and educational contents for 570 schools. Besides, studies are undertaken for development of extra curricula contents through the use of Internet and data centers in the premises of schools.

The Woreda Net is aimed at the use of information and communication technologies to support good governance as well as the woreda (district) level governments to undertake functions under the on-going program of decentralization.

Hence, the government has procured services and products for the installation of IP based videoconference systems at 3 Federal, 11 Regional and 611 woreda administrations and broadcasting system. As the second phase of the initiative, studies are undertaken in the areas of contents, local area networking and Internet pool and data centers establishments at the premises of federal, regional and woreda administrations.

The Government has taken a number of measures with regard to IT based solution for core government functions. The Government is commencing the development and implementation of interim systems (e.g. roll-out of the existing BDA3 and Budget Information System packages at the federal and regional levels) and medium-term solutions (e.g. Integrated Financial Management Information System) in the financial management arena. Similarly, work is being undertaken for personnel systems and land management systems.

Government Information Systems Strategy (GISS) will be prepared in order to ensure coordinating between the ICT sub-program and key business users such as the CSRP Coordinating Office (for financial and human resource management), the Federal Civil Service Commission, MoFED’s budget, accounts, and IT departments, as well as the UDCBO. An important element of the GISS is the need for a clear Applications Roadmap to clarify the business case for applications rollout, as well as financial, technical, procurement, and human resource requirements. The government has established ICT Development Authority. While the government recognizes the fiscal implications, implementation challenges and human resources requirements, it is key instrument of transformation with the sense of urgency the situation demands.

With regard to Urban Development and Management, devolution of power to regional governments and municipalities will ensure that decisions and strategies, including poverty reduction, are formulated and implemented more effectively at the community level. The establishment of well-defined and functioning local institutions such as municipalities as well as grassroots/community structures are prerequisites for any meaningful and sustainable measures to address poverty and other issues. It is for this reason that the GTZ assisted MMPDP and the IDA financed CBDSD are giving priority to decentralised structures and municipalities in the four regions, and the DAG CG supporting an urban poverty action research study for secondary cities.

All the four major regions have, through the GTZ financed MMPDP, put in place legislation establishing municipalities, empowering them with some functional and fiscal responsibilities. The legislation was put in place after comprehensive studies and consultations with the communities and stakeholders in the respective regions. Elections have already been held in some regions and local communities now have Councilors representing them.

By way of introducing urban management reform, a number of towns and cities have been selected in the four major regions of the country: Oromiya, Amhara, Tigray and SNNPR. The number of towns/cities selected to conduct the reform program are 12 in Amhara, 12 in Tirgray, 21 in Oromia and 19 in SNNPR. Details of the list of towns/cities in each region are attached in Annex 2.

Various initiatives are now underway both under the MMPDP and CBDSD aimed at strengthening the municipalities in terms of their organization structures, manpower requirements, capacity building, establishment of systems and procedures and addressing key issues affecting municipalities such as personnel management, financial management, land management, urban planning etc.

Once this process of capacitating and restructuring the municipalities is completed, they will be in a position to improve service delivery. The same process is also, through the IDA financed CBDSD project and proposed PSCAP, going to be repeated in the five remaining regions (Afar, Benishangul Gumuz, Gambela, Harar and Somali). Already procurement of consultants is being done and these consultants will assist the regions with the legal and institutional framework studies with full participation of the communities and stakeholders in those regions.

CBDSD is building capacity for service delivery by municipalities. The linkages of service delivery and urban poverty reduction are very important. The lack of these essential municipal services has been identified as one of the major indicators of the extent and level of poverty in any urban center. Another dimension to the provision of services by municipalities is that availability of services such as water, sewerage, road, drainage, housing, electricity, telephones etc, attracts investment and encourages/facilitates more economic or industrial activity. Increased economic activity has been identified as one of the contributors to sustainable poverty reduction since more opportunities are created for the poor to enter the mainstream of economic activity. Likewise local authorities also need to put in place laws, regulations that encourage the expansion of the informal sector as this has been found to be the one of the easiest and quickest way that the poor can obtain employment or increase their income. This could easily be a vehicle for increased opportunities for the poor.

Overall, efforts currently underway by the government to restructure the government and management of urban centers reflects government’s continued commitment to strengthen the rural-urban linkages and ensure that urban development is supportive of rural transformation-hence rapid growth and poverty reduction. The measures taken by the Federal Government to overhand the Addis Ababa city Administration has already started to show encouraging results. Cities are attempting to increase their revenue in put by optionalizing land fees through rollout of cadastral. In order to further improve urban land lease management, the government has declined to revise the proclamation. This is important and framework for elaborating regional prototype legislation. Efficient urban land delivery is important factor for increased private sector investment.

V. Macroeconomic and structural reforms

5.1. Fiscal and Monetary Reform

5.1.1. Expenditure Policy and Management

Ethiopia is acknowledged to have a very high degree of budgetary discipline5. A key challenge will be to maintain this strong tradition of financial accountability as the country moves towards fiscal decentralization to the woreda level. In this regard, capacity building initiatives are underway to support devolution of budgetary and financial responsibility.

To strengthen public expenditure policy and management, and to track poverty related expenditures; eight areas of reform activity are identified under the expenditure management and control Reform Program. They are: Public Expenditure Program (PEP), Financial Legal Framework, Budget Reform, Accounting Reform, Cash Management Reform, Financial Information Systems, Internal Audit Project, and External Audit Project.

Getting the programs under way has been slow in 2002/03. To remedy this, Government has completed an assessment report reviewing implementation, problems that have been encountered, and steps to be taken to resolve the problems. Progress with the various components of the program is as follows.

