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.

3.4.1 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

Table 2:

Tax Incidence of VAT by Deciles

Decile	Average Expenditure (Birr)	Average VAT Payment (Birr)	Effective VAT Rate (%)
1	1,688.76	73.27	4.34
2	2,593.04	117.08	4.52
3	3,206.68	139.69	4.36
4	3,747.69	162.03	4.32
5	4,301.92	185.15	4.30
6	4,895.82	206.47	4.22
7	5,582.59	245.35	4.40
8	6,531.42	289.52	4.43
9	8,028.06	375.76	4.68
10	13,839.50	800.57	5.78
Average	5,442.49	259.54	4.77

View Table

Table 2:

Tax Incidence of VAT by Deciles

Decile	Average Expenditure (Birr)	Average VAT Payment (Birr)	Effective VAT Rate (%)
1	1,688.76	73.27	4.34
2	2,593.04	117.08	4.52
3	3,206.68	139.69	4.36
4	3,747.69	162.03	4.32
5	4,301.92	185.15	4.30
6	4,895.82	206.47	4.22
7	5,582.59	245.35	4.40
8	6,531.42	289.52	4.43
9	8,028.06	375.76	4.68
10	13,839.50	800.57	5.78
Average	5,442.49	259.54	4.77

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.

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:

		Work steps		Time (days) it takes to get service
		Before process reengineering	Now	Before process reengineering	Now
1	Investment License Individuals Company	18 23	4 4	26 108	2 2
2	Trade License	26	4	225	2
3	Investment License Renewal/Replacement	11	4	13	1 hour

View Table

		Work steps		Time (days) it takes to get service
		Before process reengineering	Now	Before process reengineering	Now
1	Investment License Individuals Company	18 23	4 4	26 108	2 2
2	Trade License	26	4	225	2
3	Investment License Renewal/Replacement	11	4	13	1 hour

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.

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 6^th 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.

5.2.1. 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.

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

6.1.1.1. 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

Table 3:

Distribution of Water Harvesting Structures

Regions	# Water harvesting Structures constructed
Amhara	41,989
SNNP	9,177
Oromiya	66,740
Tigray	21,556
Total	139,462

View Table

Table 3:

Distribution of Water Harvesting Structures

Regions	# Water harvesting Structures constructed
Amhara	41,989
SNNP	9,177
Oromiya	66,740
Tigray	21,556
Total	139,462

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

Table 4:

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

S.N	Items	2001/02 Actual	2002/03		% Change over 2001/026	2002/03 out-turn as % of Budget (%)
			Budget	Pre. Actual
1	Domestic Revenue	10409	13128	11149	7.1	84.9
1.1	Tax Revenue	7926	9330	8243	4.0	88.4
	Direct Tax	3120	3612	3010	−3.5	83.3
	Domestic Indirect Tax	1498	1856	1668	11.4	89.9
	Foreign Trade Tax	3308	3862	3565	7.7	92.3
1.2	Non-Tax Revenue	2483	3798	2906	17.0	76.5
2	External Grants	2425	2793	3012	24.2	107.8
3	Total Revenue & Grants	12834	15922	14161	10.3	89.0
4	Total Expenditure including Special Programs	17652	21448	18402	4.3	85.8
4.1	Recurrent	10550	13220	12305	16.6	93.1
4.2	Capital	6130	7245	5818	−5.1	80.3
	Domestic Source	2741.5	3771.2	3264.6	19.1	86.6
	External Loan	2275.5	2199.0	1852.1	−18.6	84.2
	External Assistance	1113.4	1275.1	701.3	−37.0	55.0
	Regional Subsidy (treasury)	3847.6	4556	4523	17.6	100.0
	Poverty Targeted Expenditure	6525.2	10339.9	8027.5	23.0	77.6
	Recurrent	3093.0	4130.4	3671.0	18.6	88.9
	Capital	3432.2	6209.5	4356.5	27.0	70.2
	Poverty Targeted Expenditure as % of Total Expenditure (%)	42.8	48.2	41.9
	Special Program	972	983	655		28.4
5	Fiscal Deficit including Grants	−4818	−5526	−4793
6	Deficit as % of GDP @ CMP (%)	−9.3	−9.7	−8.4
	Memorandum Item
	GDP at Current Market Prices	51761.0	56958.0	56958.0

View Table

Table 4:

