INTRODUCTION

This report is a follow up to the first one which was produced by this Unit in September 1994. As indicated in the earlier report, the aim of these series of reports is to open up dialogue between this Country Office, and government, donor agencies, and other stake holders in the development of this country, on critical issues of development affecting the country. To this effect, we are grateful to those organizations who provided feed back to the first report and we look forward to their continued input. While the objective of the first report was to provide a brief general background to the country in order to put the socio-economic and political developments in the country in their proper perspective, the current report focuses on outlining and assessing the outcome to date of the reform efforts introduced into the country since 1991.

The report is divided into four main sections. The first section provides a brief description of the major political reforms that have been introduced in the country to date, such as the democratization and decentralization processes, and how these are likely to influence socio-economic development in the country. The second section provides a brief update on the economic development in the country. The second section provides a brief update on the economic reforms introduced since 1992 and how implementation of such reforms is proceeding to date. The third section examines how the economy is responding to the said reforms by providing a brief update on the current status of the economy and the prospects for the near future. Section four, which draws largely from the Mid-term review of the Fifth Country Programme for Ethiopia and other relevant reports, attempts to assess the impact of the assistance provided by UNDP in particular, and the UN family in general, to the FDRE in support of the above policies. To this end, several recommendations are provided on how the UNDP assistance can be made more effective in meeting the development priorities of the country, especially in light of the fact that the Sixth Programme Cycle commences in 1997.

It is our intention that the report be produced twice a year, with the next one due in August/September 1996.
 

1.1 Background

The performance of the Ethiopian economy over the last twenty years has been unsatisfactory predominantly on account of civil strife, recurrent drought, inappropriate economic policy and management, unfavorable internal economic environment and low level of external assistance. As a result the GDP growth, which averaged 4% per annum during 1965 - 75 dropped significantly to about 1.5% over the period of 1976 - 1991. GDP is estimated to have further declined by about 3.2% in 1991/92.

Ethiopia faces many development challenges. Population, which was estimated at 54.1 million in mid-1994 and growing at 3.2 per cent per annum, is expected to double by the year 2014. Life expectancy stands at 47 years. Agriculture, which is the main source of livelihood especially for the rural people who constitute about 90 per cent of the people, is characterized by low productivity. The manufacturing sector is small and rudimentary, accounting for 10-12 per cent of GDP and 15 per cent of exports. Although the country is well endowed with mineral and other natural resources, these are largely unexploited. Infrastructure is generally undeveloped and has suffered from lack of maintenance, poor quality of services and war damage over the past two decades, In addition, the basic social indicators clearly demonstrate the persuasiveness of poverty in the country. Available data on health and nutrition shows that only 46 per cent of the population has access to health facilities, while only 28 per cent and 16 per cent have access to safe water and sanitation facilities, respectively. The incidence of malnutrition has increased with children being the most affected group, while under five mortality estimated at 175,000, is one of the highest in the developing world. Participation rates at all levels of the education system have decreased in recent years and illiteracy has increased in absolute terms. In addition, rapid population growth, coupled with slow economic expansion over the years has resulted in decrease in employment opportunities for a growing labor force. While underemployment and low productivity are rampant in the rural areas, unemployment, particularly among the youth in urban areas, is a very serious concern. From the above, it can be seen that the key development challenges in Ethiopia include :
 

(a) Poverty alleviation;
(b) Promoting food security;
(c) Environmental management; and
(d) Human resources development.

Government has therefore designed policies and strategies to deal with the above mentioned challenges, most of which are in the process of being implemented with the assistance of donors, including UNDP. In the next three sections we would like to outline and examine the main policy initiatives which were introduced by government in three broad areas, namely: (I) Political reforms, (ii) economic reforms, and (iii) social sector reforms.
 

2.0 POLITICAL REFORMS

Following the fall off the previous Government in May 1991, a national Conference on Peace and Democracy was held in July 1991, which set up a Transitional Government (TGE) and a Council of Representatives. The Transitional charter adopted by the Conference provided for decision making to be decentralized to regional administrations, within a federal structure, introduced multi-party politics and an independent judiciary. Following the holding of National Elections in May 1995, the Federal Democratic Republic of Ethiopia(FDRE) was established in August 1995, replacing the TGE.
 

2.1 Democratization Process

In pursuance of the democratization process, elections for the Council of Representatives and Regional Assemblies took place in June 1992. These were followed by further elections in June 1994 to elect a Constituent Assembly to debate and approve a new constitution and prepare for national elections.

A number of the oppositions parties including the Oromo Liberation Front and All Amhara Peoples' Party boycotted the constitutional debate and the 1994 elections. The parties forming the coalition of the Transitional Government of Ethiopia gained some 87% of the seats in the Constituent Assembly.

The draft constitution, after being debated throughout the country, at various levels (Regional, Zonal, Woreda and community levels), was considered by the Constituent Assembly between September and December 1994. Most of the provisions in the draft constitution were approved without much contention. Two issues - land tenure and the right of regions to secede from Ethiopia were hotly debated, with many Constituent Assembly Members (especially those from independent parties) voicing dissenting view. However, at the end of the day even these two issues were adopted.

The national Elections took place on 7 May 1995 throughout the country, except in Region 2, 13 and 5 where they took place on 18 June 1995. Just like the Constituency Assembly Elections, the National Elections were boycotted by many of the opposition parties. The UN system was not invited to observe these elections. However, the OAU and bilateral donors represented in the country (including the EU) dispatched observations teams throughout the country. The OAU actually pronounced the elections as free and fair. As was the case with the 1994 elections, the ruling Ethiopian Peoples Democratic Revolutionary Front(EPDRF) and its coalition partners scored a land slide victory at both the national and regional levels, thereby obtaining the peoples mandate for the next five years. In August 1995, successor Government to the TGE was formed known as the Federal Democratic Republic of Ethiopia (FDRE) with a President as Head of State and a Prime Minister as Head of Government. The ethnic composition of the Cabinet clearly reflects a strong desire to foster national unity.
 