The PEP will establish a medium term public expenditure planning system informed by clearly defined objectives and priorities. The project focuses on the organization, staffing, and management of the capital budgeting process and the Public Investment Program (PIP) at the federal, regional and sectoral levels. The problems encountered in PEP work include a poorly functioning PIP data base management system and limited funding to install a system for PEP preparation. Next steps in PEP work will focus on developing relevant PEP manuals, establishing an in-service “training of trainers” program to support training at the woreda level, and establishing capital budget ceilings.

The financial legal framework project is developing financial administration laws, regulations and associated directives to ensure financial discipline over executive bodies at the federal, regional, and woreda levels. The outputs of this project have included a financial administration proclamation, relevant regulations and directives, as well as workshops and seminars aimed at building awareness among regional and woreda level bodies. Directives have been issued and implemented at the federal level, and extended to regions for regional finance bureaus to adapt. Future tasks include drafting the remaining directives, identifying shortcomings in the new financial laws, drafting and adopting procurement laws and codes, and providing the necessary training for financial administrators.

The Budget Reform program will strengthen budget control by changing the process and structure of the budgeting system. Measures include the introduction of a financial calendar, a new chart of accounts (specifying revenue and expenditure codes that is consistently applied across recurrent and capital expenditure from the federal to regional levels), and unit cost norms.

In the context of the on-going further devolution to woredas, there is a need for having a consolidated budget to get a complete picture of the fiscal landscape of the country. In this regard, as per the agreement between the Government and the IMF to prepare a consolidated federal and regional government budgets for both the past years and the current budget year including all extra budgetary funds and accounts, efforts have been made to consolidate both the federal and regional governments’ budget for the fiscal years 2001/02 to 2003/04. It is important here to mention that there was some delay in consolidation reporting last year due to the going on decentralization. The consolidated budget as per the agreement has been submitted to the Fund before November 30, 2003.

The budget preparation process will be facilitated by the newly developed budget information system (BIS), which is designed to automate the budgeting process, to quickly assess changes in the composition of expenditure by budget category and item of expenditure, and to enable the timely closure of accounts. The new chart of accounts has been implemented by public bodies of the Federal Government and the SNNPR and the Dire Dawa Administrative Council, and will be extended to Tigray and Amhara regions. BIS has been implemented at the federal level and in Southern Regional Government. To improve coordination among the federal budget team, a steering committee made up of members of MoFED and BoFED has been established. The next steps in budget reform include finalizing computerization of the budget process in all Federal and Regional Public Bodies, developing relevant manuals/guidelines in areas such as aid management, cost center budgeting and unit cost development, and issuing directives to implement budget performance monitoring and evaluation (M & E).

The goal of Accounting Reform is to clear existing accounts backlogs and produce timely accounts, to extend cash accounting to include reporting on key aspects of assets and liabilities, and institute effective asset control, management, and custodianship systems. Technical assistance has been provided to regions and federal institutions to close the backlog accounts. In the Medium Term Program, the government agreed with the IMF in its adjustment and reform program to improve the timeliness, quality, and coverage of Government Finance.

In this regard, the reconciliation of fiscal and monetary accounts of fiscal year 2001/02 was completed with technical assistance from the International Monetary Fund (IMF) and the gap between the two accounts has been reduced to less than 2 percent of the total general expenditure. Similarly, reconciliation of the two accounts for fiscal year 2002/03 is currently well in progress and will be finalized by the end of December 2003.

The Accounts Reform Project has helped reduce the backlog of accounts from 4 to 5 years to 1 to 2 years (one year at the federal level and two years at the regional level). The existing government accounting system has been documented in two volumes. Finalization of the fixed asset manual and the introduction of the expanded double entry-modified cash basis of the government accounting system (including intensive training for over 4000 accounting staff on the new procedures) will enable all public bodies to account for non-cash items such as fixed assets, debtors and creditors. The modified cash basis has been implemented at the federal level, and in the Southern and Tigray regions. Efforts are underway to speed up delivery to other regional governments.

Cash Management Reform will implement an integrated system for the use of government cash resources and improved debt management, including the timely collection of receipts, cost-effective payments systems and supporting information systems, and projections of cash flow and borrowing costs. The system design has been completed, existing cash management practices have been reviewed and documented, the procedural guideline for preparation of monthly cash projection and reconciliation has been drafted, and a draft comprehensive disbursement document has been prepared. The next steps in cash management reform will be to streamline government bank accounts, to issue cash management directives on the investment of idle cash reserves and cash flow projections, to prepare a cash management manual, and to automate the treasury payment system.

The Financial Information Systems project seeks to ensure effective control and efficient utilization of resources by (i) transferring MoFED’s budget, disbursement, accounts (BDA) and payroll applications to a PC-based system to reduce the risk of computer failure, (ii) implementing the PC-based BDA system in all Regional Finance Bureaus, and (iii) to develop an integrated computerized financial information system (IFMS) across the country. The revised BDA package has been successfully introduced in Oromiya and SNNPR as well as the Dire Dawa city administration. Next steps include revision of the IFMS to take into account ongoing decentralization, pilot implementation at the federal level, staff training for federal and regional public bodies, and full implementation of IFMS at both federal and regional public bodies. VSAT and ICT technology will be used to create a wide area network system for financial information transfer from woredas to regions and vice versa, covering education, health, agriculture and community development. The plan is to first implement IFMS at the federal level while regions would continue to use different versions of the BDA package and web portals.

The Internal Audit Project will introduce international practices of internal audit in all government institutions at all levels. Thus far the project has produced a draft Internal Audit Standards, Code of Ethics for Internal Auditors and a comprehensive Internal Audit Procedural Manual. Workshops have been conducted to review the draft documents and to provide feedback, and the draft documents have been amended accordingly. Next steps include producing final versions of the audit documents, training internal auditors at the federal and regional level, and enhancing technical capabilities of MoFED and Regional Finance and Economic Development Bureaus.

