Report No. 4683a-ET

EthiopiaRecent Economic Developmentsand Future Prospects(In Two Volumes) Volume I

May 31,1984

Division EA2DBEastern Africa Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents niay not otherwistbe disclosed without WVorld Bank authorization.

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CURRENCY EQUIVALENTS AND UNITS

Currency Unit: = Birr (Br)Exchange Rate: - US$1.00=Br.2.07 (1973 onwards)

A X Standards: Metric system

FISCAL YEAR - July 8 to July 7

ACRONYMS AND ABBREVIATIONS

AIDB - Agricultural and Industrial Development BankAMC - Agricultural Marketing CorporationBCSC - Basic Commodities Supply CorporationCMC - Coffee Marketing CorporationCPSC - Central Planning Supreme CouncilCSO - Central Statistical OfficeEBCA - Ethiopian Building Construction AuthorityEDDC - Ethiopian Domestic Distribution CorporationEELPA - Ethiopian Electric Light and Power AuthorityENEC - Ethiopian National Energy CommitteeENI - Ethiopia Nutrition InstituteEPI - Expanded Program of ImmunicationERESA - Eritrea Region Electricity Supply AuthorityERA - Ethiopian Road AuthorityETCA - Ethiopian Transport Construction AuthorityFAWCDA - Forestry and Wildlife Conservation Development AuthorityFGAE - Family Guidance Association of EthiopiaFPIA - Family Planning International AssistanceHASIDA - Handicraft and Small Industries Development AgencyILCA - International Livestock Center for AfricaICS - Interconnected SystemIPPF - International Planned Parenthood FederationIWA - Irrigation and Water AuthorityMCH - Maternal and Child HealthMOA - Ministry of AgricultureMPP - Minimum Package ProjectNBE - National Bank of EthiopiaNRDC - National Revolutionary Development CampaignNATRACOR - National Road Transport CorporationPIP - Public Investment ProgramSCS - Self contained system

GW - Gigawattgwh - Gigawatt hourha - Hectarekgoe - Kilograms of oil equivalentKwh - Kilowatt hoursmkgoe - Million kilograms of oil equivalentLPG - Liquified Petroleum GasKY - MegajoulesMW - Megawattstoe - Tons of oil equivalent

FOR OFFICIAL USE ONLY

ABSTRACT

TITLE ETHIOPIA: RECENT ECONOMIC DEVELCIPMENTSAND FUTURE PROSPECTS

COUNTRY: ETHIOPIA

REGION : EASTERN AFRICA

SECTOR : COUNTRY ECONOMIC

REPORT TYPE CLASSIF MM/YY LANGIJAGES4683a-ET CEM Restricted 05/84 English

PUBDATE: 8405

ABSTRACT: The report notes that since the 1974 Revolution, Ethiopia hasachieved considerable social progress and a moderate economic recovery,beginning in 1978/79, marked by prudent financial management: and almostfull utilization of existing industrial and infrastructure capacity. Butwith an estimated GNP per capita of around US$140 and very low aid inflows,Ethiopia remains amongst the poorest countries in the world. The reportindicates that the extent to which economic growth could be accelerated andthe living conditions of the people improved is severely liUited byfinancial and capacity constraints. There is, therefore, a great need toaccelerate the pace of economic growth and development through increasingsavings and investment and through new policy approaches in some areas.

The report examines the future prospects for the Ethiopianeconomy (with particular reference to agriculture, industry, and exports),suggests some new directions for policy actions, and considers the optionsavailable. It also focuses on selected sectoral issues, namely thoserelating to public enterprises, manpower developm;ent, energy, andpopulation, health and nutrition.

CThisFdocument has a restricted distribution and may be used by recipienLs only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank alathorization.

(ii)

ETHIOPIARECENT ECONOMIC DEVELOPMENTS AND FUTURE PROSPECTS

Table of ContentsPage No.

ABSTRACTECONOMIC INDICATORSSOCIAL INDICATORSPREFACESUMMARY AND CONCLUSIONS (i)

PART I

CHAPTER 1: RECENT ECONOMIC DEVELOPMENTS 1Introduction 1Structural Characteristics 2Economic Growth Over the Past Decade--An Overview 3Economic Growth 5Savings and Investment 8Fiscal and Monetary Developments 10Balance of Payments 17

CHAPTER 2: CAUSES OF THE SLOW GROWTH OF AGRICULT'URE 22Slow growth of Agriculture 22Factors Constraining Agricultural Growth 25Export Crops 34The Coffee Subsector 35

CHAPTER 3: THE CHALLENGE OF ACCELERATING ECONOMI]C GROWTH 40Government's Long-Term Objectives 40Medium-Term Priorities and Programs 41Towards a Clearer Definition of Policies 42Need for Some Modified Approaches 44Coffee Subsector Development 47

CHAPTER 4: MEDIUM-TERM PROSPECTS 50Scenario A: Moderate Growth 52Scenario B: Low Growth 56

Aippendix to Chapter 4 63-- The Revised Minimum Standard Model 63-- Assumptions Used for Scenarios A and B 63

MAP :[BRD 14257R1

(iii)

List of Text Tables

Table No. Title Page No.

1.1 Changes in GDP and Sectoral Growth, 1978/79-1982/83 5

1.2 Sectoral Composition of GDP, 1978/79,1981/82 and 1982/83 8

1.3 Total Resources and their Utilization 91.4 Summary of Central Government Finance

1978/79 - 1982/83 111.5 Composition and Growth of Revenue 121.6 Sectoral Breakdown of Government Capital

Expenditures 151.7 Money and Credit, FY1979-1982 171.8 Balance of Payments Summary 1978/79-1982/83 192.1 Cereal Imports and Prices 1975/76-1981/82 242.2 Actual and Potential Crop Yields Under Different

Technologies 272.3 Fertilizer Prices and use and Distribution

of Improved Seeds 282.4 EDDC Sales of Consumer Goods by Categories of

Clients, 1979/80 - 1981/82 242.5 Agricultural Producer Prices 312.6 Retail Prices of Cereals in Different Cities 312.7 AMC, Free Market and Import Parity Prices of

Major Grains, 1981/82 332.8 Coffee Sector Performance, Selected Indicators 364.1 Selected Macroeconomic Indicators, Scenario - A:

Moderate Growth 544.2 Selected Macroeconomic Indicators

Scenario - B: Low Growth 574.3 Key Macroeconomic Indicators, Scenarios A and B 59

(iv)

Economic Indicators

GNP Per Capita - US$140.0 (1982)

Annual Rate of Growth of GDPGross National. Product in FY 1983 1/ at Constant Factor Cost (Z)

(Fiscal Years)

US$ Mln % 1977-81 1981 1982 1983

GDP at Market Prices 4731.3 100.0 3.2 3.0 1.5 4.2Investment 497.3 10.5Gross Domestic Savings 87.4 1.8Resource Balance -409.9 8.7Export of Goods and NFS 551.7 11.7Import of Goods and NFS 961.5 20.3

Output in FY1983 1/

Value AddedUS$ Mln X

Agriculture 2068.1 48.4Industry 668.7 15.7Services 1535.2 35.9

4272.0 100.0

Government Finance Central Government

(Br.Mln) % of GDPF 1983 / FY 1983 FY1980-82

Current Recepits 1980.6 20.2 19.3Current Expcnditures 2186.7 22.3 18.5Current Surpltus -206.1 -2.1 0.8Capital Expenditures 1127.2 11.5 5.3

Money, Credit and Prices(Fiscal Years) 1979 1980 1981 1982 1983 1/

(Million Br. outstanding end of period)

Money and quasi-money 2063.6 2332.1 2377.6 2643.7 3040.4Bank Credit to Central Government 862.3 968.1 1107.9 1180.9 1979.4Bank Credit to Private Sector and

Financial Institutions 1222.7 1644.2 1721.8 1944.2 1741.4

(Percentages or Index Numbers)

Money as % of GDP 25.9 27.4 26.9 28.8 31.0

Annual percentage changes in:Gener.al Price Index 12.9 12.5 1.9 7.3 3.8Bank Credit to Public Sector 12.5 12.3 14.4 6.6 67.6Bank Credit to Private Sector 34.1 34.5 4.7 12.9 -10.4

Note: All conversions to dollars in this table are at the average exchange rate during the periodcovered.

All Fiscal Years are from July 8 to July 7.

1/ Provisional Data for 1983.

(v)Balance of Payments(Fiscal Years) 1981 1982 1983 1/ Merchandise Exports

(Million US$) (Fiscal Year Average 1981-83)US$ Mln. Z

Exports of Goods, NFS 554.8 519.9 551.7 Coffee 241.4 60.9Imports of Goods, NFS 793.4 881.3 961.5 Pulses 13.3 3.4Resource Gap (deficit = -) -239.2 -361.4 -409.8 Oilseeds 10.2 2.6

Hides h Skins 43.1 10.9Investment Income (net) -6.5 -2.3 -2.1 Oilseed cake 3.4 0.'9Private Transfers (net) 24.7 45.2 84.9 Other 84.5 21.3Balance on Current Acct. -221.0 -318.4 -327.0 Total 395.9 100.0

Official Transfers (net) 59.9 67.6 115.5 External Debt, December 31, 1982 1/Private MLT Capital (net) 0.0 0.0 0.0 US$ MlnPublic MLT Borrowing (net) 110.4 245.4 181.6

Disbursements (132.5) (278.0) (225.8)Amortization (22.1) (32-6) (44.3) Total outstanding &

Short-term Capital -6.0 18.9 -9.5 Disbursed 1028.0

Change in reserves Debt Service Ratio for FY1983 1/(- = increase) 59.7 -57.7 71.8 %

Minor Items(incl. errors) -3.0 44.2 -32.4 Total Outstanding &

Net Foreign Assets Disbursed 11.0(end year) 118.6 178.6 107.3Petroleum Imports 138.7 159.1Petroleum Product IBRD/IDA Lending (March 31, 1984)Imports 27.0 14.0

(US$ Mln)IBRD IDA

Rate of Exchange Since 1973US$1.00 = Br. 2.072 Outstanding &Br.l.00 = US$0.48 Disbursed 42.5 368.9

Undisbursed - 203.6Outstanding Incl.Undisbursed 42.5 572.5

= not applicable= not available

1, Provisional

April 1984

(vi)

ETHIOPIA - SOCIAL INDICATORS DATA SHEETETHIOPIA REFERENCE GROUPS (WEIGHTED AwVERAGES) /a

MOST (MOST RECENT ESTIMATE) /b/ b RECENT LCW INCOME KIDDLE INCCME

1960-b 197 ESTIMAT8'- AFRICA S. OF SAHARA AFRICA S. OF SAHARAAREA (TllO5fAIID SQ. I60 TLE

TOTAL 1221.9 1221.9 1221.9AGRICULTJRAL 580.4 591.5 592.8

GIP PER CAPITA (US$) 40.0 60.0 140.0 254.6 1147.9

KKGY COIISUCNPrION PER CAPITA(KILOGRAMS OF COAL FQUIVALENT) .. 33.0 25.0 79.8 724.2

POPULATION AND VITAL STATISTICSPOPULATION,MID-YEAR (THOUSANDS) 20093.0 25450.0 31986.0 1/URBAN POPULATION (% OF TOTAL) 6.4 9.7 14.1 19.5 28.5

POPULATICN PROJECTIONSPOPULAT'ION IN YEAR 2000 (MILL) 57.3STATIONARY POPULATION (MILL) 243.6YEAR SIATIONARY POP. REACHED 2155

POPULATION DENSITYPER SQ. KM. 16.4 20.8 25.4 29.5 56.5PER SQ. KM. AGRI. LAND 34.6 43.0 52.4 94.1 131.8

POPULATION AGE STRUCTURE (%)0-14 YRS 43.9 44.8 45.1 45.0 45.9

15-64 YRS 53.5 52.6 52.3 52.1 51.265 AND ABOVE 2.6 2.6 2.6 2.9 2.8

POPULATICN GROWTH RATE (%)TOTAL 2.1 2.4 2.1 1/ 2.8 2.8URBAN 5.5 6.5 5.5 6.2 5.3

CRUDE BIRTH RATE (PER THOUS) 50.8 49.9 48.0 47.9 47.6CRUDE DEATH RATE (PER THOUS) 28.3 25.7 24.1 19.2 15.2GROSS RE'RODUCTION RATE 3.3 3.3 3.2 3.2 3.2

FAMILY PLANNINGACCEPTORS, ANNUAL (THOUS)USERS (% OF MIARRIED WONIN) .. ..

FOOD AND NU17RITIONINDEX OF FOOD PROD. PER CAPITA(1969-71-100) 103.0 101.0 84.0tc 87.8 95.7

PER CAPITA SUPPLY OFCALORIES (X OF REQUIREMENTS) 91.0 87.0 76.0 88.0 97.1PROTEINS (GRAMS PER DAY) 72.0 69.0 59.0 51.2 56.0OF WH:'CH ANIMAL AND PULSE 29.0 28.0 22.01d 18.1 17.2

CHILD (AGES 1-4) DEATH RATE 39.9 35.1 31.2 25.7 23.6

BEAL TBLIFE EXPECT. AT BIRTH (YEARS) .. 44.8 46.3 47.4 51.9INFANT MORT. RATE (PER THOUS) 175.0 158.5 145.1 126.5 117.6

ACCESS To SAFE WATER (%POP)TOTAL *- 6.0 6.0/e 24.7 25.4URBAN .. .. 32.07e 56.8 70.5RURAL .. .. 2.d7e 18.3 12.3

ACCESS TO EXCRETA DISPOSAL(X OF POPULATION)

TOTAL .. 14.0 14.0/f 28.1URBAN .. 67.0 56.07f? 65.7RURAL .. 8.0 8.d7f 21.9

POPULATION PER PHYSICIAN 100470.0 75740.0 58490.0/5 1/ 27420.6 12181.6POP. PER NURSING PERSON 14920.0 7880.0 5440.Ci/d 3456.2 2292.0POP. PER HOSPITAL BED

TOTAL 3000.0 3080.0 3390.0/d 1L83.2 1075.4URBAN 220.0 390.0 790.07e 380.6 402.3RURAL . 15960.0 10150.d7e 3L77.5 3926.7

ADMISSIONS PER HOSPITAL BED .. 10.6

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL .. 4.5URBAN 3.5 4.2RURAL .. 4.5

AVERAGE 1H0. OF PERSONS/ROOMTOTAL .. ..URBAN 2.7 .. .. .RURAL .. ..

ACCESS TO ELECT. (X OF DWELLINGS)TOTAL .. ..URBAN 58.2/h .RURAL .. ..

(vii)

ETHIOPIA - SOCIAL INDICATORS DATA SHEETETHIOPIA REFERENCE GROUPS (WEIGHTED AVERAGES) /s

MOST (MOST RECENT ESTIMATE) /blb/b RECENT LOW INCOME MIDDLE INCCME

1960- 1970- ESTLMATE- AFRICA S. OF SAHARA AFRICA S. OF SAPARA

EDUCATIONADJTSTED ENROLLMENT RA'IOS

PRIMARY: TOTAL 7.0 16.0 43.0 1/ 63.9 97.2MALE 11.0 23.0 56.0 - 73.6 103.1FEMALE 3.0 10.0 30.0 51.6 88.5

SECONDARY: TOTAL 0.4 4.0 11.0 12.5 17.2HALE 1.0 6.0 14.0 16.7 23.5FEMALE 0.1 2.0 8.0 8.1 14.2

VOCATIONAL (7 OF SECONDARY) 20.3 4.5 . . 7.3 5.2

PUPIL-TEACHER RATIOPRIMARY 37.0 48.0 64.0 46.4 42.9SECONDARY 13.0 28.0 41.0 25.1 23.7

ADULT LITERACY RATE (7) .. 6.0/i 15.0 1/ 36.5 37.1

CONSUMPT IONPASSENGER CARS/THOUSAND E'OP 0.8 1.6 1.8/e 3.3 18.8RADIO RECEIVERS/THOUSAND POP 4.9 6.3 8.0 45.3 97.8TV RECEIVERS/THOUSAND POP . . 0.3 1.0 2.2 18.6NEWSPAPER ("DAILY GENERAL

INTEREST") CIRCULATIONPER THOUSAND POPULATION 2.1 1.1 1.7 4.7 18.2

CINEMA ANNUAL ATTENDANCE/CAPITA .. .. .. 1.0 0.6

LABOR FORCETOTAL LABOR FORCE (TROUS) 8975.0 10957.0 13206.0

FEMALE (PERCENT) 35.7 35.2 33.3 34.5 36.1AGRICULTURE (PERCENT) 88.0 84.0 80.0 76.9 56.8INDUSTRY (PERCENT) 5.0 6.0 7.0 9.8 17.5

PARTICIPATION RATE (PERCENT)TOTAL 44.7 43.1 41.3 40.9 37.0MALE 58.6 56.9 54.6 53.0 47.1FEMALE 31.3 29.7 27.7 28.9 27.0

ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 1.2 1.3

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HICHEST 57 OF HOUSEHOLDS .. .. ..

HIGHEST 20% OF HOUSEHOLDS .. ..

LOWEST 20% OF HOUSEHOLDS .. ..

LOWEST 40% OF HOUSEHOLDS .. ..

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 190.0 165.9 534.2RURAL .. .. 65.0|e 87.4 255.9

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 77.0/e 100.8 491.5RURAL .. .. 3

7.o0e 64.6 188.1

ESTIMATED POP. BELOW ABSOLUTEPOVERTY INCOME LEVEL (%)

URBAN .. .. 60.0/e 39.5RURAL .. .. 6 5. 0/ 69.0

NOT AVAILABLENOT APPLICABLE

N O T E S

/a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among theindicators depends on availability of data and is not uniform.

lb Unless otherwise noted, "Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and1971; and data for "Most Recent Estimate" between 1979 and 1981.

/c FAO data differ somewhat from Ministry of Agriculture data, and may exaggregate the apparent decline; /d 1977;/e 1976; /f 1975; /g 1978 /h Addis Ababa only; /L 1965.

1/ Estimates differ from those in the text of the Report sincethe latter reflect the findings of the latest economic mission.

May 1984

(,viii) P-a 3

DEFINITIONS OF SOCIAL INDICATOR-S.

Notes: Although the d-t, are dras tro souce geo..rally judged ths nos ashorttv n eibe.i hudas noted ths they say not hs i-terattnll..iyroapseshle bsnaoae ofthy lent of standardined defilniouIse aod ono_ t useId by diffe'rent ooonlsa So~ onlOentlog the 'dit.Tedt r ontsss afltdescrbe orders of oegnii:ude. Indicat treod, end nnutronrise re-af -oJor liffereone between .onutrls..

The .s.r.e gops ore () abs same ... onry group of thenu.bjecooon.. od(2) a nootry group noch sooshtnhge a ieso .- t than the on-Ity grop of theso,bjen oosy(net r"High feonoe 011 Eoport.e-` group ohre"hddl .Innoecnorth~ Arios end fllddls East"iohsn ben.o.a of ste..oge,rs..Io-..uIntra

affinities)i. O ho -f,rusorupdtnnnartgelr ppleinongte rshsioman a eo _idnto ndbe oi ae sortyoftsnuoresi

saerrissd inreetgarus of on... nnorn oohr Thes vogssar ony seu Iunaa:o h oo fOtInIneoro at tiss enn the noonney end

AREA (thousan d sq.bs.( 1hn1IroPopulaion divided. hY oshe oif prentining.tl- Tonal sur fens ure nomprainig land area an d inland auer; 1960, jbAFl:A _ _ ife Po usd_a_ _hola uieriyle ,1970 end 19fO dane. P-onulano, per oN-ing ysac,n - Population dioldsd by -ab-r of pr-ntlctg

Nori-uar-l -Ee Isiste ofagiutrlrm ad tropora..lly or Per.a.ently sale ..oc .fes lsdgeada lorna a..a..IIInnnrss pra-tlno nuresaifor neops. pasurs tabe and knitrheo grdena or no Ile fallon 1960, nusng aniais1970 aud 1980 deta. F.. -l tal,uban andrurl .Poplation (totsl,

ura, .Wiii}dode ytheir repni uber of hoopito1 bedsfliP PROt CAPITA (oo o e nla siar nnret surbo, t -ple, -nelfble lv pahlio and peloate gEnea n po iedhsIa n

"I"lnofredby(USane -onarion senhtyd bold faA Orio (1979-8l banin); rnhabgl1j: n ..anicnnrn. fos.pitlralrasnalisbenn .t Pereanatly sntfad1960, 1970,ad 1981 d te. bynIsot oeph yninian E.. atbleabsenntproidiug1 Principally ca tndaa1

care r. u nldd oa hsItals hanori* onlde healh and.ENERGY CONSUMPTIONr PERO CAPITA - A-uuu pp.nen I oooI tlo.o.c..rlcledice1 -etera noI eraenl stafe yapyitn htb el

prisary energy701ad lInt, erlut aorlgsno:yr-,mouler sua-a o,fidifeoen. ielo offer in-pstI let aI,sdslnadand geothr,al el1nntolnIy) In kilograsa of coal Iqiaetper n-pitn; Fr-od iie aa of. undloa feclnla o tantclpro1960, 1970, and 1980 data. rben h-ipttala include Ss prl-ntpaf/gene.ral bpintl., en7d rural

honpital a, local or .rural hopitals and ond-lcalnd naert ycetner.POPULATION £1N0 fETAL. STAIISTICS Speoai.sed houpttala are i_oludo onl under tots~l

Tota Povulilo. Mi-learthoosaudo) - on of July 1; 19o0, 1970, and 1981 Adalnslont per fnnPlta1 AEJ- Tona naber ot adelasn no or dianha-geedata. fros ho, pitala divided by tha nuaber of beds.

neba Porulatlan (Orelnetaof btonal) - natio of orb.c to co-a populatin-;diffrnt dfiironsofor o aru -ayuto coahilly of dan'a HOUSING

ewn .unre;1960, 17,ad68doeAvrglire of fooaehold (Iro panr h-hasbld) - nonu. urben, andruaPorulatinoPrjntoa Ahoshold oo..aIatu of a group of indinldoalt oh re uInqatr

F.F.fenio In Year t;1-Cretcplto poerosoebndo 19 n bt a el.A boa.rder orlodge s ay or say oa he Included intotal pepu1attan by ae. on. esad thI onliny rod fer`-iity the houeehold"for a atial opssrae. PuanInprnt er o onlnyue opao be crnnsber o-f rran pr rano - total. urba.I nod rural onstge onbetlea- asoan liOn nopentancy an biribloenaigoeIt, nrn e of perecna per roo In all urhen, and .rurl unpled nance.nnonal

capia Onos lesl, nd onne lfe eyveuoc7 aabileln an70. det lig s repecionl, Nel ing eonlod to-ptnarne srunure anyean. Thepara-nrnfor fernilor~y rae ot u bace thrhn eeluonupled porno

asesning decline io fsrnllltyacnodlng no Inoose Crel and pee toothiy McnIa tn Ela-ticito (--rnon of da2lo)- on., urba.. and rural -plnigperforonne. Ethe coontry is nrho anaigned nr t hr- naon Cohettnldelnooi electricity On iItoin quarter asp.-tg

noal-aiana f,sotulity and fertlliny nrrndn foryI Iono Plparpes of Intel urban, Ind rural dsa11Ilog tea pecololy.sftlar ruati...-lnoIscn 'talonoy popolutfi nI r neI.I ongu lb.

sInc :the bIrt.h rune In equa noth dnath con,nudou th ue REDCATIONtnrucnuor In sonun hnIs clodol ater fer ninny racen Adjuaned fnroilneo Fraion

denlise to the replan.s..ntlevel of ovit ost rercod-ooilon rote, 'hso Prtsory snhenl - total, ae n feta s-ros n .tl, al and tv-1l.- ch gene ratint of -ea replaneo Itolf rn-cly. The -tet-nay -nrollnnt of all agen an the pri-ay lerel an "'rnt.age of -epectio-

pep itan ion analsledo ibe ba's of the yin) cod charater- prin..rY nohoni-age Ppnplsion..; normaly fnclod..,s nIdvIeI age h-IlIsnl:in ofthe popolannon.t In the year 1'000, oa nhs IL ate of dnnli-e of yeare hut adjound fo differ..ton tegha of pl:,y.a education; for

fntln n rorpla.....on le-ni cut Iesit rnlersl adIolnerlsnrnysce 00 perentYear -taio...rr oalto is -a bd - The ynar oh -t soon lnry cloe sen pupils are belos or bho- the of fio,l onhon1 age.

pupulnlatnolannlll bern-hod. vn narahol-ttl ale and female - Cenpu,ed as shne secondry

Per sq. he.-MNid-ye.r poponanlon per sqaeA nnr ICbcat frroodsn gnner. -, -ocantnn , or teahe trinn ntrnin fur

tonal area; 1968,170 19 198 dnn ypil salyo Ii to17 yeasr of a an; cres Inrtncurse ore..Per eq. klot "-I. snlunol land - Cenonp-d an uh-o for ag 1un -u d generally e-clded.

only; 1960, 1970 anod 1980 data. OctnaeroonI (5re ,ret of nanoducy) - Vnoca,.. noa lonltortinonP.orlatint ASr enroot) - Childro (0-14 y- ,sot ogag (11- -Inolda rcnn L ,nduantal, or other progras .. hich operat indepe.d-

64 years),tn.d retlrng)A Ytarn andoo_rOaI p-re-oaSe ofnid-y-a -vlynoru-deparnoeots of econdaryli-nlnulots..Ppaplatino; 1960, 197), and 1981 dana. Pucil-toocohertai rsr and ...n.odarn - Total stud ut enrol id io

Poru11lan Iro-tb noeInI cet)- nna - Iena gO-nh laien of nonn sid- pri-ay sod narnodr Len. dnoded by -usb- ol In...bere in the cur-yerpplt on In1950-60,1907,ad 190S.ronpoodiog lael..1.