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

S.N	Items	2001/02 Actual	2002/03		% Change over 2001/026	2002/03 out-turn as % of Budget (%)
			Budget	Pre. Actual
1	Domestic Revenue	10409	13128	11149	7.1	84.9
1.1	Tax Revenue	7926	9330	8243	4.0	88.4
	Direct Tax	3120	3612	3010	−3.5	83.3
	Domestic Indirect Tax	1498	1856	1668	11.4	89.9
	Foreign Trade Tax	3308	3862	3565	7.7	92.3
1.2	Non-Tax Revenue	2483	3798	2906	17.0	76.5
2	External Grants	2425	2793	3012	24.2	107.8
3	Total Revenue & Grants	12834	15922	14161	10.3	89.0
4	Total Expenditure including Special Programs	17652	21448	18402	4.3	85.8
4.1	Recurrent	10550	13220	12305	16.6	93.1
4.2	Capital	6130	7245	5818	−5.1	80.3
	Domestic Source	2741.5	3771.2	3264.6	19.1	86.6
	External Loan	2275.5	2199.0	1852.1	−18.6	84.2
	External Assistance	1113.4	1275.1	701.3	−37.0	55.0
	Regional Subsidy (treasury)	3847.6	4556	4523	17.6	100.0
	Poverty Targeted Expenditure	6525.2	10339.9	8027.5	23.0	77.6
	Recurrent	3093.0	4130.4	3671.0	18.6	88.9
	Capital	3432.2	6209.5	4356.5	27.0	70.2
	Poverty Targeted Expenditure as % of Total Expenditure (%)	42.8	48.2	41.9
	Special Program	972	983	655		28.4
5	Fiscal Deficit including Grants	−4818	−5526	−4793
6	Deficit as % of GDP @ CMP (%)	−9.3	−9.7	−8.4
	Memorandum Item
	GDP at Current Market Prices	51761.0	56958.0	56958.0

6.1.1.2. 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

Table 5:

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

Sectors	2001/02			2002/03
	Recurrent (%)	Capital (%)	Total (%)	Recurrent (%)	Capital (%)	Total (%)
Agriculture & food security	5.4	15.3	8.6	4.4	14.8	7.5
Education	16.8	11.1	13.9	16.8	15.7	16.0
Roads	1.1	29.8	11.0	1.0	30.6	10.1
Water	1.0	8.6	3.6	1.0	9.4	3.5
Health	4.9	7.9	5.7	3.9	7.4	4.9
Total poverty Targeted Spending (%)	29.3	72.8	42.8	27.1	78.0	41.9
Total poverty targeted spending (Million Birr)	3092.8	4460.4	7552.8	3671	4921	8592
Total expenditure excluding special program (Million Birr)	10550.0	6130.3	17651.5	13527.0	6313.0	20495.0

View Table

Table 5:

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

Sectors	2001/02			2002/03
	Recurrent (%)	Capital (%)	Total (%)	Recurrent (%)	Capital (%)	Total (%)
Agriculture & food security	5.4	15.3	8.6	4.4	14.8	7.5
Education	16.8	11.1	13.9	16.8	15.7	16.0
Roads	1.1	29.8	11.0	1.0	30.6	10.1
Water	1.0	8.6	3.6	1.0	9.4	3.5
Health	4.9	7.9	5.7	3.9	7.4	4.9
Total poverty Targeted Spending (%)	29.3	72.8	42.8	27.1	78.0	41.9
Total poverty targeted spending (Million Birr)	3092.8	4460.4	7552.8	3671	4921	8592
Total expenditure excluding special program (Million Birr)	10550.0	6130.3	17651.5	13527.0	6313.0	20495.0

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.

6.2.1. 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.

6.2.1.1. 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

Table 6:

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

Item	2003/04 PRGF	2004/05			2005/06
		Low	Base Case	High	Low	Base Case	High
Real GDP Growth (%)	6.7	4.0	6.4	6.9	4.0	6.1	7.0
GDP Deflator (%)	5.2	6.0	3.7	4.9	6.2	3.2	5.0
Inflation Rate	5.5	5.2	3.0	2.8	5.7	3.0	3.0
GDP@CMP	64277	70095.7	71197	72188.4	76754.8	78177	81064.7
Nominal GDP Growth (%)	12.8	9.1	10.8	12.0	9.5	9.8	12.3

View Table

Table 6:

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

Item	2003/04 PRGF	2004/05			2005/06
		Low	Base Case	High	Low	Base Case	High
Real GDP Growth (%)	6.7	4.0	6.4	6.9	4.0	6.1	7.0
GDP Deflator (%)	5.2	6.0	3.7	4.9	6.2	3.2	5.0
Inflation Rate	5.5	5.2	3.0	2.8	5.7	3.0	3.0
GDP@CMP	64277	70095.7	71197	72188.4	76754.8	78177	81064.7
Nominal GDP Growth (%)	12.8	9.1	10.8	12.0	9.5	9.8	12.3

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).

