Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No.

INTERNATIONAL DEVELOPMENT ASSOCIATION

COUNTRY ASSISTANCE STRATEGY

FOR

THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

April 2,2008

Ethiopia Country Management Unit Africa Region

43051-ET

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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DATE OF LAST COUNTRY STRATEGY May 1,2006

AAA AfDB AIDS ADLI

AMP A P L APR BPR CAADP

CAE CAS CAS CR

CBDSD

CDMAP

C E M

GOVERNMENT FISCAL YEAR July 8-JQ 7

CURRENCY EQUIVALENTS US$l.OO = Ethiopian Birr 9.65 (as of April 2,2008)

ABBREVIATIONS AND ACRONYMS

Analytic and Advisory Activities African Development Bank Acquired Immune Deficiency Syndrome Agricultural Development Led Industrialization Aid Management Platform Adaptable Program Loan Annual Progress Report Business Process Re-engineering Comprehensive Afr ica Agriculture Development Program Country Assistance Evaluation Country Assistance Strategy Country Assistance Strategy Completion Report Capacity Building for Decentralized Service Delivery Capacity Development Management Action Plan Country Economic Memorandum

COMESA Common Market for Eastern and Southern

CPA CPIA

CPPR CSA cso CUDP D A C

DAG DFID

DHS EAREP

E C EFY EIB EPRDF

Afr ica Country Program Assessment Country Policy and Institutional Assessment Country Portfolio Performance Review Central Statistical Authority C iv i l Society Organization Coalition for Unity and Democracy Party Development Assistance Committee (OECD) Development Assistance Group Department for International Development (United Kingdom) Demographic Health Survey Electricity Access (Rural) Expansion Program European Commission Ethiopian Fiscal Year European Investment Bank Ethiopian People’s Revolutionary Democratic Front

EMCP

ESW ERA FDI FSP FTI FY GDP GEF GER GEQIP

GoE GTZ

HICES

HIPC HIV HLF I C A ICAS I C B IDA IDF IEG IFAD

IFC IFRS

IGAD

I H P IMF IRAPP

I S A I T N S

JBAR

Expenditure Management and Control Sub-program Economic and Sector Work Ethiopian Roads Authority Foreign Direct Investment Food Security Program Fast Track Initiative Fiscal Year Gross Domestic Product Global Environment Facility Gross Enrolment Ratio General Education Quality Improvement Program Government o f Ethiopia German Agency for Technical Cooperation Household Income, Consumption, and Expenditure Program Heavi ly Indebted Poor Countries Human Immunodeficiency Virus High Level Forum Investment Climate Assessment Interim Country Assistance Strategy International Competitive Bidding International Development Association Institutional Development Fund Independent Evaluation Group International Fund for Agricultural Development International Finance Corporation International Financial Reporting Standards Intergovernmental Authority on Development International Health Partnership International Monetary Fund IGAD Regional A IDS Partnership Program International Standards o f Auditing Insecticide Treated Nets Joint Budget and Aid Review

J G A M

KM LIL M&E M A P MDGs MDRI MEFF MIGA

MOFED

NBI NEPAD

N G O N N P NPLs OECD

ODA PASDEP

PBS PCDP

PEFA

Joint Governance Assessment and Measurement Kilometers Learning and Innovation Loan Monitoring and Evaluation Multi-sectoral H IV /A IDS Program Mi l lennium Development Goals Multilateral Debt Rel ief Initiative Macroeconomic and Fiscal Framework Multilateral Investment Guarantee Agency Ministry o f Finance and Economic Development N i l e Basin Initiative N e w Partnership for Africa's Development Nongovernmental Organization National Nutr i t ion Program Non-Performing Loans Organization for Economic Co-operation and Development Off icial Development Assistance Plan for Accelerated and Sustained Development to End Poverty Protection o f Basic Services Pastoral Community Development Program Public Expenditure and Financial Accountability

PER Public Expenditure Review

PRS PRSC PSCAP PSD PSNP P T A QAG RCBP RCIP

ROSC

RSDP SDPRP

SIL SLMP SNNPR

S WAp TWG UAP UEAP U N D P U S A I D

U S D WBI WaSH

Poverty Reduction Strategy Poverty Reduction Support Credit Public Sector Capacity Bui lding Program Private Sector Development Productive Safety Nets Program Parent-Teacher Association Quality Assurance Group Rural Capacity Bui lding Project Regional Communications Infrastructure Program Report on the Observance o f Standards and Codes Roads Sector Development Program Sustainable Development and Poverty Reduction Program Specific Investment Loan Sustainable Land Management Project Southern Nations, Nationalities, and Peoples' Region Sector-Wide Approach Thematic Working Group Universal Access Program (WaSH) Universal Electrification Access Program United Nations Development Program United States Agency for International Development United States Dollar World Bank Institute Water Supply, Sanitation, and Hygiene

I__ ___I______

Vice President: Obiageli Ezekwesili Country Director: Kenichi Ohashi Task Team Leader: John Van Dyck . .- --. " - __ _ _ " - _ _ . -

COUNTRY ASSISTANCE STRATEGY

FOR THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................. i

I . INTRODUCTION .......................................................................................................... 1

I1 . COUNTRY CONTEXT ................................................................................................ 1 A . Political Context ........................................................................................................ 1 B . Recent Economic Developments .............................................................................. 2 C . Poverty Context ......................................................................................................... 7

I11 . ANALYSIS OF DEVELOPMENT CHALLENGES ................................................ 10 A . Central Challenge in the Short to Medium Term .................................................... 10 B . Long-Term Challenges ............................................................................................ 13 C . The Challenge and Promise o f Regional Cooperation ............................................ 14

I V . ETHIOPIA’S DEVELOPMENT STRATEGY ......................................................... 15

V . WORLD BANK SUPPORT PROGRAM .................................................................. 18 A . Lessons Learned ...................................................................................................... 18 B . Strategic Objectives ................................................................................................. 19 C . CAS Lending and Non-Lending Program ............................................................... 21 D . IDA Volume and Country Performance ................................................................. 32 E . IFC and MIGA ........................................................................................................ 34

V I . IMPLEMENTING THE PROGRAM ....................................................................... 35 A . Monitoring Outcomes ............................................................................................. 35 B . Donor Harmonization .............................................................................................. 35 C . Portfolio Management ............................................................................................. 38

. .

D . Managing Risks ....................................................................................................... 41

ANNEXES Results Framework Sequencing and Selectivity across Sectors CAS Completion Report for FY 2003-2007 Ethiopia at a Glance Social Indicators Key Economic Indicators Key Exposure Indicators Selected Indicators o f Portfolio Performance and Management IFC and MIGA Program for Ethiopia IDA Program Summary for Ethiopia Summary o f IDA Non-Lending Services Status o f Bank Group Operations (Operations Portfolio)

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Annex 10: Annex 1 1 : Annex 12:

Box 1: Box 2: Box 3:

BOXES

CAS Consultations: Learning from Stakeholders Improving Labor Productivity: from Nutrit ion to Higher Education Supporting Capacity Development

EXECUTIVE SUMMARY

1.

regime (‘Derg’), or the current government, a recurring theme has been Ethiopia’s susceptibility to various forms o f shocks. Because o f population pressure, land degradation, and climate, Ethiopia i s fundamentally vulnerable to weather-induced shocks, such as the severe drought o f 2002/03 ’. Despite these difficulties, Ethiopia has achieved remarkable progress in the last several years in terms o f economic development, with GDP growth exceeding 11 percent for four straight years, and a major expansion in access to public services.

Throughout i t s recent history, whether under imperial rule, the Marxist military

.. 11.

phase o f more rapid economic growth, while simultaneously experiencing what might be called a ‘service delivery take-off.’ If this take-off proves to be more than a short-term anomaly, Ethiopia could leave the ranks o f the poorest countries in the world sooner than might have been expected only a short time ago. The basic challenge therefore for Ethiopia i s to sustain this dual take-off process that appears to be in i t s early stages.

An emerging ‘dual take-ofJ: ’ Ethiopia shows some signs o f having entered a new

... 111.

and sustaining it will be s t i l l more difficult. Successful implementation o f several important elements o f Ethiopia’s poverty reduction strategy, the Plan for Accelerated and Sustainable Development to End Poverty (PASDEP), will be required. First, Ethiopia will have to strike a delicate balance in macroeconomic management between the need to manage overheating o f the economy and sustaining growth. Second, Ethiopia needs to stimulate a greater supply response to the huge recent investments in physical and human capital, which requires improving the investment climate further for businesses o f all sizes and across sectors. Third, to make the economic growth inclusive, it i s important to give targeted support to three particular groups o f Ethiopians, women, youth, and food- insecure households. Fourth, on the service delivery front, the challenge now i s to complete the expansion o f access and begin the more difficult task o f raising quality, which requires not only additional resources but also greater scope for local initiatives and decisions. Finally, the sustainability o f the dual take-off process in the longer term will also hinge on Ethiopia’s ability to overcome i t s fundamental vulnerability to shocks by reversing the degradation o f land and water resources, facilitating movement o f some people out o f agriculture, and accelerating the ‘demographic transition’ with measures to reduce population growth.

Creating conditions for the emergence o f this ‘dual take-off was no easy task,

iv. shift from top-down to more bottom-up and open approaches in many spheres. The Government’s program o f decentralization was indeed conceived as a way to achieve such transformation in the long run. In deepening this process, Ethiopia will have to overcome the legacy o f central control. A similar challenge can be anticipated in moving toward a more market-based economic management system.

Meeting the challenge o f sustaining the dual take-off process will likely require a

Many dates in this document are aligned with the Ethiopian Fiscal Year (EFY). In this case, 2002/03 refers to EFY 1995, or July 8,2002 to July 7,2003.

1

v. The recent improvement in basic service delivery i s in itself an important indication that ‘governance’ has been improving in a critical dimension; institutional capabilities, especially at the local levels, seem to be building up, and the formal processes o f citizen participation in local decision-making have been strengthened. Nevertheless, much remains to be done to improve governance. Democratic practices at the local level need to take deeper root. More broadly, the media and civ i l society organizations need to mature and a greater space needs to be created for them, and the effectiveness o f national level accountability mechanisms, such as parliamentary oversight committees, courts, and the public audit system, need further strengthening. Progress in these areas will naturally take time, but it deserves sustained attention as transparency and accountability are critical for sustaining the ‘dual take-off in the long run.

vi. will be structured to support Ethiopia in sustaining high levels o f investments in key areas (both physical and human capital as well as institutional capacity building), while addressing priority policy issues to maximize the impact o f such spending. Specifically, this Country Assistance Strategy (CAS) aims to support Ethiopia in achieving four main strategic objectives, consistent with PASDEP: (i) fostering economic growth, in order to sustain the emerging economic ‘take-off; (ii) improving access to and quality of basic service delivery, in order to sustain the emerging basic service “take-off; (iii) reducing Ethiopia’s vulnerability to help improve prospects for sustainability; and (iv) fostering improved governance to support progress on the previous three objectives and empower citizens, building on the framework set forth in the 2006 Interim Country Assistance Strategy (ICAS). After eight years o f absence, IFC plans to increase i t s role in helping growth become more private sector-led by reestablishing i t s presence on the ground and beginning more active engagement in key sectors. MIGA too i s exploring new opportunities to support investment in Ethiopia.

The Bank’s assistance strategy. The Bank’s lending and non-lending activities

vii. 391 million, equivalent to $635 mi l l ion at current exchange rates. IDA amounts for FY 2009 - FY 201 1 will depend on the finalization o f IDA 15 arrangements, Ethiopia’s policy and institutional performance relative to other countries, portfolio quality, per capita income levels, and population. The guiding principle behind the selection o f IDA interventions will be the extent to which they can contribute in a demonstrable manner to the 26 core outcomes that will measure the Bank’s performance in reaching the CAS’S strategic objectives.

The Bank’s program for FY 2008 i s based on an initial IDA allocation o f SDR

... viii. Though ambitious in scope, the pursuit o f the CAS’S strategic objectives may be aided by opportune current trends, which suggest that Ethiopia may be breaking with the past in important ways. Many opportunities for change are embedded in the broad strategic directions articulated in PASDEP-including the opportunities provided by the current process o f deepening decentralization, plans for economic empowerment o f women and youth, and an emerging shift in the dynamics at local government levels, with a younger generation o f more educated and open administrators. In certain areas, such as

.. 11

reforms in the banking and telecommunications sectors and the encouragement o f more private sector investments in infrastructure, there are some differences o f views between the Government and the Bank on the approach. The Bank will continue a dialogue with Government to seek to narrow the gap between these differing views.

ix. seems inevitable that there will be another severe weather-induced shock sooner or later. The increasing export orientation o f Ethiopia’s economy also makes it less immune to a slowdown o f the global economy. Moreover, there are sources o f regional instability in the Horn o f Africa that could embroil Ethiopia in armed conflicts. Ethiopia’s ability to avoid costly shocks where possible, and minimize the impact o f adverse events, will be critical in protecting the current virtuous circle o f development progress. The Bank has built (and will continue to build) flexibility into i t s lending portfolio so that it i s better able to help Ethiopia cope with external shocks. Finally, Ethiopia i s in some ways s t i l l a post-conflict nation (having experienced two major conflicts in the last two decades), with many unresolved political tensions. The country’s ability to find peaceful ways to overcome the inherent risks, while maintaining i t s focus on poverty reduction, will be another important challenge. Some o f these r isks are clearly political or have strong political elements. The Bank will continue to work closely with the broad international community to help mitigate such risks, while playing a leading role in advancing the core development agenda in a way that i s increasingly harmonized.

Risks. Impressive as economic performance has been for the last four years, it

... 111

COUNTRY ASSISTANCE STRATEGY FOR

THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

I. INTRODUCTION

1. The last World Bank strategy for Ethiopia, the Interim Country Assistance Strategy (ICAS) covering FY2006 and FY2007, was discussed by the Board on May 25, 2006. The ICAS was developed in the aftermath o f the disputed 2005 parliamentary elections, which demonstrated both the promise and the r isks inherent in Ethiopia’s democratic transition. In this context, the strategy aimed to support the Government o f Ethiopia (GoE) in developing and implementing, in consultation with citizens, a strengthened program o f institution building and governance reform that would help in i ts efforts to accelerate pro-poor growth, while simultaneously continuing to improve basic services.

2. basic service delivery. This has been supported by progress in long-term institution building and gradual improvements in governance, perhaps most notably in terms o f the transparency and accountability o f basic service delivery by local governments. Efforts have also been made to improve the functioning o f the parliament in a new environment in which a significant number o f seats are occupied by opposition parties. Still, the political divisions that emerged after the 2005 elections remain strong. At the same time, the last two years have seen some openings that give cause for hope that Ethiopia may be able to transcend these divisions.

Since then, Ethiopia has made impressive strides on both economic growth and

3. (CAS) in FY2008, depending on Ethiopia’s performance on (i) public expenditure management and financial accountability; (ii) civi l service and budget transparency; (iii) fairness and accountability in basic service delivery. With reasonable progress observed in these areas, this CAS, as the Bank’s f i rs t fully results-based strategy for Ethiopia, will aim to support Ethiopia in achieving many o f the outcomes envisioned in i t s Plan for Accelerated and Sustained Development to End Poverty (PASDEP). This CAS covers the period from FY 2008 to FY 201 1, one year beyond PASDEP’s own implementation period. Should there be a major shift in the GoE’s development strategy beyond PASDEP, the Bank will advance the preparation o f the next CAS accordingly.

The ICAS foresaw the possibility o f a return to a full Country Assistance Strategy

11. COUNTRY CONTEXT

A. Political Context

4. Revolutionary Democratic Front (EPRDF) government took power. In this time the EPRDF-led regime has shifted from a rebel movement to a dominant political party. The current government has had notable success in reversing many o f the economically

More than a decade and a half has passed since the current Ethiopian People’s

disastrous policies o f the previous Marxist military regime and implementing a program o f decentralization o f responsibilities for basic service delivery to sub-national authorities. Tentative strides have been made in the long te rm shift from a highly centralized, autocratic environment to an evolving democratic state-though this shift has been characterized by a recurring cycle o f opening and closing o f political space.

5. The current political landscape remains colored by the aftermath o f the May 2005 parliamentary elections. While the country is peaceful and opposition leaders have been released from jail, the r i f t s exposed and deepened during this time are largely unhealed. Opposition parties are characterized by their youth, weak capacity, undeveloped policy agendas, and lack o f broad-based support across ethnic group and geographical boundaries. As a consequence, nearly three years after the disputed elections, the largest opposition grouping, the Coalition for Unity and Democracy Party (CUDP), has split into a number o f discordant factions. Despite the weakened condition o f the opposition, the Government continues to face a trade-off between increasing openness and participation (with likely positive effects for development and growth, at least in the longer term) and an aversion to risking a loss o f stability and control. Effective management o f this tradeoff will pose a significant challenge, with possible implications for Ethiopia’s growth and poverty reduction performance in the coming years.

6. local elections, scheduled for April 13 and April 20,2008, and the next round o f parliamentary elections, scheduled for 20 10. The local elections-which opposition groups have warned that they may boycot t -could be a key step in the process o f democratic decentralization, and may have implications for the legitimacy o f the sub- national governments that hold the responsibility for basic service delivery in Ethiopia’s federal system. Both 2008 and 20 10 elections could not only be o f major importance from a political standpoint, but also from a societal one. The perceived fairness o f the electoral processes will influence whether the societal divisions revealed after the 2005 elections will flare up again, or begin to heal.

The trajectory o f Ethiopia’s democratic transition will be shaped by the upcoming

7. troops remain continue to be engaged in Somalia. While the most likely near-term scenario for both o f these flashpoints i s for a continuation o f the status quo, either situation could escalate abruptly, whereas a resolution would appear to require a much longer process in either case. Domestically, the Ethiopian military i s carrying out an offensive to subdue a rebel movement in the Ogaden area o f the Somali Region. All three o f these situations are closely intertwined, and they individually and collectively have the potential to have severe consequences for development, stability, and economic growth not only in Ethiopia but throughout the Horn o f Africa.

Tensions between Ethiopia and Eritrea remain at heightened levels, and Ethiopian

B. Recent Economic Developments

8. economic growth, although this performance has been accompanied by growing economic imbalances. For the fourth year in succession, Ethiopia’s economy has grown

Macroeconomic context. Ethiopia i s experiencing an unprecedented spell o f

2

at an annual rate o f over 11 percent- an important achievement for a country whose per capita income in 2002/032 was same as in 1972/73. The average Ethiopian now has a level o f income that i s about 43 percent higher than the level prevailing at the end o f the 1990s (figure 1). Yet given the extremely low initial per capita income, the country remains one o f the poorest in the world, underscoring the urgency o f accelerated growth and development on a sustained basis3 Moreover, the economy faces several risks, e.g., double-digit inflation, that imply that the understandable optimism over recent growth should be moderated by caution over the potential threats to sustained economic expansion.

Figure I: Ethiopia’s Per-Capita Income: A Long Term Perspective

I Rea lGDP percapita (Bar, m 1999100 prices)

1,335 4

1,235

1,U5

1,03 5

935

I

2002/03 drought

War with Eritrea

i 835 I , , , , , , , , , , , , , , , , , , , , , , , I , , , , , , ,a, , , , , , , , , , , , , , , ,

9. economy towards a higher growth path. The Ethiopian economy returned to growth in the early 1990s after the overthrow o f the Derg and the end o f i t s repressive economic policies. This recovery was however interrupted by two major shocks: the war with Eritrea from May 1998 to June 2000 and a severe drought in 2002/03 (figure 1). Since then growth has resumed and with a stronger momentum than before. The cumulative impact o f public investment in basic infrastructure, in particular roads, power, telecommunications, and water as well as public spending in education and health have clearly raised the overall productivity o f the economy. Most macro indicators including GDP have recorded growth rates much higher during the 2002/03-2006/07 period than in any comparable period in the past. As shown in figure 2, imports, exports and foreign direct investment grew at annual rates o f 27,24 and 39 percent respectively during the

The current boom i s a combination o f cyclical recovery and structural shi f ts in the

Many dates in this document refer to the Ethiopian Fiscal Year (EFY). In this case, 2002/03 refers to

See “Ethiopia Accelerating Equitable Growth,” Country Economic Memorandum, World Bank Report N o

2

EFY 1995, or July 8, 2002 to July 7, 2003.

368662-ET.

3

2002/03-2006/07 period, compared to 6, -1 , and -14 percent during the 1995/96-2002/03 period.

10. Economic growth has been broad-based. In contrast to the public sector consumption led growth o f the 1990s, rapid growth o f private consumption has been the driving force behind the current expansion-accounting for 8 8 percent o f growth during 2002/03-2006/07 period relative to 54 percent during 1997/98-2001/02 period.' Agriculture, which accounts for 46 percent o f GDP and nearly 85 percent o f employment, has grown at 13 percent per year since 2003/04. The higher agricultural growth has come largely through increased area expansion (following the 2002/03 drought) as well as though higher yields in selected crops. This has helped Ethiopia to gradually diversify i t s exports to non-traditional products l ike flower and agro-based products. The services sector, which accounts for 42 percent o f aggregate output, has grown at 12 percent per annum during the last four years-helped by rapid growth o f financial services, retail trade and transport and communication sectors. The industrial sector, which i s the smallest o f the three sectors o f the economy and accounts for 14 percent o f GDP, has also grown at an average rate o f around 10 percent per annum since 2003/04, with construction sector being the biggest driver o f industrial growth in the country. In the coming years, with i t s large potential for hydropower, Ethiopia i s expected to become one o f the largest producers and exporters o f electricity in the region.

Figure 2: Most macroeconomic indicators including GDP have registered rapid growth in the last four years

Movement of key macroeconomic indicators (Index, 1995/96=0 Average annual growth rate

5 ports of goods

- &-Broadmoney 4 -

3 - Exports of goods

2 -

i -

-+- GDP at market prices (real)

-ForeignDrect Investment

Source: MOFED and :SA

1 1. several factors: improvements in structural policies, strengthening o f economic institutions, and some good luck. Tariffs and non-trade barriers have been significantly reduced, many sectors have been opened for domestic and foreign investors, and land market distortions are being gradually addressed. Regional states have been given

Ethiopia's strong economic performance can be attributed to a combination o f

The decline in private investment as a ratio o f GDP in recent years i s unusual, especially in light o f the rapid growth in foreign direct investment and the visible increase in pace o f private economic activities, especially in the urban areas. Since private investment i s measured as a residual i tem in the national income accounts, the possibility o f it being underestimated cannot be ruled out.

4

considerable autonomy in developing independent economic policies and a more radical devolution process i s underway, moving finances and functionaries to the woreda level. The favorable global environment, generous debt write-off, large and increasing Official Development Assistance (ODA) and remittances, and a long spell o f good weather have all played important roles in moving Ethiopia to a higher growth trajectory, though these favorable factors have been offset to some extent by the rising price o f oil, o f which Ethiopia imports all o f i t s consumption.

12. However, the good growth performance has been accompanied by some economic developments that could pose risks to sustained economic growth and poverty reduction. First, inflation has been in double digit figures for the last three years, with food prices growing at an annualized rate o f 24 percent in recent months. The distributional impact o f food price increase has been mixed.5 Many rural dwellers (most o f whom are engaged in agriculture) have benefited from the price rise, but urban inhabitants have seen a significant increase in their cost o f living. The main factors underlying inflation are: rapid growth o f money supply, rising food demand caused by strong economic growth that has exceeded rises in agricultural productivity, imperfections in agricultural marketing and continued global inflation. The Government has recently announced new measures to combat inflation, including lifting taxes on grains, tightening the monetary supply, and investigating anti-competitive practices by food traders.

13. history shows that this i s unlikely to last indefinitely. Ethiopia should therefore be prepared for a cyclical change in weather that could result in a growth slowdown. In the event o f a rainfall shock, given that output from crops accounts for 30 percent o f GDP, a 10 percent decline in crop production following a drought could reduce 3 percentage points from the GDP growth rate. Major bilateral donors have already announced global cutbacks in food aid due to higher food prices, which could constrain the response to increased food insecurity in a future drought.

Second, Ethiopia has benefited from the long spell o f good weather, but recent

14. from $3 11 mi l l ion in 2003/04. A further 20-30 percent increase in price o f o i l from their current level could increase the import bill by as much as US$175-260 mi l l ion annually. With hard currency reserves having been reduced to only two months o f imports, a further increase in o i l prices could be detrimental to the balance o f payments situation. On the fiscal side, the burden o f fuel subsidies i s becoming increasingly large despite moves in recent years to pass through some o f the global petroleum price increases to consumers. Between July 2007 and February 2008, fuel subsidies amounted to about $23 0 million. Despite the subsidies, consumers (particularly the urban middle class, which i s already being hit by higher food prices) are s t i l l feeling strong direct and indirect welfare impacts from higher fuel prices.

Third, Ethiopia imported nearly US$875 mi l l ion worth o f crude o i l in 2006/07, up

15. economic performance. The authorities face a difficult balancing act o f carefully

Ethiopia will have to work harder than before to be able to sustain i t s current

See ‘Explaining Sources o f Food Price Inflation in Ethiopia. Just in Time Policy Note. November 2007. 5

5

managing monetary policy to bring inflation under control and at the same time maintaining an accommodative environment for continued growth. While the recent economic performance has provided some cushion against future shocks, Ethiopia needs to remain watchful against these emerging risks and take preemptive actions in order to sustain i t s long-term growth potential o f 8-10 percent per annum.