-naao lrhstRat.e(retcantl-r An-nnolrohonsoubAdulnnneacrI e(porc-n-t neaedut abeot datei"peylata.na for 1950-60, 19b0-70, and 1970-Si1 poro.ntnge cf total adul; populti-nn aged 11 y..r. and ..er,

Crude Birtb Sane (nov nooneund) - anona loon birnh.n pe choun..nd of old-year poyplat""n; I96bO, 1970, and 1981 dana.- CONSUMIPION

Crude Death Reanr (pen ntousad) - Aooual dot-ha pn tnh..e.od of ild-yaac Pannnogn Cars (nen! nhouoaod cocolannon) - raus.c-ge, cars -oprts nnopopulatIon; 1960, 1972, and 1981 dana. naraea,ii lea thor eigIhn per....n; e-cludnue tlns heurses and

Gros ernu o Ifi- A-ouge o-enbr of daoghoernaoonaooill hear iv iiayeilnher I norstol ce pdcie riod it ahe.nnioa cnntoenrii Radio Rec~eloers (pe buuu'I population) - All tyy, nrosnr i ruadi

tnrrnnliy ratns; usua Lly fi-e-yrr. oorge ening In tni,1970, end br...donsotn genn uli prthusn ofppInnionnnldesn1981. lice-nvdt ...c iocoon... Ile, and In yar oho.. alnanino radi

Fenlyr Plannting-acap;on Ioo (thounuodo) - ocouuh oushr of oncoptora n 0 in effect; dnna fortaot ysesynth op_rbin uon snotof birtht,-cot-1 deie _udeuI piru of nan loya tunaY pauin.. coE untcis,uboliehed hIosn.v-g.

progran. T~~~~~~~~~~~~~V Recenne,. (pe, rthouo..nd peulatlon) -V T ... io, Io brodnat toFasfIc rln..nInn- psr (nrnt of ..rridnenv-rrcoEesrlnd neec- oblc arthosu nyltIn _nloden .. vY tnenrd 70 r-clo-r

oeeonid-1nHeelggn754 yrohcuhrh. --- nnrodrcirn can,r.odorouhoainoi-oooffcIantaaai ~f.allsarinooso voonor g-au. No-upacenire.,Lanu(rrt cnn hoaalo Iosneour

mWo AN0, NUTOITIOO " 1 "Irtmtulonr~l IInnr--t orenppnr-''denifnduoarrornindex of Food Produuir. lo t. - nnu(9t 9C~o roaproio'l r,c roc rsnIycrrrlg

0orlio.i oooie

annual -rductlo- of oil food csn...idel-o. rrdononiodnun-td and no.he tm

dalhm

ef it appna- an leas fou ftin- enfrdodIt nonledr er ai . -Codin1IFuon rinar god (..Cieaoo 1a Attendanc per Copht F pear lr-eaaed 00 thn nosher of... r noun--d of. -ue nhioh urn edible -od "Itnu, -tnr"I"t (eg.nicItr ''o d-icg ihe 70cr, including odia-iona to driv-no clne-a and

coffnr ovd -e ore on' Cded>. PAgregate pr-docthon of each c--tr y tobie u,tn..buond ono ntoonl --oroa produoer pri ce on_ion;.. I-I 1070, and 1981dune.. LAOt PORCE

percayina sool f ca lorio (ceuennoo rnninvon Coupano fon ~ Totl F-n Pre (nho....ndt E - ..onn.oit.ly acrive pe-non, Including. aredeosrg2yequivpuilent of en fo uple unilo..e ino..u.... prrcuptaper forceao -nespluyd boo .nldlog hou-eho-, sntdeon , n.ooslgday.IIAvulibnhie uopllen.1cnpra done-nic productinon inporto leoo Pepi , ofal ones. 18 tiitious in -urnoo c-onIa are'oueoPcntn .. odcugaI anonk,Non nupphiea -ncde -ni-o feed, nerds, cep-bne 1960, 1970'and`1981 data.qu...nirL.nesued in fond pr-ea-iog, und 1o-oe In din-ibuni-n P eaolrceon) - remain labor force an peroeo-gn of total labor force,Requ...e.nIno earn enotued hY rAO hoard on physiologicu os..ds for oom. -'Iiculr,r (Percnn I) - `elor ftoen in faretog. forneany,h-onnu nod-ctlntv and healtbch idrn nnr oalnsrutr,hdy oihna, I. Isio, an pencotoge nf total lobor forc; 1960, 190t o 1981 data.a ge and ann dhenrfbunton ot population, nd ot.inong 10 percent lot ... soe _nd..try (perceo) - L,abor tore fo ifotog, In..otrunti. Ion ..oufcuigantoabf lanaII,; 11-65,I1970 nod 1980 dote. and el,-nniciny, -stererd g.. an p-e.rcnngr of tonul lahor for.n ; 1960,

Per caPita umin SLtooPeio ue ( retdd- r-hocoe furcpn 1970a, 1981 dana,net nopp'yly f-d pee' doy Nan Fply of food,0I dfhid an hoo.. tcnnic Inaj1,t1, on pn IrsronQ - total, sole end fsle -yannIicipation anRequiraene- for all -ootrian eotoblisbed by 0000 yrocid for niono acIe ae r cnu sntl sal * and fanai loho forcea

alnacsof6 ve of tnal phrcelo per day nod 20 grass of anh'anlsd yncnue f Octl, sae and nal populatIon of1 al a. reste penloely;pulse pronein * faic I0asn hud hrola ni.Tee160, 190, aodt1981 data, Thna ar hsd onEL'apu hipatio rtstandard a're loser nOun clone of nlgon of- tonal plronl and r..cu. ref lect~ ag..-.... .I-ut-one of h:e pnylotln, oflong tis trend.of anima prote _anaerg For ohe o-t dU,dcrp-sd by too In nth fen -it-an- ar fror -att...oIa.srcenTh~ird Wfri,d fon tooe; 196-1, 17 n 98 dt,Econosic OI pevdnoy natto - Fanno of popolotion ovden I and 65 and Ior coPeatno pretain .. Ppl tre f ninl ad pulsr-yproneinnuyply of food the total labor force,

derived frot ansh d rolo ina ivgrne per doy; 1961-65, 1970 and1977

Child (eo I-41 IODath note (tar thousan d) - An-I0 deanhn pr nhouss..d ho Pernennga of PFrint neotno- lanh lo nash_and Aind) - Recei-ed by rich-an Iage gynopI I4 ern n nh..dren ho thIn ageegrou; fu nou d-vloping P.nsn rlch-t 20 pevce-t, pnotees 20 perceo, sod poctest 40 p-ncro of

oetvadata dert-ed fren liff nable; 190 970 nod 19801 data. hurl a.

HEALTH rOVERTY TuARC I OOUPOT7 necao uttrt ysana) - Aortage n-brr ef Year of life aerainiog Thefhafgetnnaaesr prniaenauco orn ana nat birth; 1960, 1970 and 1981 data. shuId b, interpreted alan conaiderable a-tio.-

Infant Mortality k.in (nerthib_end) _A-IAna deatha ofII- ivanuodr oneSe Eaissnd sohonte Ponerly inoe ea I EnO pe cacins -- rhao and n-rl1year of age par thoa...nd lbs births; 1960, 1070 -an 19i1 dtna ObnoepvryIntone 1lese Ul nnht cn lev~efl,brlo ahichhta inintl

A, Ilfaeacvp rnnofrn iano) - hu-al oman adryl-nrIIonaly adeqaede pleneneto toofool reqoiresrt intotNbrof o.PI. total, urban, and riul aIh rea...uble acs to uafe affordable.

easer eupply lhncludrn treoted IIIuc eacn.ra or uotre-td huh Esnisated selatios Po-rir I-noe Len-1 (USf pee c Larna - orb an und roral-unatnnd etrec sthanfro proneetnd boreholes, Fyrangs, and Rural relatIve poort Itnone- le-l Is one-thirdofaegeprnpa

saniary ells anp-erntges of nheirr-eptniv- pepulutinos. In an perso ... Ineao I- thecunr. rban lov1 Isde,inrd -testnbaruralorb-a areas puhlic faun,tain rnao s loae o oe thac 200 natera level slob adjuatnant fur higher nost of lining in urhana.,ua..

trtaheemy he csideeda behng ainhin reasovahie access of that Etstlasd lplna he ute Ab 9 p e40 y.no rfl7 enyy. (pron)- rabount.Innuno areosraau-lbleocs en.Io Ipy thet the heo-eobe or sud ruot nno fpplsn,(naodoalf.t F b n soln

neseroof 'thel boeend do ho-bn to apeodaIdincpn nt pert'of poor.the day in farnhing the fnl.ly'. 5eter tends.

Alreas to Enorta oroa (Penrenofnulto)- a, omen, anrural -Mssbr tpepl Di al"uba,and roral)2 sevdbhysrtdispose.. pI nstfsof theinrea~pennine 1p0pulatinn.. E-trot dispo...laay ivnlsde the clerhnand diap. a,nih or odnosttreatn...t, of Sotne iund SecaL1 Data Dilolaloh-noacet n n-eter .by. tene-borne synet- on the uns of yin tcotn-lc -lyais and Pr-j-ciu Departwenpriis ando:.. o insul r too. Mar 1983

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ETHIOPIA

RECENT ECONOMIC DEVELOPMENTS ANI)FUTURE PROSPECTS

This report is based on the findings of an economicmission which visited Ethiopia in March 1983. Themission comprised:

Swadesh R. Bose Chief of missionHilarian M.A. Codippily Macroeconomi-csBaran Tuncer Public enterprisesNwanganga G. Shields AIanpower developmentJohn D. Hamilton Population, health and

nutritionNaimeh Had jitarkhani S tatistical data and

literacy campaign

The mission benefited from the support and guidanceoffered by Robert P. Armstrong. The chapter on energywas prepared by Kenneth J. Newcombe of the energyassessment mission which visited Ethiopia in June 1983.

The draft report was completed in December 1983 anddiscussed with Government by Messrs. Bose and Codippillyin February 1984. The report was subsequently updatedto reflect the latest available estimates f'or thefiscal year 1982/83.

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PREFACE

The previous World Bank economic report on Ethiopia was based onthe findings of a mission which visited the country in April/May 1981.That report was issued in December 1981.1/

The present report is presented in two parits. Part I reviews, inbroad terms, recent economic developments and. focuses on some majorproblems that have emerged recently. It assesses the medium-term prospectsof the economny and suggests a number of policy actions to accelerate thecountry's economic growth and development.

Part II focuses on selected sectoral issues, namely those relatedto public eniterprises, manpower development, energy, and popula.tion, healthand nutrition. Agriculture is not covered extensiveLy in this report sincesome of the main issues in this sector have teen addressed in a jointstudy, by the Government of Ethiopia and the World Bank, compleated in March1983. The main findings of this joint study are, however, ref:Lected inChapters 2 and 3 of the present report. Issues in industry are not coveredin this report but will be addressed in a separate report to be produced byan industry sector mission which visited Ethiopia in September/October1983. The chapter on energy is based on the findings of the energyassessment mission which visited Ethiopia in June 1983.

There are two Annexes to the report: a Statistical ALnnex, and anAnnex on the literacy campaign.

1/ Economic Memorandum on Ethiopia, Report No. 3552b-ET, DecemIber, 1981.

ETHIOPIARECENT ECONOMIC DEVELOPMENTS AND FUTURE PROSPECTS

SUMMARY AND CONCLL'SIONS

An Overview of Recent Economic Performance

1. Since the 1974 revolution, Ethiopia has mide considerable socialprogress, as reflected by significant increases in literacy anld schoolenrollment and modest gains in life expectancy. The literacy rate rosefrom 7 percent in 1973 to over 40 percent in 1981 and the primary schoolenrollment rate increased from 19 percent to 47 percent over the sameperiod. Agrarian reforms, in addition, have led to improved food-intake inrural areas and to a more egalitarian distribution of incomes, Theseachievements have not, however, been accompanied by commensurate progressin economic growth. During the decade ending 1982/83, the gross domesticproduct grew at an average rate of only 2.2 percent per annum in real termsas against a population growth averaging around 2.5 percent per annum.

2. The years 1974/75 through 1977/78 were marked by int:ernalpolitical upheaval and armed conflicts which resulted in stagnation and insome cases even declines of production in the commodity produc:ing sectors.The economy recovered thereafter, with GDP growth averaging 5.4 percent perannum during 1978/79 and 1979/80. While the annual development campaigns(or Zemetchas) paved the way for this recovery, contributions to growthcame mainly from agriculture, which benefited from good weather, and fromindustry, through a greater utilization of industrial capacity. Theeconomy, howfever, witnessed a set-back during the following three years1980/81 through 1982/83, with GDP growth declining to around 2.9 percentper annum; the decline may have been more severe but for the moderaterecovery in 1982/83 (see Table 1). Total investment has remained under 11percent of GDP largely due to constraints on domestic as well as externalresources. Domestic savings, which had averaged around 4 percent of GDP inthe recent past, fell below 3 percent during 1981/82 and 1982/83.

3. This slowdown in economic growth was unfortunately accompanied bya sharp deterioration in the terms of trade. Ethiopia's terms of tradedeclined by about 27 percent during the three-year period ending 1982/83,reflecting a further decline in coffee prices and increases in importprices. Consequently, in 1981/82 and 1982/8:3 the value of merchandiseimports rose to more than double the value o.E merchandise exports and thecurrent account deficit widened to about 7 percent of GDP.

4. Notwithstanding these adverse trendls, government fiscal andmonetary management continued to be prudent. Compared to many Sub-SaharanAfrican countries, Ethiopia has a competent public service, and in general,its ministries, departments and public enterprises are well managed. Therehas been no evidence of luxury consumption, and the levels of publicinvestment have hitherto remained within manageable proportions. As seenfrom Table 1, the overall budget deficits averaged below 5 percent of GDPfor the period 1978/79 to 1981/82 with modesi: current account surpluses inseveral years. Likewise, the expansion in money supply has beeneffectively controlled. During the three-year period ending June 1982,money supply increased by a little over 8.5 percent per year.

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Table 1

Selected Economic Irndicators

(Fiscal Years July 8 to July 7)Periodaverages

78/79- 80/81Dcmestic Product 78/79 79/80 80/81 81/82 82/83 79/80 82/83

(Prelim.)1. GDP at current prices(US$ bill.) 3.8 4.1 4.3 4.4 4.7 4.0 4.52. GDP growth 1/(7%p.a.) 5.2 5.5 3.0 1.5 4.2 5.4 2.93. Growth in agriculture 2.4 4.8 2.4 -1.1 4.0 3.6 1.84. Growth in Industry 2/ 12.7 9.4 3.0 3.4 3.3 11.1 3.25. Fixed Investmient/GDP (%) 8.8 10.0 10.1 10.9 10.5 9.4 10.56. Dorestic Savings/GDP (%) 3.5 4.8 4.5 2.7 1.8 4.1 3.0

External Transactions

7. Current Account Balance/GDP (7) -4.8 -4.5 -5.2 -7.2 -6.9 -4.7 -6.48. Net Foreign Assets in

Months of Imports 4.7 3.0 2.0 2.7 1.5 3.8 2.19. Debt Service Ratio (%) 6.8 5.8 7.1 11.5 11.0 6.3 9.9

Government Finance

10. Domestic Revenue/GDP (%) 17.2 18.4 19.6 19.9 20.2 17.9 19.911. Current Expenditure/GDP (%) 16.0 18.3 18.7 18.5 22.3 17.2 19.912. Current Surplus/GiP (%) 1.2 0.1 0.9 1.4 -2.1 0.7 0.013. Capital pxenditure/GDP (%) 4.2 4.6 5.0 6.4 11.5 4.4 7.614. Overall DeficJt/GEP(%) 3.0 4.5 4.1 5.0 13.6 3.8 7.6

Money Supply & Price Movements

15. Mmney and Quasi-money(% increase p.a.) 10.0 13.0 2.0 11.2 15.0 11.5 9.4

16. Retail Price Indexin Addis Ababa 12.9 12.5 1.9 7.3 3.8 12.7 4.3(% increase p.a.)

1/ (DP at constant (1960/61) factor cost.

2/ Including Utilities

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An Assessment of Current Problems

5. The principal causes for the recent slowdown in economic growthwere drought, which affected agriculture, and capaLcity constraints (notablyin industry), owing to low rates of investment (under 11 percent of GDP) inthe past. Low investments have in turn resulted from inadequate levels ofresource mobilization. The domestic savings rate remained at around 3percent of GDP, partly reflecting a per capita inc.ome of onl.y aroundUS$140. Central government savings, although positive, remain depresseddue to high levels of current expenditure equivalent to over 18 percent ofGDP. In addition, external resource flows have remained loiw in recentyears averaging only around US$6 per capita as compared with over US$20 percapita for developing countries in Africa. While overall budgetarydeficits reflected prudent financial management, they also i.ndicated,limited success in attracting external con,cessionary assistaLnce.

6. Apart from the drought, several other factors appear to haveimpeded agricultural growth. First, in regard to inputs, the use offertilizer declined recently, following the near doubling of fertilizerprices during the two year period ending 1981/82. In addition, the use ofimproved seeds continued to be low owing to shortfalls in distribution aswell as inadequate research and location-specific seed varieties. Second,while the geographical coverage of agricult:ural extension increased, therewas no corresponding increases in manpower and financial resources,resulting probably in less efficient services. Third, although someinitiatives were taken towards improving the Government's agriculturalpricing and marketing policies (e.g. studies on pricing and incentives),they were not sufficiently advanced to be translated into incentives tofarmers to expand production and marketed surplus. The AgriculturalMarketing Corporation's (AMC's) buying prices for teff, maize and sorghumdeclined in real terms during the past four years. This decline, coupledwith shortages and high prices of consumer goods in rural areas, may haveinhibited the expansion of agricultural production for the market.Moreover, restrictions on inter-regional grain movement by privateoperators have created wide inter-regional price differentials in the openmarket whiczh cannot be explained on the basis of transportation costs.While these restrictions dampened producer prices :Ln surplus areas, theyalso led to higher prices to consumers in deficit areas. For example, thefree market price of teff in Addis Ababa in 1981 was two-and-a-half timesthe price in Bahr Dar (in Gojam).

7. Increased output of coffee, the country's main export cropaccounting for over 60 percent of merchandise export earnings, isconstrained by several factors. On the supply side, constraints of aphysical nature include: the disease-prone character of existing coffeeplantings; transportation difficulties; and inadequate testing of quality.Policy-related supply side constraints include: declining real producerprices; cof.fee taxation; and a shortage of seasonal labor forcoffee-picking, caused by restrictions on movement of labor. On the demandside, the slow growth of world coffee consumption, estimated at around 1.3percent per annum, continues to inhibit the expansiLon of coffee exports.As for other export crops, a serious decline in volume has taken place in

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the case of oil seeds and pulses--to about one-fourth the volume exportedin 1974/75. These exports were quite large and second only to coffeebefore the revolution, when tenants paid much of their rent in kind tolandlords who sold the crop for export. A shift in production in favor ofcereals took place after the revolution, and peasant consumption ofoilseeds and pulses appears to have increased.

8. Public enterprises in Ethiopia are, on the whole, reasonably wellmanaged. With the exception of state farms, the operations of publicenterprises have been moderately profitable, although profit rates andlevels have been declining. Some enterprises now face financial problemswhich will affect their operations adversely, unless corrective action istaken. A number of them are hampered by serious working capitalshortages. The tardiness of the authorities in approving price increasesfor enterprise products to meet cost increases has caused declines in thefinancial strength of certain enterprises. Some enterprises have alreadyaccumulated large debts to the commercial banks.