6.2.1.2. 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

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.

Table 7:

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

Values in Million Birr

Ethiopian fiscal year							1996		1997			1998
Fiscal year ending July 7							2003/04		2004/05			2005/06
							Revised PRGF Program	Low	Revised Projections Baseline	High	Low	Revised Projections Baseline	High
Total Revenue and Grants							17084	18131	18585	20393	19750	20014	22716
	Revenue						12542	13272	14323	16157	14679	15928	18730
		Tax revenue (inc measures)					9932	10482	11511	13172	11830	12963	15555
			Direct taxes				3673	4165	4282	5287	4434	4873	6531
			Indirect taxes				6259	6317	7230	7885	7396	8090	9024
				Domestic indirect taxes			2150	2524	2807	3088	2805	3253	3829
				Import duties & taxes			4109	3793	4423	4797	4591	4838	5195
				Export taxes			0	0	0	0	0	0	0
		Non-tax revenue					2610	2790	2812	2985	2849	2965	3175
	Grants						4542	4859	4262	4236	5071	4086	3986
Total Expenditure							21093	21666	21836	23867	22903	22809	25769
	Current expenditure						12752	13511	13097	14088	14091	13379	14830
			Defense				2400	2400	2400	2400	2400	2400	2400
			Poverty-targeted expenditure				4446	4845	4893	5415	5235	5338	6186
						Education	2513	2615	2700	2877	3026	3100	3315
						Health	711	825	819	898	815	832	1040
						Agriculture	788	918	849	1009	907	832	1070
				Water			250	272	315	349	278	358	415
						Roads	183	215	210	282	209	216	346
			Interest payments				1447	1526	1509	1526	1531	1564	1531
				Domestic interest			773	768	818	768	762	864	762
				External interest			675	758	691	758	769	699	769
			Emergency assistance (food and other emergency aid)				874	1500	902	877	1900	914	815
			Others				3583	3241	3393	3871	3025	3164	3897
	Capital expenditure						8341	8154	8740	9779	8812	9430	10939
					o/w: Poverty targeted expenditures		6841	7225	7550	8485	8010	8573	10410
						Education	898	949	991	1304	1035	1108	1515
						Health	629	664	694	899	820	878	1300
						Agriculture	1978	2089	2183	2332	2360	2526	2840
						Water	1036	1094	1143	1291	1275	1365	1755
						Roads	2301	2430	2539	2660	2520	2697	3000
	Special programs						535	767	767	767	217	217	217
Overall balance including grants (excl. special programs)							-4009	-3535	-3251	-3474	-3153	-2795	-3053
Overall balance excluding grants (excl. special programs)							-8551	-8394	-7513	-7710	-8224	-6881	-7039
Overall balance including grants							-4544	-4302	-4019	-4241	-3370	-3012	-3270
Overall balance excluding grants							-9086	-9161	-8281	-8477	-8441	-7098	-7256
Financing							4545	4302	4019	4241	3370	3012	3270
	External (net)						3283	3618	3618	3618	2613	2613	2613
	Gross borrowing						3336	3599	3599	3599	2647	2647	2647
	HIPC relief						695	815	815	815	822	822	822
	Amortization paid						748	796	796	796	856	856	856
	Domestic (net)						1162	634	300	473	707	300	507
	Privatization						100	50	100	150	50	100	150
	Other and residual						0	0	0	0	0	0	0
Memorandum item
GDP at current market price							64277	70096	71197	75168	76755	78177	84415
In Percent of GDP
Total Revenue and Grants							26.6	25.9	26.1	27.1	25.7	25.6	26.9
	Revenue						19.5	18.9	20.1	21.5	19.1	20.4	22.2
		Tax revenue (inc measures)					15.5	15.0	16.2	17.5	15.4	16.6	18.4
		Non-tax revenue					4.1	4.0	3.9	4.0	3.7	3.8	3.8