16. by keeping i t s aggregate spending level consistent with i ts total revenue and grants. The fiscal deficit (including grants) fe l l from 3.9 percent o f GDP in 2005/06 to 3.1 percent o f GDP in 2006/07--its lowest level since 2003/04 (see table 1). Fiscal policy has been increasingly counter-cyclical-relatively low deficit during boom times and high deficit during periods o f downturn-a sharp contrast to the pro-cyclical fiscal policy seen in most developing countries. Ethiopia's expenditure performance generally has been strong - especially on pro-poor spending and reduction in debt obligations. As shown in table 1, pro-poor spending has been high and rising, and represents among the highest efforts among all l ow income countries. Government has also managed a high level o f fiscal discipline by ensuring that the deviation between the budgeted and actual deficit i s kept small. More than hal f o f i t s total spending i s for investment purposes (approximately U S $ 2 billion), an indication o f the huge scale o f infrastructure in roads, energy, irrigation and the urban sector that are likely to be available soon to support the current growth momentum.

Fiscal context. In recent years, Ethiopia has maintained a prudent fiscal stance

Table 1: Ethiopia's Government finances, in percent of GDP

- .- _-._ . l_ll

Revenue Tax revenue

External grants Expend it ure

Poverty sectors spending Fiscal balance, incl. grants Fiscal balance, excl. grants External financing

2002103 15.9 11.2 5.0

28.0 12.2 -7.1

-12.1 4.3

2003104 16.1 12.6 4.6 23.7 11.8

_ _ -

-3.0 -7.6 2.8

2005106 2006/07 2007108* 2004/05 14.6 11.6 4.3 23.3 13.2 -4.4 -8.7 2.2

. _ " _ _ ^ I _ I

Source: MOFED and IMF * IMF esfimate.

14.8 10.8 3.6

22.3 13.9 -3.9 -7.4 1.1

12.8 10.2 6.4

22.2 13.1 -3.1 -9.5 1.1

14.4 10.4 5.7 24.5 14.6 -4.4 -1 0.1 1.6

17. Debt. Following debt relief through the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in 2004 and the Multilateral Debt Rel ie f Initiative (MDRI) in 2006, the net present value o f external debt relative to GDP has fallen to 6 percent and to exports at 36 percent, far below the thresholds that signal unsustainability. Domestic debt i s relatively small at 28 percent o f GDP and new external debts have been contracted mostly on concessional terms, conducive to debt sustainability.

6

C. Poverty Context

18. standards o f i t s citizens. Household survey evidence suggests that between 1999100 and 2004/05, real total expenditure per capita grew by 19 percent (1 5 percent with respect to 1995/96). This has resulted in significant reductions in poverty: the headcount fe l l by 12.4 percentage points between 1999/00 and 2004/05, and by 18.5 percentage points since the mid-1990s (see table 2). The poverty headcount ratio must have declined further following three years of double digit growth after the 2004105 household survey. Despite this progress, monetary poverty remains a significant challenge, particularly considering that around 25 mi l l ion people thought to be living below the poverty l ine in Ethiopia.

Over the past decade Ethiopia has made significant strides in improving the l iving

Table 2: Trends in monetary poverty and inequality, by area of residence (Percent of households)

National 199516 199910 200415

National Dovertv line

Depth of Poverty 13 12 8

Headcount 46 44 39

5 5 3 Severity of Poverty

0.29 0.28 0.30 Gini Coefficient

Rural 199516 199910 200415

48 45 39

13 12 9

5 5 3

Urban 199516 I99910 200415

33 37 35

10 10 8

4 4 3

0.27 0.26 0.26 0.34 0.38 0.44

Sources: PASDEP, HICES survey 1995/96, 1999lOO and 2004/05.

19. Progress in poverty reduction across urban and rural areas has been uneven6. While urban areas contributed an estimated 60 percent o f economic growth over the decade up to 2004/05, they saw stagnant poverty reduction. This seems to have been driven by a “U-shaped” incidence o f growth, with households both in the top and bottom twenty percent o f the distribution experiencing strong and positive growth, with l i t t le or even negative growth for the middle o f the distribution. This resulted in l i t t le growth around the poverty line, and raised income inequality. It seems likely that urban areas o f different types fared differently over the period - indeed evidence from panel data in the seven largest cities points to uneven trends in inequality across urban areas, and to a greater variability in the inequality trends than i s revealed by national household surveys.

20. The determinants o f such a rise in inequality in the context o f increased urbanization are currently being investigated. Available evidence points to labor market developments (such as the slow-down in creation o f manufacturing jobs, the growth o f informal sector), changes in the urban demographic structure (with an increase in the

The full impact o f recent growth acceleration on poverty and income distribution i s not known yet since there has not been any household survey in Ethiopia after 2004105. Since the last survey, there have been three more years o f double-digit growth and i t s impact on poverty i s expected to be sizeable.

7

number o f dependants in urban households) and the effects o f internal migration all as possible drivers o f these developments. Changing returns to assets, and particularly to primary education (with a growing number o f heads with completed primary education living in poverty), might have also driven the rise in inequality. While no household data for the period after 2005 are available, simulations suggest that the recent increase in food prices might have significantly contributed to worsening the welfare o f the urban poor over the last two years.

2 1. where, given the low urbanization rate in Ethiopia, nearly 80 percent o f the poor live. The 6 percentage point decline in rural poverty between 1999/00 and 2004/05 suggest that those at the low tail o f the distribution have been able to benefit from agricultural growth. After a decade o f balanced growth across all income groups, inequality has remained low and stable in rural areas, with a Gini coefficient o f 0.26. Panel data, however, reveals greater heterogeneity in these trends, with significant income mobility and reversals o f fortunes over the decade up to 2005 in rural areas. Further, even areas growing high potential export crops (such as coffee or chat) were found in some years to experience higher poverty, due to the drought. It seems likely, therefore, that the muted impact o f the high growth that Ethiopia started experiencing since 2003/04 partly reflects the high vulnerability that continues to characterize rural areas.

Despite less rapid growth, poverty reduction has been more marked in rural areas,

22. The progress in reducing poverty i s mirrored in significant gains in human development indicators, with all key Millennium Development Goal (MDG) indicators showing substantial improvement. The headline achievements for education, health and water sectors include the following (see figure 3):

Gross primary enrollment (GER) for grades 1-8 rose to 92 percent in 2006/07, compared to 80 percent in 2004/05 and 62 percent in 2001/02;

Some underserved regions l ike Afar and Somali have experienced the highest increase in enrollment;

There has been considerable reduction o f the gender gap for primary schooling - defined as the ratio o f girls to boys - from 0.87 in 2004/05 to 0.93 in 2006/07 for grade 1-4 and from 0.69 in 2004/05 to 0.78 in 2006/07 in grade 5-8;

Similar improvements have been recorded in the health sector, though information for the most recent years i s not yet available. Between 1999/00 and 2004/05:

P Infant mortality rate has fallen from 97 to 77 per 1,000; P Under-five child mortality has been reduced from 166 to 123 per 1,000 P L i f e expectancy at birth has increased from 49 to 5 1 years; P Immunization coverage has improved from 30 to 54 percent and DPT3

coverage has increased from 5 1 to 76 percent; P Distribution o f insecticide treated bed nets increased from about 3 mi l l ion

in 2005 to 18.2 mi l l ion in 2006, and deaths from malaria decreased from 110,000 in 2005 to less than 60,000 in 2006; and

P Household access to water has risen from 29 to 36 percent.

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Some o f these improvements have been supported by the pilot Citizens Report Card (2004), which reported improvement in access to services, increased voice o f the users and greater citizen satisfaction with public service delivery in Ethiopia.

Figure 3: Impressive Improvements in Human Development Indicators

Education Indicators - Changes between 2004105 and 2006107 Health Indicators - Changes Between 2000 and 2005 180 7

160

140

120

100

80

60

40

20

0 Net enrollment rate Net enrollment rate Primary School Secondary school Infant Mortality Rate Child Mortality Rate Stunting (under 5)

for grade 1-4 for grade 5-8 girlsboys ratio, gidslboys ratio, (per 1000) (per 1000) grade 1-4 grade 9-10

" ""

Source: Government o f Ethiopia, World Development indicators and Staff estimates.

23. Despite the recent socio-economic progress, significant challenges remain and new ones have emerged. Gender disparity i s an example o f a persistent challenge: in rural areas female-headed households are more likely to be poor, and are also more likely to stay poor over time than their male-headed counterparts. Further, despite a massive increase in female enrolment in secondary education, a powerful means to escape poverty, the gender gap has widened.

24. urban areas, though it remains a major concern. However, signs point to increasing infection rates in rural areas, particularly small towns, which i s o f serious concern since the large majority o f the population l ives outside o f urban areas. Rural prevalence varies among regions, with most regions having a relatively l ow prevalence o f HIV, but a few demonstrating prevalence rates greater than five percent. One o f the most critical manifestations o f the epidemic i s the rising number o f HIV/AIDS orphans, thought to number 750,000 in 2005.

The HIV/AIDS epidemic appears to have stabilized and may even be declining in

25. While vulnerability i s very high in both urban and rural areas, there are concerns about the persistence o f poverty in rural areas. This appears to be driven by the low productivity o f subsistence agriculture, increasing fragmentation o f rural land-holdings, the risks posed by soil nutrient depletion and environmental degradation, and the difficulties in connecting farmers to markets and providing them with market information. The l o w levels o f inequality identified in rural areas might also reflect the difficulties o f generating real dynamism and opportunities for diversification outside o f agriculture, as non-farm employment remains associated with greater poverty and vulnerability.

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111. ANALYSIS OF DEVELOPMENT CHALLENGES

A. Central Challenge in the Short to Medium Term

26. Poverty Reduction Program (SDPRP) and PASDEP , Ethiopia has achieved significant results in economic growth and provision o f basic services. Indeed it seems that Ethiopia may be experiencing not only the possible beginning o f an economic take-off, but also what might be called a ‘service delivery take-off..’ The basic challenge for Ethiopia at present i s to sustain the dual take-off process that appears to be getting underway. Looking ahead, it i s clear that Ethiopia needs to contend with a number o f challenges in this regard.

Under its two poverty reduction strategies, the Sustainable Development and

27. human resources over the last decade, the economy has achieved an unprecedented level o f economic growth over the last four years. Sustaining the rapid growth and creating large numbers o f jobs are critical for not only poverty reduction but also social and political stability. The sustainability o f this impressive growth, however, i s not assured. Ethiopia will have to address several challenges in both the short and medium term.

Economic take-offi Having invested heavily in physical infrastructure and

28. already pointed out in the economic developments section. With strong demand stimulus, driven both by the general rise in incomes and ambitious investments, inflationary pressure has built up. Moderating this without derailing the growth process, especially in the context o f rising international prices on petroleum, grains, construction materials, fertilizers, and other key commodities, will demand sk i l l fu l stewardship o f macroeconomic policies. Possible turbulence in the global economy as well as any weather-induced shock could further complicate this task.

In the near term, macroeconomic management will pose a challenge, as was

29. public investment has increased from 12.8 percent o f GDP in 2002/03 to 18.2 percent in 2006/07, private investment has fallen as a share o f GDP, from 9.0 percent to 6.7 percent7. Given the immense needs for infrastructure investment, this increase in public investment i s appropriate and has contributed to accelerated growth. In the longer term, however, private investment needs to grow more rapidly to sustain rapid growth. Despite some adverse developments (such as high prices o f o i l and construction materials), it seems that external factors have been on balance favorable (good weather, r ise in remittances and aid, buoyant commodity prices, economic globalization, move toward regional integration, etc.) and have also contributed to the current economic boom. Many high growth episodes have benefited from such accidental factors in the init ial stages. However, turning such serendipitous beginnings into a virtuous circle o f sorts requires a set o f sound policies.

In the medium term, Ethiopia will have to face some structural issues. While

As noted earlier, private investment i s measured as a residual item in national income accounts and therefore the limitations o f the data should be noted. The possibility o f private investment being underestimated cannot be ruled out.

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30. Heavy investment in recent years has created many new economic opportunities for the private sector, yet the private sector has not responded as strongly as could have been hoped. Eliciting a more robust supply response therefore must be at the heart o f the growth agenda. GoE policies have tended to favor a narrow range o f industries and larger investors. There i s a strong case for creating a more level playing field for all investors. This i s l ikely to help Ethiopia sustain rapid growth and make the economy more resilient to external shocks.

3 1. as the mainstay o f their livelihoods, Ethiopia needs also to raise the productivity o f agriculture to broaden the base o f growth. The Government has recognized this by making agriculture a central focus o f i t s development strategy. Yet, overall productivity in this sector has not grown significantly,' leaving a large number o f households chronically dependent on food assistance. In order to raise the bottom o f the growth base, stronger support to the agriculture and livestock sectors seems warranted. At the same time, Ethiopia's infiastructural endowment remains l ow despite recent increases in levels o f investment, so Ethiopia clearly needs to continue investing in expansion and upgrading o f basic infrastructure as well.

Given the reliance o f the majority o f the population on agriculture and livestock

32. For growth to be inclusive and poverty reducing, Ethiopia will need to address three special issues. First, some 8.3 mi l l ion Ethiopians remain more or less perennially dependent on food security programs, and several mi l l ion more are susceptible to food insufficiency in the event o f adverse climatic shocks. They tend to be in very weak positions to share in the benefits o f rapid macroeconomic growth. Building on existing programs such as the Productive Safety Nets and the Food Security programs, a more comprehensive strategy needs to be developed to l i f t this most vulnerable segment o f the population out o f the poverty trap and put them on a sustainable path toward better economic lives. Second, a rapidly growing number o f young Ethiopians with high school level education face unemployment. Likewise, despite significant progress in the social outlook on gender issues, women remain at a disadvantage in pursuing economic opportunities. If the country i s not able to engage these two groups in more productive economic activities, the result would be an immense waste o f resources, a loss o f growth, as well as possible social tensions. Third, though much smaller in scale, there i s growing evidence that poor households in urban areas experience serious food shortage and other stresses. While the rural poor have been supported by various safety net programs, their urban counterparts have not received comparable help. With rural-urban migration increasing, providing some form o f safety net for this group as well may be important.

33. Service delivery take-ofl: Through massive increases in pro-poor spending, rudimentary infrastructure has been put in place for basic education, basic health care, and agricultural services. Moderately trained front-line service providers (teachers, development agents, and health extension workers) are in place at the kebele (ward) level. Supported by the Protection o f Basic Services (PBS) Project and the Public Sector

There are, however, many small pockets where effective extension services and introduction o f technology have raised productivity sharply. The key i s to expand such successes more widely.

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Capacity Building Program (PSCAP), decentralization has played a critical role in this process. This has improved access to basic services at an unusually rapid pace and to a very significant extent, but quality remains a concern. Yet, there i s a widespread sense that with a few more resources and greater space for local decision making, not only access but quality, too, can begin to improve sharply. I t appears that Ethiopia may be on another path o f take-off, but to achieve significant improvement in these services on a sustained basis, a number o f challenges need to be met.

34. Continued enhancement o f good governance will be key to this take-off. Whi le the overall trends have been very encouraging, it i s clear that the results vary significantly across localities. Given the l o w base o f administrative capacity and the long history o f autocratic governance in Ethiopia, this i s hardly surprising. But, it does mean there i s a need for continued capacity building for both local institutions and citizens. Particularly in a situation o f fledgling democratic processes, with relatively l ow administrative capacity, i t i s important to mobilize the energies o f a range o f c iv i l society organizations (CSOs) as well. They can help to strengthen the voice o f common citizens, as well as supplement governmental capacity in service delivery.

35. Despite the sharp expansion in budgetary resources for basic services at the local levels, there remain large unmet needs for both completing the access agenda and beginning to make significant headway on quality. Securing the financial resources will be a major challenge. Thus far, expansion o f the local budgets has rel ied primarily on rapidly increasing transfers from the Federal Government (supplemented by strong donor support). Although this relationship may not change in the near term, local governments will have to step up their efforts to strengthen their own revenue bases, so that in the longer term, they will be able to finance significant portions o f local services and local investments out o f their own revenues. Developing such revenue streams will at least in the long run also give local governments an ability to borrow against future revenue streams.

36. Although Ethiopia i s often thought to be one o f the least corrupt countries in the region, there are concerns that corruption may be growing. The increasing resource flows in both the public and private sectors, the windows o f opportunity created at local levels by decentralization, and the identification o f a few but increasing number o f instances o f corruption, all suggest the need for better understanding o f the scale and nature o f corruption, more effort to monitor hotspots and trends, and to generally increase vigilance.

37. human capital needed to support the diversification o f the economy into new areas, including in agriculture. Improvement in the effectiveness o f agriculture and livestock extension services can also have an immediate and direct impact on growth. In turn, continued growth will allow GoE to raise much needed additional resources to improve basic services, and improved economic opportunities will raise the demand for better quality education. Thus the two take-off processes are mutually reinforcing.

Continued improvements in service delivery will be critical in producing the

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B. Long-Term Challenges

3 8. will have to cope with a set o f long-term issues around rapid population growth and environmental vulnerability. Although the total fertility rate has begun to decline (5.9 in 2000 and 5.7 in 2005), it remains high. For Ethiopia to reap the economic benefits o f a ‘demographic bonus’ arising from an increase in the relative size o f the working age population due to a rapid drop in fertility, the process o f demographic transition needs to accelerate. In this regard, i t i s well established that girls’ education plays a particularly important role. In the meantime, however, rapid population growth has led to a halving o f average land holding in the rural areas since 1960, to a level that i s generally considered subsistence level at best. Furthermore, population pressure has also led to degradation o f farm land as well as much o f the watershed areas. This in turn has made vast numbers o f rural households increasingly vulnerable to climatic shocks, thereby encouraging unsustainable exploitation o f natural resource^.^

To make the task o f sustaining the dual take-off more challenging sti l l , Ethiopia

39. The environmental threat that Ethiopia faces today i s increasingly recognized. Sustainable land and water management will have to be at the center o f any comprehensive response to this long-term challenge. Although good beginnings have been made to reverse this vicious circle (for instance through the Productive Safety N e t Program, the proposed Land Management Project, and the proposed Tana Beles Integrated Water Resource Development Project), far more needs to be done. Such efforts will also help Ethiopia cope more effectively with the impact o f climate change. Integral to such an endeavor will have to be a long-term strategy to shift large numbers o f rural people o f f the land and out o f agriculture, and to help those who remain in agriculture to move into high-productivity, more commercially oriented agriculture or agro-industries.

40. separated from i t s attempt to break from the strong centralization (and top-down) tendencies o f the previous regimes, which had marginalized local voices, suppressed regional diversities, and contributed to the c iv i l war. The Government views decentralization as the main strategy to address such grievances, and assure peace and better service delivery. Still, the deep-rooted tradition o f top-down decision making as well as the social norms that generally accord women a l ow status do pose significant obstacles to decentralized democratic processes that are meant to improve accountability and transparency at the local levels. Aware o f this, GoE has emphasized a wide range o f capacity building programs. In the sphere o f economic management, too, GoE was faced with the legacy o f a highly centralized, top-down system that allowed l i t t le space for private or local initiatives. While seeing the expansion o f the private sector as the strategic response, GoE has approached it in a measured and deliberate manner. Initially, i t has tended to focus more on a directive role o f the state. As GoE moves toward creating an increasingly open environment for the private sector, it may again face the tradition o f control-oriented government institutions. In both o f these broad areas, i.e.,

Finally, Ethiopia’s economic development efforts since the 1990s cannot be

Unsustainable use o f water resources i s taking place more generally, for Ethiopia lacks a system o f 9

integrated water resource management for the most part.

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decentralization of public services and private sector development, how the legacy o f central control, top-down tendencies, and hierarchical social norms may hinder the change process requires further analysis and careful tracking over time.

C. The Challenge and Promise of Regional Cooperation

41. Ethiopia inhabits a difficult neighborhood, which has seen numerous domestic and cross-border conflicts in recent years. At the same time, i ts economic fortunes are closely linked with neighboring countries in a number o f ways. First, as a landlocked country since the independence o f Eritrea in 1993, Ethiopia i s reliant on i t s neighbors for access to the sea, and hence, for much o f i t s access to global markets. While Djibouti had been the main outlet to the sea for Ethiopia starting from the opening o f the railway linking Addis Ababa to the former French colony in 191 7, it was overtaken by the port o f Assab, now in Eritrea, which came to handle up to 90 percent o f Ethiopia’s international trade from the 1970s to the 1990s. However, with the outbreak o f war with Eritrea in 1998, Djibouti recaptured the entirety o f Ethiopian sea trade. While the quality o f roads linking Ethiopia and Djibouti has steadily improved, the aging railway l ine continues to operate short o f i t s full potential, posing a constraint to trade. Ethiopia’s landlocked status also means that i t s access to undersea internet backbone cables depends on regional cooperation.

42. large potential for hydropower and irrigation. The N i l e Basin Initiative (NBI), bringing together all 10 N i le riparians to cooperatively develop the N i l e River as a common resource, represents a major breakthrough that can help enhance Ethiopia’s ability to make use o f the waters o f the Nile, in ways that can also benefit other riparians. The current-and most ambitious-phase o f the NBI agenda involves a push to ro l l out large- scale, cooperative investment projects. I t includes major opportunities for large-scale power generation and transmission, irrigation, flood control, and watershed management. Efforts are also underway to finalize a ‘Ni le Cooperative Framework’ treaty that establishes principles and a permanent N i l e River Commission-a prerequisite for sustained cooperation, as well as for publidprivate financing o f N i l e investments.

Second, historical circumstances have limited Ethiopia’s ability to develop i t s

43. neighbors, particularly in specific areas o f comparative advantage. Though Ethiopia i s part o f the Common Market for Eastern and Southern Africa (COMESA), COMESA countries account for only about 10 percent o f Ethiopia’s total trade (of which 5 percent i s Djibouti, and the rest mainly Sudan, Egypt, and Kenya). This appears to be due in large part to similar production structures, inadequate infrastructure, and lack o f information on trade opportunities. A major opportunity for growth in regional trade i s in exports o f Ethiopian hydropower to neighboring countries, many o f whom face high power costs, shortages o f electricity, and a reliance on carbon-based generation. At the same time as Ethiopia could reap high returns from such trade, i t will also allow investments on a larger scale (and therefore at a lower average cost) than could otherwise be realized. Ethiopia i s moving to link i t s power grid to Sudan and Djibouti

Third, increased regional trade has the potential to benefit Ethiopia and i t s

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soon, and a connection to Kenya i s envisaged in the medium term. For other overland regional trade, a key priority will be improving road transport linkages to neighboring countries.

44. Finally, cross-border issues in agriculture and health pose special challenges that can only be addressed with collaboration between countries in the region. Diseases such as HIV/AIDS and malaria, for example, do not respect international boundaries, and therefore international cooperation must be part o f an effective strategy to combat them. The IGAD Regional HIV/AIDS Partnership Program (IRAPP) i s one example. Similarly, cross-border migrations o f crop pests, livestock diseases, and other threats such as locusts can threaten domestic agriculture. Moving from regional r isks to regional opportunities, there are clear benefits to regional cooperation in agricultural research and in setting priorities, as under the Comprehensive Africa Agriculture Development Program (CAADP), under NEPAD".

45. but can also build greater interdependence, which could reduce the likelihood o f intra- regional conflict. In both respects, it can be a key factor in helping to sustain Ethiopia's recent economic growth.

Deeper regional integration in these areas can not only bring economic benefits,

IV. ETHIOPIA'S DEVELOPMENT STRATEGY

46. strategy (PRS), known as the Plan for Accelerated and Sustained Development to End Poverty (PASDEP). Over time, the PRS has become established as the overall government strategy for development. PASDEP shows a strong vertical coordination o f sectoral strategies with the overall government strategy and i s well integrated with the budget through the Macroeconomic and Fiscal Framework (MEFF) and the Joint Budget and Aid Review (JBAR) prepared by Government and donors.

Overview. Ethiopia i s currently implementing i t s second poverty reduction

47. scaled up development assistance and large domestic investments targeted at eliminating the poverty traps that have hindered the development o f the country. This vision shows great elements o f continuity with the f i rs t PRS (SDPRP, the Sustainable Development and Poverty Reduction Program) in areas such as infrastructure, human development, rural development, human security and capacity building. However, significant new elements have been introduced, namely an explicit link with an exercise on what it would cost to achieve the MDGs in Ethiopia. New elements also include a renewed focus on growth, specifically in the areas o f private sector and urban development, industry and the commercialization o f agriculture. These innovations reflect both new thinking on the need to rebalance the growth strategy and some developments, such as the private-sector

PASDEP's strategic vision i s one o f rapid and sustained growth primarily through

Under CAADP, Af i ican governments have committed to address issues o f growth in the agricultural sector, food security, and rural development, and to significantly increase the share o f national budgets allocated to agriculture.

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led growth in the floriculture sector and the apparent stagnation in urban poverty reduction. PASDEP priorities in key sectors are summarized in the following paragraphs.