2.2 Decentralization

One of the biggest development challenges in Ethiopia is how to bring about participatory development to ensure not only that the fruits of development are equitably distributed in the country, but that people, especially those at the regional, woreda(district) and grassroots levels are given a chance to participate in the determination of their own destiny. During the previous regimes, political, administrative and economic decisions were highly centralized, this led to a very highly polarized development pattern that still obtains today.
 

2.2.1 Political and Administrative Decentralization

Thus, since the Transitional Government of Ethiopia (TGE) was established, a policy of decentralization of authority to regional administrations has been vigorously pursued, the FDRE has fully embraced this policy.

A number of proclamations on regionalization were issued during the transition period with the basic objective of devolving power to National/Regional Self-Governments. These proclamations dealt with the definition of powers and duties of central and executive organs. Under the Federal structure that has emerged, the national/regional self-governments have legislative, executive and judicial powers in respect of all matters within their geographical areas except in such matters as defence, foreign affairs, conferring of citizenship, declaration of state emergency, deployment of army where situations beyond the capacity of National/Regional Transitional Self-Government arose, printing of currency, establishing and administrating major communications networks and the like. These fall under the jurisdiction of the FDRE. The Woredas are the basic units of the Regional/National Self-governments. Just like the Regional/National Self-Governments, Woredas have the legal mandate to plan and effectively implement development efforts in their respective areas (Proclamation 7/1992 and 33/1992). Under the Woredas come the Kebeles (neighborhood and locality units), whose major function is to coordinate the economic activities at the grass-root level.

Decentralization, through the Regionalization Programme is a vital tool in the Ethiopian context for achieving equitable and balanced development. The sustainability of the new order depends very critically on the ability of the regions to meet the aspirations of their people. However, one of the greatest challenges to the regional development strategy in Ethiopia is that the strategy has a very strong ethnic touch to it. The regions, for example, are, largely demarcated along ethnic and/or linguistic lines.

The civil war in Ethiopia had a lot to do with the dissatisfaction of most the local and/or ethnic groups with the centralist approach adopted by both the Imperial and Derge regimes. While a centralist approach is often defended on the basis of forging a nation state from a diversity of ethnic and national groups, the fact that in the case in question it prevented the various groups from realizing their aspirations made it very unpopular, hence the numerous ethnic and regional conflicts during both regimes. It is hoped that the regionalization strategy will help to avert such problems. On the other hand without the empirical and military clout, some unifying force will have to be found if at all the regions are administered and developed. The ethnicity factor, in particular, because it touches on many factors crucial to development, will need to be handled with caution and tact.

So far the main binding element between the regions and the center will be some perception on the part of the regions that their lot is better off by sticking together and to the center. As such aspects of democracy, good governance and equity will attain far more importance in the new set up than ever before.

As already indicated, the regions have big differences in terms of resource endowments. Left each region to itself, it is obvious that the resource rich regions will fare very well while the resource deficient ones will not. Take the area of human resources, for example. Because of the current policy of rationalizing the civil service has strong ethnic sentiments, as exemplified by the redeployment of many civil servants from the center to their regions of origin in an attempt to create capacity at the regions. Already we see that regions like 1 (Tigray) and 4 (Oromiya) are relatively well endowed with skilled and well trained manpower. As such their administrative systems are up and running. Other regions, such as region 5 (Somali), are finding it difficult to fill their skill gaps with their indigenous people. Given that human resources take time to develop, unless a deliberate policy of moving labor (especially skilled labor) across regions is permitted, the human resource factor because of its ethnic twist could exasperate the regional disparities. Similar restrictions have been alleged in the areas of investments, with regional authorities tending to discriminate against investors originating from other regions.⁽¹⁾

It should be indicated that the regionalization/decentralization strategy is a brave attempt at addressing the critical issues of democracy, equity, participatory development and governance. Indications so far are that substantial progress is being made, albeit not without short comings. It IT has been observed, for example, that there are indications that a civil society is emerging. Within the past 18 months or so the number of NGOs and CBOs operating in the country has increased substantially. Similarly, the number of independent news papers have mushroomed over the same period. It can only be expected that such developments are leading to the expansion of public knowledge of the democratic process and what it entails. At the regional level, many regions are beginning to get to grips with their development problems. These are encouraging developments for us in UNDP as we grapple to assist Government in developing capacities at both the center and periphery for the regionalisation/decentralization policy to attain its objectives.

From the above it is quite obvious that the TGE has placed a lot of responsibility and trust on the regional and woreda administrations as far as spurring development is concerned. The proclamations and laws issued on decentralization lay the foundation for greater autonomy to the regions. However, for the regions and woredas to effectively use the powers that have been devolved from the center, they need adequate human, financial and other resources.

2.2.2 Fiscal Decentralization

In Ethiopia, it was recognized that devolution of political and administrative responsibilities cannot take place while still maintaining fiscal controls at the center, as such, the move towards political and administrative decentralization has been accompanied by fiscal decentralization. Four sources of income are stipulated to enable the regional/national self Governments to carry out this function, namely:
 

(a) Revenue collected from taxes allocated to them;
(b) Grants to be given by the central government;
(c) Domestic borrowing;
(d) Other sources of income.

The basic rationale of fiscal decentralization is that the regional/national self basic rationale of fiscal decentralization is that the regional/national self Governments should finance their own social development programs and that central government steps in with grants and or subsidies only if the regional governments cannot finance basic social services and economic development projects on account of their backwardness and poverty.

As far as taxation is concerned, the regional/national self governments are mandated to collect the following taxes:

Personal income tax collected from employees of regional governments.
Rural land use fees.
Agricultural income tax from farmers not incorporated in an organization.
Profit and sales taxes collected from individual traders.
Tax on income from inland water transportation.
Income tax, royalties and land rent levied on small to medium scale mining activities.
Charges and fees on loans and services issued or rendered by regional governments.