9. Following the departure of many expatriates and some Ethiopiansafter the revolution, the Government filled vacated positions withrelatively less-experienced persons and was able to manage the economy withreasonable efficiency. However, a skill gap exists, and the country'sgrowing manpower needs are not yet met even in terms of the numbersrequired. Moreover, as a result of a salary freeze and domestic inflation,real earnings of professional and technical staff have been eroded,probably by over 50 percent for high level staff, since 1974/75. TheGovernment's ability to implement an enlarged investment program will bestrained unless the skilled manpower situation improves.

10. Skilled manpower (all new university graduates) is centrallyallocated each year according to requirements submitted by the ministries.Judging frcom the proportion of requests for manpower not filled, there areshortages in virtually all fields, but particularly of qualified managers,engineers, accountants, economists and agriculturalists. There is also ageneral scarcity of middle-level manpower, although its extent is noteasily quantified. Many government departments and agencies have trainingprograms to meet manpower needs; these programs are, however, notcoordinated. Overall, the nearly fourfold increase in enrollment since1976/77 in post-secondary education has not produced a commensurateincrease in output of trained manpower because of a high dropout rate.

The Government's Response

11. Some of the issues set out above are being addressed by theGovernment through the formulation of a ten-year plan for the period1984/85 - 1993/94, work on which has been speeded up recently. At the timethe mission visited Ethiopia in March 1983, plan preparation work was at apreliminary stage; hence, it was not possible for the mission to review theplan. Nevertheless, a working paper on a three-year public investmentprogram provided a description of broad objectives, strategies andpriorities, and the parameters within which Ethiopia's plans are beingformulated, and the targets envisaged. It emphasized the need to increase

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coffee and non-coffee exports and to expand import substitution in food,consumer industries and energy production. Its main weaknesses were thelack of a well formulated and consistent macroeconomic frame and targetsfor growth, investment and savings--which appeared unrealistic in relationto the financial and manpower resources likely to be available fordevelopment.

12. The Government has taken a number of decisions since late 1982 toreverse the deteriorating growth trends. rhe government's t:en-year plan isto be phased into three sub-plans--a two-year plan, a three-year plan and afive-year plan. In addition, Chairman Mengistu's speech to the secondCOPWE Congress held in January 1983 sought to give a sense of direction inwhich the economy should move. The speech stressed the importance ofrevitalizing agriculture through guaranteed producer prices and diffusionof improved technology to farmers; the need to restore confidence amongstentreprenuers engaged in small scale industry; and the need. to attractforeign investment and technology for development of the country'sresources. Although these are positive steps, a much more concerted effortis required to achieve a reasonable growthl of the economy over the mediumterm.

Tasks Ahead

13. The Ethiopian economy remains hampered by its weakinfrastructure (notably roads), low productivity in agriculture, heavydependence on one export commodity, a smaLl industrial base, and shortagesof skilled manpower. Apart from this set of unfavorable initialconditions, the availability of domestic resources for investment isconstrained by the Government's outlays on internal security, while importcapacity is constrained by the deteriorat:ion in the terms of trade and bylow levels of external resource transfers. Moreover, the recent recessionin industrialized countries has inter alia inhibited the expansion ofnon-coffee exports. Further, production growth is running up againstcapacity constraints due to the low levels of investment in the past.

14. The need now is for a medium-term approach to development, toaccelerate the pace of economic growth. This will call for policies gearedto generating a higher rate of domestic savings, and thereby facilitatehigher levels of investment. With a record of generally satisfactorydemand management, Ethiopia needs to orient economic policy towardsexpanding the directly productive sectors, particularly agriculture andindustry, and to increase economic efficiency. Th,e key elements of astrategy for achieving these objectives, should include:

- the formulation of a more realistic macroeconomic frame and apublic investment program to guide the country's developmentprocess in the medium term and t:o signaL priorities for externalconcessionary assistance;

- improvement in domestic resource mobilization and allocation;

- the stimulation of private savings and investment throughappropriate policies and incentives;

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- improvement of agricultural pricing and marketing incentives andmeasures to strengthen input distribution, research and extensionservices;

- improvement of incentives and other policies to step up exports,particularly non-coffee exports;

- increased efficiency in public enterprise management andincreased level of investment in public sector iindustry;and

- improved manpower and institutional development policies.

15. Despite the limited room for maneuverability, the mission is ofthe view that a scenario with GDP growth averaging around 4 percent perannum from 1984 to 1989 is feasible provided that:

(a) higher levels of domestic as well as external resources aremobilized to allow total investment to rise progressivelyfrom its current level of under 11 percent to at least 14percent in 1988/89; and

(b) the recommended policy measures (para. 14), alreadyinitiated by Government to some extent, are pursuedvigorously.

In the absence of higher levels of resource mobilization and attention toeconomic policy issues, the outcome might well be a low-growth scenariowith little or no improvement in per capita income levels.

16. Resource Mobilization and Use: The moderate growth scenario (4percent growth) described in the report envisages a steady increase in thedomestic savings rate from 2.8 percent of GDP in 1981/82 to about 7 percentof GDP in 1990, implying a marginal savings rate of 18 percent per annum.This appears feasible, for as recently as in 1979/80 the domestic savingsrate had reached the equivalent of 5 percent of GDP. The attainment of asteady increase in domestic savings will, however, require restraints onpublic consumption in real terms, to free resources for public investment,as well as policies to stimulate private savings and investment. ThePeasant Associations could play a pivotal role by mobilizing theirorganizational, financial and human resources for local development,provided that technical assistance and guidance are offered by theGovernment.

17. The serious scarcity of resources points to the need forimproving the efficiency of resource use, by the use of appropriate pricesto influence the behaviour of the large number of decentralizeddecision-making units. Prices should more closely reflect economic costsin order to improve resource allocation. In regard to public investment,there is a need for better planning and project selection based, interalia, on the use of shadow prices for foreign exchange, labor and capital.

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18. Under assumptions for a modest GDP growth rate averaging 4percent per year from FY85 to FY89, the current account deficit on externaltransactions is projected to widen to about US$52C million by 1988/89. Onthe assumption that grant aid averaging approximately US$115 million peryear could be realized over the period FY85 to FY89, required netdisbursements on medium-and long-term loans for the same period would bearound US$340 million per year. Making allowance for the lags betweendisbursements and commitments, this implies that the Government would haveto attain commitments of the order of US$545 million per year from 1984/85to 1988/89. If commitments of concessional assistance were to reach, say,US$355 million per year during the projection period, the balance (US$190million) would have to come from non-concessional sources or fromcommercial borrowing. This would raise Ethiopia's debt service ratio toabout 20 percent of export earnings in 1983/89--a level which represents aheavy burden for a developing country like Ethiopia.

19. Agricultural Policy: On the sectoral policy front, the mainthrust must necessarily bear upon major issues in agriculture, the sectorupon which the projected GDP growth rate largely depends (see para 6). Themoderate growth scenario is based on an average growth rate of 3.9 percentfor the agricultural sector. More resources should accordingly be providedto agriculture, with emphasis on the the peasant sub-sector, along withincreased supply of inputs and extension services. In addition, outputprices need to be restructured to provide the necessary incentives for arapid spread of improved seeds and fertilizer. In grain marketing,restrictions on inter-regional movement of grains by private trade need tobe relaxed to encourage increased production and marketed surplus, whilethe AMC's operations should be confined to supplying a part of the urbandemand and to stabilizing prices. A major expansion in research andextension services is also called for. In coffee, emphasis should fall onimproving quality through washing stations and related infrastructure andon improving producer margins to the coffee growers. A narrowing down ofproducer margins, as between coffee growing and other crop production, mayprove to be detrimental to coffee production and marketing.

20. Foreign Trade: With the value of merchandise imports presentlyrunning at double the value of merchandise exports, a major expansion inexports and increased import substitution are called for, in order to reacha more sustainable external current accouni: deficit. The expansion anddiversification of exports would be helped by: implementing exportincentive schemes; export marketing and other promotional measures; andstrengthening the institutional framework. Ethiopia also needs to giveconsideration to using the foreign exchange rate of the Birr as aninstrument of trade policy. According to i:he IMF, during the periodJanuary 1975 to December 1982, the real efiective exchange rate appreciatedby 37.5 percent against the currencies of maajor trading partners. / Thisovervalued exchange rate has tended to reduce producer margins in localcurrency and may have inhibited the growth of exports. The presentexchange rate may provide enough financial incentives for production andexport of coffee, if the coffee surcharge is not too high, but the adequacy

1/ See International Monetary Fund, Ethiopia--Recent Economic Developments,Washington, D.C. (May 1983).

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of incentives in the coffee sector needs to be studied thoroughly andmonitored continually. In regard to non-coffee exports (pulses, oilseeds,live animals, etc.), the existing exchange rate does not appear to produceadequate financial incentives to growers for exports, as limited data onexport/import parity prices relative to domestic market prices (Table 2.7,Chapter 2) indicate. Moreover, the overvalued exchange rate is notconducive to the diversification and expansion of such non-agriculturalexports as leather goods and textiles. Since overall import demand iseffectively managed by financial policies and strict control of imports,with priority to essentials, the case for an exchange rate adjustment inEthiopia does not arise so much for curtailing demand as for diversifyingand augmenting supply. A realistic adjustment of the exchange rate,preferably pegged to a suitable basket of currencies, should therefore begiven serious consideration so as to make prices reflect economic costs,improve resource allocation, and provide better producer margins. In doingso, it is necessary to give careful consideration to likely effects onprices, wages and public finance and to the need for maintainingflexibility in the system.

21. The joint venture code on foreign investment, as presentlyformulated, has no provision for the participation of small-scale localprivate industry in joint ventures. A suitable amendment to allow suchparticipation could provide a boost in acquisition of new and bettertechnology and in gaining access to markets abroad.

22. Public Enterprises: In order to improve efficiency in publicenterprises, a number of problems need to be addressed. The various layersof authority cause some unnecessary duplication in the planning and controlof enterprise operations. Considerable management time could be lostunless care is taken to avoid duplication and excessive detail. To correctthese problems, some organizational and procedural changes could be made.Existing incentives apply only to workers at low wage and salary levels; athigher levels incentives consist essentially of prospects for promotion ortransfer to higher positions. In time, as the operations grow anddiversify, the need for decentralization and greater autonomy will becomemore apparent. Therefore, early actions in bringing about somedecentralization and increased autonomy in operational decision-making,coupled with proper incentives and accountability, can contributesignificantly to operational efficiency in the public enterprises.

23. Manpower and Wage Policy: The high dropout rate in thepost-secondary education system is the most urgent issue deservingattention. It is the result of poor preparation at the secondary level,owing to shortages of qualified staff, textbooks, materials, laboratories,and workshops. The rapid localization of teaching posts in highereducation has adversely affected the quality of teaching. Improvements inthese areas and increased emphasis on vocational training requireconsiderable financial resources; in this respect foreign assistance can behelpful. The Government needs to devise more cost effective means ofutilizing existing facilities and resources. Consideration may be given tothe introduction of user charges for books and teaching materials at theUniversity level. Staff upgrading could be accomplished either through

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post-graduate training or through exchange programs with other institutionsabroad. Also, the Government should make a concerted effort to attractqualified and trained Ethiopians (including those sent abroacl for training)who are living abroad. Measures along these lines, along with an expansionof education and training facilities, could be expected to reduce the skillshortage in the future.

24. In regard to wage policy, the Government achieved iits two mainobjectives--to reduce income disparities and prevent wage increases fromcausing inflation--through implementation of guidelines on annual wageincreases of those earning below a certain level (Eirr 600-650 per month),and throughL a wage freeze above that level. This has not quite succeededin safeguarding the lowest paid, while it has resulted in a substantialerosion of real earnings of the professional and technical personnel. Theeffect of the salary freeze since 1975/76 ola the efficiency and morale ofhigh- and mLiddle-level manpower is an important issue in wage policy. Theregrading and reclassification of jobs currently being undertaken by theWage Board presents an opportunity for the Government to address the issueof incentives and to use wage policy to augment the long-run supply ofscarce skills.

Other Sectoral Issues

25. Energy: Ethiopia has one of the lowest per capita levels ofpetroleum and electricity consumption in the world. Biomass fuels forhousehold cooking comprise 93 percent of total final energy utse, more thanhalf of which is in the form of dung and crop residues. Clearing foragriculture and scavenging for firewood has resulted in an alarmingreduction (from 40 percent to less than 3 percent) of dense forest cover inEthiopia during this century. A continuation of this trend could lead toan almost complete loss of natural tree cover within 30 years. Inconsequence, about five million hectares equivalent of fuelwood would haveto be planted by the year 2000 to begin to contain deforestation anddeterioration in gross agricultural potential. Although such a level isunlikely to be achievable, it is estimated that it would be possibletechnically, to plant about 1.2 million hectares in this decade.

26. Despite the small proportion which petroleum comprises in totalenergy consumption, its annual foreign exchange cost is equivalent to morethan half of export earnings, contributing 1o the recent sharpdeterioration in the external trade balance. Ethiopia has major hydropowerresources and the promise of a significant natural gas resource foreconomic local use. High priority should, therefore, be given to betterdefining these resources and to the preparat:ion of an investment strategyrepresenting the most economic pattern of exploitation. During theremainder of the 1980s there are good prospects for reducing the import ofpetroleum pier unit of GDP growth, and for interfuel substitution inindustry andl transport. There are also opportunities to slow the rate ofdeforestation by harvesting and processing a range of presently-wastedforest and crop residues for cooking fuels. To facilitate these programs,arrangements for, and competence in, energy planning need to be improved,and energy sector investment considerably increased.

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27. Health and Nutrition: The health status of Ethiopians is amongthe lowest in the world. Ethiopia's main health problems are related tothe high incidence of infectious and parasitic diseases, malnutrition,respiratory diseases and diarrhoeal diseases. These are basically theresults of poverty, ignorance, shortages of food, safe water, sanitation,and housing, poor personal and communal hygiene, limited access to healthcare, and a climate that is hostile and variable in many areas. Theseproblems impact principally on the rural poor, the mainstay ofagriculture. They are not new, but some current trends highlight the needfor urgent action. Food production per capita is falling and leading togrowing malnutrition. As noted earlier, this is not only the result ofdrought but also of problems in food production, pricing, and distributionand consequently of low incomes. The incidence of both malaria andbilharzia is increasing, especially in areas under resettlement. Moreover,armed conflict has displaced and disturbed large populations in areasalready prone to drought, resulting in social breakdown, high mortality andstranding of children. The health of children and mothers isunsatisfactory, with future generations threatened by epidemics.Population growth has so far been held down by high mortality. But oncemortality rates decline, population growth may overtake economic growth andfood production. The constraints to be overcome are particularly severe onaccount of the difficult terrain. These constraints include: the high costof construction and logistic support for health services; insufficientskilled manpower in technical and managerial positions; a traditionaldisinterest in fertility limitation; and the legacy of a health servicesystem that did not reach out far beyond the urban centers.

28. Government plans for health sector development appear appropriateto the country's circumstances. High priority should be assigned to:extension of health services through primary health care; strengthening ofsupport systems in the regions;maternal and child health and preventivecare; family planning, with Government taking full responsibility forproviding services as part of maternal and child health care; andmobilization of the community to strike at the social causes of ill health,through peasant associations and other local level organizations.

Conclusion

29. In sum, with a record of generally satisfactory demandmanagement, Ethiopia needs to accelerate economic growth primarily throughhigher levels of public and private investment and through a vigorousimplementation of policies, some already initiated by Government, to expand.production and exports. In particular, the report recommends to theauthorities that greater use be made of indirect, macro-level policymanagement vis-a-vis direct administered controls and that efforts be madeto manage the macro-level policy instruments (e.g. exchange rate policy andwage policies) with flexibility and in such a way as to bring market pricesmore into line with real scarcity values. There is a need to develop amore realistic macroeconomic frame for a medium-term public investmentprogram. The financing of increased public investment would call forgreater efforts in domestic as well as external resource mobilization. Themarketing framework and incentive structure in the agricultural sector need

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to be improved and the business climate for private small-scaleenterprises, particularly in industry, made more favorable for increasedinvestment and output. The attainment of higher grolwth rates will alsodepend on raising the operational efficiency of public enterprises and onalleviating skilled manpower shortages. Despite the constraints to thecountry's development and the limited room for maneuverability on the partof Ethiopia's economic policy-makers, conditions exi:st for acceleratingeconomic growth and progressively improving t:he living standards of thepopulation.

PART I

CHAPTER 1

RECENT ECONOMIC DEVELOi?MENTS

Introduction

1.1 Since the revolution of 1974, Ethiopia has experienced majorinstitutional changes in its economy and society. Despite the problems ofadjustment to such rapid changes as the abolition of monarchy and thefeudal system, radical agrarian reform, and extensive nationalization oflarge enterprises, it has achieved considerable social progress and a moreegalitarian distribution of incomes, Most significantly, agrarian reformand the abolition of rent led to an improvemeni: in the food-intake and realincomes of the rural population; thus, rural-urban income differentialshave been somewhat reduced. The literacy rate increased from 7 percent in1973 to over 40 percent in 1981 while school enarollment rate of elementaryschool age children increased from 19 percent to 47 percent. Meanwhile,access to health care services increased from L5 percent to about 40percent of the population. There has also been some expansion cf ruralroads and feeder roads through intensive community participation.

1.2 Compared with the social progress ac'nieved in recent years, thecountry's economic growth has been quite slow. During the decade ending1982/83 the gross domestic product grew at an average rate of only 2.2percent per annum in real terms as compared with a population growth ofaround 2.5 percent per annum. In the aftermathl of the revolution,subsequent armed conflicts, internal and external challenges to theGovernment and a series of droughts were seriolis impediments todevelopment. Also, a very adverse external economicenvironment--international inflation, increased oil prices, low levels ofaid commitments, and in recent years a global economic recession and sharpdecline in coffee prices--hurt the economy during this past decade. A muchhigher rate of growth, particularly with respect to agricultural andmanufacturing output, is needed to improve the living conditions of thegrowing population, most of whom still live in extreme poverty.

1.3 Ethiopia's problems have been compounded by frequent droughts.The drought and famine of 1973/74 claimed about 200,000 human lives and asubstantial proportion of the livestock population, and contributed tosevere food shortages in the mid-1970s. The recurrence of drought in 1981affected several million people in nine of the country's 15 regions. Poorrains in July-September 1982 and the subsequent crop failure during theNovember 1982-January 1983 harvest season affected mainly the Welo, Gonder,Tigray and Eritrea regions. The estimated numbers affected range from oneto three million, in varying degrees of severity. Viewed against thebackground of previous droughts, the Government was better equippedlogistically to cope with the situation, and cansiderable externalassistance from bilateral, multilateral and non-governmental sources wasforthcoming. As a long-term measure, the Government has initiated schemesto resettle population in less drought-prone areas.

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Structural Characteristics

1.4 In terms of population size, Ethiopia, with a populationestimated at about 33 million in 19821/ is the third largest country inAfrica (after Nigeria and Egypt). About 85 percent of the total populationis rural. The country's land area extends over 1.22 million squarekilometers and may be broadly divided into two main geographical zones,namely: the highland plateau of central Ethiopia, and the surroundinglowlands. Its capital city, Addis Ababa, located in the central highlands,has a population estimated at around 1.4 million.

1.5 Agriculture is the mainstay of the country's economy,contributing about 50 percent of GDP, 90 percent of exports, and providingabout 85 percent of total employment. The major food crops are teff (alocally consumed cereal), maize, barley, sorghum, wheat, pulses, andoilseeds. Coffee, the principal export crop, generates over 60 percent ofthe country's export earnings. Other export crops include oilseeds,pulses, cotton, sugarcane, fruits and vegetables. The country's livestockherd is the largest in Africa. Ethiopia's other known natural resourcesinclude gold, platinum, copper and potash. There was some petroleumexploration in the past, but no petroleum reserves have been proven. Noneof these minerals has been exploited on a large scale, and in most casesthe potential for commercial exploitation remains to be established. Thereare prospects for the exploitation of geothermal energy. The country'smain potential lies in agriculture, for which the natural conditions ofseveral areas are favorable. Nearly 95 percent of the land undercultivation is operated by individual farmers who have user rights oversuch land. Farmers are organized into approximately 19,000 PeasantAssociations (PAs) consisting of 200 to 400 farmers per PA. Manufacturingindustry, which accounts for about 10 percent of GDP, is heavily dependenton agriculture; agro-based industry constitutes around 70 percent of large-and medium-scale industry. Handicrafts and small industry are operated byprivate owners. Domestic trade, especially retail trade, is still largelyin private hands. Road transport is dominated by private trucking. Publicsector control and ownership covers all of banking and insurance, shipping,railways, airways, utilities, most of large scale manufacturing, and alarge proportion of construction. The country is divided into 15 regions(including Addis Ababa) for purposes of internal administration. Theseregions are subdivided into 102 awrajas which are further subdivided into586 woredas. The administrative divisions are also broadly grouped intoseven planning zones with a view to introducing a regional focus intofuture plans and their implementation.

1.6 Notwithstanding the country's rich endowment of fertile land andits substantial agricultural potential, its wide variation in topographyand the extremely rugged terrain have been serious obstacles to internaltransportation and to economic development in general. Nearly

I/ This estimate is based on national sample surveys carried outperiodically and may well be an understatement of the actual populationsize. Ethiopia's first census is to be carried out in 1984.

three-quarters of Ethiopia's farms are more than a half-day's walk fromall-weather roads. Moreover, the wide variations in climate, soils andnatural vegetation have influenced settlement: patterns, and thus the laborsupply for agriculture. Rural roads with access primarily to agriculturalareas began to appear only as recently as in 1976.

1.7 With an estimated GNP per capita of around US$140 (1982) and witha vast proportion of the population living below the absolute povertylevel, Ethiopia remains amongst the poorest countries in the world. Overthe last decade, value added in agriculture grew at only around 1.1 percentper annum, compared with a population growth rate of 2.5 percent perannum. An estimated three million people displaced by persistent droughtscall for relief and rehabilitation. Health services in Ethiopia are verylimited and require major improvements to combat high rates of morbidity,infant mortality and maternal mortality. Life expectancy is sltill at a lowlevel of about 46 years. Housing and sanitation facilities, especially inthe towns, are poor and need urgent attention. The extent to which thestandard of living can be improved in the medium tert is limited byfinancial, manpower and capacity constraints. Improvement of incomes ofthe population and provision of better social services cannot be sustainedwithout relaxing these constraints and achieving higher rates of capitalaccumulation and output growth.

Economic Growth over the Past Decade--An Overview

1.8 The years since 1974 can be divided into three periocds insofar asthe pace of economic growth is concerned. The period 1974/75 through1977/78 was marked by internal political upheaval and armed conflicts, andthere was little economic growth. Production in the commodity producingsectors declined or stagnated. Radical institutional changes and armedconflicts created dislocations in trade and transportation, and substantialresources were absorbed by security needs.