48. predominance o f subsistence agriculture, characterized by poor land management and a limited resource base, the l ow supply and dissemination o f technology, the limited flow o f information and inadequate implementation capacity as some o f the major problems in the sector. To address these issues, PASDEP focuses on human resource development, technology, and economic infrastructure in the context o f a strong enabling environment for private sector activity and improved infrastructure. The interventions identified under PASDEP include: training programs, the introduction o f appropriate technologies and marketing systems with a strong push on marketing cooperatives, measures to improve land use and the conservation o f natural resources, improved access for farmers to agriculture inputs, markets, rural financial services, and improved security o f land tenure. Investment priorities will be based on the CAADP framework.

Market based development of agriculture. The strategy identifies the

49. Private sector development. PASDEP emphasizes the integration and interdependence between the agricultural and industrial sectors as key to the country’s economic development and to the expansion o f the service sector. The Industrial and Trade Development Policy Strategy under PASDEP aims to ensure export oriented development by providing support to the private sector, coordinating and guiding the activities o f all stakeholders and addressing market failures. Central to the program i s an active industrial policy, based on selective interventions in strategic sectors. Selected value chains and clusters are targeted, following the highly successful example o f the floriculture sector, where interventions targeted at technology, coordination and market failure were directed by public-private partnerships. Infrastructure, power generation, and construction and supply opportunities are also highlighted in PASDEP as high potential areas for private sector participation, and so are the social sectors based on the substantial growth o f private schools in urban areas.

50. effective public services to urban residents, with particular emphasis on regional equity. The strategy i s built on four pillars: support for micro and small enterprises and job creation, integrated housing development, improved access to land infrastructure, transport, and services, and promoting urban-rural and urban-urban linkages. A priority that cuts across all four pillars i s the on-going effort to strengthen urban governance.

Urban development. Under PASDEP, the strategy i s to provide efficient and

5 1. electricity, water and telecom services (along with their maintenance), are seen as central to the growth agenda and contain strong elements o f continuity with the past, particularly in the road sector. A major innovation i s a large-scale rural electrification program, the Universal Electrification Access Program (UEAP). Under UEAP access will be extended to 24 mi l l ion people, reaching penetration o f 50 percent o f the country over five years. Further, during the PASDEP period 11 electric power generating stations will be constructed with a total capacity o f 4,091 MW. PASDEP through the Universal Access Program for water supply and sanitation services (WaSH-UAP), aims to provide access

Infrastructure. Road network expansion, as well as increased access to

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to clean potable water to the entire population and improve sanitation outcome within seven years. I t also aims to promote integrated water resources management with multi purpose water resources development and providing emphasis to irrigation development in an integrated manner. Finally, the strategy’s goal i s for the entire population to have access to telecommunications within a 5 km radius.

52. year sector plan aimed at improving the quality, equity, and relevance o f education, with special emphasis on primary education for all by 20 15, as well as Technical and Vocational Education Training (TVET), teacher’s training and cross-cutting issues such as gender, civic, ethics and HIV/AIDS education. In the area o f health services the Government continues implementing i ts Health Sector Development Program (HSDP) I and 11, and will extend it into HSDP 111 with an increased focus on poverty-related health conditions such as communicable diseases (HIV/AIDS , tuberculosis, malaria) and health problems that affect mothers and children. PASDEP also includes an enhanced focus on nutrition, with a new National Nutrition Strategy (NNS) having recently been approved.

Human development. In education, the Government aims to implement a twenty-

53. Governance. PASDEP includes a number o f interventions to promote Ethiopia’s commitment to open, transparent, and democratic governance. These include: improving the capacity o f Parliament and political institutions through stronger law making and public consultation mechanisms; performing annual public audit reports and implementing systems o f annual disclosure o f accounting and performance information directly to the public; and holding local elections for woreda (district), kebele, and city councils. To ensure human rights protection and enforcement a number o f public awareness campaigns will be organized and human rights legislation and conventions will be published. A comprehensive series o f reforms has been planned under the PASDEP including participatory mechanisms to be established at the local level and many legal and administrative regulations for CSOs to be amended. The performance o f the judiciary will be improved through a computerized database system in courts implementing case management system and judge training programs. The Justice Sector Reform program also includes measures to improve the performance o f the police, prosecutors, and prison system. Specific measures will be instituted during PASDEP to strengthen the freedom o f the press and freedom o f access to information, including issuing o f licenses for community radio operators.

54. VuZnerabiZity. The Food Security Program (FSP), initiated during SDPRP implementation, remains the Government’s strategy to overcome food insecurity and reduce reliance on food aid. The key interventions under the FSP are: (i) building household assets through on-farm activities; (ii) voluntary resettlement from environmentally degraded to more productive areas; (iii) the Productive Safety Nets program, which i s helping transition from food-aid to cash-aid while building community assets; and (iv) promoting non-farm income generating activities. Related efforts include an increased focus on nutrition and putting in place flood preparedness and early warning systems.

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V. WORLD BANK SUPPORT PROGRAM

A. Lessons Learned

55. Ethiopia country team for the period from 2003 to 2007” found several lessons o f experience applicable to the Bank’s program. These include:

A Country Assistance Strategy Completion Report (CAS CR) prepared by the

The enhanced focus on governance in the FY2006 ICAS should be continued in future support, and mainstreamed through the Bank portfolio. For projects under implementation, the Bank and Government will need to continue to apply measures instituted to further enhance transparency and accountability, especially at the local level. These measures include: using clear and transparent criteria for selecting project sites and beneficiaries; ensuring greater involvement o f a broad range o f stakeholders in project preparation and implementation; strengthening M&E systems and operationalizing them in a more participatory manner; and strengthening implementation support, particularly oversight on the fiduciary aspects o f projects. N e w projects should incorporate such measures from the beginning.

The importance of the Bank staying engaged in a constructive manner during slzocks. The Bank’s partnership with Ethiopia i s long-term and events l ike the contested 2005 elections might change the terms o f engagement, but should not radically alter the Bank’s overall involvement in the country. The Bank reacted in a very measured and timely manner by shifting i t s support from general budget support to the innovative PBS project, which allowed the Bank and other donors to act as a stabilizing force and assured continuation in the improvement o f governance and service delivery to poor people.

Recognition of the unique advantages of budget support. Despite the successful shift in financing modalities from budget support to the PBS in reaction to the 2005 crisis, the benefits o f budget support could not be fully replicated by PBS, as a more narrowly focused investment instrument. Budget support provided an important forum for dialogue, especially on issues related to growth and structural reforms. In addition, the multi-donor dialogue fostered by budget support enhanced donor harmonization and reduced transaction costs. These factors argue for the resumption o f Poverty Reduction Support Credits (PRSCs) once donors and Government agree that conditions are appropriate.

The need for enhanced results and monitoring frameworks. The 2003 CAS and the 2006 ICAS contained modest monitoring frameworks that could only give a limited view o f how Bank activities contributed to outcomes. New

The Bank’s program in this period was guided by two strategies: the FY03 CAS and the FY06 ICAS. 1 1

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strategies will need to include a more explicit results chain that l i n k s country goals with outcomes, outputs and milestones in order to facilitate monitoring o f progress at various stages o f the CAS period.

56. World Bank recently completed a Country Assistance Evaluation (CAE) o f the World Bank’s support for Ethiopia from 1998 to 2006. The review recognized the relevance o f the Bank’s CASs to Ethiopia’s development priorities and deemed the Bank’s support for the pro-poor growth strategy i tse l f a success. However, citing what it considered weak outcomes on private sector development and mixed outcomes on governance-and the importance o f these two areas for pro-poor growth-the CAE rated Bank assistance over this period as “moderately unsatisfactory.” The evaluation recommended that the Bank: (i) seek consensus within the country team and with Government on priority areas for support; (ii) restrict i t s interventions to policy dialogue and analytic work (rather than lending) in areas where there were clear policy disagreements with Government; (iii) view private sector development constraints as governance issues; (iv) improve i t s knowledge base on social, political and cultural factors; and (v) continue to work closely with non-governmental stakeholders in Ethiopia. The country team has carefully examined these recommendations, and i s working to identify ways to take them on board in ways that can improve the Bank’s effectiveness.

Evaluations of Bank support. The Independent Evaluation Group (IEG) o f the

57. In 2005, the Bank’s independent Quality Assurance Group (QAG) conducted a Country Program Assessment (CPA) assessing all Bank work in Ethiopia during 2003- 2005. The CPA found the Ethiopia Country Program during FY2003-05 to be satisfactory in all key aspects: responsiveness to government plans and needs, strategic relevance o f analytical efforts and lending interventions, coordination with other donors, the design and quality o f tasks, implementation, and likely impact. The CPA recommended an enhanced focus on agriculture, private sector development, and public expenditure management. It suggested that future scaling up o f ODA and IDA allocations to Ethiopia should be conditional upon demonstrated success in these areas.

B. Strategic Objectives

58. sustain the ‘dual take-off o f growth and basic services by supporting the implementation o f key elements o f the PASDEP framework. This will, however, require addressing a set o f vulnerability issues. A continued focus on governance will be important in building on the progress that has been made, as governance has dimensions that go beyond service delivery and economic management.

The World Bank’s strategy for the period FY 2008-FY 201 1 will aim to help

59. Therefore, the CAS aims to support Ethiopia in achieving four main strategic objectives, consistent with PASDEP: (i) fostering economic growth, in order to help sustain the emerging economic ‘take-off‘; (ii) improving access to and quality of basic sewice delivery, in order to sustain the emerging basic service “take-off; (iii) reducing Ethiopia’s vulnerability to help improve prospects for sustainability; and (iv) fostering improved governance to support the f irst three strategic objectives and citizens’

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empowerment, building on the framework set forth in the ICAS, and with continued emphasis on institutional capacity building. This CAS i s also aligned with several o f the World Bank’s six strategic themes12 and the Bank’s Africa Action Plan.

Box 7; CAS Consultations: Learning from Stakeholders

In November and December 2007, the Country Team conducted extensive consultations with a wide range o f stakeholder groups from the government, the private sector, c iv i l society organizations, academia, donors, opposition members o f parliament, and other community groups. The discussions took place in the capital Addis Ababa as well as in Oromia, Amhara, Gambella and Afar regions. Although different groups naturally brought diverse perspectives, there were also significant areas o f agreement.

Most stakeholders indicated that l i fe in general had become better in the last 3-5 years. Incomes have risen, provision o f infrastructure has improved, and access to basic services has expanded. Nevertheless, serious concerns remained about the quality o f services.

Decentralization, at the level o f formal processes and resource allocation, has gone far, but true empowerment remains more limited. The relationship with the Federal Government tends to be experienced as ‘top down.’ Many local governments and communities feel they know their own solutions to the local problems but lack the resources and clear decision rights to implement them. These concerns were particularly prominent in remoter regions.

Many participants were eager for more economic opportunities. Many in women’s groups have already had some exposure to micro-credits and saw great potential in their expansion. Youth groups too were keen to have more access to such support.

Though improved significantly, biases against women remain widespread. Economic empowerment o f women would be critical in addressing such biases.

There remain concerns about the lack o f space for open political discourse. While recognizing the complexity o f the democratization process, many fe l t that more openness i s needed to strengthen transparency and accountability o f the government at all levels.

60. opportunities for change that appear to be present in Ethiopia today. Such opportunities could help make a break with the past. Many o f these opportunities for change are quite consistent with the broad strategic directions articulated in PASDEP-including those provided by the current process o f deepening decentralization, plans for economic empowerment o f women and youth, and an emerging shift in the dynamics at local government levels, with a younger generation o f more educated and open administrators, who may receive added legitimacy through the upcoming local elections. In other areas, such as banking and telecommunications reforms and increased private sector investment in infrastructure, the Government and the Bank have differed on the modalities and the

The pursuit o f these strategic objectives will be aided by a number o f

l2 The CAS contains major efforts on three o f the Bank’s six strategic themes: the Poorest o f the Poor, Knowledge and Learning, and Global Public Goods. The other three themes are: the Arab World, Middle- Income Countries, and Fragile and Conflict States.

20

pace at times, though not so much on the eventual goal. Changing circumstances may present new opportunities to re-examine these issues and help deepen reforms.

C. CAS Lending and Non-Lending Program

6 1. Instruments and selectivity. The CAS aims to maximize the impact o f the Bank’s assistance in Ethiopia through: (i) IDA credits and grants, primarily in the form o f investment projects, but also with the possibility o f development policy lending if there i s consensus between the Government, Bank, and partners that conditions are appropriate; (ii) analytical work, policy advice, and technical assistance; (iii) increased involvement o f other institutions o f the World Bank Group, with IFC planning to reopen an office in Ethiopia; (v) capitalizing on the increased scope for regional initiatives since the N i l e Basin Initiative (NBI) has matured to the point that significant new opportunities are available; and (iv) leveraging financial resources beyond the country allocation through partnerships and donor coordination.

62. In terms o f sector focus, GoE has requested based on PASDEP resource requirements that about 50 percent o f the lending should be for ‘infrastructure’, 30 percent for basic services (mostly through PBS), and the remaining 20 percent for other interventions including capacity building and certain “catalytic” investments that can leverage significant donor financing or support key policy directions. This framework will continue to guide the Bank in selecting future areas o f focus (see Annex 2) on selectivity o f the lending program. After FY2008, the lending program i s expected to become increasingly selective, with fewer and larger projects, to ensure careful preparation and strong implementation. For example, while the FY2008 pipeline includes eight projects with an average size o f about $80 million, the FY2009 pipeline will consist o f four projects averaging $155 mi l l ion (see Table 5). The CAS also aims to strengthen selectivity in relation to other donors. In jointly-supported projects, the Bank will focus on foundational aspects (such as the sector framework, or the bulky part o f funding), while bilateral donors may focus more on extensive institutional support or components that require specialized implementation ski l ls . In many sectors, this division o f labor has already allowed productive collaboration.

63. further toward a sector-focused, programmatic approach. Already, three large-scale multi-donor programs, viz., PBS, PSCAP, and PSNP, form an important part o f the program (accounting for nearly one-third o f the current IDA commitment) and will continue to be the backbone o f Bank support to basic decentralized service delivery and safety net. In the road sector, too, a well coordinated investment program has emerged (accounting for a quarter o f IDA commitment). In this CAS period, the Bank will seek to shif t support to increasingly programmatic approaches (whether through sector-wide support instruments or PRSCs) in areas such as water supply and sanitation, access to electricity, urban development, rural development, and private sector development. Nevertheless, there will be areas where a project-based approach, even in a sector with a sector-wide program, will be more appropriate (typically to support one-off investments, introduce innovations, or facilitate policy focus on new issues). The Bank will be

Lendingprogram. In the spirit o f harmonization, the lending portfolio will move

21

selective in using investment lending to keep the number o f operations contained and reduce the transaction costs for both the Government and the Bank.

64. Two years after suspension o f direct budget support, the international partners and the Government are increasingly recognizing the importance o f resuming this modality o f assistance. Moving gradually toward direct budget support i s an internationally accepted priority for harmonization. It provides important opportunities to engage in policy dialogue on wide-ranging structural issues (such as macroeconomic policy and growth) that are not feasible in conventional investment or even sector-focused operations. Resumption o f budget support will likely require that development partners feel some confidence that the political process in Ethiopia i s able to provide effective validation o f development priorities. Thus implementation o f the local elections in a way that i s broadly seen as free and fair, and continued progress on the PASDEP governance agenda, may be important milestones in moving back to budget support. In terms o f the policy content, development partners seem to broadly agree that addressing key structural issues that hinder more robust growth o f the private sector should be central to the program.

65. means by which the Bank will seek to attain the CAS core outcomes. With the tempo o f development quickened, GoE i s beginning to encounter a set o f challenges in both economic management and structural policies that are new and yet demand urgent attention. This creates a particularly fertile environment for constructive policy dialogue. Hence good AAA work i s likely to have especially high returns. Flagship analytical activities (between four and six per year) envisioned in the CAS period are shown in Table 3. The l i n k s o f these pieces to the specific CAS outcomes are broadly explained in the following section. This l i s t i s not meant to be comprehensive, nor does it contain a number o f policy notes and just-in-time advisory pieces that are anticipated in response to Government requests. Building on recent trends, a growing number o f analytical activities are expected to be undertaken jointly with Government and domestic and international partners.

Analytical work, policy advice, and technical assistance will a l l be important

22

Table 3: Planned Major Analytical Reports

FY2008 FY2009 FY2010 FY2011

Strategic Obiective 1 : Fostering Economic Growth 0 Investment Climate 0 Strategic Review of 0 Eastern Nile Strategic 0 Investment Climate Assessment (ICA) update Road Sector Development Basin Assessment Assessment (ICA) update 0 Rural Investment 0 Making Finance Work 0 Energy Strategy 0 Rural Economy Climate Assessment for Ethiopia Survey 0 Regional Growth 0 Regional Growth 0 Development Policy Reports (Amhara) Reports (Addis Ababa) Review (DPR)

Strateaic Obiective 2 : lmw-oving Access to and Qualitv of Basic Service Delivery

0 Health Financing 0 Service Delivery Quality & Decentralization

Strateaic Obiective 3: Reducina Vulnerability 0 Gender and Poverty Adaptation to Climate

Change

Strategic Obiective 4 : Fostering ImDroved Governance 0 Public Finance Review 0 Public Finance Review 0 Public Finance Review 0 Public Finance Review (annual) (annual) (annual) (annual)

0 Joint Governance Assessment and Measurement (JGAM) 0 Country Integrated

66. CAS Focus Areas and Outcomes. Under each strategic objective, the Bank will concentrate i t s support around a number o f focus areas that are likely to help sustain the dual take-off process and reinforce trends that may be promoting positive societal change. Progress toward the CAS’s strategic objectives will be measured based on performance relative to a set o f 26 core CAS outcomes (see table 4), with between one and three outcomes per focus area. These outcomes have been selected in such a way that satisfactory performance could be said to have been achieved if 70-75 percent o f the entire set o f outcomes are fully attained. The rationale for this approach i s to ensure the appropriate mix o f high-probabilityy but relatively low-impact outcomes, and some lower-probability, but higher-impact outcomes.

67. The guiding principle behind the selection o f interventions i s the extent to which they can contribute in a demonstrable manner to the CAS outcomes. The CAS proposes to have a continual process o f learning and problem-solving in regard to how best the Bank can support Ethiopia to meet the development challenges discussed in section 111. Government, donors, and Ethiopian stakeholders are expected to be key interlocutors in this process. The remainder o f this section lays out the core principles and sectoral strategies that are expected to guide this process, across al l o f the CAS’s focus areas. The detailed linkages between al l ongoing and planned analytical and financial support and the CAS outcomes are presented in the CAS Results Framework in Annex 1.

23

Table 4: Focus Areas and Core CAS outcome^'^

productivity of investment in infrastructure in a sustainable manner

2.3 Enhance citizens’ voice to improve quality of basic services

3. I Reduce exDosure to chronic food insecurity and’shocks 3.2 Address environmental degradation and population pressures

3.3 Support greater economic

__ _ ” ing economic growth

1.

2.

3. Enhance regional integration 4.

Structural and macroeconomic polices are conducive to sustain internal and external balance Strengthen road sector institutions and domestic road construction industry

Creation of an enabling environment to make growth corridor conceot a realrtv

5.

6.

Increase agricultural productivity in selected intervention areas Small town development, rural land management, and rural credit svstems s u ~ ~ o r t rural diversification

7. Improve financial sector performance 8. Improve urban governance 9. Reduce cost of internet service 10. Improved investment climate helps Ethiopia benefit

from increased globalization Quality of Basic Sewice Delive

Substantiallv achieve universal access to mimaw _lll””l -

11. education ahd increase girls’ enrollment ’

12. Increase sustainable access to potable water and sanitation services

13. Increase delivery of key health services: malaria and HIV/AIDS control, vaccination, contraception

14. Improve quality of education 15. Roll-out of the kebele health extension package

leads to improved services 16. Greater use of community radios for improved

service delivery 17. Increase PTA engagement in schools ive3: R 18. Reduce food insecurity 19. 20.

”I ~”

Develop long-term strategy for food security Increase investment in community-based watershed management

21. Accelerate demographic transition 22. Improve access by women and youth to micro

for accountability - - - - - - - - - - - - - - - - - - - - - - in - development - - - - - __ - - prccesseK - _ _ - - Harmonization and Partnerships I 5. I Deepen partnerships and donor 26 Increase donor harmonization through IDA- I harmonization supported multi-donor programs

Detailed indicators with baseline and target information, and the Bank and partner activities expected to 13

support these outcomes, are described in the CAS Results Framework in Annex 1.

24

Strategic Objective 1: Fostering economic growth

68. Support macro-fiscal stability. Ethiopia has a good track record o f macroeconomic management. The Government i s keenly aware that continuation o f this good performance will be a prerequisite for success in attaining PASDEP goals. In coordination with the IMF, the Bank will aim to support the Government in undertaking structural and macroeconomic polices to address domestic imbalances, such as inflation and fiscal pressures, and external ones, including maintaining a competitive exchange rate and keeping the current account deficit within sustainable limits. Given that the Government welcomes well-formulated policy advice, AAA will remain the main instrument for support, though a PRSC may be considered as a means to enable concentration o f policy attention on some key issues. Just-in-time policy advice, such as has been provided by the Bank recently on food price inflation, i s expected to be a valuable tool in this regard. While the sustainability o f Ethiopia’s debt has improved drastically in recent years due to the debt re l ie f granted under MDRI and the enhanced HIPC initiative, the Bank will also work in conjunction with the Government and the IMF to monitor Ethiopia’s debt burden.

69. Accelerate the level and productivity of investment in infrastructure in a sustainable manner. Infrastructure has accounted for a major share o f IDA’S support in recent years, as wel l as GoE’s own public expenditure program. The current strategy will seek to continue this trend, given Ethiopia’s massive infrastructure needs. There is, however, important scope for strengthening the capacity o f both government institutions and domestic contracting industries to quicken project implementation and reduce costs. In the roads sector, the largest single sector supported by IDA, the Bank will emphasize strengthened institutions and a more capable domestic road construction industry. With a sector review, the Bank will seek to assist GoE in developing a more effective strategy to effect such changes. In energy, supporting investments to boost access to electricity will be critical. Since the lumpy nature o f investments in power generation will mean that the sudden boost in generating capacity will not be able to be quickly accommodated with new distribution networks, increasing regional power trade will also be a priority so as to generate export revenues and smooth variability in energy supply. Given the massive investment requirements o f the sector, increased private sector participation in energy finance will be promoted. Policy notes, on-going advice, and lending instruments will be used to support the energy sector.

70. development opportunities between Ethiopia and i t s neighbors that can be exploited. The N i l e Basin Initative (NBI) has been the catalyst for a number o f these opportunities (two IDA investments in irrigation and power trade have already been made possible through the opening created by NBI). The Bank will continue to play the role o f coordinating international support for NBI, and further capitalizing on possibilities for supporting investments made possible by the initiative, particularly in terms o f additional power trade investments, hydropower, water resources management, and flood control. Outside the NBI framework, another promising opening with the potential for eventual Bank

Regionally, there are an increasing number o f potential win-win infrastructure

25

support i s an increased focus on regional transport corridors, particularly in terms o f the proposed Eastern Africa Regional Road Network, involving Ethiopia, Kenya, Tanzania, and Uganda, as well as the rehabilitation o f the Ethio-Djibouti Railway. Ethiopia i s also eligible to participate in the Bank’s $424 mi l l ion Regional Communications Infrastructure Program (RCIP), which aims to increase broadband internet connectivity in East and Southern Africa.

71. Domestically, returns on infrastructure investments can also be boosted by encouraging network effects, i.e. by grouping complementary investments in high potential ‘growth corridors.’ In addition to providing financial support for such investments, the Bank will focus on creating an enabling environment to make the growth corridor concept a sustainable reality, through supporting the establishment o f local organizations in high-potential areas to coordinate investments from the natural resource management point o f view. The Proposed Tana Beles Integrated Water Resource Development Project will be a key instrument to set a working example o f such a vision. A series o f studies on other growth corridors i s also planned, starting with Addis Ababa.

72. Increase productivity of agriculture. Recent agricultural growth has been driven significantly by an expansion in the areas cultivated, rather than by wide-spread productivity gains. Raising the productivity o f agriculture and livestock will strengthen the base o f growth and reduce the food insecurity o f the poor. Priorities for IDA lending and non-lending support will be: (i) continue to build the capacity o f the agricultural extension system and make agricultural research work more demand driven; (ii) help strengthen the rural-urban economic linkages; (iii) support more efficient agriculture input markets to improve availability; (iv) support more physical investment (irrigation, electrification, market access); and (v) improve the land management system to facilitate commercialization o f agriculture and, where appropriate, diversification o f farm households out o f agriculture. In all this, connectivity with the market i s a cross-cutting theme. Value-chain analysis and a study on development o f small towns (which are critical l i n k s between villages and the global markets) will be used as tools to identify specific areas o f policy interventions. Helping

Box 2: Improving labor productivity: from nutrition to

higher education

The Bank’s recent Investment Climate Assessments (ICAs) have underlined that a major constraint on Ethiopia’s international competitiveness i s low labor productivity, which i s estimated to be less than half o f the sub-Saharan Africa average and far below that of developing countries in Asia.

Evidence from the PROFILES project suggests that malnutrition and stunting due to iron and iodine deficiency alone costs Ethiopia as much as 10 percent of GDP in lost productivity per year. Therefore, the Bank wi l l begin a new emphasis on supporting improved nutrition in this CAS period, through Ethiopia’s new National Nutrition Program (NNP).