Experience has so far indicated that the responsibilities bestowed on the regions are by far in excess of the revenues that can be generated from the above sources. For example, in 1993/94 out of total expenditure of Birr 3,144.8 million, by the regions, only Birr 806.5 million (25.7%) was generated by them, the rest being financed from grants and subsidies from central Government. The main reason for this being that the center control about 80 per cent of the income resources, such as taxes on international trade, etc., leaving only 20 per cent for the regions. This obviously means that there is a high degree of fiscal dependence, on the part of the regions, on the center, which acts as checks and balances on their autonomy. As regional equity is one of the objectives of the decentralization exercise, care has to be taken to ensure that, policies in areas of education, mobility of labor, capital and other inputs, do not frustrate this objective, as experience has shown that factor mobility can be a powerful factor toward income equalization. Similarly, attention will need to be paid to the development of equitable resource transfer mechanisms between the regions and the center while at the same time ensuring that the expenditure responsibilities of the regions are in line with their revenue raising powers, without endangering overall macro economic balance.

3.0 ECONOMIC REFORMS

The major thrust of economic reform in Ethiopia has been in the direction of transforming the economy from a Marxist/command economy to a market based economy. This was done within the framework of s Structural Adjustment Program (SAP) which the Government launched in 1992, with the support of the World Bank/ IMF and a number of bilateral and multilateral donors, including the UNDP.

The main aim of the SAP was to bring about macro-economic stability, jump-start the economy and create a conducive environment for private sector participation, so that the private sector becomes the main actor in the productive sectors of the economy while the public sector concentrates on the social sectors and infrastructural development.

Since 1992, the country, in conjunction with the World Bank and IMF has prepared three, three year rolling, policy framework papers (PFPs) to guide its economic programme in the short and medium term. Two of the PFPs, 1992/92 - 1994/95 and 1993/94 - 1995/96 have since been implemented, the third one covering the period 1994/95 - 1996/97 is under implementation. Discussions between the Government and the Brettonwoods institutions concerning a PFP for the period 1995/96 - 1997/98 are underway, albeit protracted.

The main economic reforms covered under the SAP can be divided into six main categories as follows:

i. Exchange and trade system reforms;

ii. Public enterprise reforms;

iii. Financial sector reforms;

iv. Agricultural sector reforms;

v. Transport sector reforms;

vi. Fiscal reforms;

vii. Investment promotion.
 
 

3.1 Exchange and Trade System

A major feature of the Derge Regime were the severe exchange and trade restrictions to which the economy was subjected. These restrictions were in the form of cumbersome trade and licensing requirements, administrative rationing of foreign exchange, levying of taxes and duties on exports, arbitrary fixing of the exchange rate, general price controls and many others. These had a number of detrimental impacts on the economy including overvaluation of the Birr (52.2% - 55.8% by end of 1990), depressed production of exportable, discouragement of local and foreign investments. As such, a major focus of the initial stabilization and adjustment efforts were a reform of the exchange and trade regimes. The main aim of these reforms being to liberalize foreign trade and the exchange rate policy.

On the external trade front, the emphasis was placed on removing cost-price distortions, encouraging exports and efficient import substitution, liberalizing imports, attracting foreign investments, regularizing relations with creditors and reducing the debt service ratio.⁽²⁾

Removal of trade restrictions continued with the elimination of barriers and restrictions to exporters, including those on coffee. The introduction of a duty draw-back scheme, coupled with the rationalization of the import tariff system, greatly improved incentives for exporters. At the same time, procedures for the issuance of export and import licenses were streamlined and a comprehensive process of import liberalization was initiated. This was accompanied by reductions in tariffs and a rationalization of the tarif structure which is discussed under fiscal reforms.

In pursuance of these objectives, the Birr was devalued from Birr 2.07 to the US Dollar to Birr 5.00, on 1 October 1992 and a foreign exchange auction system was introduced in May 1993 in order to make the allocation of foreign exchange more transparent. The system has worked very efficiently, thanks to such donors as the EU, USAID, UK, etc. For providing the necessary BOP assistance to support the system. This resulted in the narrowing of the differential between the official and auction exchange rates to about 10 percent and near elimination of the parallel market.

There have also been some developments on the foreign exchange front. These have been aimed at improving access to foreign exchange by the private sector. In addition, the authorities seem to have been pursuing an exchange rate unification course. For example, in May 1995, the NBE raised the official rate of exchange from Birr 5.94 to Birr 6.26 to the dollar. This compared to an auction rate of Birr 6.23 to the dollar for the fortnight ending 27 May 1995. At the last auction held in 1995 (23 December 1995) the auction rate stood at 6.32 Birr to the Dollar. On the other hand, the parallel market rate has been rising and stood at Birr 7.75 to the dollar at the end of December 1995 compared to Birr 7.80/dollar at the end of May 1995, signifying a movement towards closing of the gap between the parallel market and the official auction rates, towards the latter part of 1995.
 
 

3.2 Public Sector Reforms, Divestiture and Privatization

During the Derge period most medium and large scale business were nationalized and private enterprise was severely curtailed. Public enterprises (PEs) predominated in all the major sectors such as agriculture, industry, commerce, and transport. By the end of FY 1981, the total number of state owned PEs reached 235 covering all areas of economic activity such as agriculture, manufacturing, wholesaling, retailing, construction, transport and so forth.

PEs had a specifically privileged position in the economy in terms of obtaining inputs and other services. For example, they had favorable access to foreign exchange, thereby giving them a privileged access to imported raw materials, spare parts, etc. In addition, Bank credit was made available to them at relatively lower rates of interest, with the result that they had a lions share of the credit made available by the domestic banking system (78.6% as of end June 1983). ³ Naturally, this led to a lot of inefficiencies in the economy and most of the public enterprises depended on budgetary support for their operations.⁴ A divestiture programme and privatization o state corporations were therefore among the top priorities of the TEE.