The goal of the External Audit Project is to strengthen the capacity of the Office of Auditor General (OAG) and Regional Auditor Offices (RAOs). A manual covering financial audit, control audit, performance audit and special investigation is planned. Thus far an assessment of existing external audit practices in civil service audit offices has been completed, and manuals and other background documents have been drafted. Next steps include developing training manuals and training auditors to apply the manuals and other capacity-building work. As a result of the recent OAG Audit Report, the Financial and Budget Committee summoned federal Ministers and State Ministers whose financial position and internal control systems were criticized by the OAG Audit Report and instructed them to take corrective action.

While considerable progress has been made in public financial management and control, particularly at the federal level, there have been problems in implementing components of the sub-programs.

This is largely due to weak capacity at the local level, causing delays in implementation. Ministries at the federal level are working closely with regional and district administrations to improve public expenditure management within the context of overall public service reform and fiscal decentralization to the woredas. MoFED is now preparing a strategic plan to facilitate greater coordination in implementing various components of the Expenditure Management and Control Program (EMCP). The strategic plan will take into account changes in organizational structure resulting from the ongoing decentralization process. Priority is being given to finalizing the closing of FY 2001 government accounts, issuing audited government financial statements for FY 2000, and finalizing the medium-term program for improving financial management.

5.1.2. Revenue Policy

The Tax System Reform project aims to create a tax system that is more supportive of private sector development, improving revenue collection, and ensuring equity and fairness of the tax system. The tax reforms that have been initiated will lay the foundations for a strengthened revenue base. Continuing efforts to improve tax administration and collection, including strengthening the large taxpayer unit which accounts for about 75 percent of several tax revenues, have resulted in tax revenues increasing from 15.3 percent of GDP in 2001/02 to an estimated 16 percent in 2002/03.

Reforms have sought to streamline and close loopholes in the income tax, make the incentive system more efficient, strengthen the collection of domestic indirect taxes through selective rate increases and broaden the tax base while relying less on border taxation. The tax reform greatly benefited from the IMF technical assistance specific measures that have been undertaken so far include:

  • a) Formulation of Tax policy and Legislation

  • b) Introduction of Presumptive Taxation System

  • c) Introduction of the Value Added Tax (VAT)

  • d) Taxpayer Identification Number System (TIN)

  • e) FIRA Organization

  • f) Operational Programs, Systems and Procedures

  • g) Continued measures to liberalize the tax regime

a) Tax policy and Legislation

The overhaul of the tax legislations is designed to encourage capital investment and development, establish a sustainable domestic revenue base and ensure equity, fairness and consistency in the administration of the tax laws. In order to ensure that the contributions of the various stakeholders were considered, an extensive consultation process on the comprehensive tax reform measures commenced in early 2002 and is ongoing.

  1. The new Income tax Proclamation was introduced in July 2002 and provides for reductions in the corporate income tax rate from 35% to 30%, the business income tax rate applicable to sole proprietors and partnerships from 40% to 35%, loss carryforward provisions and new business income tax expenditure deductions.

  2. The VAT, at the rate of 15%, was introduced on January, 1, 2003 to replace the sales tax.

  3. A Turnover Tax, similar in scope to the VAT levied at the rate of 2% on goods and 10% on services and applicable to taxpayers whose annual turnover is below the VAT threshold was introduced on January 1, 2003.

  4. The Excise Tax Proclamation, which has been rationalized to more accurately reflect the current business environment, was introduced on January 1, 2003. The measures include the reduction of the excise tax through the exclusion of depreciation from the computation of the cost production upon which the tax is based.

  5. The enforcement powers of the tax authorities were strengthened, in accordance with international practices, which will improve taxpayer compliance.

b) Presumptive Taxation

Presumptive taxation provides the instrument to broaden the tax base and raise more revenues from the hard-to-tax group, including the large informal sector and taxpayers who understate income. The following measures have been introduced:

  • The standard assessment method, applicable to the City and Regional taxpayers whose annual turnover is less than Birr 100,000, to replace the estimated assessment method which was subject to inconsistent application;

  • An advance business profits income tax on commercial imports at the rate of 3% based on C.I.F (cost, insurance and freight).

  • A withholding tax of 2% on payments made by private limited companies, public enterprises, government agencies, non-profit organizations and private non-profit institutions to designated categories of taxpayers.

c) VAT Implementation

  • The FIRA established a separate VAT Department and two new regional offices to administer the VAT.

  • The current number of VAT registrants is approximately 6000 compared to the expected 3,500 who actually were registered by January 1, 2003. Publicized enforcement actions have resulted in an influx of new registrants, some of whom will be registered retroactively to January 1, 2003.

  • The combined revenue from the VAT and Turnover Tax is approximately 13.3 percent higher than the sales tax for the comparative period to September 30, 2003. The domestic revenue contribution is approximately 20 percent higher and Customs VAT revenue approximately 8 percent higher than the sales tax from last year.

  • An interim computer system, developed by a local company, to support the core VAT business, is operating effectively and efficiently. The more comprehensive system is presently being customized and will be implemented in late 2003.

  • The VAT Department is taking constructive actions against the taxpayers who have failed to comply with the VAT proclamation.

d) Taxpayer Identification Number System (TIN)

A South African company has developed the TIN application software. Although delays have been encountered, some of which were beyond the control of the FIRA and the contractors, significant progress has been made:

  • The pilot test of the TIN system has been completed at a number of sites in Addis Ababa and at two FIRA regional offices.

  • National implementation is underway with completion expected in early 2004.

e) FIRA Organization

The Civil Service Commission has approved the FIRA’s organization proposal and the recruitment of 300 additional personnel is underway. The training of 152 graduates is currently in progress and the major capacity will be deployed to FIRA operational functions in Addis Ababa and FIRA regional offices. The main features of the new organization include:

  • The strengthening of the taxpayer education, enforcement and MIS organizations;

  • The establishment of an Investigations Department;

  • The establishment of additional FIRA regional office.