At the top end of the labor market, the lack of highly skilled workers i s also a constraint on productivity. Continued Bank support for higher education wil l aim to support the ongoing expansion of and quality improvements in the university system. In this regard, raising tertiary completion rates for women i s critical for women’s empowerment.

26

GoE to scale up o f the success stories will be the focus on lending support.

73. strongly supports PASDEP’s expanded focus on private sector and industrial development. The forthcoming Investment Climate Assessment notes a number o f improvements in the investment climate, with Ethiopia now the gth ranked business environment in Sub-Saharan Africa according to Doing Business. On the other hand, several important constraints to private sector development prevent an even greater improvement in the investment climate. In this regard, the Bank will seek to support a less targeted, more open approach to investment promotion (with attention to the role o f the Ethiopian diaspora), an improved enabling environment for small and medium enterprises, and more efficient urban land management systems to allow easier access to land. Access to banking and telecodinternet services are close to the lowest in the world, constraining growth and limiting Ethiopia’s ability to compete successfully in the global market.

Strengthen supply responsiveness of industry and services sectors. The Bank

74. The Bank will seek to support new approaches in these sectors to improve competitiveness, and will explore with Government and donor partners whether renewed budget support could have the potential to anchor broad policy dialogue on such structural issues. Small-scale studies on specific issues in these key sectors and notes on policy options will be used to anchor policy dialogue. The Bank will also support the improvement o f the institutional infrastructure for corporate financial reporting standards and practices, using the Reports on the Observance o f Standards and Codes (ROSC) initiative and a possible IDF grant. Government’s improving overall support for the private sector has made it possible for the International Finance Corporation (IFC), the private sector arm o f the World Bank Group, to decide to reopen an office in Ethiopia after an absence o f nearly eight years. IFC, together with IDA, will aim to help the economic system become more flexible, and can play an important role in improving the availability o f financial services and foreign exchange to the private sector. Periodic Investment Climate Assessment (ICA) updates, with support from the World Bank Institute (WBI) will help track trends in the business climate over time.

Strategic Objective 2: Improving Access to and Quality o f Basic Service Delivery

75. Improved access/coverage of basic services. Ethiopia’s recent ‘take-off in basic service delivery has been driven by the Government’s commitment to boost rapidly pro- poor expenditures at the sub-national level, with support from IDA and donor partners through the PBS project and earlier budget support and sectoral SWAps. By the end o f the CAS period, Ethiopia will have nearly achieved the MDG on universal primary education, l4 and will have made significant progress toward eliminating gender disparities in primary and secondary education, increasing access to potable water, decreasing malnutrition, and increasing delivery o f key health services, such as malaria

l4 Because o f a significant pastoral population, Ethiopia does face a special challenge in reaching a certain segment o f children.

27

and HIV/AIDS control, vaccination, and contraception. PBS, and i ts envisaged successor (‘PBS 27, will continue to pool donor funds in support o f this important process, alongside stand-alone support for nutrition, HIV/AIDS prevention, water supply and sanitation, and support for decentralization at the level o f municipal administrations (with a large focus on urban water supply and sanitation). While water supply and sanitation i s included in the basic services supported by PBS, a stand alone water and sanitation project i s s t i l l planned during the CAS period since local capacity remains inadequate to manage water supply and sanitation services independently. The Bank will focus particularly on strengthening results monitoring with technical assistance so as to improve further enhance the impact o f public spending on basic services. Through the second Multi-Sectoral HIV/AIDS project, the Bank will help address concerns over the potential for a sharp increase in rural infection rates, through support for prevention activities.

76. rapidly in recent years, improvements in the quality o f services have not been as easy to come by. Improving quality will depend on deepening decentralization in several dimensions, for which the Bank will step up support: allowing greater space for local initiatives and local determination o f priorities; increasing non-salary resources at the decentralized levels, and focusing on sustainable building up o f institutional capacity at local levels (e.g., making civ i l service careers more attractive). The Government has fully recognized the need to begin shifting attention from expanding access to improving quality, and in education has developed a General Education Quality Improvement Program (GEQIP), which the Bank expects to support together with donor partners.

Enhance quality of basic services. As access to basic services has expanded

77. means o f improving the quality o f basic services i s through greater involvement o f communities, citizens, and c iv i l society. This can promote enhanced accountability and alignment with local needs and priorities. The Bank will seek to support increased community involvement in service quality improvement (such as Parent-Teacher Associations, as envisioned in GEQIP); expanded statehon-state partnerships for service delivery; increased space for c iv i l society organizations, building on openings such as Civ i l Society Report Cards and PBS component four social accountability activities; and greater media attention as a way o f improving transparency and accountability in public service delivery. The Bank will undertake deeper analysis o f social dynamics around citizen participation in public decision making and try to contribute to improvement in a number o f programs that involve citizens and communities. Independent community radio service can also help improve service delivery quality, if used as a vehicle for promoting awareness and social accountability.

Enhance citizens’ voice to improve quality of basic services. Another promising

Strategic Objective 3: Reducing Vulnerability

78. Reduce exposure to chronic food insecurity and shocks. Despite some significant efforts, such as the IDA-supported Productive Safety Ne ts Program (PSNP) and Food Security Project, which have shown great promise recently, Ethiopia’s

28

vulnerability to adverse weather remains significant. The Bank will continue to support Ethiopia in addressing food insecurity issues to improve the l ives o f the poorest and protect the take-off process. An essential next step i s to help develop a coherent national strategy to assist poorest farm households to ‘graduate’ from food security programs in a sustainable manner. In this regard, raising the productivity o f agriculture and livestock i s critical. S t i l l it i s likely that Ethiopia can overcome the basic imbalance between the land and the population only through more structural changes in the economy. Thus the national strategy will have to examine the prospects for non-agricultural sectors to give incentives for a significant portion o f the rural population to shift away from agriculture, as well as the sensitive issue o f resettlement o f rural dwellers. Upcoming discussions on the next phase o f PSNP should provide a natural platform for this discussion, and the Bank plans to contribute analytical inputs for the national strategy. As an emerging issue, the needs o f the urban poor (currently not covered under the PSNP mechanism) require attention, especially in light o f the recent high levels o f food price inflation.

79. response to any shock, so as to allow the poorest households to cope effectively, also remains important. Further support to the development o f early warning indicators and contingency planning systems, particularly for large, slow-onset emergencies such as drought remains vital. This can also include pilots on weather insurance. Both the PSNP and the Pastoral Community Development Program (PCDP) will continue to work to strengthen government capacity in these areas. In addition, these programs have adopted the use o f contingent components, which are triggered in response to pre-identified risks. The flexibility created by these components will allow a more rapid and effective Bank response should a shock occur.

While risk mitigation strategies are critical, ensuring an effective and timely

80. Address environmental degradation andpopulation pressures. Continued degradation o f Ethiopia’s land threatens the prospects for sustainable growth and poverty reduction. Estimates are that erosion from cropland involves a loss o f 2-3 percent o f agricultural GDP per year in Ethiopia, and degradation o f watersheds exacerbates the impact o f droughts. While estimating the impact o f climate change on Ethiopia’s productive resources, particularly land and water, s t i l l requires further analysis, it i s clear that the impact i s significant and will require robust adaptation measures. The problem calls for a renewed effort to develop and implement a comprehensive land resource management plan, and increased investment in community-based watershed management. This can build on the promising beginning in undertaking small-scale c iv i l works to reverse degradation under PSNP. Potential entry points include integrated water resource management within the Tana and Beles sub-basins, promotion o f improved land tenure security, and the generation and dissemination o f knowledge on best practices and innovations in managing land sustainably. A particular emphasis will be placed on using the Bank’s knowledge to raise the public awareness o f the urgency o f the land degradation issue.

8 1. expanding by more than two mi l l ion people every year. As a result, land holdings per rural person have more than halved over the past 40 years and a land poor class i s emerging-20 percent o f the rural households have not enough land to produce hal f o f

A main driver o f land degradation i s Ethiopia’s population growth, currently

29

their caloric needs. Given the constraining effect high population growth rates have on economic growth and services, Ethiopia needs to develop and implement a coherent action program to accelerate i t s demographic transition. The 2006 Bank report “Capturing the Demographic Bonus in Ethiopia” recommends expansion o f family planning services, with emphasis on improving availability o f contraceptives even in the most remote rural areas. The report also showed that if Ethiopia succeeded in compressing the demographic transition period, that would significantly boost per capita income growth (‘demographic bonus’). The interest in sustaining rapid growth could facilitate more policy attention on an issue that has tended to be treated as a ‘given.’

82. social systems prevalent in many part o f Ethiopia, women and youth tend to be given much less voice. This disempowerment appears highly correlated with development outcomes. The Bank will seek to expand support for PASDEP’s focus on women and youth, particularly in regard to improving their economic independence and tapping their energies for development. Such support could involve scaling up micro finance and technical support for the two groups, developing special support programs in education to improve female completion rates, or focusing on employment and income generating opportunities. The Bank supported a successful pilot Women’s Development Initiatives Project not long ago to help develop modalities for helping poorest women build their ability to generate income outside the home. This experience, in addition to GoE’s ongoing programs, can provide useful lessons on how to scale up programs for women and youth. The Bank plans to undertake a review o f these programs, and use the results to help GoE focus i t s resources on the most effective program design. If a suitable funding instrument can be found while avoiding proliferation o f projects, the Bank i s prepared to provide funding support as well.

Support greater economic engagement of women and youth. In the traditional

Strategic Objective 4: Fostering Improved Governance

83. With i ts strong focus on governance, capacity building and decentralization in the PASDEP, the Government recognizes the importance o f enhancing the effectiveness and quality o f government operations, and i s beginning to pay more attention to the ways by which to enhance the role o f citizens in the equitable development o f Ethiopia. The ICAS strongly emphasized governance, and specified the Bank’s leading role in supporting governance in areas consistent with i t s mandate-particularly in “core” areas such as public sector reform, decentralization, PFM, and local-level accountability and empowerment-while leaving more political areas to donor partners. This emphasis remains valid, and should be sustained in this CAS period.

84. term effort. Bank support should be approached strategically, and be able to adapt to both the peaks and valleys that will inevitably accompany this process. This CAS therefore envisages a parallel approach that: (i) promotes the integration o f governance in the sectors aimed at supporting the dual growth and service delivery takeoff; and (ii) continues to target support in core areas o f governance - elaborating the need for ongoing

It i s important to recognize, however, that building good governance i s a long-

30

supply side reform, significant improvement in accountability structures and mechanisms, as wel l as new efforts to help strengthen c iv i l society.

85. development intervention. At present, a number o f sectoral, decentralization, and capacity building projects include a systemic approach to governance. This approach will be strengthened in the CAS period by making mechanisms for improving governance inherent to project design. New projects will also include descriptions o f the (implicit or explicit) governance and anticorruption strategies underpinning the activities to be supported.

The quality o f governance cuts across all sectors and impacts every type o f

86. agenda will be organized around the following focus areas:

Support for the core governance

8 7. Improve government effectiveness and quality of public administration. As the Government’s main vehicle to improve governance and service delivery at all levels o f government, the Public Sector Capacity Building Program (PSCAP) will be central to the Bank’s capacity development strategy. Near term priorities will include civ i l service regulations, human resource management business process re- engineering (BPR), and results-oriented performance evaluation. Given the recent increase public expenditures, especially at decentralized levels, the capacity o f public financial management should also be strengthened.

88. Enhance the accountability and responsiveness of government. A concerted push towards improved accountability i s planned and being implemented through PBS and PSCAP efforts, improving woreda capacity for engagement with citizens and promoting improved transparency and access to public information. A support program will be developed to diagnose the nature and scope o f corruption in Ethiopia, and to develop strategies for tackling corruption hotspots. Donor support to the development o f an effective system o f oversight institutions continues alongside this program o f work. WBI i s helping to

Box 3: Supporting Capacity Development

Capacity building has been at the heart o f Ethiopia’s two poverty reduction strategies, f i rst in the SDPRP and now in the PASDEP. Government’s capacity building strategy was launched in 200 1, with the establishment o f the Ministry o f Capacity Building and the launch if the National Capacity Building Program (NCBP) as a multi-sectoral, intergovernmental program response to the capacity building demands o f GoE’s planned institutional transformation.

In line with the NCBP and the World Bank’s Capacity Development in Africa Management Action Plan (CDMAP), Bank support for capacity building i s (i) mainstreamed across a l l interventions, and (ii) the specific focus o f a subset o f operations that focus explicitly on capacity development in priority areas. Key among these operations i s PSCAP (and the planned PSCAP II), which supports improvements to the scale, efficiency, and responsiveness o f public service delivery at the federal, regional, and local levels. Other capacity development initiatives seek to strengthen capacity in the private sector, financial sector, agriculture sector, and to promote use o f ICTs for development. A significant focus i s also expected on building capacity for both local governments and c iv i l society to enhance accountability through enhanced citizens’ participation.

strengthen capacity in Parliament so that i t can more effectively carry out i t s financial oversight role. Urban governance presents a unique set o f challenges, which the Bank i s seeking to help address in collaboration with partners including Germany and France.

89. Increase empowerment and demand for accountability. Empowering citizens will require improved capacity, access to resources, and access to information. Focus will be on establishing c iv i l society’s role in social accountability, improving the interface with government at national and woreda levels, and giving greater latitude for communities to determine development priorities. The development o f an improved enabling environment i s critical, as i s the broadening o f dialogue between the private sector and GoE to include a larger profile o f f i rms . Enhanced space for the media through the new Press L a w and within the boundaries o f an accepted code o f conduct i s also critical for improved accountability, and for providing a forum for dialogue on development priorities.

90. targeting and to develop a better basis for dialogue with government. Over the next two years, the Bank will work with government and donors to develop a more comprehensive, reliable set o f actionable indicators that measure key achievements (e.g., transparency, c iv i l service reform, public financial management), and areas o f change (e.g., corruption, c iv i l society, private sector development).

Finally, better measurement o f governance in Ethiopia i s necessary to improve

D. IDA Volume and Country Performance

9 1. Table 5 summarizes IDA’S proposed lending program for the CAS period. Ethiopia’s IDA allocation for FY 2008 i s SDR 391 million, equivalent to $635 mi l l ion at current exchange rates. l5 The FY 2008 IDA program could exceed this allocation if additional IDA resources become available during the IDA 14 period.

92. depend on the IDA 15 replenishment, which envisages funding increases for IDA borrowers. Since the country allocation process has not yet been completed, indicative IDA allocations for the rest o f the CAS period are based on the FY2008 norm allocation o f SDR 391 million. Actual allocations during FY2009 - FY2011 will be determined annually on the basis o f Ethiopia’s performance as measured by the Country Policy and Institutional Assessment (CPIA) relative to the performance o f other countries. The CPIA i s the Bank’s mechanism for linking a country’s policy and institutional performance to IDA country allocations. In this process, indicators on governance carry much heavier weight than other indicators on economic management, structural policies, and social inclusion. Other factors influencing country allocations are the quality o f portfolio implementation, per capita income level, population and the number o f other active IDA borrowers.

The lending program for the rest o f the CAS period from FY2009 - 201 1 will

l5 1 Special Drawing Right (SDR) equaled 1.625 U S D on March 24,2008.

32

r r 0 N

t

0 0 N

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t

m 0 0 N

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m -I a a

2 v) U m

0 v) K a a, n v) v ) 0 a

-

0 0 0 z % m m

M M

93. Since the CPIA system contains an inherent mechanism for aligning the IDA allocation to changing country performance, the CAS does not specify high, low, and base case scenarios. The exception to the general reliance on the CPIA and IDA allocation formula for determining the level o f annual IDA support would be in the unlikely case o f a dramatic deterioration in the Ethiopia’s risk profile or performance, in which case the Bank might be required to reconsider rapidly i t s provision o f support rather than waiting for the annual recalculation o f the CPIA.

94. Depending on circumstances, there are several other projects that may be appropriate for delivery in FY 2008 through FY 201 1 in addition to, or l ieu of, the projects included in table 5. These include a possible PRSC in the later years o f the CAS, and possible investment support for empowerment o f women and youth, power generation, the Ethio-Djibouti Railway, an Ethiopia-Kenya Regional Transport Project, and N i l e Basin Initiative projects, such as the Eastern N i l e Joint Multipurpose Program and a Flood Control project. Availability o f Regional IDA funds will be a key factor in the provision o f support for regional projects. As with all Bank support, the possibility o f such additional projects would need to be discussed with the Government and relevant partners prior to commencing project preparations in earnest.

E. IFC and MIGA

95. reintroduce a permanent presence in Addis Ababa. IFC’s previous presence on the ground ended in 2000. Wh i le IFC had largely refrained from new investments in the last decade due to currency and foreign ownership restrictions, the improving environment o f government support for the private sector has led IFC to work with the authorities to identify creative ways to operate within these constraints.

IFC. In early FY 2009, the International Finance Corporation (IFC) plans to

96. directions: exploring direct investment in high growth priority sectors (for example, building materials, tourism, and agribusiness); development o f small and medium enterprises; supporting financial markets; and encouraging public private partnerships. Support could take the form o f equity participation, loans, or technical assistance, depending on discussions with the authorities and potential private sector partners, and would be highly complementary to the activities envisioned by IDA. While specific details are yet to be finalized, IFC expects to be in a position to approve new investments in Ethiopia before the end o f FY 2008.

The IFC strategy for Ethiopia involves the possible scaling up o f support in four

97. MIGA. The Multilateral Investment Guarantee Agency (MIGA) played an important role in helping resolve expropriation claims dating from the ‘Derg’ regime. In this role, now completed, MIGA helped Ethiopia resolve almost all outstanding claims. MIGA has indicated i t s openness to considering guarantee applications for investments into Ethiopia.

34

VI. IMPLEMENTING THE PROGRAM

A. Monitoring Outcomes

98. The overall CAS Results Framework i s presented in Annex 1. I t specifies desired outcomes and defines intermediate indicators in order to keep the program focused and enable regular tracking o f progress. The framework uses as i t s starting point the goals o f the PASDEP, and narrows down the range o f PASDEP outcomes to those that the Bank can demonstrably influence over the CAS period. Since most o f the new operations foreseen in this CAS will l ikely not finish implementation until well after 201 1, results during this CAS period will come mainly from existing operations, and the quicker- disbursing interventions included in this CAS such as the PBS Additional Financing and i t s follow-on operation, PBS 2. A summary o f the results framework is presented in Table 4.

99. Monitoring and evaluation. Measurement o f the impact o f CAS interventions will be bolstered by ongoing efforts to strengthen existing government mechanisms for data collection around the PASDEP, as well as outcome and output indicators available in the Bank portfolio o f projects and analytic work. The Government i s continuing to implement i t s "Strengthening SDPRP Monitoring and Evaluation Action Plan" to refine the Government's monitoring and evaluation framework and to make it a simpler and more effective framework for measuring implementation progress, around which partners can increasingly harmonize their own monitoring systems. This effort includes increasing participatory aspects o f monitoring and evaluation, creating an Integrated Management Information System at the Welfare Monitoring Unit in MoFED, strengthening statistical capacity in the Central Statistical Authority (CSA) including establishment o f a Socio-Economic Database, strengthening the results framework o f the PRS, and improving reporting on PRS indicators in Annual Progress Reports (APRs). The Bank and other donors are working with MoFED to help implement this plan. The Bank will also work with the CSA (and other agencies if needed) to improve the coverage, reliability and timeliness o f GOE's national income accounts and household surveys.

B. Donor Harmonization

100. since 2000. A large number o f donors are active in Ethiopia, with 25 bilateral and multilateral donors averaging more than $5 mil l ion per year in O D A from 2000-200616. However, development aid to Ethiopia remains well below the average for sub-Saharan Africa inper capita terms, as shown in table 6.

Official Development Assistance (ODA) to Ethiopia has been increasing steadily

l6 Agencies with greater than $5 million in ODA per year from 2000-2006: IDA, United States, EC, Global Fund (GFATM), United Kingdom, AfDB, Germany, Italy, Netherlands, Japan, Canada, Sweden, Ireland, Norway, WFP, UNICEF, France, UNDP, UNHCR, IMF, IFAD, Finland, Belgium, Austria, and Arab Agencies. (Source: OECD DAC).

35

Table 6: Net ODA flows (excluding humanitarian aid)

2000 2001 2002 2003 2004 2005 2006 (millions of US Dollars) Total net ODA, Ethiopia 579 1005 1169 958 1428 1330 1642 olw: Mu Iti lateral 287 698 772 456 729 679 887 olw: IDA 116 434 464 247 476 247 332

~ --_..-I

(US Dollars) ODA per capita, Ethiopia 9 15 17 14 21 19 23

Source: OECD DAC

101. Government and a majority o f international partners are keen to proceed with the deepening o f the harmonization process in the spirit of the Rome Declaration (2003) and the Paris Declaration (2005). The Bank, with UNDP and one bilateral donor, i s one o f the rotating co-chairs o f the Development Assistance Group (DAG), the main forum for donor coordination in Ethiopia, made up o f about 30 bilateral and multilateral agencies. Under the DAG, efforts are underway to make strong progress on the implementation o f commitments in the Paris Declaration, including jo int ESW (much o f the Bank’s major analytical work has already been prepared jointly with partners) and jo int missions. Much o f the collective effort i s focused on furthering harmonization through a few major multi-donor programs and policy areas o f importance.

Ethiopia i s a pilot country for the OECD D A C harmonization agenda. Both the

102. The Government and development partners’ commitment to broaden collaboration and harmonization i s supported by a partnership structure, starting with High Level Fora (HLF) to discuss policy issues. A Harmonization Secretariat was established within the Multilateral Cooperation Department o f MoFED with technical assistance from DAG. Support has also been provided to assist the GoE to develop an Aid Management Platform (AMP). The Government and donors have also agreed for the f i rs t time for chairmanship of some DAG thematic policy dialogue groups to be led by the key ministerial heads. Government-donor harmonization i s also supported by regional initiatives to harmonize and set priorities, such as through the NEPAD CAADP process.

103. include the following:

There has been some progress towards the Paris Declaration indicators which

Ownership: Donors are organized around PASDEP and the thematic working groups now have Government counterparts and in some cases chaired by the Government.

Alignment: Progress is evidenced by (a) multi-donor programs that aim to support improved public financial management;(b) a larger percentage of aid that i s reported on the Government’s budget; (c) a decrease in the number o f

36

parallel project implementation units; (d) the latest OECD figures showing 96 percent o f aid demonstrates in-year predictability; and (e) OECD figures also showing that 39 percent o f aid i s untied in Ethiopia.

Harmonization: OECD data reveals a number o f indicators which reflect greater harmonization in the country. These include: (a) 53 percent o f aid delivered in the form o f program-based approaches; (b) 27 percent o f all donor missions are joint; and (c) 50 percent o f donor analytical work i s joint.

Managing for results: DAG thematic working groups have been asked to systematically report on sectoral results, which will be posted on the new DAG website. The revitalization o f the High Level Forum and the inclusion o f Government representation in all Thematic Working Groups (TWGs) will make it easier for Government to assess donor performance.

Mutual accountability. The revitalization o f the High Level Forum and Harmonization Task Force along with inclusion o f Government representation in DAG TWGs will also improve mutual accountability.

104. harmonization through multi-donor programmatic approaches (a Paris Declaration indicator). This outcome aims to build on the success o f the Bank in recent years in working with other donors on developing an innovative set o f harmonized instruments to reduce transactions costs, align support with the country’s decentralized model, and enhance the predictability o f aid17. These instruments allow for large-scale leveraging o f IDA support. Such approaches include:

The CAS includes one outcome focusing on harmonization: increased donor

Protection of Basic Services (PBS) program. First phase: IDA US$2 15 mi l l ion (May 2006), donor partners US$580 million. Second phase: IDA US$215 mi l l ion (December 2007), partners about US$560 mi l l ion (planned). Ma in partners: DFID, AfDB, EC, CIDA, KfW, Netherlands.

Public Sector Capacity Building Program (PSCAP). First phase: IDA US$lOO million, DFID 625 million, others US$30 million. Second phase planned in FY20 10.

Productive Safety Nets Program (PSNP). Total support over next 5 years expected to reach US$1.2 billion. IDA US$245 mi l l ion to date. Main partners: CIDA, DFID, EC, IrishAid, USAID, WFP, SIDA.

Water Supply and Sanitation. IDA $100 mi l l ion through 2009, with DFID co-financing o f 670 mi l l ion through 2012). Second phase envisioned with additional IDA and AfDB through 20 12.

Sustainable Land Management. Proposed support includes IDA $20 mi l l ion (late FY2008); GEF $15 million, GTZ, Nordics, UN agencies.

There are also important opportunities for increasing the linkages between such programs, particularly 17

between PBS, PSCAP, and PSNP.

37

105. Trust funds. Much o f the harmonized donor support described above i s channeled to Ethiopia through a variet o f Bank-administered trust funds, and t rust funded-grants, o f all three main types.‘ In fact, Ethiopia has one o f the largest World Bank-administered t rust fund portfolios in the Africa Region, at about $560 mi l l ion in total commitments. Trust fund disbursements have expanded sharply in recent years as a result o f the close collaboration with donors on the Protection o f Basic Services Program, and will grow further as spending accelerates under the Productive Safety Nets Partnership. The emergence o f recipient-executed trust funds as a way to complement and scale up the use o f IDA resources for this program, reflects both country circumstances, and the Bank’s support for the Paris Declaration agenda on harmonization and aid effectiveness. In addition, Bank-executed trust funds have helped cover the costs o f donor coordination, and provided resources to oversee the use o f recipient-executed trust funds.