The reform programme is being implemented through Public Enterprise Proclamation No 25, of 1992, and employs a three fold strategy. In the first place, there are public enterprises whose functions are deemed to be of critical national importance and therefor should never be divested, but merely rationalized. For such, the law provides greater autonomy, placing them under autonomous boards of directors, and generally provides an environment which will allow such enterprises to function on a commercial basis. The second group of public enterprises consists of those whose functions can be taken by the public sector, but they are either too big or are not performing profitably for successful diversification. For such, the strategy is to break them down into smaller, manageable and profitable units, usually under management contracts, prior to divestiture. For example, 10 corporations which were under the management of the Ministry of Industry were dissolved and replaced by 98 public enterprises each with a Board of Directors having management autonomy . Similarly, corporation which were under the Ministry of Transport and Communications were dissolved and re-established as public enterprises⁵. The final group consist of those public enterprises deemed for immediate sale, for these, a privatization programme has been put in place. The privatization scheme has therefore been devised to effect a step by step withdrawal of government from economic activities that are to be lift to the private sector. Thus some state owned enterprises, such as retail shops, hotels, restaurants etc. Will be offered for sale. To this effect, an autonomous agency, the Ethiopian Privatization Agency (EPA) was established in February 1994 (Proclamation NO. 87/1994) with the mandate to implement the privatization policy. In addition, the sale of Government houses to the private sector was mentioned by Government.

Civil Service Reforms have also been initiated as part of the public sector reforms and they focus on streaming the civil service to make it more efficient and cost effective. Particular emphasis has been placed on redeployement of staff from central ministries to strengthen the regional bureaux, in line with the decentralization policy. In 1994/95, adjustments were made to the civil service remuneration package with a view to decompressing to pay scale thereby maintaining and attracting quality staff to the civil service and improving efficiency.

3.3 Financial and Monetary Reforms

The major objective of monetary policy is to ensure that money supply growth is consistent with the targets set for the major macro-economic variables such as inflation, GDP growth and balance of payments. The maintenance of positive real rates of interest, for both depositors and lenders, and use of indirect instruments to control money supply, are therefore central to the attainment of the above objective. The recent introduction of Treasury bills auctions has increased the range of instrument available to the authorities in their conducting of monetary policy.

Important monetary and financial sector legislation has recently been introduced. These include, among others, the opening up of the financial system. Financial sector liberalization has proceeded through the emergence and encouragement of private banking and the insurance sector. For example, the Commercial Bank of Ethiopia has been recently joined by the Awash International Bank in the provision of commercial banking services, while another insurance institution has emerged on the insurance scene. A few more similar institution are expected sometime during the course of 1995/1996.

3.4 Agricultural Sector Reforms

Agriculture is the most predominant sector in the Ethiopian economy, contributing over 40 per cent of GDP, 85 percent of exports and over 80 per cent of employment. As such the sector has a critical role to play in the country's development process. However, it is common knowledge that the agricultural sector has been beset with low per hectare yields, lack of diversification, and heavy reliance on rainfall. These have limited the role of the sector to contribute to development. As a result, food insecurity and unemployment, are endemic to the Ethiopian economy. The basic objectives of the reform effort in this sector are to increase per hectare yields and diversify production. Thus, the reform measures have focused on increasing farmer incentives to increase yields and diversify output.

During the Derge regime, marketing of agriculture output and distribution of agricultural inputs were prerogative of state monopolies. The reform efforts have therefore focused on the liberalization of the marketing of both agricultural product and inputs. For example, private traders are now allowed to purchase and export coffee, side by side with state enterprises operating in this field. At the same time, state farms which used to enjoy privileged access to inputs (via subsidized bank credit and access to foreign exchange) have since been abolished.

In addition to allowing private traders to participate in the importation and distribution of fertilizer⁷. Although a phased approach to the removal of the fertilizer subsidy was introduced, thereby fostering competition within the sector in practice, the subsidy level on fertilizers has been increased over the past two year, to boost smallholder production. Further, in an effort to enhance food security in the country, Government has embarked upon the drafting of a food security policy. Soil conservation, construction of mini dams for irrigation, etc., have become a common feature in most of the community based devilment efforts.

3.5 Transport Sector Reforms

Transportation is one of the major bottlenecks to development in Ethiopia. The transport sector consists of four sub-sectors, namely: rail, air, ocean and road.

The rail sub-sector consists of a single railway line of 780 KM between Addis Ababa and Djibouti and catering mainly for freight transport. Over the years, the importance of rail transportation in the country has been declining. The line itself is in need of extensive reconstruction and upgrading. Today, rail transportation accounts for about 6 per cent of all freight transport.

Ethiopian Airlines, the national carrier, is one of the most efficient airlines on the continent providing domestic, regional and international passenger and freight services. Adds Ababa's Bole Airport plays a very important regional and international role and is well serviced by a number of the major European and regional airlines.

Although Ethiopia is land-locked due to the loss of ports of two ports of Massawa and Assab on the Red Sea at the independence of Eritrea, it still uses these ports on a special agreement with Ertriea and operates a small fleet of ocean liners.

Although the above three components contribute significantly to the development of the country, especially in terms of international transportation, the road sub-sector is by far the most important particularly because of the predomination of the rural economy in the country, and it provides abut 94 per cent of all transport services, including haulage of international freight to and from the sea ports.

Despite the critical position of the road sub-sector in the economy, the TGE inherited a road infrastructure which was extremely undeveloped and poorly maintained, while transport services were underdeveloped, costly and inefficient. According to a recent study, road density in Ethiopia is among the lowest in Sub-Sahara Africa and other developing countries, with an estimated 21 Km of road per 1000 square Km and .43 Km per 1000 population. Further it is estimated that only 11 per cent of the paved roads and 19 per cent of the gravel roads are presently in good condition.

Although much of the problem stemmed from financial constraints, policy constraints were also very much to blame. The Derge regime imposed a lot of restrictions and regulations on the sub-sector. Fro example, the state regulated trucking routes, fixed freight rates and owned and operated a sizable number of trucks. In order to improve the sector the Government's main strategy has been to encourage competition, efficiency, and investment. To this end, the reform efforts in this sector have focused on lifting the control of traffic routes and deregulating freight rates, to spur competition, while at the same time low tariffs and tax breaks have been used to boost investments.