	Grants						7.1	6.9	6.0	5.6	6.6	5.2	4.7
Total Expenditure							32.8	30.9	30.7	31.8	29.8	29.2	30.5
	Current expenditure						19.8	19.3	18.4	18.7	18.4	17.1	17.6
			Defense				3.7	3.4	3.4	3.2	3.1	3.1	2.8
			Poverty-targeted expenditure				6.9	6.9	6.9	7.2	6.8	6.8	7.3
						Education	3.9	3.7	3.8	3.8	3.9	4.0	3.9
						Health	1.1	1.2	1.2	1.2	1.1	1.1	1.2
						Agriculture	1.6	1.3	1.6	1.3	1.2	1.5	1.3
						Water
						Roads	0.3	0.3	0.3	0.4	0.3	0.3	0.4
	Capital expenditure						13.0	11.6	12.3	13.0	11.5	12.1	13.0
					o/w: Poverty targeted expenditures		10.6	10.3	10.6	11.3	10.4	11.0	12.3
						Education	1.4	1.4	1.4	1.7	1.3	1.4	1.8
						Health	1.0	0.9	1.0	1.2	1.1	1.1	1.5
						Agriculture	3.1	3.0	3.1	3.1	3.1	3.2	3.4
						Water	1.6	1.6	1.6	1.7	1.7	1.7	2.1
						Roads	3.6	3.5	3.6	3.5	3.3	3.5	3.6
	Special programs						0.8	1.1	1.1	1.0	0.3	0.3	0.3
Overall balance including grants (excl. special programs)							-6.2	-5.0	-4.6	-4.6	-4.1	-3.6	-3.6
Overall balance excluding grants (excl. special programs)							-13.3	-12.0	-10.6	-10.3	-10.7	-8.8	-8.3
Overall balance including grants							-7.1	-6.1	-5.6	-5.6	-4.4	-3.9	-3.9
Overall balance excluding grants							-14.1	-13.1	-11.6	-11.3	-11.0	-9.1	-8.6
Financing							7.1	6.1	5.6	5.6	4.4	3.9	3.9
	External (net)						5.1	5.2	5.1	4.8	3.4	3.3	3.1
	Domestic (net)						1.8	0.9	0.4	0.6	0.9	0.4	0.6
Percentage Changes Over Previous Fiscal Year
Total Revenue and Grants								6	8	20	9	8	11
	Revenue							6	14	29	11	11	16
		Tax revenue (inc measures)						6	15	33	13	13	18
			Direct taxes					13	16	44	6	14	24
			Indirect taxes					1	15	26	17	12	14
				Domestic indirect taxes				17	30	44	11	16	24
				Import duties & taxes				−8	7	17	21	9	8
				Export taxes				0	0	0	20	0	20
		Non-tax revenue						7	7	14	2	5	6
	Grants							7	−6	−7	4	−4	−6
Total Expenditure								3	2	13	6	5	8
	Current expenditure							6	3	10	4	2	5
			Defense					0	0	0	0	0	0
			Poverty-targeted expenditure					9	10	22	8	9	14
						Education		4	7	14	16	15	15
						Health		16	15	26	−1	2	16
						Agriculture		16	8	28	−1	−2	6
						Water		9	26	40	2	14	19
						Roads		17	14	54	−3	3	23
			Interest payments					5	9	5	0	4	0
				Domestic interest				−1	6	−1	−1	6	−1
				External interest				12	12	12	1	1	1
			Emergency assistance (food and other emergency aid)					72	3	0	27	1	−7
			Others					−10	−5	8	−7	−7	1
	Capital expenditure							-2	1	18	8	8	12
						o/w: Poverty targeted expenditures		6	10	24	11	14	23
						Education		6	10	45	9	12	16
						Health		6	10	43	23	26	45
						Agriculture		6	10	18	13	16	22
						Water		6	10	25	17	19	36
						Roads		6	10	16	4	6	13
	Special programs							43	43	43	-72	-72	-72
Overall balance including grants (excl. special programs)								-11	-23	-13	-11	-15	-12
Overall balance excluding grants (excl. special programs)								-1	-14	-10	-2	-9	-9
Overall balance including grants								-5	-15	-6	-22	-26	-23
Overall balance excluding grants								1	-11	-6	-8	-15	-15
Financing								-5	-15	-6	-22	-26	-23
	External (net)							6	6	6	-29	-29	-29
	Gross borrowing							8	8	8	−26	−26	−26
	HIPC relief							8	8	8	7	7	7
	Amortization paid							17	17	17	11	11	11
	Domestic (net)							-29	-74	-43	8	0	4
	Privatization							-50	0	51	0	0	0
	Other and residual							0	0	0	0	0	0

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.