106. standards and fiduciary controls as IDA financing. The recent increase in the volume o f trust funds has increased the financial management and procurement capacity workload; in response the Bank i s strengthening staffing in these areas and offering additional trust fund and fiduciary training for staff. Trust funds that cofinance IDA projects are by nature well aligned with the Bank’s strategy, and share the same arrangements for results monitoring. For other trust funds, more care will need to be taken to ensure selectivity, strategic fit, and systematic reporting o f results.

Trust fund resources administered by the Bank are subject to the same quality

107. global public goods, Ethiopia i s well placed to benefit from many o f the vertical initiatives launched in recent years, to address specific parts o f that agenda-including the Global Fund to Fight AIDS, Tuberculosis and Malaria; the Global Environment Facility; and the Education For All-Fast Track Initiative Catalytic Fund. The Bank plays a financial role in administering many o f these funds, and varying roles in their implementation. As part o f the wider harmonization agenda, we will actively explore the scope to ensure resources from such funds are strongly coordinated with, and benefit from, the country-level operational expertise that we can bring to bear.

As a low income country that faces major challenges on the management o f

C. Portfolio Management

108. As o f the end o f December 2007, Ethiopia’s portfolio o f IDA operations constituted 24 projects with a total net commitment o f US$2.4 bi l l ion and an undisbursed balance o f US$1.5 billion. Since the ICAS, there has been a substantial increase in net commitments o f nearly US$ 500 million. Disbursements have been averaging about

Executive Directors recently approved the paper A Management Framework for World Bank- 18

Administered Trust Funds (R2007-0198) which defines these three types as follows: a) Recipient-Executed Trust Funds which the Bank passes on to a recipient, and for which the Bank normally appraises or supervises activities supported by these funds; b) Bank-Executed Trust Funds which are directly executed by the Bank; and, c) Financial Intermediary Funds which typically encompass multi-donor vertical initiatives to implement international agreements or global partnerships for targeted sectors or themes.

38

US$350 mi l l ion in the last f ive years,” but with the maturing o f a few large-scale interventions in roads, rural electrification, and basic services, the pace o f disbursement i s expected to quicken. In the past 12 months, a number o f projects have exited the portfolio, and consequently the age o f the portfolio has dropped from an average o f 4.0 years at the time o f the ICAS to 2.7 years at present. About one-third o f the current IDA portfolio i s in the form o f grants.

109. The overall performance o f the Ethiopia portfolio i s better than the Africa Region and Bank-wide performance in three key categories-problem projects, commitments at risk, and proactivity (Table 7). One project out o f the 23 active IDA projects (or 4.3 percent) are currently rated as a problem project (i.e. rated unsatisfactory for meeting development objectives andor satisfactory implementation progress). This compares favorably with the Africa Region and the Bank as a whole where 12.5 and 1 1.8 percent o f projects, respectively, are rated unsatisfactory. The portfolio has improved since the ICAS and both in terms o f realism and proactivity has exceeded the Regional and Bank wide average with 100 percent.

Table 7: Ethiopia IDA Portfolio Performance March 25,2008

Ethiopia Africa Region World Bank ._l_-l._l

Number of Projects 23 36 1 1332 Net Commitments ($ million) 2,376 21,545 96,553 Problem Projects (no.) 1 45 157 Problem Projects (%) 4.3 12.5 11.8 Commitments at Risk ($ million) 150 5,338 16,458 Commitments at Risk (%) 6.3 24.8 17.0 Realism (%)* 100 50.0 63.6

100 70.2 72.5

* Realism index: The ratio of actual problem projects to total projects at risk. ** Proactivity index: The proportion of projects rated as actual problem projects twelve month earlier that have been upgraded, restructured, suspended, closed partially or fully cancelled.

1 10. The overall performance o f the portfolio has been satisfactory, with less than five percent o f the projects as problem projects. However key issues identified in the Country Portfolio Performance Review (CPPR) report o f June 2007, are: (a) the need to foster enhanced transparency and accountability, (b) procurement delays, (c) financial management shortcomings, and (d) weak monitoring and evaluation and results framework. Actions are underway to address key constraints in all o f these areas, as described below.

1 1 1. Bank undertook a project-by-proj ect analysis o f r isks and developed specific recommendations to further strengthen transparency and accountability in current and

Transparency and accountabizify. In parallel with ICAS preparation in 2006, the

l 9 FY03 - US$362 million, FY04-$422 million, FY05- US$373 million, FY06-$282.3million and FY07 - US$3 17 million.

39

future projects. These recommendations have been mainstreamed into project preparation during the ICAS period, and will continue to be adhered to in the period covered by this strategy. They include: (a) clear and transparent criteria for selecting project sites and beneficiaries; (b) greater involvement o f a broad range o f stakeholders in project preparation and implementation; (c) strengthening M&E systems and operationalizing them in a more participatory manner; and (d) strengthening implementation support, particularly oversight on the fiduciary aspects o f projects. For new projects, i t was also agreed with the Government that there would be public disclosure o f project information in the Ministry o f Finance and Planning website and mechanisms in projects to ensure citizen’s participation in public policy making and budget processes.

1 12. Procurement and Contract Execution Delays. Procurement and contract execution delays continue to be a major problem for the portfolio which also negatively impacts on disbursements. Major reasons for the delays include the Government’s ambitious roads and energy programs, which have stretched the procurement capacity o f the implementing agencies and have generally experienced a slower than expected pace o f contract execution, necessitating enhanced supervision. Nationally, there has also been continued deterioration in the quality o f procurement documentation that some project implementation agencies submit to the Bank. In order to assist the Government, the Bank has increased the number o f staff in Ethiopia and devolved greater decision making powers to the country office. With respect to procurement capacity, feasibility studies are underway to assess the potential to establish a certificate or diploma program in procurement at a national educational institution such as the Civ i l Service College. Action i s being taken to provide training for relevant government agencies on the Bank’s guidelines. Under PSCAP, responsibility for international competitive bidding i s being devolved to sub-program and Regional levels. The Bank and other donors have agreed on a harmonization agenda that aims to promote increased reliance on country systems.

1 13. The progress in procurement reforms in Ethiopia has seen the enactment o f a federal public procurement proclamation and issuance o f federal public procurement directives in 2005 including the establishment o f a Public Procurement Agency. Three actions that are a priority for the functioning o f the public procurement system are: (i) the creation o f functional Procurement Units in all Government entities; (ii) the creation o f a professional public procurement cadre; and (iii) institutionalized annual independent procurement audits.

1 14. management improvements through the Expenditure Management and Control Sub- Program (EMCP) o f the Government’s Civ i l Services Reform Program. This i s being supported by the Bank and other development partners. There has been significant progress in strengthening public financial management in recent years. Country financial management systems are being used to a significant extent in many projects. Development partners have adopted common financial management arrangements and requirements to a very high degree. While financial management performance in many projects i s satisfactory, there are significant weaknesses in other projects. Fifty percent

Financial Management Weaknesses. Ethiopia has been making public financial

40

o f the federal-level project implementing u n i t s used computerized accounting systems in FY2006, compared with 38 percent in FY 05. There i s however need for improvement in the quality and timeliness o f financial reporting. Major delays in submission o f audit reports on Bank-financed projects are a significant issue. A major underlying factor i s weak capacity especially at the local government level (regions and woredas). These problems lead to disbursement delays and have also delayed the approval o f some new projects.

1 15. problems, some o f which are being implemented. These include: (i) capacity enhancement (e.g., posting o f additional accountants) particularly at the regional and woreda levels; (ii) training; (iii) implementation support from the federal level and project un i ts to regional and woreda level entities; (iv) increased use o f private audit f i r m s by the Office o f the Auditor General; (v) continuous or interim audits during the year and early start o f the annual audit; (vi) ensuring readiness for implementation at project start; and (vii) streamlining and simplifying financial management arrangements across the portfolio. The strong emphasis on public financial management reforms at the federal, regional and woreda levels will continue. Another area o f emphasis i s the design and implementation o f a program to increase the number o f qualified accounting and auditing technicians and professionals to work in the public and private sectors.

Discussions are ongoing with the Government on measures to address these

1 16. monitoring and evaluation i s continuously stressed by both Government and Bank teams. This i s an area that needs substantial work. Currently many o f the projects in the portfolio and new projects are focusing on baseline surveys and ensuring that impact evaluations are carried out. The Task Teams are working closely with AFTQK to improve the results frameworks for many projects, and there i s a greater focus by management on results monitoring in the review o f supervision documents.

Weak monitoring and evaluation and results framework. The need to focus on

D. Managing Risks

1 17. r isks that might threaten to reduce the effectiveness o f i t s support. Many such r isks are well known and have been discussed in previous Bank strategies. In the medium term, the most serious risk i s likely to be Ethiopia’s vulnerability to external shocks, in particular drought and possible regional conflict. Although Ethiopia’s economy has become increasingly diversified, a severe drought, which based on history seems inevitable, will likely cause not only immediate hardships to the poorest, but also seriously disrupt the take-off process by forcing the Government to divert resources from development to emergency aid. A regional conflict, particularly given tensions with Eritrea and Ethiopia’s military involvement in Somalia, could have similar effects.

In implementing this strategy, the Bank will need to focus centrally on the key

1 18. the short term, but there are ways in which the Bank can help mitigate the impact o f a shock. First, Bank projects such as PSNP and PCDP that address vulnerability have built in contingency components that can be activated in the event o f certain shocks. A second

There i s little the Bank can do to reduce the risk o f such shocks itself, at least in

41

key measure i s the gradual shift in the portfolio structure toward greater use o f more programmatic funding instruments (e.g., PBS and PSNP), which allow acceleration o f disbursement to meet unexpected fiscal needs in specific sectors o f high importance. As the Bank continues the recent trend toward replacing traditional investment instruments with additional programmatic approaches (S WAps and/or PRSCs) in the main sectors, this built-in flexibility to deal with shocks should increase further. Moreover, while estimating the exact magnitude o f the impact o f climate change s t i l l requires more analysis, existing research shows that climate change will have a significant impact on Ethiopia’s agriculture. The Bank i s seeking to mitigate the impact o f drought on development in the longer run through i t s support to the safety net and food security program, agriculture, and environmental programs (including in particular sustainable land management). The Bank has also urged the Government to adopt a more counter- cyclical fiscal policy.

1 19. two possible scenarios o f deterioration in governance, and the potential r isks for development:

The ICAS underscored the importance o f governance-related risks, and outlined

Continued uncertainty, conflict, violence and concerns about human rights. This can threaten or reduce aid, discourage investment, and put strains on the credibility and legitimacy o f the state.

Weak and eroding institutional checks and balances, raising the risk o f capture o f decentralization, block grants and the c iv i l service, alongside a lack o f leve l playing field or credible environment to attract private investment for growth.

120. appears to have diminished, but cannot be dismissed entirely. At present, two domestic governance risks appear particularly relevant over the near term: the possibility o f disputes over the coming local elections in April 2008 (and eventually over parliamentary election in 20 lo), and the ongoing military action in the Ogaden area o f Ethiopia’s Somali region to subdue separatist rebel elements. The presence o f these r isks calls, as stated in the ICAS, for basing Bank support on a careful understanding and management of political economy risks, while seeking firmly to address core governance challenges jointly with donor partners. To the extent that such risks can be mitigated by external actors, the Bank relies on the interventions o f the broader international community for these types o f political r isks. If the future evolution o f the political context causes these risks to become heightened, the Bank will seek to adjust i t s support accordingly, both to help the country address the risks, and to manage the level o f resources entering an environment that may not be conducive to development.

Two years after the ICAS was prepared, the likelihood o f such r isks materializing

12 1. On the macroeconomic front, the highly positive growth trajectory o f recent years i s not without some risks: inflation has risen sharply, with food price increases hurting the urban poor and middle class. Good growth has been in the face o f a strong headwind from rising o i l prices; continuing o i l price increases could exacerbate inflation further and constitute a greater constraint on growth. These risks were explained in some detail in

42

the Recent Economic Developments section (section 11. B.) The Bank will continue to assist the Government in identifying and implementing actions to limit the negative growth and distributional consequences o f food and o i l price increases.

122. government carries r isks for the Bank program, notably in procurement and financial management. The long-term nature o f capacity building means that these risks are likely to remain for some time. Such risks, and measures being taken by Government and the Bank to mitigate them, are discussed in section V1.C on portfolio management.

Finally, the shortage o f sk i l ls and weak capacity especially at local levels o f

123. Bank can adjust i t s support in response to positive or negative developments in governance and other key aspects o f the development effort. In the case o f a severe deterioration in the development environment in Ethiopia, the Bank would reduce new lending and rely more on non-lending support. On the other hand, as Ethiopia makes progress towards the key outcomes contained in PASDEP, and improves i ts policy and institutional performance, a steady increase in IDA support can be envisioned.

For IDA’S overall lending program, the CPIA provides a mechanism by which the

43

ANNEXES

Annex 1: Annex 2: Annex 3 : Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Annex 10: Annex 11: Annex 12:

Results Framework Sequencing and Selectivity across Sectors CAS Completion Report for FY 2003-2007 Ethiopia at a Glance Social Indicators Key Economic Indicators Key Exposure Indicators Selected Indicators o f Portfolio Performance and Management IFC and MIGA Program for Ethiopia IDA Program Summary for Ethiopia Summary o f IDA Non-Lending Services Status o f Bank Group Operations (Operations Portfolio)

44

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Annex 3: CAS CR

Annex 3: CAS Completion Report for FY 2003-2007 March 5, 2008

Date o f CAS: March 23,2003 Date o f CAS Progress report: August 25,2004 Date o f ICAS: May 1,2007 Period covered by the CAS: March 2003-June 2005 (FY03-FY05) Period covered by the ICAS: M a y 2006-July 2007 (FY06-FY07) Period covered by this report: March 2003-July 2007 Report prepared by: Johannes Widmann and Diana Hristova

1. Introduction

1. Development Association’s (IDA) Country Assistance Strategy (CAS) for Ethiopia for FY03- 05 and the Interim Country Assistance Strategy (ICAS) for FY06-07. The report therefore covers FY03-07, referred to as the “review period” throughout this document. The CASCR aims to evaluate the effectiveness o f IDA’S strategies in i) aligning their objectives with the country’s long te rm strategic goals; and ii) contributing to country goals by achieving CAS and ICAS outcomes. In addition, this report will evaluate the Bank’s portfolio performance, provide lessons learned and highlight the issues that should be dealt with in the next CAS. It i s based on reference documents such as Project Appraisal Documents, Implementation Status and Results Reports, Implementation Completion Reports and Economic and Sector Work completed within the CAS and ICAS periods. Furthermore, this report draws from Independent Evaluation Group (IEG) and Quality Assurance Group (QAG) evaluations o f Bank performance, and the self-assessment o f the country team as well as feedback from clients, stakeholders, and partners. This report also benefited from the discussion between the Country Team and IEG during the preparation o f IEG’s recent Country Assistance Evaluation for Ethiopia.

This CAS Completion Report (CASCR) presents an assessment of the International

2. Progress under the CASDCAS period (F‘Y03-07) i s rated moderately satisfactory overall. This overall rating i s based on the following sub-ratings for each CASCR pillar (see section I11 for a detailed explanation for each rating):

(i) (ii) (iii) (iv) Reduce vulnerability (satisfactory).

Enhance pro-poor growth (moderately satisfactory). Enhance human development outcomes (satisfactory); Deepen Ethiopia’s core governance program (moderately satisfactory);

II. CAS Context

3. I n August 2002, the Government published its first Poverty Reduction Strategy-the Sustainable Development and Poverty Reduction Program (SDPRF’). The overarching objective o f the strategy was to reduce poverty through measures complementary to growth and at the same time to maintain macroeconomic stability. The document had strong ownership within the Government and i ts preparation was utilized as a forum for policy discussions with c iv i l society and the donors. Government’s Agricultural Development Led Industrialization (ADLI) strategy took center stage in the SDPRP with the agriculture sector-which counts for 40 percent o f national GDP, 90 percent o f exports, 85 percent o f employment, and 90 percent o f the poor- considered key toward poverty reduction. Others pillars o f the strategy included: (i) civ i l service reform; (ii) governance, decentralization and empowerment; and (iii) capacity building. Key sectoral reform areas, in addition to agriculture, were: (i) education; (ii) health; (iii) HIV/AIDS; (iv) roads; (v) water and sanitation; (vi) gender and development. In i t s f i rst Annual Progress

60

Annex 3: CAS CR

SDPRP Outcome Indicators 10% reduction in poverty headcount

7% average annual GDP growth Average annual inflation in single digits, preferably less than 5%

Report on the implementation o f the SDPRP, the Government added a major new pillar on food security. Government’s commitment to SDPRP implementation was shown by the increase o f pro- poor spending from 43% o f total government expenditures in FY02 to 62% in FY06, among the highest o f any Sub-Saharan African country. Table 1 shows the progress towards the overarching objectives o f the SDPRP.

FYO3-07 Progress 12.4% reduction in poverty headcount (from 44.2% in I999100 to 38.7% in 2004105) Average annual GDP growth of 11.8% (200314-200617) Average annual inflation of 12.1% (2003-2006)

4. In January 2007 the Government finalized i t s second poverty reduction strategy, called the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), which builds on the progress made under SDPRP. The PASDEP places rapid and sustained growth at the center o f the strategy with a re-affirmed focus on pro-poor spending. The strategic emphasis o f the growth pillar i s placed on (i) market-based development o f agriculture; and (ii) private sector development. A significant innovation o f the PASDEP i s i t s greater recognition o f the central role o f urban areas in growth and poverty reduction. The strategy retains i t s strong emphasis on human development and aims to build on the major achievements o f SDPRP.

5 . The FY03-FY05 Country Assistance Strategy (CAS) for Ethiopia was based on the SDPRP and sought to focus Bank support around three strategic objectives: (i) enhancing pro-poor growth; (ii) improving human development outcomes; and (iii) reducing vulnerability. Although it was not prepared under the “results-based CAS” framework, the CAS recognized that the ultimate success o f World Bank support to Ethiopia would be measured by achieving results on the ground based on SDPRP priorities. Therefore, the CAS set out a framework o f “Core CAS monitoring indicators.” The monitoring framework was further refined in the CAS Progress Report o f August 2004. These monitoring indicators, which are also used by this CASCR, covered most-but not al l-outcomes that the CAS wanted to achieve.

6. elections led to an elevation in governance risks that threatened continued progress on development. Accordingly, the Bank decided to draft an Interim CAS to support Government in developing and implementing, in consultation with citizens, a strengthened program o f institution building and governance reform to help in i t s efforts to accelerate pro-poor growth. Specifically, the ICAS focused Bank support around five strategic objectives: (i) deepening Ethiopia’s ‘core’ governance program; (ii) providing basic services for poor people in a fair and accountable way; (iii) enhancing the investment climate and raising investor confidence; (iv) increasing agricultural productivity; and (v) developing infrastructure to support development o f towns and growth corridors. As opposed to a full CAS, the shorter timeframe o f an Interim Strategy was deemed to be more appropriate in order to allow for a transitional period where Government, stakeholders, the Bank, and partners could develop consensus around a strengthened governance agenda.

A new CAS was planned for FY06. However, the aftermath o f disputed May 2005

7 . support, which the Bank had provided during FY04-05. The Bank, together with other budget support donors in Ethiopia, based this decision on increased risks relating to governance, particularly the risk that unconstrained budget support could be vulnerable to political capture or diversion from the core priority o f basic service delivery. However, the Bank recognized that in the absence o f direct budget support, development partners should not abandon critical support to

One major shift under the ICAS was the Bank’s decision to suspend direct budget

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delivery o f basic services, which enable people to break multi-generational poverty traps. I t therefore prepared the Protection o f Basic Services (PBS) Project to support a continuation of the upward trends in access to basic services at sub-national levels, and to strengthen empowerment and decentralized decision making to ensure that resources are allocated according to people’s priorities. The PBS absorbed the c iv i l society capacity building project, under preparation since the FY03 CAS period, to provide stronger leverage to the c iv i l society empowerment and social accountability agendas through i ts significantly larger f low o f resources. The operation has prevented the roll-back o f hard-won gains in human development outcomes in the aftermath o f the political crisis and has become a vehicle for mobilizing coordinated donor support to Ethiopia with an annual volume o f over $400 mi l l ion and with eight development partners.

Table 2: Alignment of CAS, ICAS into Consolidated CASCR Evaluation Framework

FY03 CAS Objectives

1. Pillar: Enhancing Pro-Poor Growth I, 1 Accelerating rural growth 1.2 Fostering an enabling environment for urban growth (by enhancing the investment climate) 1.3 Supporting the development of financial markets 1.4 Promoting rapid growth of exports

2. Pillar: Enhancing Human Development Outcomes by Improving Governance 2.1 Improving delivery of education services 2.2 Expanding access to health services 2.3 Improving access to clean water supply,,,and sanitation ........ .............. ........... .... ...... . ...,......,.... ” ....... ........... .......... ......

2.4 Supporting the reform of public sector systems 2.5 Deepening and strengthening decentralization

3. Pillar: Reducing Vulnerability 3.1 Improving food aid delivery and other safety net programs 3.2 Reducing vulnerability to terms of trade shocks (CAS CR Objective 1.4) 3.5 Increased attention to environmental issues

FY06 ICAS Objectives

1 .I Increasing agricultural productivity 1.2 Enhancing the investment climate and raising investor confidence 1.3 Developing infrastructure to support development of towns and growth corridors

2.1 Providing basic services for poor people in a fair and accountable way

3.1 Deepening Ethiopia’s ‘Core’ Governance Program

(Vulnerability included under objective 2.1, Providing basic services for poor people in a fair and accountable way )

FY08 CASCR Evaluation Framework

1. Pillar: Enhance Pro-Poor Growth 1 .I Accelerated rural growth and increased agricultural productivity 1.2 Enhanced investment climate 1.3 Developed financial markets 1.4 Rapid export growth and reduced vulnerability to terms of trade shocks (CAS Objective 3.2) 1.5 Developed infrastructure 2. Pillar: Enhance Human Development Outcomes 2.1 Improved delivery of education services 2.2 Expanded access to health services 2.3 Improved access to clean water supply and sanitation

3. Pillar: Deepen Ethiopia’s ‘Core’ Governance Program 3.1 Reform of public sector systems 3.2 Deepened and strengthened decentralization 3.3 Empowered civil society 4. Pillar: Reduce Vulnerability 4.1 Reformed relief food aid delivery and other safety net programs 4.2 Increased attention to environmental issues

8. the GoE’s poverty reduction strategy, this report integrates key strategic objectives and outcomes of both strategies into one coherent framework to facilitate the evaluation of

Since the FY06 I C A S can be regarded as a continuation of the FY03 CAS’S support to

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Key Outcome indicators Increased productivity of agriculture

Increased adoption of productivity-enhancing technologies by farmers

results. Table 2 shows the CASCR evaluation fiamework. While merging o f both frameworks requires a certain degree o f retrofitting o f outcomes and indicators, it also allows building a more meaningful results chain and showing the Bank’s contribution to outcomes. As with al l Bank CASs at the time, the FY03 CAS was not designed as a “results-based” strategy even though it did contain several progress (or “benchmark”) indicators. The FY05 CAS Progress Report introduced more comprehensive “CAS Monitoring Indicators”. The ICAS introduced various “longer-term outcomes for which the ICAS i s expected to contribute” as well as “shorter-term outputs expected to result from the ICAS program” that also fit into the broader strategic framework o f the FY03 CAS. Another benefit for merging both frameworks i s that having a longer period covered by the evaluation framework (FY03-07) allows the main trends to be seen more clearly.

FYO3-07 Progress Increased productivity from 1.37 (tons per hectare) cereal production (2002) to 1.44 (2006) Increased use of fertilizer by private peasant holdings from 0.66 quintal per hectare (2003/04) to 0.75 (2005/06)

111. CAS and ICAS Outcomes

9. This section evaluates outcomes achieved under each objective during the review period and the Bank’s contribution to these outcomes. The report focuses on key outcome indicators as listed in the CAS, ICAS or CAS Progress Report. Where necessary, it will also use additional indicators that were not available at the time o f the CAS/ICAS design.

1. Pillar: Enhance pro-poor growth

10. Overall progress under the f i rs t strategic objective is rated moderately satisfactory. There has been major pro-poor growth over the review period, at rates unparalleled in Ethiopia’s long history. Growth averaged nearly 12 percent between 2003/04 and 2006/07 and given a relatively low level o f income inequality (estimated Gini o f 0.30) growth in Ethiopia has been inclusive and pro-poor. As shown in table 1, poverty rates have declined significantly. In particular, the three percentage point decline in rural poverty between 1999/00 and 2004/05 suggests that those in the poorest (rural) areas have been able to benefit from agricultural growth. However, while agriculture growth has been very strong, agricultural productivity rose only slowly and the Bank’s dialogue in the sector yielded only limited progress.