Recently, the Government has produced a road sector policy, which among other things, aims at increasing the capacity of the private sector in the construction industry (including road construction) by minimizing the role of Government in the industry; reducing the capital requirements for registration of contractors; encouraging joint ventures with foreign contractor; and facilitating of contractors training. Improvement of rural transportation, enforcement's of transport safety, providing guidelines for allocation of investment for rehabilitation, maintenance, and construction, etc., are among the priorities of the said policy. A comprehensive roads programme has been designed on the basis of the above policy and presented for donor support. The programme is expected to launched in July 1996.

3.6 Fiscal Reforms

As already indicated, on the fiscal front, major reform efforts have been in the areas of re-orienting public expenditure from military spending and economic sectors towards social sectors, and in reducing the fiscal deficits through strengthening of revenue collection and reducing expenditure.

The strategy has been to broaden the revenue base by including other activities (such as services) into the tax bracket while at the same time reducing levels of taxation (for both direct and indirect taxes), to improve incentives and promote tax compliance. A number of tariff adjustments have been undertaken since 1993 along with the above strategies. For example, in August 1993, a harmonized system of import tariffs was introduced, thereby narrowing the gap between tariff rates applicable to different commodities and reducing the level of import tariff rates applicable to consumer goods. During the last tariff reform undertaken in January 1996, the maximum tariff rate was reduced from 80 per cent to 60 per cent to 24 per cent; and the tariff rate on cereal imports was reduced from 35 per cent to 5 per cent.

According to the Public Expenditure Review (PER) conducted by the World Bank, in 1993/94, despite the slow down in economic activity, total revenue (tax and non-tax) increased by 23.5 per cent to reach Birr 3818.9 million, representing 14 per cent of GDP (up from 11.9 per cent in 1992/93). Of this revenue, 78.3 per cent came from taxation especially income and profit taxes (22.3%) and import duties and taxes(31.5%); compared to 69 per cent from taxation in the previous year, thus signifying improved tax collection efforts. On the other hand, effort to improve effectiveness and efficiency in public spending continue. As the PER observed, total Government expenditure which averaged 29 per cent of GDP between 1986/87 and 1990/91, declined to 20 per cent in 1991/92, reflecting a slow down in activity as a result of the change in regime. In 1993/94, total Government expenditure rose sharply to reach 28 per cent of GDP, in response to the needs to rehabilitate the economy and address urgent social needs.

3.7 Investment Promotion

An examination of the economic situation in Ethiopia indicates that both the levels of investment and domestic savings are very low. The ratio of gross domestic savings to GSP is not only low but has been declining over the past few years. For example, it fell from 7.0 per cent in 1986/87 to 1.8 per cent in 1993/94 . At the same time, although the level of investments in the country is very low, it has been rising over the past few years, that is rising from 15.1 per cent of GDP in 1986/87 to 16.8 in 1993/94. It should be indicated that despite this rising trend in gross fixed investments over the past five years or so, the situation is still below that obtaining elsewhere. For example, in the Sub-Saharan Africa and Asian regions average rates of 15.9 per cent and 31.1 per cent, respectively, were registered between 1980 and 1988.⁸⁽³⁾

A rapid increase in the ratio of investments to GDP to say 25 per cent, is required in order for Ethiopia to achieve faster growth and stimulate employment. Vigorous domestic and external resource mobilization efforts are therefore called for.

A closer look at the savings and investment situation in Ethiopia suggests that the environment, particularly during the Derge regime has not been particularly conductive to the promotion of savings and investment in the country. This was realized by the TGE, as a result of which an Investment code was promulgated in May 1992 as part of the economic reform package.

According to the Proclamation to provide for the Encouragement, Expansion and Coordination of Investment (no. 15/1992), the main investment objectives include the following:

(i) to develop a domestic market of extensive and dynamic activity with a view to achieving an increase in the variety, quality and volume of supply of the goods and services of the country;

(ii) to promote the development activation and strengthening of domestic private capital which widely participates in the economy in general and in the production sector in particular;

(iii) to encourage foreign investors to play proper roles in the country's economic reconstruction endeavours' and

(iv) to encourage the production and utilization of domestic raw materials, production machinery, equipment and other goods.

In order to fulfill these objectives certain provisions are made. For example it distinguishes areas of investment activities into four types, namely;

i) Areas of investment reserved for Government;

ii) Areas reserved for investment by Government on its own or in partnership with private investors;

iii) Areas open for private investment; and

iv) Areas of investment to be determined by future Government Policy and law.

The proclamation also makes a number of provisions to facilitate investment, these include: provisions for allocation and utilization of land and water resources, provision of fiscal and other incentives, as well as procedure for approval of investment application, establishment and registration of enterprises. For foreign investors, special provisions are also made for transfer of technology, and loans and conditions for remittances. The Ethiopian Investment Office(EIO) is charged with the overall responsibility of administering the investment law^9.

From July 1992 to October 1995, a total of 2084 projects, with a capital value of Birr 13.6 billion, have been approved by the IOE. However, by October 1995, only 217 (10.5%) of the projects, with a capital value of Birr 1.4 billion, were operational. In addition, only 19 (1%) of the projects were proposed by foreign investors. While in terms of sectoral distribution, the largest number of the proposed projects (39.3%) are in the manufacturing sector, followed by agriculture (27.8%), real estate (11.8%0, hotels and tourism (10.5%) while the rest took up 10.6 per cent (see table 2). The investment date also indicates that over 80 per cent of the investment activities are concentrated into the three regions of Addis Ababa(48.8%), Tigray(21.7%) and Oromia (12.1%).
 