Subsequently, the FIRA and the ECuA were granted autonomy and are no longer under the Federal Civil Service Commission.

f) Operational Programs, Systems and Procedures

  • A Large Taxpayer Office has been established to manage 500 taxpayers who account for 75-80% of annual revenues;

  • Manual taxpayer accounting systems have been developed for all taxes;

  • Operating manuals have been produced for the accounting, audit and collection enforcement business functions.

  • The development of the business system requirements for a computerized integrated tax system, to support the administration of all taxes is underway.

g) Regional Cooperation

The City and Regional tax authorities actively participated in workshops, seminars and study tours and contributed to the development of new tax policies and legislations, the Standard Assessment presumptive tax method, the TIN business system requirements and the registration and education of VAT taxpayers.

The Revenue Sector Reform Program Office has provided training on the new legislations to personnel of the City/Regional tax authorities and to FIRA regional personnel. In addition, 771 City/Regional personnel have received training to date on the Tax Reform Program at the Civil Service College and at Mekele University. Training is continuing on an ongoing basis.

h) Tariff Reform and Modernization

Ethiopia being a member of the International convention on the Harmonized Commodity Description and coding system, and following the economic reform program launched since mid-1992 by the Government, the Harmonized System has replaced the former tariff structure in August 1993.

The government has conducted series of customs import tariff amendments and measures have been taken in line with the economic reform program since August 1993. In this regard, the 6th round tariff amendments have been undertaken scaling down the maximum tariff rate from 230 percent to 35 percent. The simple average tariff rate has been reduced from 79.1 percent to 20.0 percent and the weighted average tariff rate reduced from 41.6 percent to 17.5 percent during the same period. In January 2003, the average weighted import tariff was reduced from 19 ½ percent to 17 ½ percent, the maximum tariff rate was reduced from 40 percent to 35 percent, and the number of tariff bands including zero-rate has been reduced from 7 to 6.

The IMF Fiscal Affairs Department conducted a review of the Ethiopian Customs Authority (ECA) during June 2003 and provided technical advice for a strategy on reform, which will be taken into account by the reform team. In the meantime, the ECA continue to implement measures to facilitate the clearance of goods and combat smuggling. The migration to ASYCUDA ++ from version 2.7 is underway. The development of the project documentation for the remaining sub-program, and the terms of reference for securing of a senior Customs advisor, for a period of two years is well in progress.

5.2. Other Structural Reforms

5.2.1. Financial Sector Reform

An effective system of financial intermediation can promote rapid and sustainable economic growth by channelling savings into productive investments. With this in mind, Government is implementing a medium-term strategy to strengthen the banking system, the most important source of investment finance. To put in place the basic financial infrastructure, the financial statements produced by financial institutions and corporations need to be in compliance with internationally accepted accounting rules, a sound auditing process is needed, along with a supportive legal system, good governance, prudent regulation, and a strong supervisory structure. This has been the basic strategy of the National Bank of Ethiopia (NBE)- the supervising authority.

Regulation for bank provisioning for non-performing loans (NPLs) has been revised to bring it closer to international best practice by including five NPL classification categories. A study is underway to establish a credit rating system for medium and large bank borrowers. A restructuring plan has been adopted to address the weak financial condition of the Development Bank of Ethiopia (DBE). The Council of Ministers has approved the proposal to raise DBE’s capital from Birr 250 million to a prescribed capital of Birr 600 million, and its non-performing loans (NPLs) have been reduced through the issuance of a bond.

To give lenders reliable information to evaluate the creditworthiness of borrowers, the NBE established the Credit Information Centre in progress, an online database that tracks the liability position of borrowers. To improve the accuracy and reliability of information provided to lenders, and to do away with the practice of keeping two different sets of financial statements, one for borrowing, one for tax purposes, borrowers will be required by law to make available to lenders the same financial information that is submitted to the tax authorities.

Additional measures are being considered to improve the legal and regulatory environment, to encourage banks to modernize and adopt improved banking practices, including strengthening credit evaluation and risk management skills. The government also recognizes the need for well-defined and enforceable property rights, including creditors’ rights to secure repayment. Specific measures have been adopted to enforce the foreclosure law, so that banks can reduce NPLs and deter delinquency. To increase competition, private banks are encouraged to increase their scale of operations and expand their capital base, including through mergers.

The financial restructuring of the banking sector: (i) a performance contract, set as a structural benchmark for June 30, 2002 under the PRGF arrangement, was signed by the government and the management of CBE on June 28, 2002 to ensure that the CBE is operated effectively, on a commercial basis. The management of CBE now has autonomy in decision making, including staffing, meeting performance targets, and pursuing delinquent borrowers; (ii) a new directive on the amendment of provisions was adopted on August 31, 2002. The first directive was adopted on March 30, 2002 but was subsequently revised to bring it more fully in line with international best practice. The directive stipulates that full provisioning should be implemented by January 2004.

A legal and policy framework to support the growth of Micro Finance Institutions (MFIs) and Rural Savings and Credit Cooperative Societies (RUSACCOs) was established through Proclamation 40/1996, which assigned supervision of MFIs to the NBE Micro finance Supervision Division. To date, the NBE has licensed 22 MFIs. The growth of Ethiopia’s micro finance industry has been impressive. As of June 2003, the MFIs have a combined network of about 1,246 branches and sub-branches, outstanding loans of Birr 527,469,230 outstanding savings of Birr 406,146,370 and outreach to 720,684 poor rural households. Nevertheless, this still represents a very small portion of the potential demand for micro finance, which is estimated to be between 4.2 and 5.5 million households.

MFIs have achieved regional ‘best practice’ in savings mobilization and have achieved high repayment rates that range from 90 to 95 percent. The nominal return on equity averaged 7.7% and the inflation-adjusted return averaged 6.3%. The NBE plans to further promote the development of MFIs by transforming them into rural banks and by facilitating the flow of funds from commercial banks to those institutions for the purposes of on- lending.