1 1 . The review period saw a notable shift in Government’s strategy with respect to the role o f the private sector as the engine o f growth, and that growth itself i s now much more centrally a feature o f the development strategy, an evolution with which the Bank has been closely associated. As confirmed by the forthcoming FY08 Investment Climate Assessment (ICA), there has also been tangible progress in improving the investment climate and increasing the role o f the private sector in the economy, but a number o f constraints to private sector development remain. Key among these constraints i s the lingering inefficiency o f the financial sector, which, according to the FY08 ICA, functions poorly in allocating scarce capital to the most productive f i r m s . The Bank’s dialogue has been especially diff icult in the area o f telecommunication and the slow progress in the sector i s disappointing. Within the wide range o f interventions covered under this pillar, the roads sector (which received the largest financial support from IDA o f any single sector) stands out as an example o f strong achievement. Energy generation has grown, but progress in increasing access to electricity-above a l l in rural areas-remains slow.

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12. Rural growth has been remarkably strong, but progress in agriculture productivity has been disappointing. The agriculture sector has experienced not only a remarkable recovery from the 1990s, but sustained growth at an annual average rate o f almost 13 percent between 2003/04 and 2006/07. Increases in agriculture productivity over the past decade can be explained mainly through area expansion in response to liberalization under ADLI since the 1990s. Land productivity at 1.15 tons per hectare remains low and labor productivity very l ow (value added per worker in the agriculture sectors i s US$144 vs. US$329 average for Sub-Saharan Africa). Subsistence agricultural on small plots o f land with limited irrigation and fertilizer use remains the predominant production model in much o f Ethiopia. Coupled with this are severe environmental degradation in many parts o f the country and high climatic variability, leading to recurrent weather shocks.

13. Over the period there was significant improvement in the manner o f provision o f agricultural extension services, and some significant improvements in farm level diversification and marketing opportunities. Respondents to a Citizens Report Card survey in 2005 were satisfied overall with agriculture extension services and more than 58 percent felt that agricultural extension services have improved over the last two years. In addition, there have been some success stories during the CAS/ICAS period with respect to agriculture research with improved varieties reaching higher crop yields. Recent successes in the flower industry, where revenue generated for 2006/7 amounted to US$63.6 million, point toward the importance o f new strategic directions namely toward market-driven diversification and commercialization, and increasing exports, with a greater focus on private sector investment.

14. The Bank’s policy dialogue through the PRSC achieved limited progress in agriculture sector reform. Government’s ADLI strategy emphasizes intensification to increase agricultural productivity focusing on a combination o f technology, credit, fertilizers, seeds and improved management practices to raise productivity. The ADLI strategy evolved over the review period placing increased importance on marketing and the private sector. The Bank’s policy dialogue init ially focused on decreased government intervention in the sector and-where there i s a rationale for state involvement-the promotion o f more effective government systems to support agricultural development. Progress was slow at the beginning o f the review period and the Bank had to reduce the originally agreed credit amounts for PRSC I and I1 by US$30 mi l l ion and US$20 million, respectively (from US$150 mil l ion originally envisaged for each PRSC) due to lack o f sufficient progress with respect to fertilizer marketing, commercializing agriculture and developing rural markets (in addition to telecoms, see below).

15. i t s dialogue with Government. A Vulnerability and Risk Assessment was completed in 2005, analyzing the management o f risk as important determinant o f poverty and outlines social protection strategies for better risk management. The 2005 Poverty Assessment-“The Role of Agriculture and Agency”-highlighted the importance o f complementing agriculture research and extension with market development, i.e. proper incentives for farmers and traders, a facilitating institutional environment, and infrastructure to improve market connectivity. The 2007 CEM, which has a major focus and separate chapter on agriculture, confirmed these findings. It found that an ADLI-l ike strategy was s t i l l appropriate, even as agriculture was losing i t s overall impact on growth, but that a more holistic strategy was required. A Wor ld Bank Water Resources Assistance Strategy for Ethiopia: Managing Water Resources to Maximize Sustainable Growth was done in March 2006. In June 2006 a major Rural Development Review was completed, which conducted comprehensive analysis o f the agricultural sector and recommended strategic options for increasing agricultural productivity.

However, a range o f timely and relevant analytic work allowed the Bank to improve

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Key Outcome Indicators Improved investment climate

Increased capacity of private sector firms

Increased growth of private sector

16. The Bank provided support for the rural program through various multi-sectoral operations. The Capacity Building for Agricultural Services project aims at strengthening the agriculture technology system, making it more responsive to clients needs, and enhancing the capacity o f producers to select economically viable technologies and practices. The project had to be delayed to a FY06 delivery as a consequence o f the slow pace o f reforms (and due the lack o f availability o f IDA13 funds). The Productive Safety N e t Program (PSNP), further discussed below, replaced the emergency-based humanitarian relief system for the chronically food insecure population with what i s effectively a major rural development program. It has shifted assistance from a relief-oriented system funded on an emergency basis, to a development-oriented safety-net funded on a multi-annual predictable basis, enabling better local level planning by communities and local authorities, and focusing on longer term outcomes. In addition, the Food Security, Pastoral Community Development and Emergency Drought Recovery projects contribute to the empowerment, income security and improved service delivery to marginalized and disadvantaged sections o f the population. The projects are already registering tangible results, for example: capacity building to support local governments; facilitating voices o f the poor and their development priorities were addressed; strengthened confidence o f rural poor, particularly women and unemployed youth, to engage in income generating activities; in areas where rural micro- finance was nonexistent, these projects have supported many rural households to save, and invest in productive assets.

FYO3-07 Progress Decreased amount of days required to start a business from 44 (2003) to 16 (2007) Total factor productivity (TFP) in representative industries? Increased in food sector from 51 (2002) to 87 (2006); Increased in garment sector from 43 (2002) to 67 (2006); Increased in wood worWfurniture from 113 (2002) to 145 (2006) Increased private investment from US773 million (2002/03) to US$1,302 million (2006/07)

Increased inflow of FDI from US149 million (2001/02) to US482 million (2006/07)

17. private sector activities albeit from a low base and despite many remaining challenges. Doing Business ranked Ethiopia as a top ten reformer on business start-up procedures in 2005. Ethiopia i s now the gth ranked business environment in Sub-Saharan Africa. There has been notable success in reducing the cost and time required to start a business, due to improvements in business registration and licensing. Additional positive outcomes include reduced time required to clear customs, lower tax burden for small businesses, and an increased availability o f land for business and industry in urban areas. A 2006 Investment Climate Survey has concluded that “practically every aspect o f industry’s business environment in Ethiopian has improved over the past four to five years. As shown in Figure 1, there has been significant progress since 2002, with the rate o f complaint significantly lower than the low-income cross country average with respect to almost a l l institutional factors. In addition, the share o f private investment nearly doubled and FDI inf low almost tripled, and there i s evidence for the increase in the capacity o f private firms based on an increase in total factor productivity per worker. Still, there remains a large agenda for further reforms to enhance the investment climate, particularly in regard to improving the access to finance; reducing anti-competitive practices; developing a more open, less targeted approach to

Ethiopia made good progress in improving the investment climate and enhancing

Market share weighted industry average TFP (upper middle income countries = 100) 26

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Key Outcome Indicators Increased private access to finance

Reduced share of NPLs in total loans outstanding Increased credit provided to the private sector

investment promotion; improving the enabling environment for small and medium enterprises, and improving the efficiency o f urban land management systems to allow easier access to land.

FYO3-07 Progress Decreased percentage of firms considering access to finance a ‘major’ or ‘very severe’ obstacle from 50% (2002) to 41% (2006) Decreased share of NPLs in total loans outstanding from 61 % (2002) to 20% (2006) Increased credit provided to the private sector from $1,105 million (2001/02) to $2,265 million (2006107)

Figure 1: Percent rating factor as obstacle to business operations (all industries), 2006 --” 60%

Electricity Transportation Tax Access to Corruption Access to land Customs and Anticompetitive Administration Finance Trade practices

Regulations

Ethiopia 2002 0 Low Income Countries

18. business climate. In general, Ethiopia provides many complexities regarding the dialogue on private versus public sector involvement in the economy, including unorthodox policies such as endowment-owned enterprises and the substantial state role in directing private sector development through, inter alia, the banking system. Much o f the progress achieved since 2001/2002 resulted from policy dialogue based on firm ESW/AAA, including: four policy conferences, two investment climate assessments, a 2006 Value Chain Analysis, a 2006 Tourism Sector Strategy and two CEMs. A 2002 I C A survey identified business constraints in Ethiopia and gave recommendations on the institutional reforms to spur enterprise development, which the Government included in i t s reform program. A 2004 follow-up to the survey confirmed improvements in business registration and licensing. The 2006 ICA pointed out the need to further increase f i r m s ’ productivity and competitiveness. Improvements in the investment climate were listed as prior actions under PRSC I and resulted in reduced cost and time required for business registration. PRSC I1 supported the Government’s privatization strategy with a focus on a wider assortment o f divestiture instruments (e.g. public-private partnerships). The PSD Capacity Building project further supports the privatization agenda and aims to create conditions for improved private sector productivity and competitiveness. The project was restructured to have a stronger focus on export development, which emerged as a Government priority following the Diagnostic Trade Integration Study (see more below).

The Bank’s analytic work and PRSC dialogue contributed to positive changes in the

19. to finance, reduced share o f non-performing loans and increased private sector credit. According to the 2001 and 2006 ICA surveys, the share o f f i r m s that see access to finance constraints as “major” or “very severe” was reduced from 50 to 41 percent. Access to finance improved also but moved overall from being the fourth to the second major concern for the private sector. Another key goal was the reduction in non-performing loans (NPLs), which was successfully carried out, and laid the basis for recovery o f the financial sector. In parallel, there has

Financial markets recovered over the review period, as evidence by increased access

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Key Outcome Indicators Improved ratio of exports to GDP

Diversification of exports (share of coffee in merchandise exports)

been a gradual expansion o f private banking (more than 50 percent o f the market today, up from 20 percent in 2001)’ and o f MFI lending, both o f which are now high by African standards. Positive outcomes from these developments are evident in the doubling o f the credit provided to the private sector over the review period.

FYO3-07 Progress Increased exports of GNFS from US$983 million (2001/02) to US$2,486 million (2006107). Total value of merchandise exports doubled from US$660 million to about US$1.2 billion. Diversification improved from 40% share of coffee to total exports (2001) to 36% (2007)

20. support in this sector was closely aligned with the general policy dialogue regarding the role o f the private sector discussed above. Over the period, the Bank’s focus moved from restructuring o f the banking sector to specific focus on increased access to finance. The PRSC series supported the restructuring o f the Commercial Bank o f Ethiopia and directly contributed to a reduction o f the amount o f NPLs. The FY06 Financial Sector Capacity Building Project i s closely aligned with the CAS outcome aiming at an improved financial sector that allocates resources to the private sector more effectively and efficient. The project was officially launched in February 2007 and so far shows satisfactory process.

The Bank moved from general policy dialogue to specific lending support. The Bank’s

21. export diversification. Average annual export growth was over 16 percent in the past six years. The total value o f exports increased from US$660 mi l l ion in 2001/02 to US$1.2 bi l l ion in 2006/07. Coffee remains Ethiopia’s largest export item but significantly reduced world prices but major droughts since 2001 led to a relative decline in its share vis-a-vis total exports. In 2001, coffee’s share was only about 40 percent o f total exports from 60-70 percent in the preceding decade and, even though world prices rebounded somewhat, remained at 36 percent in 2007. However, coffee’s relative decline as key export product i s also due to some emerging sectors that signal Ethiopia’s potential for more export diversification: For example, the review period saw the discovery o f Ethiopia’s potential for high-quality horticulture produce and spectacular growth in the sector. Revenues from Ethiopia’s flower exports increased from US$660,000 in 2001 to an estimated US$63 mi l l ion in 2007. While there were only four main flower producers in 2002, it i s estimated that the industry attracted up to 80 producers by the end o f 2006. In addition, oilseeds are also increasingly important, accounting for 2 percent o f total exports in 1997 and 2 1 percent in 2006.

The review period saw strong export growth and showed Ethiopia’s potential for

22. While the main effort was on the part of Ethiopian economic actors, the Bank contributed to Ethiopia’s export growth and diversification through key analytic work. Ethiopia’s 2003 Industrial Development Strategy identifies export-oriented manufacturing as a key vehicle to generate employment and reduce poverty. Among other things, the strategy supports entrepreneurs to compete in global markets by providing incentives through tax privileges, access to capital and land. The Bank and partners prepared the 2004 Diagnostic Trade Integration Study, which identified key constraints to Ethiopia’s integration into the multilateral trade system and the global economy. The study suggested a program o f technical assistance to strengthen Ethiopia’s ability to increase i t s participation in world trade, including accession to the WTO, which was supported under the Bank’s PRSC series and formally initiated in December 2006. The 2007 C E M highlights further reforms to accelerate export growth within sectoral discussions on agriculture and rural development, private-sector led growth and infrastructure. Export growth in general

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Key Outcome Indicators Increased road density

Reduced road transport costs per km Increased teledensity

Increased electricity coverage

requires a holistic approach and the Bank provided inputs through various sectors (e.g. agriculture, private sector development, etc.) covered under different sections in the report. The PSD Capacity Building project was restructured to have a greater focus on export development following the DTIS.

FYO3-07 Progress Increased road density from 27 km (2001) to 38.6 km (per 1,000 km2) road density in 2007 Little change evident Increased teledensity from 0.6 lines per 100 persons (2002) to 2.0 lines (2006) Increased from 17% in 2005/6 to 22% in 2006/7

Progress under the objective has been positive in roads, mixed to weak in other areas, and overall infrastructure levels remain low. Strong progress was made in increasing Ethiopia’s road network: Road density increased to 3 8.6 km (per 1,000 km’), but remains below the African average o f more than 50 km. Further progress indicators include improved road conditions from 35 percent asphalt roads in 2002 to 60 percent in 2007 and a reduced average distance to al l weather roads from 17 km to 14 km over the same period. Teledensity grew over the review period from a l ow base, but the growth has lagged most other sub-Saharan Afr ica countries. Overall telecommunications coverage in Ethiopia remains among the lowest in the world, with about two telephone lines per 100 Ethiopians (about ha l f o f which are fixed, and the other ha l f mobile). This compares to about 14 l ines per 100 people in sub-Saharan Afr ica (one fixed line and 13 mobile l ines per person). Internet access also lags; there are about 0.2 o f 100 Ethiopians are internet users, compared to about 3.2 o f 100 sub-Saharan Africans. Total energy production in 2006/7 reached 3,386 GWH, and the total electricity coverage o f the country has increased from 17 percent in 200516 to 22 percent by the end o f 2006/7.

23. sector outcomes. The strong progress in roads i s an indicator for successful Bank financial intervention. The road sector accounted for US$600 mi l l ion in IDA commitments, or 26% o f total IDA support, from FY03-07. The review period coincides with the second five-year phase o f the 1 0-year Road Sector Development Program (RSDP, 1997-2007). While the first phase, through 2002, focused on rehabilitation and upgrading o f main roads, including regular maintenance, the second phase aims to consolidate the achievements o f the f i rs t phase by increasing network connectivity and providing sustainable road infrastructure to rural areas. The Bank provided phased support to the RSDP from i t s onset through a Road Sector Investment Project, followed at the start o f this CAS period by the Adaptable Program Lending (APL), currently in i t s third stage. Good effort was also made to build the capacity o f the domestic road construction industry, and mainstream HIV/AIDS prevention measures into road sector activities. The Bank’s large volume o f support and close collaboration with the Ethiopian Roads Authority (ERA) highlight the direct contribution by the Bank to the positive improvements in transport sector outcomes.

The Bank’s investment lending in roads was an important contribution to positive

24. limited results. Under the PRSC series, the Bank focused on revision o f the telecommunications policy, allowing for partial liberalization o f the sector and for a reduction in mobile phone tariffs. However, while government liberalized some peripheral segments o f the telecom sector (e.g. internet services) it decided against larger reforms, such as the licensing o f a second mobile operator. The Government produced a telecom action plan in 2004, as part o f the required “triggers” for PRSCII financing. However, the Bank considered the plan to be insufficient to

Telecommunication was a difficult part of the Bank’s policy dialogue with only

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CAS Outcome Indicators Increased primary enrollment rate

Improved primary completion rates

achieve the needed growth in telecom access. As a consequence, financing o f PRSCII was reduced to US$130 mi l l ion instead o f the US$l50 mil l ion originally envisaged.

FYO3-07 Progress Increased gross primary enrollment (grades 1-8) from 68% (2003/04) to 92% (2006/07) Increased primary education completion rates for grade 5 from 44% (2003/04) to 65.2% (2006/7)

25. power production and efforts to expand access in rural areas are receiving increasing attention. The Energy I1 project financed construction o f the Gilgel Gibe hydropower plant (180 MW), completed in 2004. The FY05 Energy Access project aims at establishing a sustainable program for expanding the population’s access to electricity and improving the quality and adequacy o f electricity supply. Progress on implementation has been slow but i s expected to accelerate as major contracts begin implementation. The Rural Access Expansion project series focuses on the same objectives but concentrates on supporting the push to expand access to electricity in rural towns and villages.

IDA investments in electricity generation have contributed to strong increases in

2. Pillar: Enhance human development outcomes

26. made in increasing pro-poor spending and expanding access to services, though increases in quality were slower. The positive outcomes under this pillar are closely related to governance reforms especially the decentralization o f service delivery. The review period coincides with increased decentralization o f service delivery and the transfer o f fiscal resources to sub-national levels o f government. After a f i rs t wave o f decentralization o f fiscal resources to the regions in 1994, this period from 2002 on saw an increased devolution o f power and resources to the districts (woredas). Woredas are now increasingly responsible for the delivery o f primary and secondary education as well as health services (see below for more details). A Bank study on Enhancing Human Development Outcomes through Decentralized Service Delivery analyzed woreda-level data before and after decentralization in Oromiya and Southern Nations, Nationalities and Peoples Region (SNNPR). The study concluded that overall the decentralization to woredas seemed to have had a positive impact both on increased service delivery as wel l as on health and education outcomes. One o f the key recommendations from the report was to increase the block grants from the Federal government to the regions and from regions to woredas in order to increase their budget envelopes and commensurate to improved service delivery. This provision o f resources to the Federal block grant transfer system i s one o f the cornerstones o f the PBS project, which, together with other Bank projects and programs, contributed positively to enhanced human development outcomes.

Overall progress under the Second Pillar i s rated satisfactory. Excellent progress was

27. during the review period. Total primary enrollment went from 8.1 mi l l ion students attending primary school in 2000/01 to 14 mi l l ion in 2006/7. There has been considerable reduction o f the gender gap for primary schooling - defined as the ratio as girls to boys - from 0.87 in 2004/05 to 0.93 in 2006/07 for grade 1-4 and from 0.69 in 2004/05 to 0.78 in 2006/07 in grade 5-8. The GER for secondary (grades 9-10) stood at 36 percent in 2006/07, about double the level o f 2002. A pattern that can be observed in any country where enrolment rates increase substantially i s that teacher training naturally lags before catching up. In Ethiopia, the pupil-teacher ratio at the primary level (grade 1-4) increased from 42 in 1997 to a peak o f 71 in 2005. However, this trend has been reversed over the past two years and the ratio declined to about 64 in 2007 with GoE’s increased efforts on teacher recruitment and training. At the same time, primary completion rates more than

Primary enrollment increased, with the focus shifting toward the quality of education

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Key Outcome Indicators Improved primary health care coverage

Increased percentage of children under 5-years of age who sleep under an insecticide treated bednet Increased proportion of children under I-year of age vaccinated with DPT3 and measles vaccine

Increased contraceptive prevalence rate

doubled over the review period. Still, improving educational quality must be a key focus for Bank support in future interventions.

FYO3-07 Progress Increased health care service coverage from 62% (2002) to 77% (2005) 4 percent in 2005 (no baseline available) Additional indicators: Increased distribution of bednets from 3 million (2005) to cumulative 20 million (2007) Increased proportion of children under I-year of age vaccinated against (2000-2005):

DPT3 from 21 % to 32% Measles from 27% to 35%

Increased contraceptive prevalence from 8% (2000) to

(0 (ii)

28. The Bank contributed to education outcomes in a harmonized manner with donor partners based on a comprehensive sector development plan, first through a Sector-Wide Approach (SWAP), then through the PRSC series, and finally through the PBS Project. The Ethiopian Government launched the 20-year ESDP I in 1997, funded through a SWAP to which the Bank contributed through a US$lOO mil l ion investment operation. Starting with PRSC 1 , the Bank facilitated a successful shift from SWAP financing to general budget support as the main vehicle for providing financing to the second phase o f the education program. The PBS project, with i t s focus on protecting basic services provided at the sub-national level, continued this function providing financing to the third phase o f Government’s education sector development plan. A comprehensive Education Country Status Report by the Bank informed the third phase o f the sector plan and thereby contributed to the improvements in the efficiency and effectiveness in education spending. The importance o f education beyond primary was also recognized during the earlier half o f the review period and the Bank conducted a study on higher education development that identified concrete necessary conditions for successful higher education reform. Building on these findings, the Post-Secondary Education Project (FY05) has begun to contribute to an increase in the quality o f instruction and management o f tertiary institutions.

29. There has been good progress on health indicators during the review period. Health care coverage increased considerably during the review period with positive effects on overall health outcomes. According to the 2000 and 2005 demographic and health surveys (a new survey i s currently underway), under-five mortality decreased from 166 (per 1,000) to 123 between 2000 and 2005 and infant mortality decreased from 97 to 80 (per 1,000) over the same period. HIV figures are currently being revised. They appear below 5 percent - lower than previously assumed. The nutritional status o f children improved between the two health surveys. The proportion o f children underweight fel l from 47 percent in 2000 to 38 percent in 2005. From the intermediate outcome indicators that were selected under the CAS/ICAS , vaccination rates and contraceptive prevalence rates showed good progress. The percentage o f children 12-23 months fully vaccinated increased by 43 percent from 14 percent in 2000 to 20 percent in 2005. Three in five have received the Bacille Calmette Guerin (BCG) vaccination for tuberculosis and 35 percent have been vaccinated against measles. The coverage for the f i rst dose o f DPT i s relatively high (58 percent). However, only 32 percent go on to receive the third dose o f DPT. The distribution o f ITNs increased from about 250,000 in 2000 to 3 mil l ion in 2005 to 18.2 mi l l ion in 2006; the number o f deaths from malaria decreased to less than 60,000 in 2006 (from 110,000 in 2005). L i fe expectancy at birth has also increased slightly from approximately 47 to 49 years between 1995 and 2005.

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Key Outcome Indicators

30. The Bank successfully managed the shift from investment lending within a SWAP to financing under the PRSC series and the subsequent protection of positive sector outcomes through the PBS project. As with education, effectiveness o f public spending in health has been facilitated by the development o f a comprehensive sector development plan. The Bank contributed investment lending to a SWAP to finance the f i rs t phase (FY 1997-2002) o f the plan with a strong focus on expansion o f access to primary health services. The PRSC series supported financing o f the second phase o f the health sector program and contributed to the implementation o f an extension health package and training o f health extension workers. The Bank’s Country Status Report for Health provided analytic underpinning for that implementation phase, e.g. by assessing the impact o f expenditure increases in the areas o f outreach, prevention, and behavior change programs on reducing infant and child mortality rates. The PBS project i s closely aligned with the current third phase (FY2006-20 10) o f the health program. The project has a special component on promoting the health MDGs by providing predictable financing for those critical inputs for primary health service delivery subprogram that cannot be efficiently financed through the project’s general financing o f sub-national basic service delivery. This health MDG component aims at among others accelerating and sustaining malaria control, reducing infant mortality through vaccines, improving the delivery o f primary health services. It i s directly aligned with some o f the positive outcomes achieved over the past years as mentioned above, particularly malaria due to i t s significant role in increasing ITN distribution.

FYO3-07 Progress Obiective 2.3 Imt>roved access to clean water sumlv and sanitation

- I (2004/05) to 52% (2006/7) -

3 1. however, differences between rural and urban areas persist. Total access to safe drinking water increased. Nationally, access to water rose from 42% in 2004/05 to 52 percent in 2006/7. Between 1995/96 and 2006/07, water access increased from 72 to 82 percent in urban areas and from 9.6 to 46 percent in rural areas.

Overall access to improved water sources increased during the review period,

32. between outputs and outcomes i s needed to show actual impact. The Water Supply and Sanitation Project i s directly aligned with the CAS objective by aiming at increased access to sustainable water supply and sanitation services for rural and urban users, through improved capacity in the sector. The Development Objective i s based on the lessons learned from a predecessor project, rated as satisfactory by IEG, which identified sector capacity building, decentralized implementation responsibility, and integration o f hygiene and sanitation into the water supply projects as key building blocks. Accordingly the project was designed to build capacity o f public and private sector stakeholders to plan, construct and maintain water supply and sanitation facilities. Progress so far i s satisfactory, with indicators o f progress including establishing o f systems for demand-driven planning in more than 200 woredas and other institutional reforms at central and district level. The project i s currently improving efforts to define a monitoring and evaluation program that should help to show more results on the ground.