 

Table 1. Sectoral Distribution of Registered Investment Proposals: July 1992 - October 1995
 
 
 
 
 
 

Sector	No. of Proposed Projects	Percentage
Agriculture	578	27.8
Mining and Quarrying	15	0.7
Manufacturing	819	39.3
Construction	37	1.8
Hotels and Tourism	220	10.5
Transport	29	1.4
Social Sectors	57	2.7
Real Estate	246	11.8
Others	83	4.0
Total	2084	100.0

 

Source: Investment Office of Ethiopia

From the above data, a number of things can be discerned about investment activity in Ethiopia. In the first place, it is clear that there is a certain degree of inertia in the implementation of the investment code in terms of both domestic and foreign investments. That fact that only 10.5 per cent of the projects approved since July 1992 are operational, proves the point.

Although the investment promotion provisions appear attractive, a number of problems have been sighted as contributing to their slow pace of implementation. In the first place, the provisions are in some ways restrictive. For example, there are restrictions with respect to areas of operation for both local private sector and foreign entrepreneurs, as indicated above. The minimal capital requirements for issuance of a license to an investor stipulated in the regulations (US $ 500,000 for foreign investors and Birr 250,000 for local investors) also act as barriers to entry for local and foreign entrepreneurs.

Despite the policy to encourage the private sector, not all the regulatory measures adopted during the previous regime have been eliminated. For example, many regulations still abound which restrict the undertaking of certain activities in certain areas. This mostly applies to informal sector activities. In addition, although in principle the monopoly which most state enterprises has been broken through the privatization and divestiture laws discussed above, in principle this is not the case. Whether through administrative action or otherwise, some enterprises are still favored in terms of land allocation, issuance of licenses, etc. One can say that the playing field for private enterprise is not completely level, one still finds a number of quasi-public enterprises which still enjoy some positive discrimination. At the same time, bureaucracy and red tape are still an obstacle to private sector expansion.
 
 

3.8 Social Sector Reforms

Ethiopia's main development challenge is to eradicate poverty and make development sustainable. To this end, within the above policy framework, Government has developed a comprehensive social development policy which aims at promoting social integration and social development . A number of social policies and strategies have been and are presently being drafted. These include:

1. The National Policy for Disaster Prevention and Management(NPDPM)

2. The National Population Policy(NPP)

3. National Policy on Women (NPW)

4. The National Food and Nutrition Strategy(NFNS)

5. The National Conservation Strategy(NCS)

6. Education Policy

7. The National Health Policy

The above mentioned policies which are the basis for Ethiopia's social development strategy stress the following:

community determination of interventions, with line departments responding to those expressed needs;

clear responsibility and empowerment at all levels

relief shall sub-serve the goals of development

expediting economic and social development processes

reducing the rate of rural to urban migration;

maintaining/improving the carrying capacity of the environment

raising the economic and social status of women

significantly improving the social and economic status of vulnerable groups (women, youth, children and the elderly).

These policies clearly indicate Ethiopia's wish to reduce poverty and they are in line with the basic principles of sustainable Human Developments(SHD). The national policy on women, for example, is a statement of basic principles prescribing the scale and scope of women's full involvement in the development process at the strategy, policy, planning, programme, project and implementation levels. The NFNS on the other hand aims at guaranteeing food security and to raise the nutritional status of the population, while the national conservation strategy which is in the initial development phase encompasses a Forestry Action Plan as part of the future conservation strategy. In addition, the Population policy aims at closing the gap between high population growth and low economic productivity by enhancing the productive capacity of the agricultural sector, while in education the objective of the policy would be to increase the number of literate and numerate people whose skills are essential to development.

The Government's community to social development can be seen through the increase in the budget to the social sectors. For example, according to the latest Public Expenditure Review conducted by the World Bank and Government, the recurrent budget allocated to Education increased from an average of 11.78 per cent of the recurrent budget between 1986/87 to 1990/91 to 16.18 in 1994/95¹⁰.

As a follow up to the World Social Summit which was held in Copenhagen in 1995, Government is in the process of formulating a national Action Plan on Social Development which aims at ensuring that all facets of development are human centered. The implementation of such and action plan is certainly bound to enhance sustainable human development in the country. Government has recently established a welfare Monitoring Unit in the Ministry for Economic development and Cooperation. It is hoped that this will help to monitor the implementation and impact of the Social Action Programme.

4.0 IMPACT OF THE REFORM EFFORTS ON DEVELOPMENT TODATE.

While it could be said that it is too early to judge the impact of the reform efforts on development in the country, we can say with a certain degree of confidence that most of these efforts are beginning to pay off. As indicated in our previous report, major improvements have been registered in the areas of real growth, the balance of payments situation, the government deficit, inflation, and some of the macroeconomic variables. In this report we only focus our attention on economic developments in 1994/95 and prospects for the near and medium future.

4.1 Economic Performance in 1994/95

In 1994/95, considerable progress was made to deepen the reforms initiated in the 1992/93-1994/1995 and continuing through the 1993/94-1995/96 PFPs. The 1994/95-1996/97 was launched.

Although the reform efforts have only been in place for the past three years or so, some far reaching achievements have been realized in the economy. In this section we will attempt to outline such achievements to date and provide and indication of the direction the economy is likely to move in the near and medium term should the reform effort remain on course.

Real GDP in 1994/95 is estimated to have grown by 5.6 per cent, signifying a rapid acceleration from the 1.3 per cent registered in 1993/94. The good performance was largely due to the recover in the agricultural sector which is estimated to have grown by 4.6 per cent in 1994/95 as opposed to the 5.6 per cent decline experienced in the previous year because of poor rains, insect infestation and lower fertilizer usage (resulting from higher prices associated with the 1992 devaluation). While food shortage was a major problem in 1993/94 due to the effects of a severe drought experienced then in the country, 1994/95 saw a substantial improvement in food production, with an estimated production of 70,418,000 quintals, due largely to good rain, increased acreage, and more importantly increased fertilizer usage.