The Rural Financial Intermediation Programme (RUFIP) managed by the Development Bank of Ethiopia’s (DBE’s) RUFIP unit has an estimated USD 100 million budget, largely financed by concessional loans from the International Fund for Agricultural Development (IFAD) and the African Development Bank. RUFIP’s aims to extend outreach to 1.5 to 2 million rural households, build skills in non-collateral based lending, and improve linkages between rural finance and the formal banking sector. The program aims to train about 40,000 women in business skills development.

The restructuring plan of the CBE includes, among others, (i) a time-bound plan for reducing NPLs to 20 percent of total loans over less than four years by end-June 2007; (ii) a business plan to keep the capital adequacy ratio over 10 percent with no capital injection envisaged from the government; (iii) strengthening of credit risk and porttfolio management, with the assistance of consultants from the Bank of Scotland, through improved credit guidelines, organizational restructuring, and staff training.

5.2.2. Monetary Reform

As regards monetary reform, the final report of the comprehensive study of the NBE is to be completed by end of December 2003. Subsequent actions depend on the review to the study and adoption of implementation plan.

VI. Financing the SDPRP and the Macroeconomic Fiscal Framework (MEFF)

6.1. Out-turn During the First Year of the SDPRP Implementation (2002/03)

During fiscal year 2002/03, general government revenue including grants stood at Birr 14,161 million and showed an increase of 10.3 percent over the previous fiscal year (2001/02). On the other hand, total General Government expenditure including special program during fiscal year 2002/03 reached Birr 18,402 million, of which Birr 12,305 million (67 percent) was effected for recurrent expenditure and Birr 5,818 million (32 percent) for capital expenditure

6.1.1. Fiscal Outturn During 2002/03 Versus the 2002/03 Budget Revenue

During fiscal year 2002/03, general government revenue stood at Birr 11149 million and showed an increase of over 7 percent over the previous fiscal year (2001/02). This increase is largely attributed to the increase in non-tax revenue by 17 percent while tax revenues showed a modest 4 percent increase over the preceding fiscal year. However, with in tax revenue direct taxes witnessed about 3.5 percent decline over the preceding fiscal year. The decline in the direct tax component is in-turn attributed to the decline in business profit tax largely as a result of overall weak economic activity as a result of the drought.

The overall modest increase (4%) in the tax component (despite the decline in direct taxes) is because this decline has been more than compensated by improvements in revenue collection following the introduction of the VAT as indicated by the significant increase in domestic indirect taxes.

Notwithstanding the modest increase in domestic revenue over the preceding fiscal year (7.1 %), overall domestic revenue collection fell short of the 2002/03 revenue budgets by about 15 percent. The biggest shortfall from the budget was recorded by non-tax revenue collection (about 24 %). Major components of revenues fell short of the 2002/03-revenue budget as indicated in Table 3 below.

Table 3:

Distribution of Water Harvesting Structures

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During the 2002/03 FY total revenue including external grants stood at 14161 million Birr and showed an about 10.3 percent increase over the preceding fiscal year (2001/02). During the fiscal year, external grants out-turn (mainly emergency and project assistance and CPF grants) increased by over 24% over the preceding fiscal year (2001/02). During 2002/03 outturn from external grants stood about 8 percent higher than the budget (Table 4 below).

Table 4:

Comparison of 2002/03 Fiscal Out-turn with the Budget, Million Birr

article image Expenditure

During fiscal year 2002/03 total general government expenditure including special programs reached Birr 18402 million, of which Birr 12305 million (66.9 %) was effected for recurrent expenditure and Birr 5,818 million (31.6 %) for capital expenditure and the residual (1.5%) for special programs. During fiscal year 2002/03, total general government expenditure including special programs showed a 4.3 percent increase over the preceding fiscal year (2001/02). While recurrent expenditure increased by over 17 percent capital expenditure declined by about 5 percent during the 2002/03 FY. The increase in recurrent expenditure apart from relief spending is to a large extent attributed to a boost in spending on poverty-oriented sectors. On the other hand, defence spending has been maintained constant in nominal terms and has been declining in real terms. Defence spending has declined from over 13 percent of GDP in 1999/2000 to about 4 percent of GDP in 2002/03. On the other hand, the decline in capital expenditure is largely attributed to decline in spending (measured by the difference between the out-turn and the budget) from external sources of finance in particular from external assistance. As indicated in Table 4 above, during 2002/03 actual capital spending from external assistance fell short of the budgeted amount by about 45 percent. Provisional actual spending from external loan fell short of the budgeted amount by about 16 percent. With about 13 percent shortfall, development projects financed through treasury sources performed better than projects financed both through external loan and assistance. Given that around 75 percent of capital spending is accounted for by poverty-oriented sectors (Table 4 above), the shortfall observed in regard to external sources of finance has had also implication on the performance of poverty-oriented sectors. Although spending on poverty-oriented sectors increased markedly compared to the preceding fiscal year (2001/02), actual utilization has still fallen short of the budgeted amount by a significant margin (about 30 percent) as indicated in Table 4 above.

The share of poverty targeted spending (both recurrent and capital from all sources) increased from 37 percent of total expenditure in 2001/02 to about 44 percent by the end of 2002/03. During 2002/03, despite the decline in overall capital expenditure, capital expenditure on poverty-oriented sectors still showed a 27 percent increase over the preceding fiscal year. During the same year, recurrent spending on poverty-oriented sectors also increased by about 19 percent over the preceding fiscal year. Overall, poverty targeted spending showed a 23 percent increase over the preceding fiscal year (2001/02).