While the Bank undoubtedly contributed to improved access to water, a clearer link

3. Pillar: Deepen Ethiopia’s ‘Core’ Governance Program

33. short review period showed good progress in many areas, e.g. decentralization, intergovernmental fiscal relations, procurement and public financial management, also with respect to the relatively

Overall progress under the third pillar i s rated moderately satisfactory. The relatively

71

Annex 3: CAS CR

Key Outcome Indicators Improved public expenditure management and financial accountability, as evidenced by PEFA indicator scores Improved income and non-income incentive environment for public servants measured by a gender disaggregated wage decompression ratio and privatelpublic comparators

narrow outcome indicators as defined in the CAS. Progress on transparency and accountability accelerated toward the end o f the review period with support from the PBS program. However, the elevated governance risks that became evident after the disputed 2005 elections, while having moderated, remain a concern as the country continues to be politically polarized. Strong efforts by the Bank and other partners continue to be necessary to support improvements on the overall governance agenda.

FYO3-07 Progress The 2007 PEFA assessment shows that there has been a fairly successful track record of public financial management improvements at the Federal level. Public salary increased during the review period. Wage decompression ratio is 1:16.5 (2006).

34. review period was the transfer o f power and resources to sub-national levels of government. The Bank’s innovative financing (e.g. the Public Sector Capacity Building Support Project and the PBS project) and analytics (e.g. the Joint Budget and Aid Review) contributed to improved efficiency o f the public sector and public spending as well as increased decentralization and citizens’ empowerment. A key highlight i s the strengthening o f government functions on the woreda level, which-in addition to the positive service delivery outcomes discussed above- contributed to improvements in the satisfaction o f beneficiaries. However, public sector transformation processes take time, and progress remains uneven, due to: (i) the size and diversity o f a country o f 77 mi l l ion people; and (ii) the fact that Ethiopia i s a federal republic with significant regional autonomy. Significant improvements in governance and public sector capacity across the board, from such a l ow base, will take about a generation, not f ive or ten years.

As already discussed under the previous pillar, the Bank’s main focus during the

35. While much work remains to be done, improvements have been noted in modernizing fiscal and financial management and some evidence for an improved incentive environment in the civil service. The 2007 PEFA assessment shows that at the Federal level the budget process supports aggregate fiscal discipline. The credibility o f the budget i s strong with low deviation between the budgeted and actual out-turns and low level o f expenditure arrears. Resources are allocated strategically with an orderly budget process, good budget classification system and good information in the budget documentation. However, efficiency in service delivery i s affected by weaknesses with regard to l ow predictability o f availability o f funds by spending units, procurement systems, internal controls for non-salary expenditure, financial reporting, and internal and external audit systems. As a more general proxy indicator for increased government effectiveness, overall tax revenues increased from 1.1 bi l l ion Birr in 2003 to 1.9 bil l ion Birr in 2007. The indicator on the incentive environment for public servants was derived from the FY04 Public Sector Capacity Building Support Project (PSCAP). However, the project s t i l l has not been able to report on these indicators only noting unspecific “salary increases” in the public sector and wage decompression ratios for 2006 (without baselines for comparison).

36. The Bank contributed to progress through innovative and joint financing and analytics. PSCAP catalyzed the formation o f a multi-sectoral SWAP for public sector reforms. The SWAP aims to: (i) improve the scale, efficiency, and responsiveness o f public service delivery at the federal, regional, local level; (ii) empower citizens to participate more effectively in shaping their own development; and (iii) promote good governance and accountability. Unlike traditional sector development programs, PSCAP resources are provided to regions as performance-based

72

Annex 3: CAS CR

Key Outcome Indicators

transfers that are separate from basic regional subsidies. Several multilateral and bilateral donors have joined the Bank in pooling resources through PSCAP, and the approach i s being adopted by other programs. For example, the multi-sector Productive Safety Net Program (see below) incorporated many o f the harmonized features o f PSCAP in i t s design. An Institutional Governance Review (IGR), completed in FY05, was the Bank’s key analytical instrument to support the Government’s state transformation process with benchmarking surveys and a focus on M&E o f the performance o f the overall public sector reform program. The Bank conducted a CPAR and a CFAA in FY03 and a FY04 Public Expenditure Review on public spending in the social sectors. Since FY05, these diagnostics have been combined in annual Joint Budget and Aid Reviews (JBAR) conducted joint ly by Government and Development Partners (including the Bank).

FYO3-07 Progress

Increased regional revenue mobilization

Education: 54% of beneficiaries in rural areas and 72% in urban areas satisfied (2005) Health: 49% of beneficiaries in rural areas and 47% in urban areas are satisfied (2005) Sanitation: 47% of beneficiaries in rural areas and 26% in urban areas are satisfied (2005) Water: 68% of users of public taps in rural areas and 43% in urban areas are satisfied (2005) Agriculture extension: 53% of beneficiaries in rural areas

budget (2002/03) to 71 % (2005/06) Increased (total) regional revenue mobilization from US$81 million (2004) to US$109 million (2006)

I are satisfied (2005) I Increased size of woreda transfers from 55% of regional

37. As mentioned above, woredus are now responsible for a large proportion o f basic service delivery: (i) in the education sector, woredas establish and manage kindergartens and primary and-in some regions-secondary schools; (ii) in the health sector, woredas establish and manage health posts, clinics and health centers; (iii) in the water sector, woredas in almost al l regions have the mandate to develop and operate springs, hand-pump wells, water supply lines, water and soil conservation schemes, ponds, water harvesting schemes and small-scale irrigation schemes; (iv) al l woredas have the mandate to construct, maintain and manage rural roads; and (v) in the agriculture sector, al l woredas have the mandate to operate environmental rehabilitation programs, operate and manage veterinary clinics and farmers’ training centers.

Progress on strengthening decentralization on the woreda level has been substantial.

3 8. remains room for improvement. One o f the key outcomes during the review period was the strengthening o f decentralization associated with devolution o f responsibilities for basic service delivery to woreda as evidenced by an increase in the size o f woreda transfers and regional revenue mobilization. A Citizens Report Card-the f i rs t o f i t s kind in Ethiopia-conducted by a local CSO provides an important feedback from users o f public services. The survey i s based on a sample o f 3,800 households in 10 woredas in the rural regions o f Tigray, Oromiya and Southern Nations, Nationalities and Peoples Region (SNNPR) as well as the urban region o f Di re Dawa. The public service with the highest satisfaction rating i s education especially in urban areas. Perhaps surprisingly, health services receive relatively high satisfaction ratings o f close to 50 percent in rural areas, higher than in urban areas. Users o f public taps are generally satisfied, however, access to these water sources remains l o w with a large number o f people depending on rivers, ponds and unprotected springs. As already mentioned above, respondents are also overall satisfied with

Satisfaction with available local government services is relatively high, though there

73

Annex 3: CAS CR

Key Outcome Indicators Citizens are better informed on public budget processes (budget formulation, allocation and expenditures)

agriculture extension services and more than 5 8 percent feel that agricultural extension services have improved over the last two years.

FYO3-07 Progress Improved access to public budget information: Budgets are publicly posted in all regions and most woredas in 2007 (from zero in 2005)

39. The Bank supported decentralization through various related interventions. PRSC I supported decentralization through efforts to stabilize public management systems and to promote performance across tiers o f government. PRSC 2 prior actions included issuance and cabinet approval o f a fiscal decentralization strategy for municipalities and woredas. The Bank’s Capacity Building for Decentralized Delivery Project aims to enhance service delivery performance by initiating long-term public sector capacity building through institutional reforms, systems development and training at the federal, regional and woreda levels. The project so far achieved various outputs, e.g. the development o f capacity building plans for regions and federal agencies, capital investment plans for municipalities, staff training, etc. Other relevant projects with respects to decentralization include PSCAP and PBS, which are discussed more in detail in other sections o f this report.

40. limited space available for it to operate in relation to the state. Limited progress was made in opening new space for c iv i l society to enhance i ts role in promoting vertical accountability. With the support o f the PNBS project, access to budget information increased, though efforts are s t i l l underway to measure increased participation o f citizens in budget processes. According to evidence from the JBAR and the PBS project, budget information i s now increasingly accessible to a l l citizens especially on the regional and woreda level, where this kind o f information did not exist before 2005. However, the fact that increased budget information i s available does not guarantee that people can understand and engage in public budget processes. A Financial Transparency and Accountability Perception survey i s currently underway to measure and provide baselines for this dimension.

Civil society remains weak in Ethiopia, both in terms of its own capacity and the

41. projects. The CAS envisioned a Civ i l Society Capacity Building Project in FY05 to support the capacity building o f c iv i l society, with two distinct financing windows, one for Government-led initiatives (enabling environment) and one for c iv i l society-led initiatives (capacity building). The content o f this operation was folded into the PBS with the intention that the large f low o f resources attached to the PBS would provide stronger leverage to the c iv i l society empowerment and social accountability agendas. The ICAS considered the PBS project a key catalyst to focus Bank projects supporting decentralized service delivery and strengthening empowerment. The PBS project, through i ts third and fourth components, supports the development o f accountability mechanisms on both the government and citizens’ sides and directly contributes to better integrate citizens into the budget process. Still, the issue o f empowering c iv i l society remains a diff icult on in Ethiopia, and one on which innovative approaches will be required in the new CAS.

The Bank contributed to enhanced empowerment and accountability through several

4. Pillar: Reduce vulnerability

42. Overall progress under the fourth pillar has been satisfactory. While the large amounts o f food aid traditionally received by Ethiopia have prevented the starvation o f millions, traditional food relief has not addressed long-term development needs, and has often distorted local

74

Annex 3: CAS CR

Key Outcome indicators Increased amount of cash assistance relative to food aid

Number of chronically food insecure people covered by multi-year productive safety nets

Improved food security and resilience to shocks for chronically food insecure households

food markets. The Ethiopian Government decided that an alternative system was needed to support the needs o f chronic, predictably food-insecure households, as well as to address some o f the major underlying causes o f food insecurity. In 2005 it started implementation o f a new program, the Productive Safety Net Program (PSNP), which had been endorsed at the G-8 Summit o f June 2004 as a major element o f the effort to end famine in the Horn o f Africa. The PSNP replaced the emergency humanitarian appeal system as the chief instrument for init ially assisting about 5 mil l ion chronically food-insecure people in rural Ethiopia. It was scaled up to reach 7.23 mil l ion people in 2006. W h i l e PSNP has yet to be tested under a severe drought, results so far are very encouraging-beneficiaries report less food insecurity, less recourse to selling assets to buy food, increased use o f health and education services, and increased creation o f assets.

FYO3-07 Progress Increased amount of cash aid from negligible in 2003 to approx. $90 m in 2005, and $140 in 2006 with commensurate reduction in amount of food-aid Increased number of chronically food insecure peoule covered by multi-year productive safety nets from negligible to 5 million in 2005 and 7.3 million in 2006 75% of beneficiary households report improvement in food security in 2005 as compared with 2004

43. supported under PSNP aimed to address not only chronic food shortages, but also the underlying causes o f food insecurity through a public works component with an integrated watershed management focus that would tackle the severe environmental degradation in many food insecure areas. Indicators for changes in the food aid system include the increase in the amount o f cash aid relative to food aid and the substantive increase in the number o f people covered by multi-year productive safety nets.

The review period saw a major reform of the emergency food aid system. The reforms

44. major reductions in the vulnerability of poor households. The Bank conducted a risk and vulnerability assessment and focused on the issue in the Public Expenditure Review at the beginning o f the review period. Both argued that more effective management o f risks should require increasing the productive element o f safety net transfers, protecting household assets through expanding the coverage o f the food security program, and enhancing rural growth. The PRSC series supported defining o f institutional arrangements, implementation modalities and monitoring mechanisms for a system o f multi-annual productive safety nets. The Bank prepared an Emergency Drought Recovery Project, which assisted the Government to respond to the drought in a timely manner, while increasing i ts fiscal capacity to protect other public expenditures and/or significantly expand the public programs relating to food insecurity and vulnerability. Furthermore, a community intervention component generated direct employment for over 900,000 individuals.

The Bank took the lead role in catalyzing donor support and directly contributed to

45. Program, which in i ts f i rs t phase provided predictable cash and in-kind resources to around 5 mil l ion chronically food insecure households in rural Ethiopia. The second phase o f the APL expanded to cover 7.23 mi l l ion food insecure households eligible for the program. Evidence on the PSNP so far indicates that the program i s wel l targeted. As to impact the picture i s mixed, with some positive evidence regarding the impact on food insecurity and asset protection, especially when the combined effect o f the PSNP and the FSP are considered. Additional efforts to strengthen the transparency o f the program as wel l as the appeals and grievance procedures were introduced in 2007. The Program s t i l l faces challenges including the need to build adequate capacity to ensure

The lessons from the latter component proved beneficial for the Productive Safety N e t

75

Annex 3: CAS CR

Key Outcome indicators Strengthen regulatory and institutional capacity

Reverse loss of environmental resources

timelier, more predictable payments and effective implementation o f public works. While the safety net program represents significant progress, the phenomenon o f increasing urban vulnerability and poverty s t i l l remains an unmet challenge.

FYO3-07 Progress Environment Proclamation approved in 2004; Woreda Environmental Management Plan completed in 2006/07 17 million seedlings planted and 245,000 km of stone bunds constructed in 2005 with support of PSNP

46. environmental management. At the federal level, the Parliament approved the Environment Proclamation in 2004, which among other things, defines the organizational arrangements for environmental protection and environmental assessment requirements. On the regional level, progress included the establishment o f regional environmental protection units and the completion o f woreda environmental management plans.

There has been progress in strengthening the legal and institutional framework for

47. the PRSC and analytic support. Approval o f the Environment Proclamation was a prior action under PRSCl. Other achievements under the program included issuance o f environmental guidelines on agriculture, industry, dams, mining, and roads. The Ethiopian Environmental Protection Authority in close collaboration with the World Bank and DFD launched a Country Environmental Analysis in April 2003. The PSNP addresses environmental degradation in the areas most seriously affected in the country. The public works in the PSNP are implemented within an integrated watershed management logic and focus on soil and water conservation activities, specifically aimed at environmental sustainability. These works include bunds, ponds, canals, and maintenance and development o f springs and wells. The PSNP represents a huge reforestation effort for Ethiopia, with over 17 mil l ion seedlings planted in 2005 alone. Evidence from Ethiopia and other countries has shown that these types o f activities/approaches can have a profound impact on the environment. However, more attention i s needed to reverse land degradation which i s a major cause o f Ethiopia’s low agriculture productivity, persistent food insecurity and rural poverty.

The Bank supported the process of institutional environmental strengthening through

IV. Measuring Bank Performance

48. Levels o f financing were below “base case” in the CAS, but slightly higher than envisioned under the ICAS. Bank lending over the CAS period (FY03-05) was US$1,174 million; below the “base case” lending scenario o f US$1,504 mill ion. This shortfall was due to lack o f availability o f IDA 13 resources, as frontloading by other countries reduced the amount o f IDA available to Ethiopia. Bank lending over the ICAS period (FY06-07) was US$l, 135 mill ion. Overall, there have been no major dropped projects or slippages from the financing program as envisaged under the CAS and ICAS. Some projects envisioned in the FY03 CAS were folded into other projects to exploit synergies and streamline the program. Appendix 2 shows planned versus actual financing during the CAS and ICAS periods.

49. Portfolio quality was satisfactory. Table 3 shows Ethiopia’s portfolio performance during FY2002-2007. The Independent Evaluation Group (IEG) rated 70 percent o f Ethiopia operations assessed during FY02-07 as satisfactory for development outcomes. This rating corresponds with the average rating for operations in the Afr ica Region over the same period. rates slightly below the Bank-wide average. Ethiopia operations rate relatively l ow on

It

76

Annex 3: CAS CR

sustainability and institutional development impact in comparison with the regional and Bank-wide average.

Table 3: Ethiopia portfolio performance FY2002-2007 Fiscal year 2003 2004 2005 2006 2007 FYO3-07 Portfolio Size 19 20 22 22 21 Net Comm Amt (US$ million) 1,844.5 1,941.4 1,614.2 2,010.6 1,990.3 Number of Problem Projects 1 3 1 1 1 IEG Evaluations Number of Projects 4 2 3 4 4 17 Net Commitments 258.4 215.4 563.8 297.7 446.4 1,781.7 Outcome % Satisfactory 75 100 66.67 50 75 73 Sustainability % Likely 100 0 50 0 nia 37.5 lnst Dev Impact % Substantial 50 0 50 100 nia 50 AFR Outcome % Satisfactory 68 72 72 65 61 68 Sustainability % Likely 63 66 74 64 nla 67

Bank Outcome % Satisfactory 73 78 81 83 76 78

lnst Dev Impact % Substantial 50 56 57 53 75 58

lnst Dev Impact % Substantial 43 49 54 40 nla 47

Sustainability % Likely 73 79 84 83 75 79

50. An Ethiopia Country Program Assessment during FY2003-2005 by the Quality Assurance Group (QAG) was satisfactory overall. The Q A G panel rated the Ethiopia country program as highly positive with respect to responsiveness to government plans and needs, strategic relevance o f analytical efforts and lending interventions, coordination with donors, the design and quality o f tasks, implementation and likely impact. The country program was underpinned by a far range o f highly innovative, timely and influential analytics. Appendix 3 l is ts al l the Bank analytic support during the CAS and ICAS periods, most o f which was delivered as envisaged. Additional unplanned activities, such as PSNP which was introduced in response to the Government’s new Food Security Program, demonstrated the Bank’s responsiveness to changing priorities.

5 1. Ethiopia portfolio and consultations with government and World Bank task teams identified four portfolio-wide risks factors that have adverse impacts on implementation and results: (i) transparency and accountability, (ii) financial management, (iii) procurement, and (iv) M&E. Weak financial management and procurement delays were identified in the last CPPR (2005); although a number o f agreed actions were implemented, including training programs, these problems continue to occur. Specific actions to address procurement delays have been adopted: systematic training in procurement for relevant government agencies and the Bank; finalization o f standard bidding documents for national competitive bidding; feasibility studies together with MoFED on the potential to establish a certificate/diploma program in procurement. To improve financial management project implementing agencies will accelerate computerization o f their accounting systems to facilitate accurate record-keeping and close accounts on time; “roving accountants” will be recruited to provide targeted assistance in financial management to weaker project implementing agencies, and the use o f financial monitoring reports, instead o f SOEs based on transactions, will be piloted in two or three new projects in FY 2007/08.

Within the latest Country Portfolio Performance Review for FY 2006, a review of the

77

Annex 3: CAS CR

V. Pronram-wide Lessons Learned and Issues for the new CASz7

52. For projects under implementation, the Bank and Government will need to continue to apply measures instituted to further enhance transparency and accountability, especially at the local level. These measures include: using clear and transparent criteria for selecting project sites and beneficiaries; ensuring greater involvement o f a broad range o f stakeholders in project preparation and implementation; strengthening M&E systems and operationalizing them in a more participatory manner; strengthening implementation support, particularly oversight on the fiduciary aspects o f projects. For new projects will be designed with measures to strengthen transparency, local accountability, and oversight mechanisms.

53. rather than pull-out all support. The Bank’s partnership with Ethiopia i s long-term and events l ike the contested 2005 elections might change the terms o f engagement, but should not radically alter the Bank’s overall involvement in the country. The Bank reacted in a very measured and timely manner by shifting i ts support from general budget support to the highly innovative PBS project, which allowed the Bank and other donors stay engaged. The Bank thereby acted as a stabilizing force and assured continuation in the improvement o f governance and service delivery to poor people.

I t i s important for the Bank to stay engaged in constructive manner during shocks

54. the 2005 crisis, the benefits o f PRSCs were apparent and could not be fully replicated by PBS, as a more narrowly focused investment instrument. The two PRSCs had an overall positive impact and catalyzed many important reforms. They provided and important forum for dialogue, especially on issues related to growth and structural reforms that would need to be continued, e.g. to push for further reforms in telecom and the overall development o f a market economy. The public expenditure framework and governmental transfer systems are well- developed to allow budget support to have i t s intended impact. In addition, dialogue within the PRSC enhances donor harmonization and reduces transaction costs. These factors argue for the consideration o f resuming PRSCs as soon as donors and government agree that conditions are appropriate.

Despite the successful shift in financing modalities from PRSCs to PBS in reaction to

55. The next CAS will need to develop a more comprehensive results and monitoring framework. The 2003 CAS aligned the Bank’s program with broad objectives. It listed a few monitoring indicators that were, however, insufficient to link Bank contribution to outcomes. The new CAS will need to include a more logical results chain with that links country goals with outcomes, outputs and milestones that will facilitate monitoring o f CAS progress at various stages o f the CAS period.

’’ SectoraVthematic lessons learned are reflected in Appendix Table 1, Summary Table o f CAS Completion Report.

78

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Annex 3: CAS CR

CAS CR Appendix 2: Planned and Actual Financing FYO3-07 (US$ million)

~ ~~~

FY03 CAS PLANNED FY IDA

2003 Enerav Access 132.7 Cap&y Building (CBDSD) 26.2 ESRDF Supplemental 28.3 Emergency Drought Recovery 60 Pastoral Community Development 30 Roads II 127

2004 PRSC I 150 Roads II (Supplement) Capacity Building (PSCAP) Water & Sanitation Post-Primary Education Rural CB PSD Capacity Building

170 100 70 50 60 30

ICT Capacity Building- 20 2005 PRSC II 150

Decentralized Infrastructure Fund 150 Nile Basin 100 MAP II 30 Civil Society Capacity Building 20

Subtotal FY04 Subtotal FY05

Roads APL 2 Supplemental 87 Rural Electricity Access Expansion 125 Financial Sector Capacity Building 15

49 Capacity Building for Agricultural Services

2007 Productive Safety Nets I1 Local Investment Grants MAP II Rural Electricity Access Expansion II Tana Growth Corridor Irrigation and Drainage Roads APL 3 Urban Development Subtotal FY06 491 Subtotal FY07 400-550 TOTAL FYO6-07 891 -1.041

2,395.2- 2,545.2 TOTAL FYO3-07

IDA GRANTS Actual 132.7 _- Actual 26.2 -- Actual 28.3 -- Actual 60 60 Actual 30 30 Actual (RSDP APL I) 126.8 126.8 Actual 120 120 FY05 (Roads APL II) -- -- Actual I00 -- Actual 100 25 FY05 -- -- FY06 -- -- FY05 -- -- FY05 -- -- Actual 130 130 FY08 (PBS AF) FY08 FY07 FY08 (merged with PBS) Additional Actual Financing: Roads APL II Post-Secondary Education PSD Capacity Building ICT Capacity Building

160.9 -- 40 24 5 25 --

Productive Safety Nets I 70 55.7 404 216.8 320 145.0

449.9 190.7 1 , I 73.9 552.5

STATUS Actual Actual Actual Actual

21 5 215 87.3 --

133.4 -- 15 15

Actual 54 -- Actual 175 175 FY08 (PBS AF) -- -- Actual -_ 30 FY08 -- -- FY08 -- -- Actual I00 -- Actual 225 -- Actual (Urban WSS) I00 --

504.7 230 600 205

1 , I 04.7 435 2,278.6 987.5

86

- FY 2002

2004

2005

2006

Annex 3: CAS CR

CAS CR Appendix 3: FY03-07 Planned and Actual Non-Lending Program

FY03 CAS PLANNED FY07 COMPLETION REPORT PRODUCT STATUS

CFAA Actual CPAR Actual Joint Staff Assessment of PRSP Actual Irrigation Note Actual Country Portfolio Performance Review (CPPR) Actual Paramedical Manpower Actual Social Protection Strategy Merged with Vulnerability and Risk Assessment Public Expenditure Review (PER) on Basic Actual (FY04)

Gender Assessment Actual (FY04) Integrated Trade Framework Actual (FY04 Trade IF DTlS Study) Vulnerability and Risk Assessment Actual (FY04) Investment Climate Assessment (ICA) Actual (FY04) Education Country Status Report Actual CEM - Sources of Growth Actual (FY05) Health Country Status Report Actual (FY05) Higher Education Review Actual Rural Development Review Actual (FY06) Poverty Assessment Actual (FY05) Country Environmental Analysis Actual (FY05 Environment Country Status Rpt.) Country Portfolio Performance Review (CPPR) Actual (FY05)

Additional Actual Nonlending: Joint Staff Assessment Note (1st APR) Legal and Judicial Assessment Actual (FY06 Institutional Governance Review)

Actual (Urban Housing)

Actual (FY06 Decentralized Service Delivery) Actual (IDF grant through FY08)

Services

State Transformation Water Strategy Actual Poverty reduction in Cities Financial Sector Development Actual Service Delivery in a Decentralized Framework M&E Support

FY05 CAS Progress Report Health Country Status Report MDG Costing Soil Fertility and Poverty

Actual Actual (Improving Understanding of MDGs) Actual (FY07 Soil Degradation)

Additional A ctual Nonlending: HIV/AIDS Community Involvement Joint Budget and Aid Review

FY06 ICAS PLANNED FY07 COMPLETION REPORT PRODUCT STATUS

PSlA (oil prices) Actual Telecom Fiscal Analysis Actual Joint Staff Assessment Note (2nd APR) Actual CEM: Growth and Governance Actual Rural PER Actual (FY07) Labor Market Study Actual Joint Budget and Aid Review FY06 Actual Population Actual Rural Risk Management (Weather Insurance) Actual (FY07) Value Chain Analysis Actual Tourism Actual Health Financing Actual (FY08) Nutrition Actual (FY07) Investment Climate Assessment update Underway Debt Sustainability Analysis Actual