Thus, although food insecurity was still a problem in 1994/95, its impact was greatly reduced by the good agricultural performance. The Commission for Disaster Prevention and Preparedness issued a food aid appeal for 1995 for 492,460 MT to cover an expected affected population of 3,994,000 as opposed to an appeal for about 750,000 MT for an estimated affected population of well over 6 million in 1994.¹¹

Table 2. GDP Growth Rates 1990/91-1994 /95
 
 

Sector	1991/92	1992/93	1993/94	1994/95
Total GDP @ FC	-8.7	12.3	1.3	5.6
Agric. and allied activities	-5.7	6.5	-5.6	4.6
Industry	-22.3	28.8	7.1	8.8
Distrib. Services	-21.1	26.4	8.0	6.8
Other Services	-10.6	13.0	10.9	5.6

Source: MEDAC.
 
 

Performance in other sectors was very satisfactory. Industry, for example, is estimated to have grown by 8.8 percent in 1994/95 compared to 7.1 percent the previous year. It is noteworthy that all the sub-sectors under industry exhibited growth rates so 7.5 percent and above, with the manufacturing sector growing by an estimated 10.4 percent in 1994/95. The distributive services (transport, commerce etc.) "other services" sectors, achieved growth rates of 6.8 and 5.6 percent, respectively.

The buoyancy in the economy is reflected in the country's balance of payments situation. Total exports at the end of 1994/95 reached an estimated 2.95 billion Birr, 82.1percent on the level achieved the previous year. The main boost came from coffee (accounting for 61% of total exports) which experienced volume and price increases of 2.7 and 90.5 percent, respectively. Leather products, which accounted for 12.9 percent of total exports in 1994/95, registered an increase of 87 percent during the year under review. Imports rose by 29.5 percent, signifying a readily availability of raw materials, spare parts and capital equipment to industry, in line with the import liberalization policy. Food imports, however, remained fairly high in 1994/95, at 45.3 percent of total imports, compared t 47.1 percent in 1993/94, implying the lingering of food insecurity concerns in the country. These developments led to an improved BOP position, with current account deficit (excluding public transfers), narrowing from Birr 1575.6 million the previous year to Birr 1075.5 million at the end of 1994/95, and foreign exchange reserves standing at 43.4 weeks of imports at the end of 1994/95 against a programme target of 20.6 weeks of imports.
 
 

Monetary policy, while continuing to be tight in 1994/95, ensured that money supply grew at a rate consistent with other macroeconomics targets such as economic growth, inflation, balance of payments, etc., while allowing for reasonable credit to meet the needs of the productive sectors, particularly the private sectors. Maintenance of positive real interest rates for both lenders and borrowers, continued to be a major objective of monetary policy in 1994/1995. Thus in 1994/1995 broad money grew by 20.7 per cent, compared to 14.4 per cent in 1993/1994. While net lending to Government decelerated by 5.1 per cent, that to other sectors (basically private sector) increased by 14.5 per cent in line with the policy of shifting allocation of domestic bank resources away from the public sector to the private sector.

Inflation, as measured by the Addis Ababa Retail Price Index, picked up in 1994/95. On an annual average basis, inflation rose from 1.2 per cent in 1993/94 to 13.4 per cent in 1994/95, with the biggest push coming from the food sector, coupled with a liquidity build up emanating from the improved coffee earnings, an indication that the current monetary instruments cannot adequately deal with the mopping up of such liquidity, thus calling for the need for additional measures.
 

4.2 Prospects for 1995/96 and Beyond

Economic performance during 1995/96 and beyond, will to a large extent, depend on the continued implementation of the reform programme as spelled out in the 1994/95-1996/97 PFP whose basic maroeconomic objectives are as follows: (a) to achieve an annual average growth rate of real GDP of about 6.0 percent
(b) to contain the rate of inflation at 4 percent by 1996/97
(c) to contain the external current account deficit (including official transfers) at 2.5 per cent by 1995/96 and 6.7 percent by 1996/97 (or 2.2 percent excluding aircraft purchases slated for 1996/97) and
(d) ensure foreign exchange reserves of over four months of imports by 1996/97.

Indications so far are that performance is broadly consistent with these targets in many areas. Current estimates indicate that GDP will grow by about 7.6 per cent in 1995/96, which is above the 6.0 per cent projected by the programme for 1995/96. The impetus for this growth is expected to emanate from the agricultural sector where good rains coupled with higher usage of fertilizer, particularly in the smallholder sub-sector, is expected to boost growth in output to 4.5 per cent. According to the latest crop production estimates, 84,45 million quintals are expected to be produced, an increase of 19.9 per cent over the output realized in 1994/95. This increase is expected to emanate from a 15.3 per cent expansion in hectare coupled with an average yield increase of 10.5 per cent for all crops, largely from increased usage of fertilizers and improved seeds.

The Industrial sector is also expected to be buoyant during the same period, largely as a result of continued availability of foreign exchange through the auction system to finance critical inputs such as raw materials, machinery, capital equipment and spare parts. Continued inflows of foreign assistance coupled with high coffee export earnings, have boosted the official foreign exchange reserves to about Birr 4.4 billion. However, future strength of the balance of payments situation will depended on increased direct foreign investment. While the former will depend on the extent to which export diversification will succeed, the later will depend on the reforms that will be made to the investment code to make the country more attractive to foreign investors.

Although Government has continued to pursue tight monetary and fiscal measures, some inflationary pressures have been building up in the economy. As indicated above the annual average annual rate of inflation during 1994/95 stood at 13.4 percent, implying that the programme target for 1995/96 of 4.5 per cent will not be attained. It is estimated, that by mid-1996, inflation as measured by the Addis Ababa Retail Price index may have decelerated to about 8-10 per cent per annum as a result of falling food prices following the bumper harvest experienced in 1995/96.
 

5.0 CONCLUDING REMARKS

The above analysis clearly indicates that the political and economic reforms in Ethiopia are firmly entrenched and that they are having a fundamental impact on the country's development, although a number of challenges still remain. In this section we would like to briefly highlight some of these problems and indicate what UNDP and other donors are trying to do to alleviate them. For proposes of emphasis, we focus our attention over the next 10 years(1996-2005).
 