Overall, regions’ own revenue finances on average less than 40 percent of their expenditure assignments. The resource gap at regional and sub-regional level has been bridged through federal subsidy (block grants to regions). In this regard, federal subsidy to regions accounted for the bulk of spending by regions and woredas. Regions and woredas account for the bulk of poverty targeted spending (particularly of social spending). For instance, during 2001/02 spending by regions on education and health accounted for 61 percent of total general government expenditure on these sectors. Regions’ share on those sectors averaged 60 percent by the end of 2002/03. As depicted in Table 3 above, federal regional subsidy, which stood at over 4.5 billion Birr during fiscal year 2002/03 showed about 18 percent increase over the preceding fiscal year.

During 2002/03, expenditure performance also fell short of the expenditure budget by about 14 percent. The biggest shortfall in expenditure performance during 2002/03 was recorded for capital budget (20 %) while recurrent spending fell short of the budget by about 7 %. The short fall in overall recurrent budget was to a large extent accounted for by defence spending. Overall poverty targeted spending also fell short of the budget by over 22 percent. Capital expenditure lagged way behind the budget (about 30 percent short-fall) while recurrent shortfall stood at about 11 percent. Such a level of shortfall in capital spending has to a large extent been attributed to lags in disbursement from external sources particularly external assistance. With regard to federal regional subsidy, the entire budgeted amount has been transferred to regions (Table 4 above for details).

Sectoral Performance of Poverty Reducing Spending

As indicated in Table 3 above, total poverty targeted expenditure, which stood at 8027.5 million Birr during 2002/03 showed an increase of over 23 percent over the previous fiscal year. Of this, 3671 Million Birr was spent on recurrent and 4356.5 million Birr (54 percent) on capital expenditure. Poverty targeted recurrent spending increased by 19 percent while the capital component showed a 27 percent increase over the preceding fiscal year.

Total public expenditure on poverty-targeted sectors averaged 45 and 44 percent of total expenditure in 2001/02 and 2002/03. Recurrent expenditure on poverty-targeted sectors increased from 29 percent of total expenditure in 2001/02 to 30 percent by the end of 2002/03. Capital expenditure on poverty-targeted sectors also increased from 71 percent of total expenditure in 2001/02 to 75 percent by the end of 2002/03.

With regard to sectoral allocation, with in the recurrent component, during 2002/03 education followed by agriculture and food security and health accounted for 19, 5 and 4 percent of total recurrent expenditure, respectively. With regard to capital expenditure, road followed by education and agriculture and food security in that order accounted for 30, 15, and 15 percent, of total capital expenditure respectively, during the same year. Overall (for both recurrent and capital), road followed by education and health accounted for 19, 18, and 9 percent of total expenditure during 2002/03. The details on trends in the share of poverty-oriented sectors are depicted in Table 5 below.

Table 5:

Public Expenditure on Poverty-Oriented sector as a Ratio of Total Public Expenditure

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Deficit and Financing During for 2002/03

As indicated in Table 4 above, total revenue including grants stood at about 14,161 Million Birr while total expenditure including special programs amounted to 18,402 Million Birr. This resulted in to fiscal deficit amounting to 4241 Million Birr. The deficit was financed through net external borrowing of 3484 Million Birr and net domestic bank and non-bank borrowing of 1653 Million Birr and 8 Million of privatisation proceeds. Fiscal deficit including grants narrowed from -9.3% of GDP in 2001/02 to -7.5 % of GDP in 2002/03.

6.2. Updates on the 2003/04-2005/06 Macroeconomic Fiscal Framework (MEFF)

6.2.1. Alternative Macro Scenarios and the Rationale

As indicated in the SDPRP, GDP in real terms was projected to grow at an average rate of 7 percent per annum during the years spanning the SDPRP period (2002/03-2004/05). However, the first year of the SDPRP implementation (2002/03) has experienced the severest drought since 1984/85. This experience confirmed the need for alternative scenarios for the outer years (2004/05 and 2005/06). Information on the 2003/04 FY, the second year of the SDPRP period being the budget year we are already in, is established in most respects. In this regard, the 2004/05 FY receives special focus as it is the last year of the SDPRP. Alternative scenarios (high, base case, and low) have been envisaged for the outer two years (2004/05 and 2005/06). The Base Case is expected to fall in between the High and the Low scenarios for the subsequent two years (2004/05 and 2005/06). The High and Low scenarios are basically considered as deviations from the Base Line in respect of optimistic (High) and pessimistic (Low) scenarios, respectively. As the main source of shocks to the Ethiopian economy has been transmitted through the agriculture sector in terms of variability in output and external shocks transmitted through international prices of primary exports, the High and Low case scenarios are considered to be (for this purpose) the reflections of the agricultural sector in terms of domestic economic activity and external shocks brought about through international prices of exportable such as coffee. Accordingly, the high case assumes normal rainfall with even distribution across the country and relative improvements in international prices of traditional exports such as coffee. The Low case envisages shocks either domestic or foreign or a combination of the two. For the High and the low scenarios, for 2004/05, the 2003/04 recently revised PRGF Program (November 2003) serves as a base for developments in all relevant macro variables. Real Sector and Prices

The binding macro aggregate up on which all other macro variables (fiscal, monetary, and BOP) hinge is the real sector. The magnitude of real GDP growth for the current fiscal year (2003/04) is already established along with the fifth PRGF review (November 2003). Accordingly, GDP in real terms is expected to increase by 6.7 percent during 2003/04. As indicated in Table 6 below, under the Base Case, real GDP growth is projected at 6.4 and 6.1 percent in 2004/05 and 2005/06, respectively.