87

Annex 3: CAS CR

2007 Urbanization Study Actual Joint Budget & Aid Review FY07 Actual Growth Corridors Underway Poverty Update Underway Banking Sector Corporate Governance Review Underway Urban PSlA Actual (Employment PS IA) Rural Investment Climate and Markets Underway

Additional Actual Nonlending: Debt Sustainability Analysis Food Price Inflation Study

88

Annex 4: Ethiopia at a Glance 31308

Key Development Indicators

(2006)

Pcpuldion, midyear (millims) S u f z e area(tbusmd sq. km) Pcpulaion goMh (Oh) Urban ppulaion(% of btal ppulation)

GNI (Atlas mtthod, US$ billms) GNI percapita(At1as metbd, US5) GNI per capita(PPP, internatonal 5)

GDP at market price, growh (%) GDP at constant factor wst, growth GDP per capib growth (Oh)

(most recent estimate 2000-2006)

Poverty heactourt rdio d $1 a CBy (PPP, %) Pwerty headcourt rd io it 52 a c?ay (PPP, %) Life expedancy d birth (years) lnbnt mortality(per 1,Oa) live tirths) Child mdnutRion(% of children mder5)

Adrlt literacy, mab (% d ages 15 a d olCBr) A&lt literacy, female (%of ages 15 m d older) Grosspnmaryenrollmen[ male(% ofage group) Gross pnmary enrollment female ( O h d age TOW)

Access to an inproved water source(% ofpopulaticn) Acccss to inprovedsantation faasties (% of ppuldion)

Ethiopia

727 1,104

2 0 17

14.3

1.19)

10.9 11.6 8.6

201

78 43

38

50 23 s 64

35

m

Sub Saharan

A t k a

770 24,265

2.3 36

648 842

2,032

5.6

3.2

41 72 47 96 29

69 50 98 86

56 37

LON ircome

2,403 29,215

1 6 30

1,562 650

2,698

8 0

6 1

59 75

72 50

108 96

75 38

Net Aid Flows

(US$ rnlims) Net ODA m d offclal a d TOO 3donors (in 2003

Unlted States taly United Kingdom

A d (%of GNI) A d percaplta (US5)

Long-Term Economic Trends

Consumer prices (annual % chmge) GDP inplkil deflator (annual % chmge)

Exchange rate(mnualavwzge, lccalper US$) Terms d trade index (DO0 = la))

Pcpuldion, midyear (millims) GDP (US5 millions)

A g c ~ k ~ r e lndrstry

servloes

Household fnal mnsurnptan expenjiture GeneralgovY fnal consumpbon a p w d i t u e Gross captal fonnatm

Exports of g o d s m d servlces l m p r k of p o d s and servces Gross savlrgs

bnufadunrg

1980

21 1

19 7 4

3 4 6

12 5 4 3

2 1 131

37 7 7.269

60 3 105 49

29 2

80 0 9 8

145

76 I 1 9 10 8

1990 2000

1,003 686

50 130 183 26

35 11

84 8.5 20 11

5.2 6.2 3.3 6.9

2 1 8.1 1 51 100

51 2 64 3 12,083 8,180

54 0 49 4 11 1 12 2 4 8 5 5

34 9 38 4

77 2 73 8 132 17 9 129 20 3

56 12 0 86 23 9

119 16 2

(ss of GDPJ

2006 '

1 937

625 67 75

15 8 27

12 3 11 6

8 7 79

72 7 15,166

47 5 12 6 4 5

39 9

86 4 12 1 24 2

13 8 36 5 15 1

Aae distribution, 2006

Male Female

8 0 6 4

5064 4 0 4 4

3034

2 0 2 4

10 14

0 4

20 10 0 10 20

pe rcenl

Under4 mortdityrate (per 1pOO)

l W 0 19% ZOO0 2005

nEthiopla rJSub-Saharan Afrlca

Growth of GDP a d GDP per capita(%)

D T

90 95 00 05

+GDP - GDP per capita

1980-90 1990-PO0 2000-06 (amage innualgrowth %)

3.1 2.3 2.0 22 4 5 6.7

08 3 6 5 1 3 2 4 6 8 7 29 4 0 5 5 43 5 3 7 5

12 3 4 8 4 40 9 0 0 4 49 6 5 8 0

3 2 7 0 13 9 3 2 5 8 13 0

Note:Figuresin italicsareforyearsotherthanthose s p c l i e d 2006data are pelimnary. .. indicatesdataarenot avaibbb a. Ad &ta are for2035. Develcpment Econanics, DwebpmentData Grcup (DECDG)

Note: data presented in this standard table may differ from data cited in elsewhere in the CAS due to differences in time period (Ethiopian fiscal year vs. Western calendar year) or the definition of indicators used.

89

EthioDia

Balance of Payments and Trade

(US$ m'llicns) Total merchmdise eWorts(fcb) Total merchmdise imports (a0 Net tra& in mods and services

Current amcunt balance asa%ofGDP

Workers' remittances and mmpensatan ofemployees (receipts)

Reserves. irchdirg gold

Central Government Finance

(76 of GDP) Current revenue (ircbdirg giants) Domestic revenue**

Total expenditure** Current ewendture

Overall surplusldefct

Hi@est marginal tax rate (%)

Tax reverue

hdiudral Corpaate

External Debt and Resource Flows

(US$ m'liicns) Total debt cutstmdingand dstursed Total debt service Debtrelef(HPC, MDRi)

Total deb! (% of GDP) Total debt service (% of =pats)

Foreim dired irwestment (net infbws) Pcrtfdb equily(mt inlows)

a000

486 1,611 -976

-335 4.1

53

349

15.7 14.0 9.5

26.0 20.6

-9.4

5,483 137

2284

67.0 13.1

135

2006

1,000 4,592

-3.443

-1,386 -9.1

169

1,158

16.0 14.6 10.8 22.3 11.6

-6.3

35 30

2326 163

1,383

15.3 7.6

0 0

Composition oftotal external debt, PO6

Idem1 560

Private Sector Development

Timerewired tostart abushess (days) Cost to start a busimss (% d GNI percaMta) Timerewired toregisterpmperty (days)

Ranked asa majorcmstraht to tusfless (% of mmagers surveyed who a g e d )

Tax rates Tax adninistratan

Stock market capitalhition (% of GDP) Bmk capital toasset rata (%)

PO0 2006

- 16 - 45.9 - 43

72.2 59.2

Governance ndicdors, 2000 and 2M6

Voice and accountabihv

Regulatory qualiiy ~I I I

R uI e of law I , CWnrol o1corrupbon

0 25 50 75 rm

U2W6 Country's percentbe rank (C-lW) hgherwliloca ~mplybatbrrdnps LPWO

%urn: Kaufmann-Kraay-Martruza, Work Bank

Technology and Infrastructure

Paved mads (% d total) Fked ihe ani moble phone

High Bchmlogyexports srhsmbers (per 1,000 people)

(% d manufactured expr ls)

Environment

AgriarlClrd Land (%of imd area) F a s t area (%of land sea) Natiomllyprdectd areas (% oflandarea)

Freshwater resources Der caaDita (cu. mters) Freshwater wthdrawal(% d inbrml resources)

C 0 2 emissions per cagta (mt)

GDP per unit of energy use (2000 F?P $per kg dollequivalent)

Energy use per capita (kg of al equivalent)

2000

12.0

0.1

31

4.6

0.09

2.8

291

2005

19.1

0.2

32

1.712

0.71

2.9

303

( U S mdrons)

IBRD Totaldebt oulstardingand dbbused Disbursements Prircipaf repiymalts Interest payments

0 0 0 0 0 0 0 0

IDA Total debt oulstardingand disbused 1,779 553 Disbursements 137 9S*' Total debt service 34 39

IFC (fiscalyear) Total disbursed and octstandingportfola 0 0

of rhich IFC own acmunt 0 0 Disbursementsfor IFC own a m u n t 0 0 PorifoSo sales,prepayments and

repayments fcr F C wn amount 0 0

MlGA Gross expcsure - - New grarmtees - -

Note: Figures in itaics are for years other thanthose specified 2006data are pelrnflafy. .. hdicatesdataare not malable. -indica& otseluationisnot alplicable. ** IDA dsbusement ofboth granls andcredit amount to U S 3 0 1 2 m i l i m in2006 fiscal y e s . Develcpment Econanics, Development Data Grcup (DECDG).

3/3/08

Note: data presented in this standard table may differ from data cited in elsewhere in the CAS due to differences in time period (Ethiopian fiscal year vs. Western calendar year) or the definition of indicators used.

90

Millennium Development Goals

1 0 .

Ethiopia

With selected targets to achieve between 7990 and 2015 (esimde closest todate shown, +/- Pyewsj

Goal 1: halve the ra tes for t l a daypoverty and malnutrition Poverty healcount ratioat $1 aday(PPP, %of poptiatan) Poverty healccunt ratioat natanal p o w w line (% d populatim) Share of mcane orcmsunptionto thepoorestqunltile(%) Prevalence of malnutntion (% of chiklren under 5)

Goal 2: ensure that children areable to complete primary schooling hmary school enrolment (net, %) hmary completlon rate (% of relevart age g o l p ) Secmdaty school enrolment (gross, %) Youth literaqfrate (% of people a p s 15-24)

Goal 3: eliminate gender disparity h education and empowerwomen Ralo ofgirlsto boysinpnmaryand semndaryeducatan (96) Wanen emfloyed m the mnagnailtural secbr(% of mnagnailtural employmen9 Proportionof seets held bj wrnen in natanal parliament (%)

Goal 4: reduce under4 mortality by two-thirds Undsr-5 mrb l t y rat? (per 1,000) hfant mcrtdityrate(per 1,000 iue births) kas les immmizatan (propoltion of one-year otds immunzed, %)

1990 1995 2200 2005

44 2 387 7 2 9 1

477 47 2 384

2 26 13

18 36 78 37 58 17 35

204 179 151 123 122 107 92 77 38 38 52 66

Goal 5: reduce maternal mortality bythlee-fourths NIatemal mortality rstio (modeled estimate, per 100,003 live tirths) Births attended by sldled health stsff (% d totab

Goal 6: halt and begin to reverse the spread o f HIWAIDS and othermaior diseases Prevalence of HIV(% ofpopulatim ages 15-49) Cortracepfveprevalenoe (% of women ages 15-49) hcaence of tuberculosis (per 103,000 people) Tuberailasis cases detected under DOTS (56 )

Goal 7: halve the proportion of peopb without slstahableaccessto basic needs k c e s s to an improued wster source (% of population) k c e s s to m~mved s i i ta ton fasiliies (% ofpopulatim) Forest area (%of totd land area) Nalonaly protected arms (% of tobl land area) C02 emsslms (metnc tom p a capta) GDP per lnit d energy use (constant2000 W P $per kg 13 oil equivalent)

Goal 8: develop a global partnership for development Faedline and m b i k phme subscnbers (per 1,000 people) htemet users (per 1,030 people) Persond computers (per 1,000 people) Youth lnemployment (% of totd labor force ages 15-24)

iducation indicators (%)

100 7

0-7 2000 zom 2005

-9- Primary n et e nrollment ra S o

~ R a e o d g n s t o b o y s i n ~ m a r y a secondary educabon (. .)

Aeasles imrnun ization (Oh of 1-year olds)

Irn 1

4

OEhbPia WubSaharan Nrica

23

0.1 2.8

0

87 1 673 6 6

1.4

19 28 36

0.0 0.1 0.1 2.5 2.8 2.9

0.0 0.2 0 0 2

3T indicators (per 1,000 people)

Note:Figuresin italicsare foryearsotherthanthose specified .. hdicatesdata aenot available.

Development Econanics. DwebpmentData Grcup (DECDG).

313’08

Note: data presented in this standard table may differ from data cited in elsewhere in the CAS due to differences in time period (Ethiopian fiscal year vs. Western calendar year) or the definition of indicators used.

91

Annex 5: Social Indicators

POPULATION Total population, mid-year (millions)

Urban population (% of population) Total fertility rate (births per woman)

POVERTY (% of population) National headcount index

Urban headcount index Rural headcount index

Growth rate (% annual average for period)

INCOME GNI per capita (US$) Consumer price index (2000=100) Food price index (2000=100)

INCOMElCONSUMPTlON DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption)

SOCIAL INDICATORS Public expenditure

Health (% of GDP) Education (% of GNl)

Net primary school enrollment rate (% of age group)

Male Female

Access to an improved water source (% of population)

Urban Rural

Total

Total

lm m un ization rate (% of children ages 12-23 months)

Measles DPT

Child malnutrition (% under 5 years) Life expectancy at birth (years)

Total Male Female

Mortality Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59)

Male (per 1,000 population) Female (per 1,000 population)

Maternal (per 100,000 live births) Births attended by skilled health staff (%)

Latest single year

1980-85

43.4 2.8

11.5 7.1

180 45 41

32.4 8.7

41.6

0.6 1 .o

12 6

44 42 45

123 206

49 1 401

1990-95

56.5 2.0

13.9 6.2

150 92 84

40.0 7.2

47.7

0.9 2.6

22 25 19

23 81 15

38 57 48

44 43 45

107 179

448 358

1999-05

71.3 2.1

16.0 5.3

38.7 35.1 39.3

170 117 117

30.0 9.1

39.4

1.1 7.3

69 73 64

36 92 25

59 69 38

43 42 43

80 127

451 425 673

6

Same regionlincome group

Sub- Saharan

Africa

741.4 2.3

35.2 5.5

745 127

3.4

56 80 43

64 64 29

47 47 48

100 168

489 467 92 1 42

Low- income

2,353.0 1.9

30.0 3.7

580 128

3.1

80 83 77

75 88 70

63 67 39

58 58 59

80 122

298 244 684 41

CAS Annex 85. This table was produced from the CMU LDB system. 02/20/08 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey.

92

Annex 6: Key Economic Indicators

Actual Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 2009 2010 2011

National accounts (as YO o f GDP) Gross domestic producta

Agriculture Industry Services

Total Consumption Gross domestic fixed investment

Government investment Private investment

Exports (GNFS)b Imports (GNFS)

100 100 100 42 44 47 14 14 13 44 42 40

92 91 97 22 25 23 13 16 15 9 10 8

13 15 15 27 32 35

Gross national savingsc 21 21 17

Memorandum items Gross domestic product 8558 10054 12305 (US$ million at current prices) GNI per capita (US$, Atlas method) 120 140 170

Real annual growth rates ('YO, calculated from 1999100 prices) Gross domestic product at market prices -2.2 13.6 11.8 Gross Domestic Income -3.3 10.4 13.4

Real annual per capita growth rates (%, calculated from 1999100 prices) Gross domestic product at market prices Total consumption Private consumption

Balance o f Payments (US$ millions) E X P O ~ ~ S (GNFS)~

Merchandise FOB Imports (GNFS)~

Merchandise CIF Resource balance Net current transfers Current account balance

Net private foreign direct investment Long-term loans (net)

Official Private

Other capital (net, incl. errors & ommissions)

Change in reservesd

Memorandum items Resource balance (% o f GDP) Real annual growth rates ( 1987 prices) Merchandise exports (FOB) Primary Manufactures

Merchandise imports (CIF)

-4.2 -2.8 -0.1

1140 483

2347 1856

1164 - 1207

-109

123 360 205 155

-111 -262

-14.1

6.0

17.4 1.9

11.4 7.0 7.5

1494 600

3 175 2587

1338 -1681

-406

150 412 259 152 249

-405

-16.7

29.0

14.0 23.5

9.8 18.0 20.1

1858 847

4367 3633

-2509 1773 -77 1

150 27 1 387

-1 16 562

-21 1

-20.4

17.6

15.6 26.4

100 48 13 39

98 24 17 8

14 37

15

15166

200

10.9 12.0

8.6 11.2 12.1

2105 1000 5548 4592

-3443 2095

-1386

365 80

222 -142 544 397

-22.7

4.4

-1.5 17.6

100 46 13 40

94 25 18 7

13 32

20

19395

230

11.1 11.0

8.9 5.1 6.7

2486 1185 6266 5 126

2885 -3780

-882

482 239

329 -168

-19.5

10.4

-3.4 2.7

100 46 14 40

92 25 19 6

13 30

24

23749

280

8.8 8.5

6.6 3.2 3.5

3025 1425 7779 6428

-4754 3772

-1012

522 734

43 -287

-20.0

13.9

35.4 19.1

100 46 14 40

96 23 17 6

13 32

18

27341

330

7.2 6.3

5.1 9.4

10.1

3572 1590 8884 7384

3782 -5312

-1595

60 1 1254

68 -329

-19.4

12.4

11.0 10.8

100 46 14 40

96 23 17 6

13 31

17

31221

380

7.1 6.4

4.9 4.5 4.7

3992 1694 9856 8193

4214 -5864

-1811

874 1026

98 -188

-18.8

7.9

10.5 9.3

/Continued)

100 46 14 41

94 23 17 6

13 30

19

35117

420

7.5 6.9

5.5 3.4 3.4

4482 1881

10643 8792

4869 -6161

-1534

997 699

102 -264

-17.5

11.8

10.1 5.7

93

Actual Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 2009 2010 2011

Public finance (as % o f GDP at market prices)' Current revenues 20.2 19.5 17.5 16.7 16.3 16.1 15.4 15.1 15.8 Current expenditures 19.3 13.8 12.4 11.6 10.4 10.9 10.6 10.5 10.4

Capital expenditure 8.7 9.9 10.9 10.7 10.8 12.5 11.4 11.0 11.1 Foreign financing 5.1 4.0 3.7 2.8 2.9 4.6 4.2 3.9 3.6

Current account surplus (+) or deficit (-) 0.9 5.7 5.1 5.2 5.9 5.2 4.8 4.6 5.3

Monetary indicators M2/GDP Growth o f M 2 (YO) Private sector credit growth / total credit growth (%)

41.5 39.0 38.0 36.1 33.3 31.7 32.2 32.6 33.1 14.7 10.9 19.6 17.4 19.7 21.9 21.6 20.6 18.8

-39.4 10.2 30.1 42.2 37.9 44.9 39.1

Price indices( 1987 =loo) Merchandise export price index 73.2 70.6 84.7 95.8 102.8 108.5 107.7 106.4 105.7 Merchandise import price index 104.0 117.3 130.3 140.1 152.2 160.3 166.2 168.7 171.3 Merchandise terms o f trade index 70.4 60.2 65.0 68.4 67.5 67.7 64.8 63.1 61.7 Real exchange rate (US$/LCU)f 44.5 42.0 45.0 49.2 51.9

Real interest rates Consumer price index (YO change) 15.1 8.6 6.8 12.3 17.8 15.9 12.6 GDP deflator (% change) 12.8 3.9 9.9 11.6 16.8 17.6 11.7 10.9 8.8

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

94

Annex 7: Key Exposure Indicators

Actual Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total debt outstanding and disbursed (TDO) (US$m)"

7272 6644 6261 2326

N e t disbursements (US$m)" 364 403 572 89

Total debt service (TDS) 92 100 89 163 (US$m)a

Debt and debt service indicators

TDO~XGS~ TDOiGDP TDS/XGS ConcessionaliTDO

IBRD exposure indicators (%) IBRD DSipublic DS Preferred creditor DSipublic DS (%)' IBRD DSiXGS IBRD TDO (US$m)d

Of which present value o f guarantees (US$m)

Share o f IBRD portfolio (YO) IDA TDO (us$mld

IFC (US$m) Loans Equity and quasi-equity IC

MIGA

604.2 402.4 302.6 101.0 85.0 66.1 50.9 15.3

7.6 6.1 4.3 7.1 87.6 85.3 82.2 65.9

0.0 0.0 0.0 0.0 67.4 78.4 56.2 55.0

0.0 0.0 0.0 0.0 0 0 0 0

0 0 0 0 3179 3488 3359 553

a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short-

b. "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types o f both loan and equity instruments.

term capital.

95

Annex 8: Selected Indicators of Portfolio Performance and Management As of March 25, 2008

Indicator" FY05 FY06 FY07 FY08** Portfolio Assessment Number of Projects Under Implementation a

Average Implementation Period (years) Percent of Problem Projects by Number a,

Percent of Problem Projects by Amount a*

Percent of Projects at Risk by Number Percent of Projects at Risk by Amount Disbursement Ratio (%) e Portfolio Manag em en t CPPR during the year (yedno) Supervision Resources (total US$OOO) Average Supervision (US$OOO/project)

19 2.9 5.3 0.4 5.3 0.4

27.8

Yes $ 1,551

$67

27 3.2 4.5 2.0

13.6 3.4

29.0

No 2,658

98

Since Last FY 80 Five FYs Memorandum Item

Proi Eva1 bv OED bv Number 63 16 Pr4 Eva1 b; OED b; Amt (US$ millions) 3,800.7 1,754.0 % of OED Projects Rated U or HU by Number 33.3 25.0 % of OED Projects Rated U or HU by Amt 22.3 17.2

27 2.5 4.8 4.3 9.5 5.8

27.6

Yes 3,286

122

23 3.0 4.3 1.3

17.4 6.3

12.9

No 2,260

98

a. Total number of projects active for current FY. b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year. ** Year to date.

Source: World Bank

96

Annex 9: IFC and MIGA Program for Ethiopia As of March 22, 2008

2005 2006 2007 2008

IFC approvals (US$m) 0.0 0.0 0.0 0.0

Investment instrument@) Loan Equity

MIGA guarantees (US$m) 0.0 0.0 0.0 0.0

Statement of IFC’s Held and Disbursed Potlfolio As of March 22, 2008

Year BorrowerIPurpose Original Gross Commitments

Loan Equity Participant Total

Total commitments now held 0.0 0.0 0.0 0.0

Source: World Bank.

97

Project year

Annex IO: IDA Program Summary for Ethiopia As of March 25, 2008

strategic Implementation Rewards Risks (H/M/L) (M) (H/M/L)

FY 2008

FY 2009

FY 2010

FY 201 1

Ethiopia Nutrition SIL Pastoral Community Development 2 Sustainable Land Mgmt SIL Tana Beles Integrated Water Res Devt Urban Local Govt Development NBI Power Export: Sudan lnterconnector Rural Electricity Access Expansion 2 Protection of Basic Services

Total FY08

30.0 50.0 20.0 45.0 100.0 41 .O 133.5 215.0 634.5

PBS 2 Quality of Educ Improvement SIL Tourism Project SIL Roads APL 4

Total FYO9 635**

Productive Safety Nets APL 3 Rural Electricity Access Expansion 3 Rural Development PSD Support PSCAP 2

Total FYlO 635**

NBI Power Export: Kenya lnterconnector Water Supply and Sanitation Sustainable Land Management 2 Pastoral Community Development 3 Roads APL 5 Possible PRSC

Total FYI 1 635**

H H H H H H H H

H H H H

H H H H H

H H H H H H

M H M M M M M H

H M M M

M M H H M

M M M M M H

* Already approved by Board ** Indicative amount based on FY08 allocation

98

Annex 11: Summary of IDA Non-Lending Services As of March 22, 2008

Completion Cost* Product FY (US$OOO) Audiencea Objectiveb

Recent completions Value Chain Analysis Institutional and Governance Review Rural Development Assessment Decentralized Service Delivery Assessment Labor Market Constraints Review Population Study Tourism Study Joint Budget & Aid Review CEM PSIA Higher Oil Prices Debt Sustainability Analysis Housing Sector Study Review o f Expenditure in Rural Development Urbanization Study Soil Degradation Study Rural Risk Management Costing o f Nutrition Program PSIA Employment Creation Food Price Inflation

Underway Investment Climate Assessment Health Financing Rural ICA Public Finance Review JBAR Education & Nutrition Linkages ROSC Accounting & Auditing Regional Growth Report: Amhara Regional Growth Report: Addis Ababa Gender and Poverty Making Finance Work for Ethiopia

Plunne d/Proposed Public Finance Review Strategic Review o f Road Sector Development Agriculture PER I1 Eastern N i l e Strategic Basin Assessment Land Administration Development Policy Review (DPR) Joint Governance Asst. & Measurement (JGAM) Country Integrated Fiduciary Assessment (CIFA) Rural Economy Survey Investment Climate Assessment (ICA) update Service Delivery Quality and Decentralization Adaptation to Climate Change

FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY07 FY07 FY07 FY07 FY07 FY07 FY07 FY07

FY08 FY08 FY08 FY08 FY08 FY08 FY08 FY09 FY09 FY09

FY09-1 I FY09 FY09 FYlO FYlO FYlO FYlO FYlO F Y l l F Y l l F Y l l FYI 1

342 334 64 8 420 552 36 1 142 99 18 36 25 74 97 245 212 55 83 95 41

243 72 220 124 2 98

25 1

283 --

-- -- -- -- -- -- -- -- -- -- -- _ _

a. (G) Government, (D) donor, (B) bank, (P) public dissemination. b. (A) Knowledge generation, (B) public debate, (C) problem-solving. * Cost is actual cost for ongoing and completed activities.

99

2 2

1 %

c o r - N c o m c o N c o m r - r - m ~ r 0 b c o * m m r - b w 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NNNNNN(uNNNNNNN(uNN(u(u(u(u(u

2 B 2

8 .- I

g I

4.2

I .- I

3

0 0