1.9 In the second period, comprising the two years 1978/79 and1979/80, the economy made a recovery as hosti:Lities subsided and securityconditions improved. This recovery was initiated by annual developmentcampaigns or "Zemetchas" (beginning in 1978/79) broadly aimed at increasingagricultural and industrial output and at improving distribution servicesin the short term, through increased budgetary allocations to thesesectors, combined with a target setting cum monitoring process.2 / Thiswas the Government's first concerted attempt at revitalizing the economy inthe aftermath of both the revolution and the subsequent military conflictsin the Ogaden and Eritrean regions. GDP grew at about 5.2 percent and 5.5percept in real terms during the years 1978/79 and 1979/80, respectively.Major contributions to this growth performance came from agriculture, whichbenefited from good weather, and from industry, following the resumption ofindustrial activity in and around Asmara. The return to normalcy alsopermitted the resumption of internal transport and distribution services as

2/ See Economic Memorandum on Ethiopia, Report No. 3552b-ET, December1981, for a description of Zemetchas.

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well as commercial activity. Ethiopia's external current account deficitand the government's overall fiscal deficit both remained below 5 percentof GDP during 1978/79 and 1979/80, and the debt service ratio was around 6percent. These deficits reflected the exercise of financial prudence onthe part of the Government in avoiding inflationary domestic financing. Onthe other hand, these deficits were also indicative of the government'slimited success in attracting external concessionary assistance in supportof higher levels of investment. In 1979 net official developmentassistance to Ethiopia was as low as US$6 per capita compared to an averageof around US$21 per capita for low income countries in Africa.3 /

1.10 The economy, however, witnessed a setback in the third period,i.e., 1980/81 to 1982/83. The growth of real GDP slowed down to an averagerate of 2.9 percent per annum during this three-year period, despite amoderate recovery in 1982/83. This slowdown was mainly due to conditionsof persistent drought, capacity constraints in industry, and the low levelof total investment, the last in consequence of increasingly severeconstraints on domestic as well as external resources. The deceleration ineconomic growth was coupled with a sharp deterioration in the externaleconomic environment. Ethiopia's terms of trade declined by about 27percent over this three-year period, reflecting a further decline in coffeeprices and sharp increases in import prices. Efforts to raise non-coffeeexport earnings were not successful owing to internal factors as well aspoor marketing prospects. Consequently, Ethiopia's current account deficitwidened significantly, reaching around 7 percent of GDP in both 1981/82 and1982/83.

1.11 The Government has taken a number of decisions since late 1982 toarrest the unsatisfactory economic situation. First, within the frameworkof the ten-year plan (which has been under preparation for the last twoyears), the Government has taken steps to prepare a two-year plan (to befollowed by a three- and a five-year plan) with clearly defined objectives,strategies, policies and project proposals for financing over themedium-term. Second, Chairman Mengistu, in his speech to the SecondCOPWE4/ Congress held in January 1983, emphasized: the importance ofrevitalizing agriculture through guaranteed producer prices and diffus:Lonof improved technology; the need to restore confidence amongst privateentrepreneurs engaged in small-scale industry and thereby draw them intothe mainstream of development; and the need to attract foreign investmentand technology to develop Ethiopia's natural resources. This statement,inter alia sought to give a sense of the directions in which the economyshould move. Third, senior government officials were reassigned in April1983 with the intent of strengthening the key ministries concerned witheconomic development. A Joint-venture Code was introduced in January 1983to promote joint ventures between foreign investors and Ethiopian publicenterprises. In addition, proposals have been made to simplify and

3/ World Bank, Accelerated Development in Sub-Saharan Africa, Washington,D.C., 1981, Statistical Annex, Table 22.

4/ Commission for Organizing the Party of the Working People of Ethiopia.

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rationalize the system of direct and indirect taxes and make these taxesmore income elastic.

Economic Growth

1.12 As noted earlier, GDP growth decelerated t:o an average of 2.9percent per year during the three-year period 1980/81 to 1982/83. Theperiod average would have been lower but for the modlerate recovery in1982/83, during which year GDP increased by 4.2 perc.ent. This slowdown,relative to the average annual GDP growth of 5.4 percent achieved in thepreceding two years, was largely attributable to poor agriculturalperformance, lower growth in industry, and stagnation in builcling andconstruction activity (see Table 1.1).

Table 1.1: (HANGS IN CDP AND SEXBCTCAL (RDWIlI, 1978/79 - 1982/83

1978/79 1979/80 1980/81 1981/82 1982/83(Prelim.)

( - - - - - - -(I Birr million)- - - - - - - -

GDP at Current Market Prices 7,986 8,499 8,854 9,169 9,794

GDP at Constant Factor Cost 4,219 4,452 4,586 4,654 4,852

(Growth rates in percent per anrum)

GDP at Constant Factor Cost 5.2 5.5 3.0 1.5 4.2

Agriculture 2.4 4.8 2.4 -1.1 4.0

Other Coadity Sectors 12.7 9.4 3.0 3.4 3.3Of which: Iarge Scale Mamifacturing 27.3 10.5 5.6 4.1 6.7

Ii:idicrafts Small Ind. 4.0 2.5 2.5 2.5 2.5Building and Construction 7.7 16.7 0.5 0.7 0.3

Trade and Trainsportation 12.1 5.7 3.4 4.7 5.6

Other Services 2.2 4.2 3.9 3.2 4.5

Source: Anm- Tables 2.3 and 2.4.

1.13 Ag:riculture (comprising essentially crops and livestockproduction), which accounts for around half of GDP (at factor cost), grew

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at an average rate of only 1.8 percent per year during the three yearsending 1982/83. This sector is operated by millions of small farmers,organized into Peasant Associations, who cultivate around 95 percent ofthe total cultivated area, produce about the same proportion of cropoutput, and own practically all livestock. Land operated by producers'cooperatives and under state farms covers about 5 percent of the totalcultivated area. Although recent trends in the volume of crop productionare not clear, the output of major crops evidently declined during 1980/81and 1981/82 from the levels attained in 1979/80; a moderate recovery wasreported in respect of 1982/83. The total production of cereals, pulsesand oilseeds in 1981/82 is believed to have dropped by at least 4 percentfrom the 1979/80 level. A major cause for this decline was the droughtwhich persisted over the years 1980/81 and 1981/82, affecting large partsof the Welo, Gonder, Tigray and Eritrea regions. This drought diminishedseverely the capacity of large numbers of farmers to sustain themselves.Tens of thousands of people journeyed long distances in search of food atrelief distribution centers in Gonder and Welo. While spontaneoussettlement in new land is no longer permitted by Government, as notedearlier, resettlement of displaced families in less drought-prone areas,under government sponsorship, is in progress. These settlement schemes arecostly, typically requiring basic infrastructure and other facilities.Substantial resources, including a large volume of foreign assistance, arecommitted to those relief-oriented activities through the Relief andRehabilitation Commission (RRC). Apart from bad weather, other factorswhich appear to have contributed to the decline in food production in thepast three years include: inadequate output prices and other incentives tofarmers to augment their production and marketed surplus; a drop infertilizer use; and the lack of capacity in the extension and researchsystems to deliver appropriate technological packages to the farmers.These factors are discussed at some length in Chapter 2.

1.14 In large-scale manufacturing, where the public sector accountsfor over 90 percent of output, the high growth rates of 27 percent and 10percent in value added in the years 1978/79 and 1979/80, respectively,reflected the resumption of industrial activity (particularly in and aroundAsmara) and increased capacity utilization in general after hostilitiessubsided. These growth rates were attained almost entirely through theincreased utilization of existing capacity, facilitated by the priorityallocation of foreign exchange to imports of essential inputs and spareparts. Since this recovery, manufacturing industry has been running upagainst capacity constraints. Except in a few fields such as foodprocessing, beverages and textiles, there have been no major additions toindustrial capacity in recent years. As full capacity utilization wasreached, output growth slowed down principally due to a low level ofinvestment for capacity expansion. Thus, the average annual growth rate ofmanufacturing industry fell to 4.6 percent during the three years ending1982/83. Some major industrial projects such as the Muger Cement factory(capacity--300,000 tons per annum), Combolcha Textiles (capacity 20 millionsq. meters per annum), Ethiopian Sugar (additional capacity--25,000 tonsper annum) are now under construction and are due to commence productionwithin the next two years. On the other hand, the equipment and machineryof several public manufacturing enterprises are old and need to be replaced

soon. The speed with which this can be done is, however, severely limitedby financ:ial and foreign exchange constraints. This sector has beenfurther constrained by skilled manpower shortages and, in outlyingprovinces, by shortages in infrastructure facilities--notabLy, transport,power and water supply.

1.15 While government efforts and limited resources were directedtowards large-scale industry, growth in the handicraft and small industrysector during the recent past has been disappointing (see Table 1.1). Thissector, which is largely domestic-resource-based arnd employment-intensive,can augment the supply of consumer goods and farm tools. But it seems notto have received the attention it merits. No study has ascertainedsatisfactorily the causes of this disappointing performance. It wouldappear, however, that apart from uncertainty among private operators inregard to future government policy, a number of constraints have affectedthis sector. These include: inadequate and cumbersome official creditprocedures, a heavy reliance on money lenders, and inadequate supply oftechnical and other support services from the Government. There is,however, a hopeful sign that this sector is to be assigned higher priorityin the future, viz. the government's plan to reorganize the Handicrafts andSmall Scale Industries Development Agency (HASIDA) to enable this agency toplay a more supportive role.

1.16 As regards other sectors, the poorest performer in the years1980/81 and 1981/82 was the building and construction sector. In contrastto high growth rates achieved in 1978/79 and 1979/80, the sector hasvirtually stagnated since then (see Table l.1) owing to shortages ofbuilding materials, skilled workers, emerging constraints on public sectorconstruction capacity, and shortage of project finance. These problems andconstraints point to the need for a study of the construction sub-sector.The need for such a study on how the construction industry's problems maybe solved is emphasized by the consideration that construction currentlyaccounts for more than half of capital formation. Trade, transportationand other services maintained moderate growth during the period 1980/81 to1982/83. In the tourism sector, three big tourist class hotels were openedin 1982. The Government has also negotiated the purchase of two Boeing 767aircraft (at a total cost of about US$100 million) to expand the servicesof Ethiopian Airlines. In addition, the Government has recently purchasedtwo cargo ships at a cost of around US$34 million.

1.17 As may be seen from Table 1.2, these output trends have not ledto any significant shifts in the structure of the economy. At constantfactor cost, the decline in agriculture's share during the period 1978/79to 1981/82 was less than 2 percentage point:s and the increases in industryand service sectors' shares were lower. At: current prices, however,agriculturie's share dropped by 2.8 percentage points over the same period.This reflects the fact that over this four--year period, agricultural pricesdeclined rielative to those of industry and services.

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Tahle 1.2: MMJ1URL (UtSJILCN CF GEP, 1978/79, 1981/82aId 1982/83

(ErEm3t of aIP at factor aost)

(At arrerit fatonr cOst) (At 1960/61 fa±or cost)1978/79 1981/82 19823 1l78/79 1981/82 19283

(prelim-) tPelim.)

Arkulme 51.4 48.6 48.4 46.7 44.9 44.8

lder Camrxdity Sectors 14.7 15.8 15.6 15.6 16.4 16.3Of UiLich: Iarge aBle ICufat uiug 6.6 7.2 7.4 5.1 5.6 5.8

lHnfi=caft & Sa1. Scale Ind. 4.0 3.8 3.7 4.7 4.5 4.5ArIdirg & CbOstrxtion 3.2 3.9 3.8 4.5 4.8 4.6

Tiade & Th 1portatn 15.1 16.0 15.9 15.1 15.7 15.9

0t1ler Servites 18.8 19.6 23.1 22.6 23.0 23.0

Saxee: Ahe Tablef 2.3 ard 2.4.

Savings and Investment

1.18 Because of serious financial resource constraints reflecting lowdomestic savings and the low level of foreign aid inflows, Ethiopia'sinvestment rate has remained low. An increase in the mobilization ofdomestic resources (through taxes and through generation of surpluses ofpublic enterprises) enabled Ethiopia's fixed investment rate to increasefrom 7.5 percent in 1977/78 to about 10 percent in 1979/80. But since thenthe rate of total fixed investment has remained around 10 percent of GDP,with public investment accounting for about three-fourths of totalinvestment.

1.19 During the recent past, aggregate consumption remained at aroundl96 percent of GDP, reflecting in part the basic consumer needs in alow income economy and the high level of public expenditure relating todefense and security needs. There was an increase in recorded grossdomestic savings from about 3 percent of GDP in 1978/79 to nearly 5 percentin 1979/80. However, subsequent years witnessed further increases in theconsumption/GDP ratio (see Table 1.3); this ratio exceeded 97 percent in1981/82 and 1982/83. This was mainly attributable to increased publicconsumption (see Table 1.3). The high rate of consumption expenditure alsoreflects inadequacies in domestic resource mobilization efforts.Uncertainty and a lack of confidence among private operators seem to have

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Table 1.3: TOTAL RESOURCES AND THE][R UTILIZATION

(In percent of GDP at current market prices)

1978/79 1979/80 1980/81 1981,182 1982/83(Prelim.)

GDP at Market Prices 100.0 100.0 100.0 100,0 100.0Net Imports a/ 5.3 5.2 5.6 8.2 8.7

Total Resources 105.3 105.2 105.6 108.2 108.7

Consumption 96.5 95.2 95.5 97.3 98.2Of which: Public 14.6 15.2 15.8 16.2 17.1

Private 81.9 80.0 79.7 81.,1 81.1

Investment 8.8 10.0 10.1 10. 9 10.5Of which: Public 5.9 7.3 7.6 8.3 8.0

Private 2.9 2.7 2.5 2.,6 2.5

Total Ut:ilization 105.3 105.2 105.6 108.2 108.7

Domestic Savings 3.5 4.8 4.5 2.7 1.8

Memorandum Items:

Volume changes in:Total resources 100.0 104.2 107.2 111.3 117.0Consumption 100.0 102.8 105.7 109.1 115.1Investment 100.0 119.8 123.9 135.3 137.6Private consumptionper capita 100.0 99.1 98.5 98.9 100.6

a! Net imports of goods and non-factor services, i.e., the resourcebalance.

Source: Annex Table 2.1.

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resulted in lowering motivations to save and invest. As may be seen fromTable 1.3, the domestic savings rate dropped to less than 3 percent ofGDP. The resource gap has also widened to over 8 percent since 1981/82from around 5 percent in the earlier two years. Foreign financing of totalinvestment rose from 52 percent in 1979/80 to around 82 percent in1982/83. This low level of domestic savings highlights the uphill taskthat planners and policy makers are bound to encounter in mobilizingdomestic resources for a major investment program in a poor country.Increases in domestic savings are indeed possible, as for example, throughincentives for rural savings and investment and through restraints oncurrent expenditure, as will be discussed in Chapters 3 and 4.

Fiscal and Monetary Developments

1.20 In contrast to the situation in many, if not most countries inSub-Saharan Africa in the early 1980s, Ethiopia's overall budget deficitsremained below 5 percent of GDP in both 1980/81 and 1981/82 and itsbudgetary current account was in surplus by around 1 percent of GDP in bothyears (see Table 1.4). These relatively low deficits reflected financialprudence on the part of the Government in avoiding inflationary domesticfinancing. These deficits were also indicative of limited success inmobilizing external concessionary assistance in financing larger capitalbudgets. The government's total revenues recorded a growth averaging 6percent per year in real terms during the years 1980/81 and 1981/82 despitea steep decline in tax revenues from foreign trade as a result of therecession. In both 1980/81 and 1981/82, total revenue as a proportion ofGDP reached 19.6 percent, up from 18.4 percent in 1979/80 (Table 1.4).This increase in the revenue ratio resulted from large increases in non-taz:revenues (essentially surpluses of public enterprises), while the ratio oftax revenue to GDP has remained essentially unchanged at about 15 percentsince 1979/80. This tax revenue/GDP ratio is close to an estimatednormative value of around 16.5 percent for Ethiopia according to aninter-country comparative analysis.5 / It suggests that Ethiopia may nothave too much scope for raising this ratio without creating disincentiveeffects. Ethiopia's main sources of tax revenue are indirect taxes ondomestic sales, imports, and exports, and direct taxes on income andprofits. Revenues from direct taxes increased faster than GDP over theperiod 1978/79 through 1981/82. However, revenues from domestic saleslagged behind the growth of GDP while revenues from exports (essentiallycoffee) and import taxes declined in absolute terms (see Table 1.5).Export tax revenues declined mainly owing to a combination of a decline incoffee prices and the graduated rate structure of the coffee surtax. As aresult, the ratio of tax revenue to GDP declined slightly. However,non-tax revenue increased several fold, almost entirely due to majorincreases in collections of arrears in respect of profits, taxes, interestand rent (essentially surpluses of public enterprises and financialagencies)to raise total revenues to nearly 20 percent of GDP (see AnnexTable 5.2 for details).

5/ International Monetary Fund, Taxation in Sub-Saharan Africa, OccasionalPaper No. 8, Washington, D.C. (October 1981).

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Table 1.4: SM[RY C2F MUNTRAL (IDVEROET FINP1978/79 - 1982/W3

1978/79 1979/80 1980/81 1981/82 1982/83(Prelim.)

(In Birr million)

1. Domestic Revenue 1,376 1,560 1,739 1,824 1,981of which: Tax Revenue 1,156 1,30)3 1,339 1,387 1,478

2. Current Expenditure 1,282 1,548 1,'559 1,692 2,187of whkich: General Services 809 906 972 1,019 1,079

3. Current Surplus 94 12 80 132 -206

4. Capital Expenditurea/ 333 389 438 585 1,127

5. Overall Deficit -239 -377 -358 -453 -1,333Financed 'by:Foreign L3ans (net) ar]d Grants 164 142 128 460 384Damestic JBorroxdng (net) 75 235 230 -7 949

Banking System (net) (62) (10'9) (142) (40) (851)Other (13) ( i6) (88) (-47) (98)

Merandurn Items:

Changes over the Previous Year (%):

Total Revenue 15.2 13.4 11.5 4.9 8.6Tax Revenue 23.1 12.7 2.8 3.6 6.6Current Expenditure -4.8 20.7 7.2 2.0 29.3Capital Expenrliture 21.8 16.8 12.6 33.6 92.6

As Percent of Current Price GDP:

Donestic ]Revenue 17.2 18.4 19.6 19.9 20.2(Tax Revenues) (14.5) (15.3) (15.1) (15.1) (15.1)Current Expenditures 16.0 18.3 18.7 18.5 22.3Current Account Surplus 1.2 0.1 0.9 1.4 -2.1Capital Expenditures 4.2 4.6 5.0 6.4 11.5Overall Deficit 3.0 4.5 4.1 5.0 -13.6

a/ Net of Iniputed Value of External Grants in kirnd.

Source: Annex Tables 5.1 anrd 5.2.

- 12 -

Table 1.5: ZlEiPIA: CDMPOSITION AND OiWIl (CF REVENUE

Average AnnualGrowth Rate

(Nominal)1978/79 1979/80 1980/81 1981/82 1982/83 1978/79 - 1981/82

(Prelim.)(In Birr million) (%)

Direct Taxes 320 378 485 532 556 18.5(Taxes on Net Income &Profits) (272) (329) (436) (482) (505) 21.0

Inlirect Taxes 836 925 854 856 921 0.8of which: Donestic Sales 284 370 384 394 423 11.4

Inport Tax 323 247 291 277 300 -5.0Export Ta 229 308 179 185 198 -6.9

(Coffee Surtax) (203) (276) (148) (160) (173) -7.7

Nor-Tax Reverie 220 257 400 436 503 25.6of which: Profit, Interest

& Rents (79) (147) (301) (333) (396) 62.0

Total Revenue 1,376 1,560 1,739 1,824 1,981 9.9

Mmorandum Items:

GIP Deflator 100 102 104 106 109 2.2Addis Ababa ConsumerPrice Idex 100 113 115 123 128 6.4

Source: Amex Table 5.2.

- 13 -

Figure 1

i - . ,

ETHIOPIA: GOVERNMENT FINANCE. 1977/78-19T12/83 E7HICPIA: GOVERNMENT FINRNCE. 1977/78-1982/83(elILLIONS OF BIRRJ (7. OF GDP - CURR MKT PRICES)

1000 / _/

3M.0~~~~~~~~~~~~~ 30 .0

2500.o 0 I u c o - TOTAL EXPENDITURE I/TOTAL IXPEC0IIANL 2E.0

-54tt.0 --@t1¢ tX-t^7tIUliC - -2' .C . _ \_- IONESTIC REVENUE

2000 o... CURRENT AXENOT0UCR / -seee.e _ - 4 1 2C .O _ - ' _ _ _ _ ".0

at1500.0 C~ URRENT EAPOMOITURtlNI.E_CRFTCXEOTR

IL~~~~~~~~~~~~~~~~~~~~~~ CURRENTI EXP ENDITURE

v3 tooo.e 7 1Cu .o 0

O CAPITAL eUPCROItuAC Im CAPITAL EXPENOITURE3J 100.0 __ U| _ _ CL __ ____.-1.0_ _

.0 - -- K !~~~~~~~~~~~~~~~~~~~E .0 _ _ _ _ _ _

-M-0 %~~~~~~~~~~~~~-

-0600.0 *1_NU*tJVlttT WI? . -111.0 _OENRRLL OEFICIT

.t t .1,. . . r , 716 76 M II S2 I 78 79 60 el 62 03

FISCAL YEARS FISCRL YERRS

1.21 As the above analysis implies, (see Table 1.4--years 1979/80 to1981/82) the buoyancy of total tax revenue with respect to GD)P has fallenbelow one in recent years. The Government intends to make the tax systemsimpler but more income elastic. The proposal is t:o simplify the presentsystem of indirect taxes involving 15 categories of turn-over/transactiontaxes into four tax rates to be levied on domestic and foreign goodsaccording to their classification ranging from essential to luxury goods.These taxes are to be levied at the point of manufaLcture or at thewholesale stage, as appropriate. As regards direct. taxes on agriculturalincome, the approach being followed by the Government is to :improve uponthe existing system under which both the assessment. and collection of taxesare made by peasant associations. The assessment of taxes in the futuremay be carried out directly by the Government, leaving the collectionfunction with the peasant associations. Agricultural income is consideredto be heavily under-reported by farmers; very few of them report incomesabove Birr 600 on which higher tax rates apply. The envisaged reforms areintended to remedy this situation without changing the existing progressivetax rates. In regard to revenue from export taxes, some reforms werecontemplated to improve coffee producers' profit margins. A committee hadconsidered whether the basis for the coffee surtax should be changed fromthe higher ICO prices to the Jimma 5 export price and whether the

- 14 -

progressive structure of the surtax should be reduced gradually to a flatrate. The Government has, however, decided to retain the existing system.The main difficulty concerns the filling of the revenue gap arising fromthe decline in the coffee surtax.