High Case Scenario

Under the high scenario, overall GDP in real terms is expected to increase by about 7 percent each in 2004/05 and 2005/06, respectively. Real GDP growth rates for the high case are in line with government projections on GDP growth rates during the preparation of the Country Assistance Strategy (CAS) by the World Bank. In terms of real GDP growth, the margin between the high case and the baseline is relatively narrow being mindful of the downside risks of being too optimistic. Real GDP growth under the High Case is projected at 6.9 and 7.0 percent in 2004/05 and 2005/06, respectively. Inflation measured by the Consumer Price Index is projected at 2.8 and 3 percent during the two consecutive years, respectively. GDP deflator is also projected at about 5 percent each during 2004/05 and 2005/06. As a result, GDP at current market prices is projected to increase by 12.0 and 12.3 percent during 2004/05 and 2005/06, respectively (Table 6 below).

Table 6:

Real Sector Projections under Low, Base Line and High Case Scenarios

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Low Case Scenario

Under the Low Scenario, real GDP is forecasted by assuming drought and/or external shocks to occur in both the outer projection years (2004/05 & 2005/06). This is expected to cause a reduction in agricultural output although the expansion of the extension programme and application of modern inputs are likely to bring about an increase in yield in non-drought prone areas. The access to land and water harvesting programmes currently underway are also expected to have a positive impact on agricultural output, thus slightly compensating the effect of the anticipated drought. That is why the possibility of negative real GDP growth is ruled out. A drought is also expected to have an impact on the activities of the sectors, with relatively strong linkages with the agriculture sector. Thus growth rates for small-scale & cottage industries, trade, and transport & communications are estimated by considering the low agricultural output in the projection years. Thus, overall GDP is projected to grow at about 4 percent in both forecast years. Inflation under the low scenario is projected at 5.2 and 5.7 percent, respectively. The GDP deflators for the two consecutive years (2004/05 and 2005/06) are projected at 6.0 and 6.2 percent, respectively. Thus, nominal GDP is projected to increase by 9.1 and 9.5 percent in 2004/05 and 2005/06, respectively (Table 6 above). Fiscal Implications of the Alternative Macro Scenarios

As indicated above, for the 2003/04 FY, the fiscal implications of real GDP growth and prices are already reviewed and set in line with the agreement under the fifth PRGF review. Indicative targets are also set for the outer two years under the PRGF Program. What need to be assessed are the fiscal implications of the alternative (High and Low) scenarios for the outer two years.

High Scenario

Under this scenario, domestic revenue is projected to increase by about 29 and 16 percent during 2004/05 and 2005/06, respectively. Of this, the tax component is projected to increase by 33 and 18 percent during 2004/05 and 2005/06, respectively. The non-tax component is also projected to show a modest increase of about 14 and 6.0 percent during the two outer consecutive years, respectively. With in the tax component; direct taxes, domestic indirect taxes, and foreign trade taxes are expected to account for 40, 23 and 37 percent of tax revenue during 2004/05. Their relative share is projected to increase to 42, 25 and 34 percent of total tax revenue during 2005/06. Non-tax revenues are projected to account for about 19.0 and 17.0 percent of domestic revenue during 2004/05 and 2005/06, respectively. Under this scenario, domestic revenue is projected at about 14 and 18 percent higher than that projected under the Baseline for 2004/05 and 2005/06, respectively. Domestic revenue is projected to reach 21.5 and 22.2 percent of GDP during 2004/05 and 2005/06, respectively. While tax revenues are projected to increase from 17.6 in 2004/05 to 18.5 percent of GDP in 2005/06 the non-tax component is expected to decline from 4.0 to 3.8 percent of GDP during the respective years. The decline in the relative share of the non-tax component is in line with the Government’s tax reform agenda aimed at putting the domestic resource mobilization effort on a more sound and sustainable base: increasing reliance on productive economic activities as a basis for domestic revenue generation.

Under this scenario, notwithstanding the difficulties to predict external grants, the emergency relief component is projected to show a modest decline as it is expected to decline assuming that the overall economic environment would improve. However, still budget support/CPF grants is expected to show a modest increase even under the High Scenario. The details for the current fiscal year (the Program) and the two outer years are depicted in Table 7 below.

Under the High scenario, expenditure for the outer two years is projected taking in to consideration the government’s overriding agenda of boosting poverty reducing spending over the coming two years given that 2004/05 is the last year of the SDPRP period and 2005/06 might also be the beginning of the second cycle of the SDPRP.

Under the high scenario, poverty reducing expenditures are projected taking in to consideration the projected increase in domestic revenue and rationalizing discretionary spending items. Defense spending is projected at 2.4 Billion Birr for both projection years (2004/05 & 2005/06). Under the High Case, the increase in domestic revenue over the Base Line has been projected at over 1.9 and 2.9 Billion Birr in 2004/05 and 2005/06, respectively. This increase in the projected level of domestic revenue augmented by increases in projections of external project assistance and loans made based on existing commitments serve as basis for projected allocations across sectors with priority focus on poverty-oriented sectors. Under this scenario, it is worth noting that external grants (emergency relief and CPF/budget support) falls short of the Base Line (albeit by not a significant amount) for both projection years (Table 7).

Accordingly, total expenditure on poverty-oriented sectors is projected at about 58 and 64 percent of total expenditure and 18.5 and 20.1 percent of GDP at current market prices during 2004/05 and 2005/06, respectively. Under the Base Line, the relative spending levels on poverty-targeted sectors are almost the same as the High case. Defense spending declined from 3.7 percent of GDP in 2003/04 (Program) to 3.2 percent and further to 2.8 percent of GDP in 2004/05 and 2005/06, respectively.

Under the high scenario, budget deficit including grants is projected at 5.6 and 3.8 percent of GDP at current market prices for the two consecutive projection years (2004/05 and 2005/06), respectively. The deficit is to be financed through net external borrowing of 3618 million Birr (4.8% of GDP) with a financing gap indicated in Table 7 below as “net domestic bank and non-bank borrowing” of 473 million Birr (0.6% of GDP) for 2004/05. For 2005/06, net external financing and financing gap (net) indicated in Table 7 below as “net domestic bank and non-bank borrowing” are projected at 2.8 and 0.8 percent of GDP, respectively. Under the Base Line, net external finance is projected at 4.8 and 3.1 percent of GDP for 2004/05 and 2005/06, respectively. Compared to the High case, the Base Case shows a tendency to overstate external finance in both projection years.