5.1 Rapid Population growth.

The rapid rate of population growth for example, will remain a serious problem into the next decade and is and is manifesting itself in the form of pressure on natural resources, such as the extent of top soil erosion, deforestation, etc. This problem is manifested by the extent of top soil erosion, deforestation, etc.

The Government is trying to address this problem through a mixed strategy that includes:

(a) Population control
(b) Proper management of the environment and available natural resources.
(c) Improving the lot of the poor people through involving them in participatory development projects which emphasize on the building of community assets and involvement in income generating activities. UNDP is involved in all these efforts.

With more than 85 percent rural population it is difficult to expect substantial effect of population policy in reducing the population growth. The demographic projections suggest that it is only after year 2010 that population growth will start decelerating.

Urban areas will continue to attract a large wave of rural people, especially young rural men and women. The size of rural exodus to urban area will continue to produce the danger of an explosive mass of young people including young women and children living under miserable conditions. By the year 2005, an increasing proportion of people in Ethiopia will be living in urban areas. UNDP will need to gear its policies towards meeting the needs of the urban poor. Water and sanitation, housing and job creation, will need special attention. It is for this reason that the recommendations of the recently completed study on Urban Poverty, focusing on Addis Ababa, will need to be given serious attention.
 

5.2 Human Resources Development

The extent to which success will be realized on the above, will depend on the availability of human resources to plan, implement, monitor and evaluate the efforts enumerated above, especially at the regional and grassroots level, in order to make the whole development process sustainable and in line with SHD.

The HRDU Programme is the major tool for operationalizing SHD in Ethiopia. It focuses on such areas as HRD policy formulation and planning, human freedoms and opportunities, health and basic needs, education and training, science and technology, employment and livelihoods. Gender issues are addressed in all these areas. The component on HRD Policy and Planning emphasizes on the integrated approach to policy formulation and planning. For example, with the recent adoption of a population policy, a framework now exists for integrating population issues into development planning. However, for sustainable human resources development, population policy needs to be integrated with not only other social development policies such as education and health, but also Employment policies, Science and Technology, Food Security, etc. This component provides a framework for such an integrated approach. The component on Human Freedoms and Opportunities focuses on the provision of an environment for the participation of peoples and communities in their governance, with the basic aim of empowering people to take their fate in their own hands through the provision of basic services that would allow to mobilizing and use their resources to improve their own conditions. The aim here is to promote national capacities to develop and sustain institutions and processes which will nature cultures of popular participation, good governance, civil rights and strengthened civil society.
 

5.3 Food Security

Food insecurity is a serious problem for Ethiopia. Since the 1984 famine, on average 4.5 million people (close to 10% of the population) have been officially declared as having a food deficit and therefore in need of food aid for their livelihood. In addition, dependence on food imports is very high as evidenced by the fact that, over the past decade, donor financed food imports into the country have averaged close to 1 million metric tones per year. Malnutrition is quite severe in both urban and rural areas.

The FAO estimates that given the current trends in population growth and prevailing food production technologies, the food demand/supply gap will continue to widen, thereby giving rise to more and more food imports, a situation which is not sustainable in the current aid climate, and number of people suffering from malnutrition and other food deficit related ailments are bound to increase in absolute terms.

Although such problems as civil unrest (upto 1991) and natural disasters, such as recurrent droughts, erratic rainfall, pest infestations and so forth, compounded by fast population growth(3% per annum), are largely responsible for the food deficiency in the country has a structural dimension to it in addition to the emergency dimension associated with the above factors, which presupposes that agricultural policies have also played a role.

Agricultural productivity in Ethiopia is very low compared to Sub-Saharan African standards. The average yield of all food grains, which constitute the staple food, range between 800kgs. to 1,500 kgs. per hectare. This is far below the national averages obtaining in countries like Zimbabwe and Kenya. Both farming practices and crop husbandry methods and use of technology such as fertilizers, improved seeds, etc. lag far behind in Ethiopian agriculture. Past pricing and marketing policies, etc. have proved a major disincentive to agricultural productivity.

Given the magnitude of the food insecurity problem in the country, as exemplified by the numbers dependent on food aid now and the poor nutritional status of the majority of the population, there is a need for a clear food security strategy and policy that not only emphasizes on enhancing the production of food or how to manage relief aid, but more importantly, addresses the issues of equitable access to food.

Government is taking several approaches to the issues of food security. These include enhancing improvements if food productivity, especially on small holdings through introduction better farming methods, by emphasizing on research and extension; improving the distribution system through marketing and price reforms (of both inputs and outputs); and better management of relief food, including shifting emphasis from relief to development. The policy on Food Security, currently being prepared by the Government, should lead to an action programme which should be supported by interested donors such as the World Bank, UNDP, the EU, USAID, FAO etc.
 
 

5.4 CONCLUSION

On the basis of the foregoing overall and sectoral policies, the Government has already taken notable measures: a change in the role of planning in the economy is underway where planning is to concentrate on effective perspective and regional planning, economic forecasting, macro-economic management, the creation of an enabling environment for the private sector and efficient management of public sector investment projects.

In addition, the Government opted for a decentralized system of government, in which a federal/central government share political, administrative and economic power with regional governments. A careful assessment of the policies and practices of decentralization will need to be undertaken so that appropriate adjustments are made to the process to ensure that its objectives are made.

While the economic Reform Programme has created the general conditions for renewed growth effort in the period ahead, the development process still needs a long term to have an effective impact.

The sustainability of the development effort will require a broader perspective and a coordinated long-term effort, significant infrustructural changes and also substantial financial resources.

By the year 2005 the development objectives will be reached if the conditions of a politically stable government and security of ownership, the creation of enabling environment in terms of legal and regulatory framework, availability of human and infrustructural capacities are attained. The main changes will be for the government to mobilize domestic and external financial resources and the efficient use of existing capacities.

TOP

^2. See PFP, 1992/93 - 1994/95, p.7.

^3. 8 See, MOPED, Survey of Current Economic Conditions in Ethiopia, Vol. II, No. 4, May 1994 p. 15.