1.22 The share of current expenditure as a proportion of GDP in1981/82 declined and came close to the 1979/80 level of 18.3 percentdespite a large increase in 1980/81. Taking 1979/80 as a reference year,the largest increase in current expenditures came from general servicesfollowed by social and economic services. According to preliminaryestimates, during the fiscal year 1982/83 normal current expenditureincreased by about 8.5 percent while total revenue increased by about 9percent in nominal terms. However, during the same fiscal year, there wasan exceptional increase in budgetary expenditure which was financed by anissue of a special bond. A part of this amount was used to strengthen thecapital of public enterprises including current transfers to theAgricultural Marketing Corporation to pay off accumulated subsidies, andalso to settle some arrears carried over from previous years. With theincorporation of this increased expenditure into the main budget, thecurrent account showed a deficit equivalent to about 2.1 percent of GDP.There is a clear awareness on the part of the Government that therecurrence of such situations should be avoided in the future. Accordingto the revised budget for the fiscal year 1983/84, the Government expectsto record a small current account surplus and to hold the overall deficitat less than 8 percent of GDP. On the whole, current expenditure continuedto be inordinately high in relation to capital expenditure.6 /

1.23 Central Government capital expenditure continued to increase infiscal years 1980/81 and 1981/82; the growth rate in the latter year wasabout 34 percent in nominal terms. As a result, capital expenditureincreased to over 6 percent of GDP in 1981/82. The bulk of capitalexpenditure was on agriculture and road construction (67 percent in 1978/79and over 45 percent in 1981/82); the remainder was largely in respect ofother infrastructure, services and industry. While the share ofagriculture in government capital expenditure declined from 44 percent in1978/79 to 24 percent in 1981/82, that of industry, mining, water,transportation, power, and trade went up from 18 percent to 41 percent, andthe share of social services declined slightly to 13 percent. According toprovisional information, capital expenditure increased by about 86 percentin 1982/83 with a significant shift in favor of agriculture (see Table1.6). A large part of this increase (Birr 245 million) may be attributedto equity contributions to public corporations.

1.24 The overall budgetary deficit was financed largely (about 64percent) from the domestic banking system in 1980/81 whereas it wasfinanced entirely from external resources in 1981/82--an exceptional yearin respect of external capital inflows (Table 1.4). But the exceptionalexpenditure referred to in para. 1.22 led to an overall deficit of Birr1,333 million in 1982/83 and consequently, government domestic borrowing in

6/ See "International Comparisons of Government Expenditure", IMFOccasional Paper 10, Washington, D.C. (April 1982).

- 15 -

1982/83 was relatively high. Thus, the financing from the domestic bankingsystem amounted to 9 percent of GDP in 1982/83. It should, however, benoted that the 1982/83 budget deficit is overstated in relation to those ofprevious years owing to the settlement of arrears (para. 1.22) and equitycontributions to public corporations--activitijes which should have beenspread over the past years.

Table 1.6: EtHIOPIA: SFLTCIAL BREAKXDN CF G(fMTENT CAPITAL EXPENDrI1ES

(Percent of total)

1978/79 1979/8) 1980/81 1981/82 1982/83(Prelim.)

Agriculture d: Iand Settlement 44.0 31.4 27.8 24.0 33.8Road Cbnstruction 22.6 28.5 21.5 21.7 7.8Water Resources, Public Building &

Other Tranaportation 10.1 13.3 15.3 12.4 13.3Industry, Mirdng, Tourism, &

Electric Pcwer 7.5 10.0 21.4 28.6 23.8Social DIvelcent 14.0 14.7 14.0 13.0 8.5Others 1.8 2.1 - 0.3 12.8

Total 100.0 100.0 100.0 100.0 100.0

(Total Capital Expenditure-(Birr million)a/ 372 453 532 682 1,271

Morandum Item:

Percent increase of capitalexnditure over previous year 11.3 21.8 17.4 28.2 86.4

a/ Includes inputed value of external grants in kind (see Amex Table 5.4).

Source: Airxx Table 5.4.

1.25 The government's prudent fiscal management,as reflected by itslimited borrowing from the banking system, has contributed to financialstability. Also, the expansion in the money supply was moderated as the

- 16 -

National Bank of Ethiopia reduced the rate of domestic credit expansion andmonitored the allocation of credit to priority sectors. Thus, over thethree-year period ending June 1982, net domestic credit to Governmentincreased at an average rate of about 11 percent per annum, net credit toother sectors rose by about 17 percent, and overall domestic creditexpansion averaged to about 14 percent per annum (see Table 1.7). Overthis period, the expansion in money and quasi-money averaged around 8.5,percent per year. This low rate of expansion of the money supply reflecteda decrease in net external assets which partly offset the effects of theexpansion of domestic credit. However,according to provisionalinformation, the money supply increased by about 15 percent during thefiscal year 1982/83. Net credit to Government expanded by 68 percent in1982/83 as a result of an exceptional borrowing,the proceeds of which wereused to strengthen the capital base of public enterprises, to settlearrears and to meet the budgetary financing requirements of theGovernment. Net credit to other sectors including public enterprisesdeclined by 10 percent.1.26 The government's control over credit expansion, together withincreased production of essential consumer items and the return to normalcyin internal transport, has led to a significant reduction in the domesticinflation rate in recent years. Other contributary factors to the declinein the inflation rate possibly include: the effects of price controls; themaintenance of an overvalued exchange rate (see para. 1.31); and theeffects of the wage freeze on higher level staff. The inflation rate (asmeasured by the Addis Ababa retail price index) declined from 12.9 percentin 1978/79 to 7.3 percent in 1981/82 and to 3.8 percent in 1982/83 (seeTable 1.7). While this index is limited to the measurement of pricechanges in consumer items, there is no index which reflects price increasesin construction and building materials. Also, the paucity of priceinformation in rural areas has hindered the development of a suitable priceindex for rural areas. The absence of such information, particularly,agricultural prices in rural areas, weakens the reliability of the GDPdeflator.

- 17 -

Table 1.7: EZHICPIA: MDNEY AND CRED'T, FY1979-1982(In Birr million; End of June)

Percentchge

1979 1980 1981 1982 1983 1979-83(Prelim.)

Foreign Assets (net) 452 368 245 370 222 -50.9amestic Credit 2,085 2,612 2,830 3,125 3,721 78.5Net Credit to Goverrment 862 968 1,108 1,181 1,979 129.6Net Credit to Other Sectors 1,223 1,644 1,722 1,944 1,741 42.4MDby and Quasi4bney (M2) 2,064 2,332 2,378 2,644 3,040 447.3

Memorandum Item:

Ratio of M2 to GDP (%) 25.9 27.4 26.91 28.3 31.0Percentage increase of M2/year 11.3 13.0 2.0 11.2 15.0Percentage increase in AddisAhaba Retail Pri>e Indexfrcm previous fiscal year 12.9 12.5 1.9 7.3 3.8

Source: Anhx Table 6.1

Balance of Payments

1.27 Recent developments in Ethiopia's balance of payments aresummarized in Table 1.8. As may be seen, Ethiopia's current accountdeficit on ext:ernal transactions remained below 5 percent of GD]? during theyears 1978/79 and 1979/80, mainly due to an increase in the volume ofcoffee exports (which account for over 60 percent of Ethiopia's exportearnings) and to keeping imports under control. The volume of coffeeexports in both 1978/79 and 1979/80 was over 40 percent above the 1977/78level, and this compensated for the decline in coffee prices. However, in1980/81 the current account deficit increased to a level equivalent to 5.2percent of GDIP and widened further to about 7.1 percent in 1981/82 and1982/83, reflecting a steady decline in export earnings and increasedimport expenditures since 1979/80 (see Table 1.8). Consequently, the valueof merchandise imports was more than double the value of merchandiseexports in 1981/82 and 1982/83 (see Annex Table 3.1). A deterioration inthe terms of trade also adversely affected the country's gross domesticincome; during the three-year period ending 1982/83, the terms of tradedeclined by about 27 percent and the income loss is estimated at around 1percent per year (see Annex Table 12.2).

- 18 -

Figure 2

ETHIOPIR: EXTERNAL TRR2E AND RESOUJRCE GAP(AS a PERCENT OF GOP)

fn 17 _ __

Ci ----- --- - - - --- ----Z7-s .D .1I- 7. -

I&J

2.1

,, .0 .

,.e

-30.0 J

FISCAL YEARS

1.28 The principal cause of this unfavorable trend was the sharpdecline in coffee export prices. In 1980/81, the export price of coffeedropped by some 25 percent below the 1979/80 level and caused a 17 percentdecline in coffee export earnings, despite an increase in the volume ofcoffee exports in that year (see Appendix Table 3.3). The continued highdependence on coffee export earnings is a major weakness of Ethiopia'strade structure. Rather than offsetting the decline in coffee earnings,non-coffee export earnings in 1981/82 were even less than those of1979/80. One of Ethiopia's major exports, namely pulses, has suffered asevere decline over time. The export of pulses reached a record level of144,000 metric tons in 1973/74 and has steadily declined since then toabout 25,000 tons in 1980/81. Overall, there was some substitution in theproduction of cereals for pulses and oilseeds as the abolition of rents(largely paid in kind) led to an increase in farmers' consumption and adecrease in the marketed surplus available for export. But this does notfully explain the decline in major non-coffee exports. A multiplicity ofsupply constraints and the lack of incentives continued to impede thedevelopment of these and other non-coffee exports including live animals,hides and skins, and leather. (See Chapter 2 for further discussion.)Moreover, external market conditions were not conducive to an expansion of

- 19 -

Table 1.8: EfCffPIA: BAIACE CF PA)M4TS SUbkRY, 1978/79 - 1982/83

(In Birr million)

1978/79 1979/80 1980/81 1981/82 1982/83(Prelim.)

Exports of Gcods & MS 942.6 1,209.5 1,147.2 1,076.2 1,142.0Imports of Goods & NMS -1,367.9 -1,652.4 -1,642.3 -1,824.2 -1,990.4Resource Balance -425.3 -442.9 -495.1 -748.0 -848.4

Factor Services -5.2 15.0 -13.4 -4.7 -4.3Private Transfers (net) 48.2 41.3 51.1 93.6 175.8Current Account Balance -382.3 -386.6 -457.4 -659.1 -676.9

Official Transfers (net) 123.5 124.0 123.9 139.9 239.0Pubic Loans (net) 146.2 214.5 228.6 508.0 375.9Other Capital(incl. errors & omissions) (net) 17.4 -35.5 -18.6 130.7 -86.7

Changes in Reserves (- = Increase) 95.2 83.6 123.5 -119.5 148.7

Memo Items:

Net Foreign Assetsin months of imports 4.6 3.0 2.0 2.7 1.5

Debt Service Ratio(as % of expoits of gods andnon-factor services) 6.8 5.8 7.1 11.5 11.0

Current Accont Deficit as % GDP 4.8 4.5 5.2 7.2 6.9

Source: Annex Table 3.1.

non-coffee exports. For all these commodities--excepting live animals andmeat--export prices declined. There was some expansion in 1981/82 in theexport volume of oilseeds, pulses, fruits and vegetables, and hides andskins. But these increases were very small.

1.29 Meanwhile, after two years of fairly tight control, total importsrose by 10 percent in value in 1981/82, reflecting mainly sharp increasesin capital and consumer goods imports. According to provisionalinformation this trend continued in 1982/83; t:he value of imports rose by afurther 10 percent owing to a major increase in consumer goods imports.The increase in the consumer goods imports resulted from substantialinflows of food and other commodity grants, a:Lthough actual cash imports ofconsumer goods declined.

- 20 -

Figure 3

ETHIOPIA: TERMS OF TRADE. 1977-83

150.0

.140.0 1 -E_

(SPORT TtlCE INDEX ,

130.0 .

$0.0 _ / -- _

70.0 TERHS Of TRADE \

10.0

77 7 79 sao es 82 asF ISCL YEARS

1.30 One positive development in the external account was the near,doubling in 1981/82 of private transfers. This reflected mainly increasedremittances to missionary and other private institutions and increasedgifts to Ethiopians from relatives abroad. The deterioration in theexternal account was also cushioned by a significant increase in officJiLaltransfers, and more importantly by a quantum jump--from Birr 229 millioia toBirr 508 million--in the inflow of public long-term capital. This

reflected, in large part, the disbursement of a concessional loan of U',)$15O

million equivalent from a bilateral source. This was an unusually highi

level of external resource inflow for Ethiopia, and for the first time in

many years the overall external account showed a surplus. Thus Ethiopiia's

net foreign assets rose significantly in 1981/82 to a level equivalent to

2.7 months of imports, but declined to 1.5 months of imports in 1982/8:3.

1.31 The rate of exchange was fixed at US$1.00 = Birr 2.07 in 197:3 and

has remained unchanged since then. During the period January 1975 to

December 1982, Ethiopia's import-weighted real effective exchange rate

appreciated by 37.5 percent against the currencies of its major trading

- 21 -

partners.7 / This appreciation of the Birr has tended to reduce margins inlocal currency of producers of exports. This issue will be addressed laterin Chapter 4.

1.32 As reported by the Government under the World Bank's DebtReporting System, Ethiopia's external debt at: the end of 1982 stood atUS$1,028 million. This was equivalent to about 23 percent of GDP in1981/82. This relatively small external debt: ratio largely reflects thelow volume of external resource transfers. Ethiopia remains amongst thelowest recipients of official development assistance (ODA); in 1981/82, ODAreceipts amounted to about US$6 per capita as compared to an average ofaround US$20 per capita for Sub-Saharan Africa as a lwhole. During thethree years ending 1981/82, external assistance in the form of grantsaveraged around US$62 million per annum, or US$2 per capita. The mainsources of grants have been the EEC, UNDP, UIIFPA, UNICEF, WFP, Sweden, theFederal Repu'blic of Germany, France, Italy, the Soviet Union, and theGerman Democratic Republic. Discounting the unusual circumstances in1981/82, the underlying trend in medium- and long-term loans indicates anet inflow of the order of US$105 million per annum, or US$3.3 per capita.The main loan sources have been the International Development Association,the African Development Bank, the African Development Fund, the IMF, theEEC Special Action Account, and bilateral sources. As a result of the lowlevel of external assistance and the concessionary nature of thisassistance, Ethiopia's debt service ratio had remained at around 6 percentof export earnings in the recent past. However, the debt servLce ratio hasbegun to increase--reaching a level of about 11 percent in 198:2/83, mainlybecause export earnings declined and larger debt service payments felldue. Although debt service obligations are as yet al: manageabLe levels,the increase in the debt service ratio should be regarded as an earlywarning of possible debt problems ahead unless policiLes and measures areadopted to develop exports and to achieve efficient :Lmport substitution.

7/ See International Monetary Fund, Ethiopia - Recent EconomicDevelopments, Washington, D.C. (May 1983).

- 22 -

CHAPTER 2

CAUSES OF THE SLOW GROWTH OF AGRICULTURE

2.1 The previous chapter noted that, although Ethiopia's economicperformance and financial management since 1978/79 have compared favorablywith that of most countries of Sub-Saharan Africa, its GDP growth slackenedin the three years ending 1982/83, there being only marginal growth in percapita terms. While an adverse external economic environment, severedroughts in the northern areas of the country, and increasing capacityconstraints in industry contributed to this slowdown in economic growth,the more fundamental problem has been the relatively sluggish performanceof agriculture and exports. This chapter will indicate the major internalfactors which seem to have contributed to this slow growth. The emphasiswill be more on long-term performance than on short-term deterioration.While financial resource constraints did not permit any appreciableincrease in domestic investment to expand productive capacities, theunsatisfactory growth of food and agricultural production (below the rateof population growth) may be attributed to several factors other than thedrought. These include: inadequate supplies of fertilizers, improvedseeds, extension and other support services; inadequate farmers'incentives; and restrictions on the transport and trade of grains.

Slow Growth of Agriculture

2.2 The slow growth of agriculture has been the most significantfactor explaining the slackening of GDP growth in recent years. Because ofthe importance of this sector, and its sluggish performance over a longerperiod, this performance will be reviewed at some length.

2.3 Agriculture is the dominant sector in the economy, contributingnearly 50 percent of GDP and 90 percent of exports. There are about 7million farm families with an average holding of 1.5 hectares. The smallholder farms (organized into Peasant Associations) account for 94 percentof cultivated land and over 90 percent of agricultural output--includingmost food crops (cereals, pulses and oilseeds), coffee, and virtually alllivestock. Only crops such as cotton and sugar are grown primarily onstate farms. Agriculture affects all sectors of the economy; itssatisfactory growth is critical not only for improvement in the foodsituation but also for accelerating the growth of GDP, exports andindustrial production.

2.4 Ethiopia's national accounts show an average growth ofagricultural value added (in constant prices) of about 1 percent per yearduring the decade ending 1981/82, compared to over 2 percent annual growthof GDP (see Annex Table 2.2). Between 1971/72 and 1977/78, droughts andinternal turmoil adversely affected agricultural output, and there was nogrowth. In the five years beginning 1978/79, real growth averaged about2.5 percent per year. But only in 1979/80 and 1982/83 did the rate ofagricultural growth substantially exceed the rate of growth of population(estimated at 2.7 percent per year).

- 23 -

2.5 Physical production data--especially for food crops--are not veryaccurate. Even for the major cereals (teff', maize, sorghum, barley, wheat)which constitute the bulk of food crops, the time series of production upuntil 1980/81 seems to be far from reliable.1/ The Central StatisticalOffice (CSIO) now conducts annually an agricultural survey2/ which expertsconsider to be well-designed and well-implemented. This survey seems toprovide fairly reliable agricultural production figures for 1980/81 and1981/82, but these data are not comparable with the series for earlieryears. Pr:ior to 1980181, production and acreage estimates were generatedfrom surveys conducted by the Ministry of Agriculture (MOA). Judging bythe volume of cereals imports and the movement of open markel: prices ofcereals in Addis Ababa (see Table 2.1), it is reasonable to conclude thatproduction stagnated and marketed supplies declined in the period 1974/75through 1977/78. Prices in Addis Ababa rose sharply in 1976 through 1979despite increasing food imports, which reached a peak of 361,,000 tons in1978/79. Production seems to have increased slightly in 1978/79 andsubstantially in 1979/80, as indicated by the small decline or stability ofcereal prices in 1980 and 1981, despite a considerable reduct:ion in foodimports in these two years. Thus, while official cereal productionfigures3/ (7.5 million tons by CSO) for 1979/80 are probably overestimates(or the figures for earlier years underestimates), this evidence suggeststhat production did increase substantially owing to good weather in mostareas and government efforts to raise production through the (Zemetcha)Development Campaign. In the two years ending 1981/82, the growth ofproduction and of marketed supplies of cereals slowed down. There was aresurgence of price increases in 1982 and early 1983, despite no furtherreduction of imports and the continuation of the government's prudentfinancial management. Average retail prices in Addis Ababa during Januaryand February for maize and sorghum increased by 20 percent and 15 percent,respectively, between 1982 and 1983. However, in late 1983 cereal pricesbegan to come down substantially in Addis Ababa following increasedsupplies in the market. The 1982/83 output was reportedly close to that of1979/80. The domestic prices of pulses and oilseeds also increased whileexports declined, and production grew slugg:ishly.

1/ For example, the CSO's figures imply an increase of 56 percent incereal production in 1979/80 over the previous year and a decline of 18percent over the next two years (see Annex Table 7.1).

2/ This is based on a stratified sample of 12,500 agricultural households,drawn from 500 peasant associations in ]2 regions (excluding Eritreaand Tigray regions), and uses a combinat:ion of interview and objectivemethods, e.g., area measurements and crop-cutting experiments on asample of fields.

3/ These do not include an estimated annual. production of about 1.5million tons of ensete, roots and tubers.

- 24 -

Table 2.1: CEREAL IMPORTS AND PRICES, 1975/76 - 1981/82

PercentCereal change

Cereal Imports Price fromCommer- Food Index previous

Year cial aid Total (1 96 3=10 0)a/ yeara/- - - - -(tons '000) … - - - -

1975/76 32.0 60.6 92.6 223.9 54.71976/77 119.8 65.0 184.8 289.6 29.51977/78 109.0 206.4 315.4 350.4 21.01978/79 116.2 244.7 360.9 407.6 16.3

1979/80 188.9 134.4 323.3 394.6 -3.21980/81 51.0 152.2 203.2 400.0 1.41981/82 38.6 182.0 220.6 457.7 14.4

a/ Index of Addis Ababa prices for calendar years 1976 through 1982.

Sources: AMC and WFP, Addis Ababa for imports; CSO, Addis Ababa, forprices.

2.6 The increases in cereal prices in FY82 (and in the first ninemonths of FY83) were substantially larger than increases in the overallprice index, indicating a continuing problem of inadequate food grainproduction and marketed supply. The government's efforts to augment urb.anfood supplies through the expansion of state farm foodgrain productionturned out to be a very costly experiment. Although the state farms'estimated production of cereals increased from about 82,000 tons in 1978/79to over 282,000 tons in 1981/82, their actual production and deliveries tothe Agricultural Marketing Corporation (AMC) consistently failed to achievethe targets (see Annex Table 7.7). As noted earlier, their costs ofproduction are so high that they incur heavy losses despite thesubstantially higher prices (about 20 to 50 percent more than those paid topeasants) paid for their grains by the AMC. It has now become clear thatthere is no quick and easy solution to the problems of increasingagricultural production and marketed surplus.

2.7 The Government has recognized that the results of its state farmoperations to date have not been encouraging. It has sought, without muchsuccess, to improve the financial performance of state farms. The basiceconomic issue is not, however, whether the state farms can be madefinancially profitable, but rather whether the resources now being devotedto this sector could yield a higher rate of return in alternative uses,e.g., through intensive efforts to raise productivity in the peasant

- 25 -

sector, where the labor expended by the peasants does not represent afinancial outlay by the public sector. This basic issue is under review byGovernment.

Factors Constraining Agricultural Growth

2.8 Since almost all of agriculture depends on rainfall,4/ and theuse of purchased inputs is very limited, it is difficult to assess thefactors, other than weather, causing this recent slowdown in agriculturalproduction. Weather conditions were unfavorable for agriculture in 1981/82for large parts of northern Ethiopia. But the poor performance ofagriculture, especially over a longer period, cannot be explained entirelyby poor weather and limitations of naturaL environment.

2.9 Although increasing soil erosion, irregular rainfall and poorfarming practices are serious constraints, Ethiopia has a substantialpotential for agricultural development owing to its relatively large areasof fertile and virgin land in the south and in some of the central areas ofthe country. Of an estimated (nearly) 80 million hectares of agriculturalland, only 12 million hectares are used for crops and fallow.5 / About 65million bectares are classified as permanent pasture land (Annex Table7.6), but much of this land is fertile and arable.