View Table

Table 7:

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

Values in Million Birr

Ethiopian fiscal year							1996		1997			1998
Fiscal year ending July 7							2003/04		2004/05			2005/06
							Revised PRGF Program	Low	Revised Projections Baseline	High	Low	Revised Projections Baseline	High
Total Revenue and Grants							17084	18131	18585	20393	19750	20014	22716
	Revenue						12542	13272	14323	16157	14679	15928	18730
		Tax revenue (inc measures)					9932	10482	11511	13172	11830	12963	15555
			Direct taxes				3673	4165	4282	5287	4434	4873	6531
			Indirect taxes				6259	6317	7230	7885	7396	8090	9024
				Domestic indirect taxes			2150	2524	2807	3088	2805	3253	3829
				Import duties & taxes			4109	3793	4423	4797	4591	4838	5195
				Export taxes			0	0	0	0	0	0	0
		Non-tax revenue					2610	2790	2812	2985	2849	2965	3175
	Grants						4542	4859	4262	4236	5071	4086	3986
Total Expenditure							21093	21666	21836	23867	22903	22809	25769
	Current expenditure						12752	13511	13097	14088	14091	13379	14830
			Defense				2400	2400	2400	2400	2400	2400	2400
			Poverty-targeted expenditure				4446	4845	4893	5415	5235	5338	6186
						Education	2513	2615	2700	2877	3026	3100	3315
						Health	711	825	819	898	815	832	1040
						Agriculture	788	918	849	1009	907	832	1070
				Water			250	272	315	349	278	358	415
						Roads	183	215	210	282	209	216	346
			Interest payments				1447	1526	1509	1526	1531	1564	1531
				Domestic interest			773	768	818	768	762	864	762
				External interest			675	758	691	758	769	699	769
			Emergency assistance (food and other emergency aid)				874	1500	902	877	1900	914	815
			Others				3583	3241	3393	3871	3025	3164	3897
	Capital expenditure						8341	8154	8740	9779	8812	9430	10939
					o/w: Poverty targeted expenditures		6841	7225	7550	8485	8010	8573	10410
						Education	898	949	991	1304	1035	1108	1515
						Health	629	664	694	899	820	878	1300
						Agriculture	1978	2089	2183	2332	2360	2526	2840
						Water	1036	1094	1143	1291	1275	1365	1755
						Roads	2301	2430	2539	2660	2520	2697	3000
	Special programs						535	767	767	767	217	217	217
Overall balance including grants (excl. special programs)							-4009	-3535	-3251	-3474	-3153	-2795	-3053
Overall balance excluding grants (excl. special programs)							-8551	-8394	-7513	-7710	-8224	-6881	-7039
Overall balance including grants							-4544	-4302	-4019	-4241	-3370	-3012	-3270
Overall balance excluding grants							-9086	-9161	-8281	-8477	-8441	-7098	-7256
Financing							4545	4302	4019	4241	3370	3012	3270
	External (net)						3283	3618	3618	3618	2613	2613	2613
	Gross borrowing						3336	3599	3599	3599	2647	2647	2647
	HIPC relief						695	815	815	815	822	822	822
	Amortization paid						748	796	796	796	856	856	856
	Domestic (net)						1162	634	300	473	707	300	507
	Privatization						100	50	100	150	50	100	150
	Other and residual						0	0	0	0	0	0	0
Memorandum item
GDP at current market price							64277	70096	71197	75168	76755	78177	84415
In Percent of GDP
Total Revenue and Grants							26.6	25.9	26.1	27.1	25.7	25.6	26.9
	Revenue						19.5	18.9	20.1	21.5	19.1	20.4	22.2
		Tax revenue (inc measures)					15.5	15.0	16.2	17.5	15.4	16.6	18.4
		Non-tax revenue					4.1	4.0	3.9	4.0	3.7	3.8	3.8
	Grants						7.1	6.9	6.0	5.6	6.6	5.2	4.7