Low Scenario

Under this scenario, domestic revenue is projected to reach 13.3 and 14.7 Billion Birr during 2004/05 and 2005/06, respectively. With in the tax component direct taxes, domestic indirect taxes, and foreign trade taxes are expected to account for 40, 24 and 37 percent of tax revenue during 2004/05 and 2005/06, respectively. Their average relative share is projected to increase to 37, 24 and 39 percent of total tax revenue during 2005/06.

The non-tax component is also projected to reach about 2.8 billion Birr each during the two outer consecutive years, respectively. Non-tax revenues are projected to account for 21 and 19 percent of domestic revenue during 2004/05 and 2005/06, respectively. Under this scenario, domestic revenue is projected at 7.3 and 7.5 percent lower than that projected under the Baseline for 2004/05 and 2005/06, respectively.

Under the Low Case, domestic revenue including grants is projected at about 18.2 and 19.8 billion Birr during 2004/05 and 2005/06, respectively. Under the Base Line, the projection for the respective years amounted to about 18.5 and 19.9 Billion Birr. Of this, under the Low case, the domestic component is projected to reach 13.3 and 14.7 billion Birr during 2004/05 and 2005/06, respectively. As indicated, the projected deviation of the Low case from the Base Line in terms of total resources (domestic revenue plus grants) seems to be narrow as the shortfall in domestic revenue in the Low case is expected in large part to be offset by the assumed significant increase in external grants largely owing to envisaged relief emergency assistance.

On the expenditure side (under the low scenario), expenditure on poverty-targeted sectors is projected consistent with domestic revenue shortfall compared to the level of domestic revenue projected under the PRGF Program while as much as possible protecting spending allocation for poverty-oriented sectors. Defense spending is being maintained at 2.4 Billion Birr in line with the PRGF Program for both projection years (2004/05 & 2005/06). Spending on discretionary items is also rationalized. The shortfall in domestic revenue against the Base Line has been projected at over 1.03 and 1.19 Billion Birr in 2004/05 and 2005/06, respectively. This shortfall in the projected level of domestic revenue is to be partially compensated by increases in projection of external grants made based on existing commitments serves as basis for projected allocations across sectors with priority focus on poverty-oriented sectors. Under this scenario, it is worth noting that external grants (largely emergency relief and CPF/budget support) are projected to increase over the Base Line level for both projection years (Table 7). External grants under the Base Line is projected at 6 and 5.2 percent of GDP for 2004/05 and 2005/06, respectivel while external grants is projected at 7 and 6.6 percent of GDP for the respective years under the Low Scenario.

Poverty reduction being the government’s overriding priority agenda, spending on poverty-oriented sectors is not going to be compromised under even difficult circumstances. This is also what was witnessed during the 2002/03 fiscal year where spending on poverty-oriented sectors even showed an increase over the preceding fiscal year (2001/02).

Under the Low scenario, budget deficit including grants is projected at 6.2 and 4.4 percent of GDP at current market prices for the two consecutive projection years (2004/05 and 2005/06), respectively. The deficit is to be financed through net external borrowing of 3618 million Birr (5.2% of GDP) and financing gap indicated in Table 7 below as “net domestic bank and non-bank borrowing” of 634 million Birr (0.9% of GDP) for 2004/05. For 2005/06, net external financing and financing gap are projected at 3.4 and 0.9 percent of GDP, respectively. Under the Base Line, net external finance is projected at 5.1 and 3.3 percent of GDP for 2004/05 and 2005/06, respectively.

In conclusion, it is worth noting the following points in connection with the line item “Net Domestic borrowing”. In regard to the outer two years (2004/05 and 2005/06) for both the Low and High scenarios, the “net domestic bank borrowing” figures in Table 7 for 2004/05 and 2005/06 do not necessarily represent intended (planned) levels of domestic bank and non-bank borrowing, rather a Financing Gap, given the limitation of firm data on envisaged multi-annual external finance disbursement plans. As is already indicated, the level of external finance is based on existing commitments, which are to be firmed up as time goes. Thus, the figures against the line item “Domestic Net” for the 2004/05 and 2005/06 strictly represent financing gap (net) rather than net domestic bank and non-bank borrowing. The line item “net domestic bank and non-bank borrowing” strictly applies only for the 2003/04 FY (Table 7) in line with the Program (PRGF).

The details of the fiscal implications (revenue, expenditure, and financing) of the High, Baseline and the Low scenarios for 2004/05, 2005/06 are summarized in Table 7 below.

Table 7:

Summary of Government Finance Forecast (Low, Base Line, and High Scenarios), 2003/04-2005/06

Values in Million Birr

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Note:-Under the low scenario, average real GDP growth of 4 percent is assumed for both 2004/05 &2005/06 fiscal years. Under such a scenario, inflation rate projected at 5.2 &5.7 percent for these years respectively is superimposed on the real GDP growth for both years to arrive at nominal GDP at market price by taking the nominal GDP projected under the revised PRGF for 2003/04 as a base. Implications of Alternative Scenarios on SDPRP Financing

In the context of Ethiopia, the war on poverty is multi-thronged and needs to be carried out at all possible fronts. Poverty reduction strategies such as the SDPRP serve as vehicles to achieving the MDGs. As indicated in the SDPRP targets set across key poverty-oriented sectors are consistent with MDGs. All targets in the MDGs have equal weight and urgency in the Ethiopian context. It is difficult to separate and make emphasis on one or the other. In fact, there is so much interdependence that the total is greater than the sum of the individual goals.

Table 8:

Projected Poverty-targeted Allocation as a % of GDP

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