2.10 The improvement of soil and water conservation practices(including dams, ponds, terraces, contour works, rural roads andreforestation) to reduce soil erosion, and the development of irrigationfacilities to minimize the impact of droughts are important for relaxingthe physical constraints to long-term agrLcultural development. There is,however, considerable potential for growth through technology diffusion,through increasing yields on rainfed landsa, and through expansion of thecultivated area. Weather conditions are lOt equally volatile in allregions and Awarjas of the country.6 / There are about 31 Awarjas (mostlyin Shewa, Gojam, Arsi, Gonder, Sidamo, WoLega and Kefa) out of a total of102 which have about one-half of the country's fertile land and in which

4/ Out of 12 million hectares used for c:rops and fallow, only about100,000 hectares (or less than 1 percent) are irrigated, about 700,000hectares are estimated to be potentiaLly irrigable.

5/ Nearly 6 million hectares are under cereals, pulses and oilseeds; about0.5 million hectares under coffee; 0.1 million hectares underindustrial crops; 3 million hectares iare fallow; and 2 to 3 millionhectares are under ensete and root crops.

6/ Ethiopia has 15 administrative regions. Regions are sub-divided intoAwarjas (102 in all), and Awarjas into Woredas (586 in all).

- 26 -

the pattern of rainfall is relatively stable.7/ These high potentialareas contain nearly 60 percent of Peasant Association membership (andprobably of peasant population), produce about 54 percent of cereals,supply over 90 percent of the grains procured by the Agricultural MarketingCorporation (AMC), and account for nearly 95 percent of fertilizers used bythe peasant sector.

2.11 Some peasants, especially in these high potential areas, havebegun to adopt the new seed-fertilizer technology package in a rudimentaryform for the production of cereals. Because of a more stable rainfall,farmers' perceived risks of losing their investments in new seeds andfertilizers is relatively less in these areas than in areas having lessstable weather. However, a wider application of this proven minimumtechnology package has been hindered by a number of constraints. Since1979/80 the costs of inputs (mainly fertilizers) and the prices of outputs(as set by the Government) have been unattractive to farmers, the qualityand availability of improved seeds have deteriorated, extension serviceshave been inadequate, and the supply of consumer goods to rural areas hasnot improved. The adverse impact of these factors on production andmarketed output has not been limited to the high potential areas but has invarying degrees affected most farmers in the country.

2.12 The available new seed-fertilizer technology, requiring acombination of fertilizers, improved seeds and improved farm practices,would permit an increase in cereal yields of around 100 percent; an optimalapplication of fertilizer alone could raise yields by around 50 percent.8 /The potential yield increases are shown in Table 2.2. Introduced inEthiopia over a decade ago, this package has been delivered through theIDA-financed Minimum Package Project (MPP) which has remained thecenterpiece of the government's investment strategy for peasantagriculture. Although the program under MPP II was extended to cover 440Woredas or over 75 percent of Ethiopia's districts, the 'package' has beenalmost solely fertilizer--consisting of about 95 percent DAP and 5 percenturea. Fertilizer use in the peasant sector increased fairly rapidly from1973/74 through 1979/80, during which period fertilizer prices did not risemuch (see Table 2.3). But as the price of fertilizer rose sharply (nearlydoubling) in the two years 1980/81 and 1981/82, fertilizer use in thepeasant sector declined sharply. Meanwhile, producer prices paid by theAMC for the most important cereals--maize, sorghum and teff--were reducedslightly (see Table 2.5). These changes in the relative prices of

7/ This is described in the World Bank report, Ethiopia: AgriculturalSector Interim Report, 1983, and in the report of a joint Government ofEthiopia and World Bank team, entitled Ethiopia: Review of FarmersIncentives and Agricultural Marketing and Distribution Efficiency,Addis Ababa, 1983.

8/ In the early 1970s, new seed varieties of wheat and maize wereimported, and adopted by farmers. The imported varieties of barley andsorghum showed few characteristics that were improvements over localvarieties.

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Table 2.2: ACTUAL AND POTENTIAL CROP YIELDSUNDER DIFFERENT TECHNOLOGIES

(tons/hectare)

Fertilizerplus

National Fertilizer improved IAR fieldCrop averagel/ use2/ seed3/ demonstration4 /

Teff 0.8 1.16 1.3 1.7a/Wheat 1.0 1.54 1.9 2.0t/Maize 1.6 2.27 4.0 5.0Sorghum 1.1 1.53 2.6 2.5Barley 1.0 1.54 2.0 4.0

Sources and Notes

1/ National average yields of peasant sector. Source:Institute of Agricultural Research (IAR), Handbook on CropProduction in Ethiopia, 1979.

2/ Minimum yield with fertilizer use only. Source forincremental yields: MOA, Fertilizer Study, 1982.

3/ Yield estimate by MOA Agronomy Department, Fertilizer andImproved Seed and Husbandry Pracitices, 1983.

4/ Results of IAR field demonstration. Source: IAR, Handbookon Crop Production in Ethiopia, L979.

a/ For red teff (white teff: 1.0-1.2).

b/ For durum wheat (bread wheat: 3.2-4.0).

fertilizers and major cereals reduced the 'benefit-cost ratio of fertilizeruse and made fertilizer use unattractive to farmers.9 / The decline in

9/ The average fertilizer response ratio of teff, wheat, maize and sorghumis estimated as 5:1; that is, 5 quintals of additional cereals for anapplication of 1 quintal of fertilizer per hectare, as is indicated byTable 2.2 (column 3). The cost of 1 quintal of fertilizer increasedfrom Birr 65 in 1979/80 to Birr 116 in 1981/82. The average farmgateprice for 5 quintals of cereals remained at Birr 130, reducing thebenefit-cost ratio from 2 to nearly 1.

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fertilizer use was much smaller in Shewa and in the area around AddisAbaba, presumably because farmers in these areas were able to obtain higherprices for grains in the open market, unlike in the other major surplusprovinces (Arsi, Gojam and Gonder) where all grain is purchased by the AMCat relatively low fixed prices.

2.13 Adequate varieties of improved seeds have not yet been developed,and supplies of improved seeds to farmers have not increased. Out of atotal production of about 22,000 tons of improved cereal seeds in 1981/82,less than 4,000 tons were supplied to peasants (Table 2.3). Also, most ofthese seed varieties are nearly a decade old, and much of their originalyield potential and disease resistance have been lost. The fundamentalproblem with improved seed supply appears to be inadequate selection andresearch. Without truly improved seeds, the impact of fertilizer isconsiderably lower. Also, the price of "improved" seed (Birr 70/quintal)is double the price of grain.

Table 2.3: FERTILIZER RICES AND USE, AND DISIRIBUrION CF NPVED SEEDS

1973/74 1978/79 1979/80 1980/81 1981/82

A. Price of fertilizer (DAP)Birr/quintal 42 55 65 85 116

B. Use of fertilizer by thepeasant sectora/ ('000 tons) 10 32 48 43 30

C. Total improved seeddistribution (tons) na 5,316 9,831 10,880 22,042

D. Improved seed distribution tothe peasant sectora/ (tons) na 2,316 2,684 3,401 3,517

a/ Peasant Associations and producers' co-operatives.

Source: MLnistry of Agriculture.

2.14 Agricultural extension services have expanded to cover 469Woredasl 0 / without corresponding increases in manpower and financialresources. As a result, relatively inexperienced and inadequately trained

10/ 440 under MPP II, 29 under 1 Arsi Rural Development Unit (ARDU) andWolaita Agricultural Development Unit (WADU) projects.

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extension staff have been thinly spread over large areas, and the provisionof services has probably become poorer. Out; of a total of nearly 15,000staff now involved in providing agricultura]. services, fewer than 2,000have had at least two years of agricultural training, and another 2,500have had a few weeks to nine months of practical training. Also, theinadequacy of operating funds has severely limited the provision ofservices. The poor quality of extension an. support services, coupled withserious wealknesses of the available technolcigical inputs has adverselyaffected thie dissemination of technology to farmers in the PeasantAssociations which are the main contact bodies for extension and inputsupply.

2.15 Tle availability of basic consumer goods such as cloth, sugar,salt and soap has not increased in the rural areas. The sales of thesegoods, by the Ethiopian Domestic Distribution Corporation (EDDC) to thepeasant sector (through Service Co-operatives and Peasant Associations), asa proportion of its total sales, declined from 23 percent in 1979/80 to 18percent in 1981/82 (see Table 2.4).11/ Since there is still an acutescarcity in the rural areas of such items, it does not appear that privatetraders have augmented supplies to rural arEas to offset the diecline indeliveries by the public sector. The unavailability and/or very highprices of consumer goods has been a further disincentive to farmers toexpand their production for the market.

Table 2.4: EDDC SALES OF CCNSUMER GOODS BYCATEGORIES OF CLIENTS, 1979/80 - 1981/82

(in Birr '000)

1979/80 1980/81 1981/82(lients Value % Value % Value %

Peasant sectora/ 94,081 23 97,092 19 99,607 18Urban Dwellers Assoc. 54,120 13 42,11;L 8 42,463 8Handicraft P?roducer Coop. 35,008 9 57,758 11 77,646 14Government :institutions 63,932 16 117,412 23 122,524 23Private sector 160,250 39 205,050 39 203,178 37

Total 407,391 100 519,423 100 545,418 100

a/ Through Peasant Associations and Service Co-operatives.

Source: EDI)C.

11/ The main items handled by EDDC are building materials, food andbeverages, textiles, sugar, salt, coffee and stationery.

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2.16 The government's agricultural pricing and marketing policies didnot provide adequate incentives to farmers to expand production andmarketed output of grains. An estimated 20 percent of the total foodgrains consumed in the country is marketed, out of which nearly 70 percentis handled by private traders and the rest by the AMC--the public grainmarketing agency. The AMC is responsible for the domestic procurement ofgrain and other food crops and for all commercial grain imports. It sellsmost of its grain in the four major cities. Addis Ababa alone accountedfor 88 percent of its sales in 1981/82. About 85 percent of AMC's domesticprocurement--which increased from 1 million quintals in 1978/79 to over 3.5million quintals in 1981/82--is made in the three major surplusregions--Gojam, Shewa and Arsi.

2.17 Private traders are required to sell to the AMC all of theirgrain purchases in Arsi, Gojam and Gonder, and 50 percent of their grainpurchases in other regions, at a price (called the wholesale buying priceat trade centers) of about Birr 5 per quintal above the farmgate producerprice. Farmers or traders are not allowed to transport foodgrains out ofany of these regions. However, to the extent that farmers in other regionscan also sell grains on the free market, the average prices obtained byfarmers for their total sales (to the AMC and others) are higher than theprices fixed by the AMC. Despite such opportunities of selling in the openmarket, available in varying degrees in different regions, the decline inAMC's buying prices of major cereals (except in the cases of wheat andbarley) over the past three years (see Table 2.5) has almost certainlyreduced the average prices for cereals received by farmers in many areas.In real terms, [deflated by the Retail Price Index for Addis Ababa(excluding rent)] the AMC's buying prices have declined sharply for maize,and also for sorghum and teff (Table 2.5). The use of the index ofnon-food prices in Addis Ababa would not change the estimatessubstantially; but it would indicate a smaller decline in "real" producerprices (than shown in the table) in 1981/82 in which year food pricesincreased faster than non-food prices.12/ Admittedly, the Addis Ababaprice index does not reflect the changes in prices of goods purchased byfarmers; yet the rough estimates shown in Table 2.5 indicate some declinein the terms of trade of agricultural producers, especially of maize andsorghum, during recent years.

2.18 The existing level of producer prices and restrictions oninter-regional grain movements have, on the one hand, led to priceincreases on the free market in the main urban centers (particularly AddisAbaba) and, on the other hand, have served to depress prices in majorsurplus areas such as Gojam and Arsi. The differential between the AMC's(wholesale) buying price and the Addis Ababa free market (wholesale) pricehas increased for maize, teff and sorghum. In 1979/80, the AMC's buyingprice was 91 percent of the Addis Ababa free market price of maize; in1981/82, it was only 38 percent of the free market price (Annex Table7.8). Only in the case of wheat did the differential slightly narrow.

12/ This may be regarded as a rough indicator of the movement of the termsof trade of agricultural households.

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Table 2.5: AGRICULTURAL PRODUCER PRICES

AMC buying price (wholesale): Index of AMC's buying price

Birr/quintal adjusted by Addis CPI

Year Teff Wheat Maize Sorghum Teff Wheat Miaize Sorghum

(mixed) (white) (white)

1979/80 42 27 27 28 100 100 100 1001980/81 40 35 21 27 93 126 76 951981/82 40 35 21 27 87 117 71 881982/83 43 35 24 27 9 0 al 1 1 2 a/ 7 8 a/ 8 5 a/

a/ Assuming a 4 percent increase in the Addis Ababa Consumer Price Index

in 1982/83.

Sources: AMC buying price from AMC; Addis Ababa CPI from CSO.

Table 2.6: ETHIOPIA: RETAIL PRICES OF CEREALS

IN DIFFERENT CIIIES

(Birr per Kg)

Asella Addis Ababa Bahr Dar(Arsi Region) (Shewa Region) (Gojam Region)

19765Teff 0.51 0.58 0.42Sorghum 0.23 0.34 n.a.

Wleat 0.31 0.39 0.39

1981Teff 0.66 1.12 0.42Wleat 0.36 0.M3 0.47

Source: CSO.

2.19 Free market retail prices of grains vary widely among regions,and the differentials have increased in recent years., According toofficial CSO data, the free market price of teff in Addis Ababa in 1981 wastwo-and-a-ha.Lf times the price in Bahr Dar (in Gojam) and about 70 percent

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higher than the price in Asella (in Arsi); the wheat price in Addis Ababawas about double the price in either Asella or Bahr Dar (see Table 2.6).In 1976, price differences were much smaller. Restrictions oninter-regional grain movement by private operators have created widerinter-regional price differences which cannot be explained by the costs oftransportation. Thus, these restrictions adversely affect the consumers indeficit areas by pushing up grain prices, dampen incentives of growers insurplus areas by depressing prices, and hinder both the expansion ofmarketed supplies and the development of an integrated national market soimportant for Ethiopia's economic development. This emphasis on the impactof pricing and marketing policies is not to deny the crucial importance ofintroducing technological-organizational changes for transformingtraditional agriculture over time. These necessary changes can, however,be accelerated or hindered by incentives or disincentives provided bypricing and marketing policies.

2.20 It should be noted, however, that AMC's selling prices for wheat,maize and sorghum were reasonably consistent with estimated import paritiesin 1981/82 (see Table 2.7). If the difference between AMC's buying pricein rural areas (from co-operatives and traders) and its selling price inAddis Ababa is assumed to represent the cost of transportation and handlingof grain from farmgate to Addis Ababa, then AMC's buying prices were alsofairly consistent with the farmgate equivalent of import parity prices atAddis Ababa. The differentials between AMC's buying price (fromco-operatives) and selling price (at Addis Ababa) in 1981/82 ranged fromabout US$87/ton for wheat to US$112/ton for maize to US$130/ton forsorghum, at the prevailing rate of exchange of the Birr. Even with suchhigh transportation and trade margins, AMC has hardly broken even. Thiswas partly due to higher prices paid by AMC for grain purchases from statefarms and the relatively low price at which most of the wheat was sold bythe AMC.

2.21 Unless AMC's operating efficiency is improved to reduce theexisting high transportation and trade margins, producer prices cannot beraised without raising AMC's selling prices.

Table 2.7: AM, FREE M1iRKET, AND DMPORT PARITY PRICES (F MAJOR vRAINS, 1981/82

(US$ per metric ton)

ANCbuying price

Free Free market AMC from Coops &AMC purchase price AMC market retail price selling price Traders

Import from fram selling retail as % of as % of as % ofWorld parity Co-ops & state price price import import import

pricesa/ prices traders farms (Addis) (Addis) parity price parity price parity price(Addis)

Wheat 145 240 174 227 261 425 177 % 109 % 73 % wMaize 117 217 101 150 213 300 138 % 98 % 47 %Sorghum 114 211 126 149 256 372 176 % 121 % 60 %Rape seed 311 2 4 6 b/ 222 - 323 488 19 8 7%b/ 13 1 %b/ go ib/

a/ F.o.b., US or Canadian ports.

I,/ _'1" CjeT_tP4- TAWE AAA-I A l-I, A9~ A-AA" xi as-,-A TT0&:C /-@A 4 _l__A 4 - _1

handling from Addis Ababa to port.

Notes and Sources: For estimating Import parity, the following additions were made to world prices: ocean freight ofUS$30/tan of uwheat and US$35/ton for maize and sorghum, and internal transportation and handling

.E Trj%t C ...... t.... -. - -- I nI '-- - - _ - _ Icosts VI UO$5/± LUor VL d.L± gLL ,s om pIrt to ALud.s ^iiOU. tralkiport anM hinaMng coStS are Lakenfrom The Impact of WFP Food Aid in Ethiopia, FAD, 1981. All world prices are taken from The WorldBank, EED, Ccxmndities Prices data; they refer to f.o.b. Nbrth American Ports. Rape seed worldprices are taken from The World Bank, Ethiopia: Agricultural Sector - Interim Report, 1983. Allconversions are at the official exchange rate US$1=Br2.07.

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2.22 While the government's objective of supplying foodgrains atreasonable prices in urban areas is understandable, its possible impactupon agricultural production via producer prices and farmer incentivesneeds to be carefully assessed. The rigorous enforcement in certain areasof the present system of price control and restriction of movement ofgrains is having adverse effects on the growth of production, marketedoutput and urban food supply, by dampening producer prices in surplusareas. If strict enforcement is not feasible, as is the case in some areas(e.g. Shewa), expansion of the parallel market may lead to the breakdown ofthe official marketing system and create public cynicism about thegovernment's policies. None of these alternatives is conducive toEthiopia's development.

Export Crops

2.23 With respect to Ethiopia's agricultural exports, a seriousdecline in volume has taken place only in the case of oilseeds and pulses.These exports were quite large (second only to coffee) before therevolution, when tenants paid much of their rent in kind to landlords whLosold the crops for export. It is not clear whether the shift of productionin favor of cereals and the decline in marketed output and exports ofoilseeds and pulses after the abolition of rent, with resultant increasesin peasant consumption of oilseeds and pulses, have been reinforced by thegovernment's price policies. Studies of the costs of production of thevarious crops should be undertaken to provide the information base neededto formulate appropriate price policies and to assess their impact onproduction.

2.24 It is difficult to calculate price parities in the case ofoilseeds and pulses because world market price quotations are not availablefor these items. But rough calculations (based on rape seed prices)suggest that AMC's farm-level buying price is only slightly lower (seeTable 2.7 for rape seed prices) than the export parity price at AddisAbaba, and, because of high handling and transportation costs, must behigher than the farmgate equivalent of that export parity price. AMC'sselling price is considerably higher (and the free market price in AddisAbaba is still higher) than the export parity price. This has made oilseedexports unattractive at the present rate of exchange of the Birr. Alloilseeds exports were handled, until recently, by a public corporationwhich, despite higher domestic open market prices, tried to sell more inexport markets. But large quantities were apparently neither produced (atlow prices) nor exported.

2.25 The Government has a genuine concern that a diversion of oilseedsand pulses from domestic consumption to exports (as is likely to resultfrom an exchange rate adjustment) would have an adverse nutritional effiecton the population. It seems, however, that increased exports could comefrom increased production. But since AMC's buying prices do not seem toprovide any incentives to farmers for increasing production of oilseeds andpulses (which compete for much of the same land as cereals but, in theabsence of any improved technology, have much lower yields on average), thegovernment's administrative devices alone have not proved strong enough to

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raise these exports. It should be noted, however, that AMC's producerprice for oilseeds (e.g. rape seed) is quite high relative to that formaize or sorghum. The question whether producer prices for oilseeds (andpulses) should be raised further, relative to cereals, in order to raisetheir production for export, cannot be answered without some minimum dataon costs of production of the various crops iTI relation to theirimport/export parities. Relevant data are not: available for othernon-coffee agricultural exports, but it is likely that similar pricedisincentive factors, among other technical impediments to productiongrowth, lay behind the poor performance of these exports despite strongadministrative efforts to increase sales abroad in the face of higherdomestic open market prices.

The Coffee Su'bsector

2.26 Since coffee is so prominent in Ethiopia's exports, it isimportant to review the problems of this sub-sector. As noted earlier,even at the present low prices, coffee contributes over 60 percent ofexport earnings and nearly 10 percent of government revenue through thecoffee surtax and the cess. Coffee is also an important consumer good,drunk by most Ethiopians, with domestic consumption estimated to absorbmore than half of total production.

2.27 Although coffee export figures are fairly firm, there are noreliable estimiates of local consumption, and hence no reliable estimates oftotal production. A principal reason for this is that. coffee growing inEthiopia is scattered and fragmented. In several parts of the country,coffee trees grow wild; this wild coffee accounts for about 10 percent ofcommercial production. Most of the remainder is of thte "garden" variety,planted on smallholder farms currently yielding an estimated average ofonly some 400 kg per hectare. In all, coffee is grown on an est:imated500,000 hectares. Of the estimated total national production of' about200,000 tons in the 1981/82 coffee year (October through September), about97 percent was grown in the peasant sector and only 3 percent on a numberof state farms; created in recent years.

2.28 There has been no clearly observable trend in EthiopiaL's coffeeexports over the past two decades. Indeed, the time series of e!xports hasbeen characterized by wide year-to-year fluctuations over this entireperiod. Whereas the long-term trend may therefore appear to be one ofstagnation, it should be noted that exports were particularly depressedduring the years of disturbances in the mid-19'70s (See Table 2.6). In thefour years ending in 1976/77, coffee exports averaged less than 50,000tons, whereas in the four years ending in 1981,182, they averaged about82,000 tons. In 1981/82, the volume of exported coffee declined to about80,000 tons from the previous year's level of 88,000 tons (a 9 percentfall) reflecting, inter alia: a slight reduction in Ethiopia's ICO(International Coffee Organization) quota; a drought in the Hararge region(source of a superior coffee sold at a premium price mainly to SaudiArabia); and a buildup of stocks in anticipation of improved export pricesin 1982/83 (an expectation which was not realized). The current level ofEthiopia's coffee exports represents about 2 percent of world trade incoffee.

Table 2.8: ODFFEE SEICR PRF0RFORMANCE, SELEC) NDICATXRS

Fiscal Years 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83

EXPORTSVolume ('000 tons) 49.0 77.1 42.9 57.8 86.3 80.1 88.4 80.2 87.5Value (Birr million) 117.5 297.7 408.9 512.5 541.6 631.7 524.3 477.2 478.2Unit Price (Birr/kg) 2.40 3.86 9.53 8.87 6.28 7.89 5.93 5.95 5.48

COFFEE DUrLY PLUS SURTAX REVENUES(Birr million) 25.0 68.8 199.9 263.4 215.6 292.3 161.0 172.1 191.2

LOMEM)RANDWJ ITEM4S

Change Over Previous Year (in %)Export volume - 57.3 -44.4 34.7 49.3 -7.2 10.4 -9.2 9.1

RatiosCoffee as % of total exports 25 55 63 76 73 66 61 60 56Coffee duty/surtax as% of total revenues 3.5 8.8 19.8 22.2 15.7 18.7 9.2 9.3 10.0

COFFEE YEARSEnd-year stocks ('000 tons) 40 29 49 39 35 51 65 86 106Washed coffee exports ('000 tons) 5 4 4 5 8 19 8 11 10Danestic consumption ('000 tons) 96 102 112 110 101 95 96 97 97

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2.29 Of the 1981/82 exports, about 73,000 tons went to Europe and theUSA under the ICO quota arrangements while some 6,000 tons went tonon-quota markets (nearly all to Saudi Arabia and the Gulf States). Washedcoffee accounted for only about 13 percent cf total coffee exports in1981/82 and went entirely to Europe. The average unit export price (forall coffee) remained at the previous year's level of about US$1.20 perpound, but owing to the decline in the volume of exports, coffee exportearnings dropped by 9 percent to Birr 477 million--1:he lowest level since1976/77.