Total Expenditure							32.8	30.9	30.7	31.8	29.8	29.2	30.5
	Current expenditure						19.8	19.3	18.4	18.7	18.4	17.1	17.6
			Defense				3.7	3.4	3.4	3.2	3.1	3.1	2.8
			Poverty-targeted expenditure				6.9	6.9	6.9	7.2	6.8	6.8	7.3
						Education	3.9	3.7	3.8	3.8	3.9	4.0	3.9
						Health	1.1	1.2	1.2	1.2	1.1	1.1	1.2
						Agriculture	1.6	1.3	1.6	1.3	1.2	1.5	1.3
						Water
						Roads	0.3	0.3	0.3	0.4	0.3	0.3	0.4
	Capital expenditure						13.0	11.6	12.3	13.0	11.5	12.1	13.0
					o/w: Poverty targeted expenditures		10.6	10.3	10.6	11.3	10.4	11.0	12.3
						Education	1.4	1.4	1.4	1.7	1.3	1.4	1.8
						Health	1.0	0.9	1.0	1.2	1.1	1.1	1.5
						Agriculture	3.1	3.0	3.1	3.1	3.1	3.2	3.4
						Water	1.6	1.6	1.6	1.7	1.7	1.7	2.1
						Roads	3.6	3.5	3.6	3.5	3.3	3.5	3.6
	Special programs						0.8	1.1	1.1	1.0	0.3	0.3	0.3
Overall balance including grants (excl. special programs)							-6.2	-5.0	-4.6	-4.6	-4.1	-3.6	-3.6
Overall balance excluding grants (excl. special programs)							-13.3	-12.0	-10.6	-10.3	-10.7	-8.8	-8.3
Overall balance including grants							-7.1	-6.1	-5.6	-5.6	-4.4	-3.9	-3.9
Overall balance excluding grants							-14.1	-13.1	-11.6	-11.3	-11.0	-9.1	-8.6
Financing							7.1	6.1	5.6	5.6	4.4	3.9	3.9
	External (net)						5.1	5.2	5.1	4.8	3.4	3.3	3.1
	Domestic (net)						1.8	0.9	0.4	0.6	0.9	0.4	0.6
Percentage Changes Over Previous Fiscal Year
Total Revenue and Grants								6	8	20	9	8	11
	Revenue							6	14	29	11	11	16
		Tax revenue (inc measures)						6	15	33	13	13	18
			Direct taxes					13	16	44	6	14	24
			Indirect taxes					1	15	26	17	12	14
				Domestic indirect taxes				17	30	44	11	16	24
				Import duties & taxes				−8	7	17	21	9	8
				Export taxes				0	0	0	20	0	20
		Non-tax revenue						7	7	14	2	5	6
	Grants							7	−6	−7	4	−4	−6
Total Expenditure								3	2	13	6	5	8
	Current expenditure							6	3	10	4	2	5
			Defense					0	0	0	0	0	0
			Poverty-targeted expenditure					9	10	22	8	9	14
						Education		4	7	14	16	15	15
						Health		16	15	26	−1	2	16
						Agriculture		16	8	28	−1	−2	6
						Water		9	26	40	2	14	19
						Roads		17	14	54	−3	3	23
			Interest payments					5	9	5	0	4	0
				Domestic interest				−1	6	−1	−1	6	−1
				External interest				12	12	12	1	1	1
			Emergency assistance (food and other emergency aid)					72	3	0	27	1	−7
			Others					−10	−5	8	−7	−7	1
	Capital expenditure							-2	1	18	8	8	12
						o/w: Poverty targeted expenditures		6	10	24	11	14	23
						Education		6	10	45	9	12	16
						Health		6	10	43	23	26	45
						Agriculture		6	10	18	13	16	22
						Water		6	10	25	17	19	36
						Roads		6	10	16	4	6	13
	Special programs							43	43	43	-72	-72	-72
Overall balance including grants (excl. special programs)								-11	-23	-13	-11	-15	-12
Overall balance excluding grants (excl. special programs)								-1	-14	-10	-2	-9	-9
Overall balance including grants								-5	-15	-6	-22	-26	-23
Overall balance excluding grants								1	-11	-6	-8	-15	-15
Financing								-5	-15	-6	-22	-26	-23
	External (net)							6	6	6	-29	-29	-29
	Gross borrowing							8	8	8	−26	−26	−26
	HIPC relief							8	8	8	7	7	7
	Amortization paid							17	17	17	11	11	11
	Domestic (net)							-29	-74	-43	8	0	4
	Privatization							-50	0	51	0	0	0
	Other and residual							0	0	0	0	0	0

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.