2.30 As of April 1983, the outlook for 1982/83 was for thbe volume ofcoffee exporcts to recover to the 1980/81 level of 88,000 tons but forexport earnings to remain at the 1981/82 level in consequence of an 8percent decLine in unit prices. Ethiopia's 1982/83 ICO quota was set at81,600 tons.

2.31 ALthough (as noted above) the data on total product.ion anddomestic consumption are not reliable, official data suggest that in themid-1970s, iwhen exports were severely depressed, doniestic consumptionaveraged just over 100,000 tons per year while, duriLng the four yearsending 1981/82, domestic consumption fell somewhat ats a consequence of theincreased exports.

2.32 The Government imposes a duty, a cess and turnover I-ax, and aprogressive surtax on coffee exports. In the late 1.970s, the surtax wasthe source of about 20 percent of the government's t:otal revenue. Thesurtax is currently based on the ICO Composite Indicator Price at New York,and affects washed and unwashed coffees equally. But since this is a"progressive" tax geared to the level of world prices, the surtax receiptshave fallen along with world prices and currently account for only some 9percent of total revenues. Meanwhile, the producer's share of the FOBprice remained roughly the same--about 34 percent in 1976/77 and about 35percent in 1.980/81, due in large part to the coffee surtax.

2.33 The growth of Ethiopia's coffee production, exports and revenuesis constrained by a variety of factors, some on the supply side, others onthe demand side. Some of the supply constraints may be characterized asphysical and. technical, while others may be charactetrized aspolicy-related. Among the former are: the age and disease-proneness ofexisting cof'fee plantings; transportation difficulties; an inadequate database to facilitate informed decision-making; insufficient test:ing of thequalit:y of disease-resistant varieties of coffee trees; the low level ofknowledge amiong coffee farmers of proper cultivation techniques; and theexistence of a highly profitable market for other crops. Among thepolicy-related and institutional constraints are (or' have been in therecent past): declining producer prices, partly due to declining worldmarket prices for coffee, and the overvalued exchange rate; a scarcity ofwage goods which have diminished incentives for coff'ee farmers to produceand invest in coffee production; high coffee taxaticn; and theslower-than-targetted rate of implementation of the EEC-financed coffeeimprovement project. The government's policy in recent years has beengeared to expanding its control over the coffee trade and to expanding

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state farm coffee production. In the face of declining world coffeeprices, the Government is (like the governments of other coffee-dependentcountries) faced with the dilemma of trying to maintain coffee tax revenuesat as high a level as possible without, at the same time, depressingincentives to coffee producers to the point where the country's longer-termexport prospects would become too endangered. Moreover, policies whichtend to reduce relative incomes of coffee farmers vis-a-vis incomes ofother farmers will not be conducive to fostering increases in coffeeoutput.

2.34 Some of these constraints warrant further explanation andcomments as follows:

2.35 One of the physical/technical causes of the long-term stagnationin Ethiopia's coffee production has been the prevalence of coffee berrydisease (CBD) which has affected up to 30 percent of the nation's trees andresulted in a loss of some 20 percent of potential coffee production since1971. The disease is being contained through a program to distributeannually about 10 million seedlings of disease-resistant varieties. But sofar the replanting program has been concentrated on the few state farms andproducer cooperatives, and the program will not be completed until 1987 atthe earliest.

2.36 One policy-related constraint that has not so far been alleviatedby government action is the serious shortage of seasonal labor for coffeepicking, particularly in Kaffa and Illubabor. Some restrictions on labormovements have been removed, but the basic problem is that the supply ofseasonal labor from the northern regions (where there are seasonal laborsurpluses) remains reduced by restrictions on movements out of those areasand due to apprehension, by potential migrants, of losing land use rightsat home. Seasonal labor is, however, recruited from the northern provinces(as well as from Addis Ababa) for work on the few state coffee farms. Butthis does not resolve the extensive seasonal labor shortage faced by largenumbers of peasant coffee farmers.

2.37 The very low average coffee yields are only partially explainedby CBD or by the low rates of application of purchased inputs. Someimprovement in yields would be achieved through better coffee picking ifseasonal labor shortages were eased. Also, even without fertilizer, higheracreage yields could be obtained through improved cultural practices suchas pruning, weeding, mulching and stumping--provided that incentives areadequate and farmers could be persuaded of their efficacy through a moreeffective extension program.

2.38 Inadequate investment in such needed facilities as purchasingstations, pulping factories, rural roads and trucks for coffee transport,warehouses and washing stations hinders the improvement of quality andquantity of coffee produced. Owing to the effective nationalization of alarge portion of coffee marketing and the take-over of washing stations bythe co-operatives, there has been negligible private investment in recentyears. The Government has made a major effort during the past severalyears to improve the transport situation, particularly rural roads, butfinancial stringencies have limited the level of investment in all sectors.

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2.39 Until recently, Ethiopia's producer pricing and firiancialmanagement systems for washed coffee were not compatible with its objectiveto increase both the quality and the production of washed coffee. The maineffect was that there were inadequate incenimives to farmers to deliverfresh cherries to the washing stations instead of sun drying them,resulting in a low level of utilization of existing washing stations. TheGovernment has, however, taken a number of steps to correct thesedeficiencies, most notably by increasing the price premium for washedcoffee in the 1981/82 season and then by inl:roducing a differential pricingsystem based on quality in the 1982/83 season.

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CHAPTER 3

THE CHALLENGE OF ACCELERATING ECONOMIC GROWTH

3.1 In the light of the recent slowdown in economic growth and thevirtual stagnation of per capita real GDP since 1974, the attainment of ahigher and sustained rate of output growth has become a critical need if:he government's long-term objectives of raising the living standards ofthe population are to be pursued seriously. This chapter will discuss howthe Government is responding to the challenge and what modified approachesand clarifications of policies appear to be needed to accelerate capitalaccumulation and growth.

3.2 The major tasks ahead are to augment agricultural production, tostrengthen the external sector, and to accelerate capital accumulationthrough the increased mobilization of domestic and external resources. Howeffectively these tasks are managed in the short and medium term willinfluence the long term. In its public statements, the Government has beengiving increased emphasis to the importance of improving agricultural andexport growth, and it is beginning to clarify some policies in regard tothe non-public sector. It will be argued that some further clarificationlwould be advisable, and that the government's concern about sluggish outputgrowth needs to be translated into effective measures in regard to priceand incentive policies in peasant agriculture, the use of appropriate pricesignals to improve resource allocation for exports and import-substitution,and the mobilization of the talents and resources of the public andnon-public sectors to augment savings, investment and production.

Government's Long-Term Objectives

3.3 The government's announced long-term development objectivesremain the improvement of living standards of the people, a structuraltransformation of the economy towards self-reliant development, creatingemployment opportunities, achieving a more equitable distribution ofbenefits of development, and laying foundations of a socialist society.For the realization of these long-term objectives, the main elements of thiegovernment's strategy are: to raise levels of investment and savings; topromote co-operatives in agriculture, handicrafts and cottage industries;to mobilize peoples' organizations and employ labor-intensive techniquesfor agricultural production, small-scale industrial production, rural roadsand social services; to increase productivity in peasant agriculturethrough improved technology and input use; to expand and diversify exports;and to expand industries to meet the basic needs of the people and toincrease exports. Agriculture, being the mainstay of the economy, isexpected to generate surpluses and foreign exchange for financing thecountry's long-term industrialization program and absorb the bulk of thelabor force. According to official statements this sector is to beassigned the highest priority, followed by industry, infrastructuraldevelopment (mainly rural roads and power) to support agriculture andindustry, and provision of basic health and education facilities for thepeople.

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Medium-Term Priorities and Programs

3.4 After the moderate successes of the annual investment plans andthe Development Campaign (Zemetchas) towa:rds resolving immediate problemsof shortages of food, industrial crops and essential manufactured goods,the Government embarked on the preparation of a Ten-Year Perspective Plan.An early draft presented to the 1981 UN Conference on the least developedcountries was overly ambitious (7.5 percent yearly GDP growth) in terms ofboth financial feasibility and implementing capacity. A first draft of theten-year plan was completed in mid-1983. Within this ten-year plan(1983/84-1993/94) the Government intends to implement a two-year, athree-year, and a five-year public investment program, with more specificobjectives, priorities and policies. As of March 1983, when the missionvisited Ethiopia, work on the Three-Year '[nvestment Program (PIP) for1983/1984-1985/86 was in a very preliminary stage.1 / Consequently it wasnot possible for the mission to carry out a full evaluation of the PIP asoriginally intended. Nevertheless, a worlking paper on the PIP provideduseful information concerning the broad parameters within which amulti-year PIP was being formulated. This working paper provided a broaddescription of the country's objectives, strategies and priorities. Itemphasized the need to increase coffee and non-coffee exports, and toexpand import-substitution in Food, consumer industries and energyproduction. It suggested priority to those projects and programs which arequick-yielding and have a positive impact on the balance of payments.

3.5 The main weaknesses of the working paper on the PIP were: (i) itsmacro-frame which lacked detailed projecti:ons of GDP by subsector, balanceof payments and government finance projecl:ions, and (ii) its targets (e.g.6.3 percent yearly GDP growth rate; 19 percent investment/GDP ratio by1986/87) which appeared unrealistic, as will be seen in Chapter 4. Itallocated 21 percent of investment for mining, power and water development,20 percent for transport and communication, 19 percent for industry and 15percent for agriculture. Much of the need in agriculture is for currentinputs. Much of the investment in transport is proposed to be in ruralareas, to ease a major constraint on production growth in agriculture.This working paper represented a first step in the process of formulating amulti-year medium-term plan, and questions of developing a suitablemacro-frame with realistic targets for key variables and externalassistance as well as for sectoral allocat:ions of investment were yet to beformally addressed. When a PIP is prepared and appropriately adjusted tothe level of financing possibilities, it will be particularly important toensure that agriculture investments are given the priority that theydeserve.

3.6 The mission was also of the view that whiile individual componentsof the plan were being effectively developed by the various working groups,these were not being brought together in a sufficiently coherent manner,

1/ As of March 1984, work on this document had been superceded by thetwo-yiear investment plan beginning 1984/85, wlhich was nearingcompletion.

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partly due to institutional factors. The integration of separatecomponents into a feasible plan is indeed a difficult one, requiringseveral iterations, particularly when it comes to matching investment planswith resources available. While investment planning is centralized at theCPSC,and external grant assistance is handled by the CPSC, negotiations onmedium-term loans (concessional and non-concessional) are handled by theMinistry of Finance. In view of the crucial importance of externalresource mobilization, it is recommended that the Government (a) improveits internal information base on external resource flows to enable betterforecasting of these flows; and (b) strengthen the organization andstaffing of departments in charge of external resources mobilization andimprove procedures for negotiating more external assistance.

3.7 In agriculture, the program's main objective is to increaseproduction by farmers through the provision of farm inputs, creditfacilities and extension services, along with the IDA-supported MinimumPackage Program. The program's focus is on increasing yields intraditional rainfed areas, with emphasis on the high-growth-potential areaswithin Peasant Agricultural Development Program (PADEP). Some small-scaleirrigation development (through low-cost river diversion works) is proposedin Gojam, Gonder, Wello, Tigrai, Shewa and Wollega to reduce farmerdependence on unreliable rainfall. The program proposes to developexport-oriented, high-value industrial crops on areas to be developed bymajor irrigation schemes. Feasibility studies of some of these majorirrigation projects indicate a high proportion of foreign exchangerequirement in total project cost, and high investment costs per hectare.While irrigation projects in the Awash area have an indicative investmentcost of around $6,000 per hectare, those along the Blue Nile would cost$18,000 or more per hectare (e.g., Gumara). These high costs raisequestions about the priority warranted for such projects, especially in theface of severe financial and foreign exchange constraints, unless benefitsare also correspondingly high. Furthermore, for the longer term, there isa need to explore designs and methods of infra-structure construction whichcan reduce capital- and import-intensity.

3.8 In industry, the program's main objectives are to make a sizableexpansion in domestic production of basic consumer goods, intermediategoods and farming implements through modernization and expansion ofexisting industrial units, establishing some new units, and supportingexpansion of handicrafts and small industries. It also envisages thedevelopment of some industrial exports. Important projects includeexpansion or establishment of factories for manufacturing textiles, sugar,paper, electric bulbs, and spare parts for various industries. In order toavoid costly mistakes of misallocating investment to uneconomic industrialventures, it will be essential to ensure that all major projects receivecareful economic appraisal by the Development Projects Studies Agency (seeparagraph 4.26).

3.9 In the transportation sector, the program's main objectives areto improve and construct feeder roads to open some inaccessibleagricultural areas, upgrade the existing international airports, andrehabilitate two seaports and one shipyard. The timing of these projects,

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which are likely to be large and construction-intensive, will requirecareful consideration, inter alia, in terms of implementation capacity anddemand for infrastructure services over the medium and long term. In themining and energy sectors, the program is designed basically to save andearn foreign exchange and to provide certain basic inputs for thedevelopment of industry and agriculture.

3.10 The size of the envisaged medium-term investment program willhave to be reduced to bring the volume of projected resource uses more intobalance with the volume of prospective resource availabilities. There canbe no question that the major tasks ahead are to augment agriculturalproductiorn at a rapid pace, to strengthen the external sector for vigorousexport expansion and selective import-substitution, and to developsupportive infrastructure. However, even after several years of workingwith annual investment plans, Ethiopia does not yet have a maulti-yearpublic investment program. It is therefore too early to judge theenvisaged allocation of investment or to make specific reconmLendations inthis regard. But the country clearly needs such an investment program withwell defined objectives and policies in order to accelerate economicdevelopment and to mobilize external assistance.

Towards a Clearer Definition of Policies

3.11 In order to attain higher rates of investment and productiongrowth, there is need for some changed approaches and for a clearerdefinitiort of policies for mobilizing resources and using them moreefficiently. Some beginning in this direction has already been made, asnoted below.

3.12 Unsatisfactory growth in the production and markel:ed surplus ofpeasant agriculture has raised doubts regarding the efficacy of thegovernment's pricing and marketing policies for essential food grains,although no definite measures have been adopted. It is now recognized thatthe state farms were hastily established and expanded without economicfeasibility studies, in response to the need for providing J-ood supplies tomajor cities and government institutions. The policy now is to consolidateand improve efficiency rather than to expand acreage under s,tate farms,with the exception of the planned substantial expansion of state coffeefarms.

3.13 As was briefly noted in Chapter 1, a sense of direction in whichthe Government should move in order to pull the economy out of stagnationwas provided in Chairman Mengistu's speech to the Second CO]'WE Congress inJanuary 1983. The Chairman stated that the fall in the rate of growth offood production below the rate of growth of population "signifies analarming situation," and that the development of the agricultural sectorthrough farmer incentives and diffusion of improved technology is aprerequisite for overcoming food shortages, and for augmenting rawmaterials and export earnings essential for industrial and overall economicdevelopment. He also called for new emphasis on restoring confidence amongindividual proprietors outside of agriculture, and for measures to "modifythe previous policy so that citizens with capital and know-how can

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establish and expand small-scale industries... .expected to enhance thefruitful utilization of the capital in the private economic sector which isnow unnecessarily squandered." His statement also noted the need forforeign investment to develop Ethiopia's natural resources. These policyintentions are yet to be acted upon in the various fields. With a view toincreasing investment and promoting the acquisition of new technology, theGovernment published the Joint Venture Code in the form of a Proclamationin January 1983. The objectives of this Proclamation are to provide aframework to promote joint ventures between foreign investors and localpublic sector enterprise. Although the proclamation specifies the foreignequity holding to be 49 percent or less, there is provision to increasethis share with the approval of the Council of Ministers. However, in themission's view, one shortcoming in this Code is the lack of any provisionfor foreign collaboration with local private enterprise, within theexisting legal framework.

3.14 The Government has recently allowed private traders a more activerole in export marketing. The export of live animals, heretoforerestricted to the public sector, is now open to private traders. Also,private traders can now play an expanded role in the export of oilseeds andpulses. As noted earlier, the Government has a policy of establishingIndustrial Trading Estates for small industries. AIDB loans are nowavailable to both private operatives and co-operatives. In brief, theprincipal aim of government policies is in the right direction--to increaseinvestment and production--through fruitful utilization of the resources ofthe private as well as the public sector--for both exports andimport-substitution. However, the requisite policy framework remains to beclearly articulated and defined.

Need for Some Modified Approaches

3.15 Against this background, the major elements of a better-definedapproach for accelerating production in agriculture and industry areoutlined below. Some modified approaches are also called for in regard toexternal trade, the mobilization and better use of resources, andattracting a greater volume of external assistance. These questions willbe addressed in Chapter 4.

3.16 In agriculture, efforts need to be concentrated on the smallfarms sector which, despite the long-term goal of establishing producers'co-operatives, will continue to account for the bulk of agriculturalproduction at least through the 1980s. The main potential for outputgrowth in the medium term is through increased yields from the use ofadditional improved seeds, fertilizers and improved farming practices. Anexpansion of cultivated area also provides some opportunities. Within theoverall constraints of finance, more resources should be provided topeasant agriculture vis-a-vis the state farms. Along with an increasedsupply of these inputs supported by extension services, output pricesshould provide strong incentives to make the use of these purchased inputsattractive and thus facilitate their rapid and wide adoption. Also, theavailability of essential consumer goods in rural areas needs to beaugmented; service co-operatives and petty traders would be morecost-effective in carrying these goods to the rural areas.

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3.17 InI grain marketing, restrictions on the inter-regionial movementof grains by private operators need to be relaxed ta help develop anational market and to provide incentive prices for increased productionand marketed supplies, while keeping AMC's operations confined essentiallyto supplying a part of the urban demand and to stabilizing prices within areasonable range. The government's pricing policy should aim at fixing andperiodically revising AMC's buying prices of crops in relation to theirproduction costs, and international prices. Export crops should beencouraged through price policy and strong incentives. For agriculturalpricing policy in a small, trade-dependent economy like Ethiopia, theconcepts of import and export parities are useful, despite theiryear-to-year fluctuations. As a first approximatior., the maximum pricepayable to producers is the equivalent at the farmgate of the import (orexport) parity, i.e., the c.i.f. price at the main consumption center(Addis Ababa) less the transportation and handling costs between thefarmgate andl Addis Ababa. But if the costs of production are much lower(e.g., as in the case of coffee) it may be neither necessary nor prudent topay close to import-export parity prices to induce farmers to increaseproduction. On the other hand, when domestic costs of product:ion of majorimport-substitutes (cereals) and exports (oilseeds, pulses) are found to behigher than the import-export parity prices at the Existing exchange rate,it is indicative of an overvaluation of the Birr, warranting appropriateadjustment measures. The importance of agricultural prices, incentives andmarketing to growth of production and marketed output has emerged as acrucial domestic policy issue requiring clarificaticn. With appropriateresource allocation and incentives, the peasant sector will, over time, beable to meet: the urban food requirements. State farms should consolidatetheir operations and attain financial viability by reducing overhead costs,by avoiding excessive mechanization and by better equipment maLintenance.

3.18 A resource-constrained investment program should support thedevelopment of research and extension for the peasant sector and thedevelopment of the historically-neglected rural infra-structure--roads,small-scale irrigation, soil conservation, agricultural storage andprocessing facilities--essential not only to agricultural development butalso to promote industry and trade and to facilitate development of anintegrated national market. Resource constraints will require thisinfrastructure to have low capital and import intensities. A]so, theGovernment should encourage local initiative and efforts to undertake suchinvestments. The Peasant Associations, together with service andproducers' co-operatives in different areas, have already carried outvarious tasks to improve economic and social conditions in rural areas.These tasks have included construction of roads, schools, clinics, andgrain storage facilities as well as support to the literacy campaign. Withsome technical assistance and guidance from the Government, the PeasantAssociations' organizational, financial and labor resources should be usedto undertake! such developments for the direct benefit of the local people,and thus to accelerate capital accumulation. As noted in Chapters 7 and 8,encouragement of such community participation in local development wouldpermit much-needed afforestation to augment energy supplies and preventsoil erosion, and provision of some minimum health services in rural areasat a low cost to the Central Government.

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3.19 In industry, there is a need for greater encouragement ofsmall-scale and cottage industries to supply simple consumer goods to thepopulation, produce simple agricultural implements, and processagricultural produce. The encouragement of small-scale industry is apolicy issue on which some clarification has recently been made (para.3.13). Financial resource constraints may not permit rapid expansion ofcapacity of large-scale capital-intensive and import-intensive industriesto meet the increasing demand for manufactured goods, particularly asfarmers' incomes begin to rise, although faster growth of income wouldgenerate increased savings to finance industrial investment. Also, theequipment and machinery of many existing large-scale enterprises are old,and the needs for replacement investment will soon be large.

3.20 The financial performance of public industrial enterprises needsfurther improvement. The surpluses of public enterprises (profits beforetax) began to decline in 1981/82 (see Tables 5.1 and 5.2, Chapter 5).Competing objectives--e.g., generation of enterprise surpluses versus pricecontrol to protect the poor--have hindered the realization of the potentialcontribution by public industrial enterprises to the public finances (seeChapter 5). Such control of prices of essential items, which could not beeffectively policed throughout the country, led to a proliferation ofparallel markets where higher prices accrued to down-stream traders.Realistic price policy guidelines should allow for changes in response to arise in costs, and public enterprises should be encouraged to use part oftheir surpluses for adequate repair and maintenance of plant andequipment. Also, greater delegation of responsibilities to enterprisemanagers will be desirable to facilitate more efficient decision-making inrespect of production, marketing, inventory control and investment. Whatis needed is a proper balance between government control and enterpriselevel decision-making. However, in an economy largely based on smallproduction units, it would be unrealistic to try to mobilize domesticsavings almost entirely through the public sector (taxes and publicenterprise surpluses).

3.21 There is need for a public investment program in industry, linkedto that of the agricultural sector, to expand capacity to produce massconsumption goods, develop construction goods using local materials, andexpand exports. Increasing industrial exports (which now comprise lessthan 7.5 percent of total merchandise exports) should also be a major goalin designing industrial projects and in adjusting incentives. What exportscould potentially be generated is an important question which cost andprice studies may help to answer. Judging by earlier studies and casualobservation, some types of cotton textiles, footwear and leather productsappear to be made at internationally competitive costs, although there maybe no immediate surplus for exports, except for leather goods. However,increases in costs during recent years may have adversely affected thecompetitiveness of these products. The manufacture of clothing and oflabor-intensive products such as dolls, toys, and sporting goods wouldalmost certainly be feasible in the longer run, based on low wages inEthiopia. Since construction expenditure constitutes over one-half oftotal fixed investment, an enlarged domestic construction industry isessential for undertaking a large investment program under serious importconstraints.

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Coffee Sub-Sector Development

3.22 Thbe remainder of this chapter will focus on some issuesconcerning coffee production and exports. Anong the specific coffee sectorobjectives of the Ethiopian Government for the coming decade are: (i) toraise coffee production from an estimated 20D,000 tons to 300,000 tons andto increase coffee exports to about 100,000 tons in 1987; (ii) to raise thevalue added in coffee production and export 'by increasing the output ofwashing stations from the present level of 14,000 tons to 36,000 tons;(iii) to raise average yields from about 400 kg per hectare tco about 600 kgper hectare (an objective which, if achieved, would alone serve to achievethe output target); (iv) to progressively increase the number of producercooperatives in the coffee areas from the present number of 177 (of which15 are registered); and (v) to develop the state coffee farms at a rate ofabout 3,000 ha per year.

3.23 The realism of the afore-mentioned coffee export target has to beevaluated in the context of world market prospects. World consumption ofcoffee is projected to grow by only some 2.4 percent annually up to 1985and thereafter by about 1.3 percent annually. World trade in coffee isprojected to grow by around 1.7 percent annually from 1985-90 and by 0.9percent annually from 1990-95.

3.24 It remains to be seen whether the International Coffee Agreement(ICA) will remain in force and be effective in supporting prices in thefuture. But if it does, it appears unrealistic for Ethiopia to expect itsICA quota to reach 100,000 tons within a decade, since global quotas shouldnot be expected to increase faster than the rate of world import demandgrowth. If the global quota were to increasis by more, then the ICA couldnot be expected to remain effective in maintaining prices near to theirpresent level in real terms. And because Etlaiopia's annual exports arealready well in excess of 400,000 bags, it cannot expect any significantincrease in its quota share by virtue of being a small exporter. Coffeeimport demand in non-ICA-member countries is expected to grow somewhat morerapidly than. in member countries, but here too the government's expectationof a major increase without incurring substantial price discounts seemsunduly optimistic. It is true that Ethiopia has succeeded in selling some6,600 tons annually of its premium Harrar coffee to Saudi Arabia at apremium price, and that it has sold additional amounts to other socialistcountries at a premium or no price discount. But the premium paid bySaudi Arabia is now on the decline. Ethiopia's inability to provide tradecredits on its coffee sales to Eastern Europe has also become a constraintto its ability to sell in non-ICA markets. A fundamental factor underlyingthese trends has been the increasingly fierce competition from. othercoffee-producing countries in the non-ICA ma:kets. This competition hasresulted in price discounts of 40-50 percent in such markets, and Ethiopiacannot expect to be immune from these compet:itive forces in the future.

3.25 Ethiopia's future coffee strategy must also take into account thestrength of domestic demand and the limitations which this imposes on thegovernment's ability to raise exports vis-a-vis domestic consumption. Tobe sure, it has evidently had some success in doing so through the

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operations of the Coffee Marketing Corporation (CMC), established in 1973.CMC's long-run aim is to completely control the coffee market, and by1981/82 it marketed all washed coffee and about two-thirds of exportedunwashed coffee. Nevertheless, in the face of strong internal demand,which is evidently quite inelastic with respect to both price and income,achievement of increased volume of exports required the CMC to purchase allexport quality coffee for export, only rejects being kept for the homemarket. The prevalence of domestic coffee prices outside thecoffee-producing areas which are much higher than the official purchaseprice in the coffee producing areas creates large incentives to illegaltrade, despite the abolition of internal private trade in coffee. Thistrade can of course be further suppressed, but the social and political aswell as the financial costs of this course of action need to be weighedcarefully against the presumed economic benefits and against the costs andbenefits of alternative approaches.

3.26 Some of major physical and policy-related constraints toincreasing coffee production have been noted in Chapter 2. One constraintwhich cuts across the sectors is the lack of an adequate information basefor arriving at policy decisions. One of the most critical of thesedecisions concerns at what level producer prices need to be maintained toprovide adequate incentives to production and investment in the peasantsector. In particular, better farm-level cost data is needed in order forthe Government to monitor systematically the relative profitability ofcoffee production vis-a-vis other crops. Such information has an importantbearing not only upon determining the optimal input mixes and croppingpatterns, but also upon the management of both coffee taxation and theexchange rate of the birr vis-a-vis other currencies. There is need toimprove the information base regarding costs for better decision-making inorder to foster the most efficient use of resources.

3.27 One area in which improvement should be made is in the coffeesub-sector infrastructure. In addition to developing 'coffee roads' andtransport facilities, improvement is needed in the physical facilitiesneeded to expand and improve the processing and marketing of washedcoffee. The recent IDA-financed coffee processing project would, interalia, help construct new washing-stations and related facilities andimprove existing stations. Assuming that this project is implementedsatisfactorily, it would raise the share of high quality washed coffee fromthe recent level of about 11-13 percent to around 30 percent of totalcoffee exports.

3.28 The proposed expansion of the coffee state farms raises thequestion of whether the state-farm sector might not wind up producinghigh-cost, low value coffee that could be difficult to sell at a profiteither abroad or domestically. Especially in view of the medium-termoutlook for the public sector finances (see Chapter 4), it appears that theGovernment can ill-afford any expenditures which are not economicallyviable. Hence, it would seem warranted for the Government to "go slow"with further state coffee farm development until it has thoroughlyre-evaluated the economics of such development in light of the opportunitycosts and benefits of utilizing its investable resources in other,

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potentially more productive ways, such as improving the quality and yieldsof coffee in the peasant sector.

3.29 A fundamental constraint upon the government's ability to harnessto its own ends the means of production in the coffee sub-sector is itslimited ability to fully control either factor or product markets. Unlikein large-scale industry, where the inputs and outputs are geographicallyand otherwise concentrated, coffee production and marketing is spatiallyand otherwise dispersed and involves the participation of millions ofindividuals pursuing their own economic self-initerest. In this setting, itis difficult for the Government to expect that it can simultaneouslyprocure and export growing volumes of quality coffee and generate growingcoffee tax revenues without at the same time providing an incentivestructure geared to aligning private and social. profitabilities. Recentexperience has shown that coffee smuggling (whether abroad or to thenon-coffee-producing regions) cannot be controlled effectively (at leastnot without undue costs), and it has also showln that coffee farmers are nodifferent from teff or maize farmers in that they will tend to neglecttheir crops (or alternatively switch to more profitablea activities) unlessthe financial incentives are sufficient for them to do otherwise. Hence,the Government may be well advised not to try t:o equalize coffee farmers'incomes to those of teff farmers through its pricing and procurementpolicies, but rather to seek to implement its equity objectives by othermeans. In view of the importance of this sub-sector in the nationaleconomy and the need to improve the information base of the sub-sector as awhole, it is recommended that the Government gives consideration toundertaking a c-omprehensive study on the coffee sub-sector.

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Chapter 4

MEDIU4-TERM PROSPECTS

4.1 The aim of this chapter is to assess the medium-term prospects ofthe Ethiopian economy in the light of its structural characteristics andrecent developments. The analysis presented in this chapter will take cifffrom the discussions in the preceding chapters, which focussed largely onthe causes of the recent slowdown of economic growth, including theemergence of increasingly stringent financial as well as capacityconstraints. These constraints are likely to remain over the medium term,with foreign exchange availability being a major influence on developmentpossibilities, although the Government is of the view that capacityconstraints in some areas are likely to be eased in the near future.

4.2 The economy remains constrained by its weak infrastructure(notably roads), its heavy dependence on one export commodity (coffee), lowproductivity in agriculture, a small industrial base, and shortages ofskilled manpower. These features of the economy are to a large extentlegacies of under-development inherited from pre-revolutionary times.Thus, the production base from which Ethiopia seeks to move forward isitself a limited one. Apart from this set of initial conditions, theeconomy is now impaired by a number of other constraints brought about byrecent developments. First, the availability of domestic resources forinvestment and for economic and social services is constrained by thepriority given to internal security needs. Second, the capacity to importhas been severely constrained by a deterioration in the terms of trade andby low levels of external resource transfers. Moreover, the recentrecession in the industrialized countries has, inter alia, inhibitedsomewhat the expansion of non-coffee exports. Third, production growth isrunning up against capacity constraints due to the low levels of investmentduring the recent past. There is, therefore, a great need to acceleratethe pace of economic growth by raising investment levels and productivit-y.As noted earlier, the Government has been working on a ten-year perspectiveplan. This plan will, inter alia, serve as a frame of reference for two-,three- and five-year investment plans with specific targets, sectoral plansand project proposals. There are indications (see Chapter 3) that theambitious target of 7.5 percent annual GDP growth (which appeared in anearly draft of the ten-year perspective plan) will be reduced to a morerealistic rate.

4.3 The task of quantifying a medium-term perspective for Ethiopia isindeed a formidable one, given the country's current problems, its weakdata base, and the degrees of uncertainty affecting future policy, exportprospects and aid flows. Yet with merchandise imports presently running atdouble the value of merchandise exports, it may be seen that the unfoldingcurrent account deficit would become unsustainable over the medium term(in view of Ethiopia's limited debt service capacity) in the absence ofboth accelerated export growth and increased inflows of concessionaryassistance. A major expansion of non-coffee exports is called for in order

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to sustain a viable balance of payments position during the remainder ofthe 1980s.

4.4 In regard to agriculture, apart from droughts and physicalconstraints, inadequate policies with respect to producer prices,incentives, and resource allocation to the peasant sector have beenidentified as causes of poor performance. Improved agriculturalperformance is crucial for even a moderate growth rate of GDP and exports.The recent policy initiatives by the Government to stimulate the growth ofpeasant agriculture, and the need for further clarification of policies inthis regard, have been noted (para. 3.16). Despite government efforts topromote exports, some weaknesses in its export: promotion policies have beenindicated and the need for improved price policies to direct production andinvestment efforts for exports have been mentioned. The preceding chapterhas stressed the importance of appropriate price signals in improving theefficiency of resource allocation. Productior. growth in large-scaleindustry is likely to be modest in the medium term. NVew investment couldraise output significantly only in the late 19'80s. But there is scope forsmall industry provided that its role in the economy is better defined andthat appropriate policies, incentives and institutional reforms areimplemented.

4.5 The growth of the economy will depend crucially on the level ofinvestment. 'In this regard, the importance of effective policies forincreasing domestic savings and investment, in. both the public andnon-public sectors, has been emphasized. An increase in investmnent alonewill not suffice. Since a large part of the total investment (around 80percent) is likely to be in the public sector, it is important 1o ensurethat the projects implemented are economically viable and arequick-yielding, so as to provide an increase in output; over themedium term. Economic growth is equally dependent on the country's stockof human capit:al, particularly skilled manpower, and on the general levelof health and nutrition of the workforce as a whole. The availability ofskilled manpover is of crucial importance to the implementation of a majorinvestment program. Increasing the supply of skilled manpower alone willnot suffice; labor services need to be effectively allocated and utilized.The attainment of planned targets in agriculture will, inter alia, dependon a healthy labor force. Malaria and other diseases which couldincapacitate agricultural labor, and thereby seriously affect agriculturaloutput, need to be controlled. The non-agricultural sectors of the economyare heavily dominated by public enterprises. Hence, the efficientoperation of public enterprises is critical to Ethiopia's growth prospects,as is the availability of adequate supplies of energy, upon which thenon-agricultural sectors are heavily dependent. These sectoral issues willbe addressed in Part II of this report.

4.6 In sum, Ethiopia's medium-term growth prospects will largelydepend on: (a) government policies to more effectively mobilize andallocate domestic resources; (b) the extent of success of the Government'sefforts to boost agricultural production and exports; (c) actions toincrease the availability of skilled manpower, to develop a healthy laborforce and improve the utilization of the labor force for development work;

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(d) efficient operation of public enterprises; (e) the provision ofadequate supplies of energy; and (f) the mobilization of greater externalassistance. The assessment of the medium-term prospects in this chapterassumes that some policy initiatives taken by the Government (as noted inChapter 3) will not only be continued, but that other important policiesdiscussed in this chapter will be more clearly defined and pursued. Twoscenarios are presented to illustrate what appears to be a likely rangewithin which the economy might evolve over the next few years, undervarying assumptions. These scenarios are only as plausible as theassumptions on which they are based. The main objective of this exerciseis to highlight some directions for future policy action by projecting theorders of magnitude of key macroeconomic variables and of possible problemsover the medium term.

Scenario A: Moderate Growth

4.7 This scenario represents how the economy might evolve over themedium term, assuming that weather remains "normal" and provided that:

(a) higher levels of domestic as well as external resources aremobilized to allow total investment to rise progressively fromits current level of around 10 percent to about 14 percent of GDPby 1989; and

(b) policy measures (some already initiated by Government) toincrease output and exports are pursued vigorously.

In the absence of higher levels of resource mobilization and attention tokey policy issues, other factors remaining the same, the outcome might wellbe a low growth scenario, with GDP growth averaging around the projectedpopulation growth rate of 2.8 percent per year. Such an outcome (ScenarioB) is discussed later.

4.8 Fiscal year 1981/82 (the most recent year for which firm data areavailable) is taken as the base year and 1988/89 as the terminal year; thefive-year period from 1984/85 to 1988/89 is referred to as the "projectlionperiod". The projections are based on assumptions formulated on the basisof information provided by the Government and the mission's judgments. Themain assumptions are set out in the Appendix to this chapter.

4.9 The projections relating to the moderate growth scenario are setout in Table 4.1. This table sets out selected macroeconomic indicatorsfor the base year, the terminal year and for an intermediate year (1986/87)as well as period averages for the projection period. As may be seen fromthis table, GDP is projected to grow at a rate of 4 percent per annum.This growth rate is crucially dependent on agriculture, which is projectedto grow at progressively increasing rates, averaging 3.9 percent per anlumover the projection period. This rate is much higher than the average rateof 2.1 percent per year achieved in the five-year period ending 1981/82.It is based on the assumption inter alia, that the Government will pursuepolicies and programs designed to bring about a broader use of improved

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seed-fertilizer packages, the expansion of Land area under cultivation,better extension and research services, and increased availability ofagricultural credit. Industry (including ulilities and construction) isprojected to grow at an average rate of 4.4 percent per annumn. This isslightly lower than the average rate of 5.0 percent achieved over thefive-year period ending 1981/82 (essentially through greater capacityutilization). The realization of this rate (4.4 percent) would require:(a) that new public sector factories which are under construction willyield output over the projection period; (b) that increased small-scaleindustry (SSI) sector output will be achieved through a clearer definitionof the role of SSIs in the economy, tax incentives, and other measures tostrengthen the sector; and (c) that activiti:es in the building constructionsector will pick up considerably, with the easing of building materialshortages referred to in Chapter 1.

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Table 4.1: SELECrED MAC1RECONCHIC INDICAI(RS

SCENARIO - A : M3IERATE GRODWT

Average annualBase growth rate/year Period average

Item 1981/82 1986/87 1988/89 1984/85-88/89

Dbmestic Product

GEP Growth 4.0Cobsumption Growth 3.3Iner. Capital Output Ratio 3.2Savings rate (% of GDP) 2.8 5.6 7.0Investment (% of GDP) 10.9 13.0 13.6

External Balance

Growth of Export Volume 7.0Growth of Import Volume 4.3Import Elasticity 1.1CTurrent Account Deficit US$318 m. US$490 m. US$520 m.

as % of GDP 7.2 7.7 7.1

Grants US$68 m. US$110 m. US$130 m.Concess. Loan fnoaitments US$180 m. US$355 m. US$430 m.Debt Service Paynents US$60 m. US$150 m. US$245 m.Average Interest on

all loars (%) 3.8

Debt Service Ratio % a/ 11.5 15.6 20.3External Reserves

(Months of imports) 2.5 2.5 2.5

Public Finance

Current Reveruesas % of GEP 19.7 20.2 20.5

Current Expealitureas % of GDP 18.3 18.2 17.5

Current Account Surplusas % of GIP 1.4 2.0 3.0

Capital Expenditureas % of GOF 6.3 9.3 9.2

a/ As percentage of exports of gDods and norn-factor services.

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4.10 The moderate growth scenario envisages an increase in totalinvestment from the current level of around 10 percent of GDP to nearly 14percent of GDP in 1988/89. The implied incremental capital output ratio islower than that of Scenario B. The underlying assumption here is that mostnew projects will be relatively quick-yielding in character. Given theprojected external resource flows, the financing of this investment willrequire a steady increase in domestic savings, indicating a trade-offbetween increased consumption and increased savings. The required domesticsavings rate is thus 5.6 percent of GDP for 1986/87 and 7.0 percent of GDPfor the terminal year, as compared with a rate of around 5 percent of GDPin 1979/80. However, since the base year domestic savings rate was only2.8 percent of GDP, the corresponding marginal savings rate is 18 percent.The attainment of this marginal savings rate will require: (a) restraintson public consumption so as to free resources for public investment; and(b) policies and programs to stimulate private savings and investment (tobe discussed below). This scenario provides for real growth in totalconsumption of around 3.3 percent per annum over the projection period,which, although lower than the projected GDP growth, is higher than theprojected population growth rate of 2.8 percent per annum. To the extentthat government current expenditure of a non-developmental nat:ure could bereduced or controlled, the growth of investment (public or private) and/orprivate consumption could be higher, and thereby contribute to higherlevels of welfare.

4.11 IrL regard to the external balance, this scenario implies that ifexports of goods and non-factor services grew at an average rate of about7 percent per annum in real terms, a sustainable current accotnt deficitand a manageable external debt situation could be realized. This wouldcall for maJor efforts in stepping up production for export as well asexport promotion, particularly in respect of non-coffee exports. Itunderlines the urgency for implementing: effective policies, including anadjustment in the exchange rate (see paragraph 4.23'}; programs to increasethe supply of export commodities; and improved export marketing and creditprograms. Concurrently, this scenario also implies that real import growthshould be contained at 4.3 percent per annum through restrainl:s on consumergoods import:s, so as to permit a higher growth of capital goods importsnecessary for the investment program. Although the current account deficitis projected to increase to about 7.7 percent of GDIP in 1986/87, thisscenario points the way to containing it at around 7' percent of GDP by1988/89.

4.12 Concessional assistance availabilities are limited, and projectedlevels of such assistance are likely to fall far short of the emergingbalance of payments deficits. Accordingly, substant:ial commercialborrowing may be required. On the assumption that grant aid averagingapproximately US$115 million per year could be realized over t'he projectionperiod, the required net disbursements on medium- and long-teirm loans areestimated to average about US$340 million per year and the coxrespondingcommitments at around US$545 million. Since commitments on concessionalassistance could average about US$355 millicn per year during theprojection period, the balance, estimated at about US$190 milLion, may haveto come froma non-concessional sources or frcm commercial borrowing. Thisincludes, for example, the sum of approximately US$100 million already

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negotiated for the purchase of two Boeing 767s, at an interest rate ofabout 12 percent per annum, and other commercial and export credits atsomewhat lower interest rates. This would raise the debt service ratio toabout 20 percent in 1988/89 and to higher levels thereafter. Thesemagnitudes of debt servicing are bound to be a heavy burden for adeveloping country like Ethiopia. A failure to attract the above-indicatedvolume of concessional assistance, and a concommitant heavier reliance oncommercial borrowing, would raise the debt service obligation to evenhigher levels. Conversely, the debt service ratio could be kept lower byattracting higher volumes of concessional assistance. However, theavailability of higher levels of concessional assistance would becontingent upon greater efforts in regard to the development of a suitableproject portfolio and the carrying out of policy reforms where necessary.The tight balance of payments situation would also preclude the possibilityof maintaining a more desirable external reserve level. This scenarioprojects the external reserve level to reach the equivalent of 2.5 monthsof imports at best, although higher levels are possible at the expense of ahigher debt service ratio.

4.13 Government revenue has already reached a high proportion of GDP(about 20 percent) and it seems neither desirable nor feasible that thisproportion would increase substantially over the medium term. Somecategories of taxes could be expected to increase in line with real GDPgrowth (see Appendix to Chapter 4 for disaggregation). On this basis,total revenue as a proportion of GDP is estimated to remain at about 20percent of GDP in 1988/89. Yet even this outcome is predicated upongreater efforts in improving efficiency in the assessment and collection ofdirect taxes, the efficient implementation of the new system of indirecttaxes, and raising larger surpluses from public enterprises throughincreased efficiency while having due regard to the reserve requirements ofindividual enterprises. While overall targets for revenue for each ensuingyear may be set in relation to projected GDP, each category of revenue(notably domestic sales taxes and income and profit taxes) calls forfurther analysis with a view to formulating sub-targets for each of these.This scenario also assumes that the growth of government expenditure wouldbe contained at around 2 percent per annum (in real terms) from 1984/85 to,1988/89. The current account surplus is projected to increase from 1.4percent of GDP in 1981/82 to about 3.0 percent of GDP in 1988/89. There is;scope to increase this surplus by further restraints on public consumptionexpenditure.

Scenario B -- Low Growth

4.14 This scenario represents how the economy might evolve over themedium term if policy reforms and programs which underlie the assumptionsin the Scenario A were not implemented to the extent assumed. Projectionsrelating to this scenario are set out in Table 4.2. GDP is projected togrow by about 2.8 percent per annum, which is essentially a continuation ofthe rate experienced during the two-year period 1980/81-1981/82. Thisscenario assumes an agricultural growth rate of 2.4 percent annually, whichcould result from a continuation of current policies. The projectedindustrial growth rate (3 percent per annum) reflects increases in valueadded resulting from industrial plants now under construction.

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Table 4.2: SELECIED MK4 XXXOJ2IC INDICUCoRS

SCENARIO - B : CW I

Average armualBase growth rate/year Periox average

Item 1981/82 1986/87 198B/89 1984/85-88/89

Domestic Product

GnP GroWth :2.8Consumption Growth :2.5Incr. Capital Output Ratio :3.8Savings rate (% of GDP) 2.8 :3.5 4.3Investuent (% of (GP) 10.9 10.8 10.9

External Balncre

Growth of Export Volume 4.7Growth of Import Volume '2.6TInpoTt Elasticity 13.9Current Account Deficit US$318 n. US$50) m. US$540 m.

as % of GDP 7.1 3.2 7.8

Grants US$68 m. US$110 m. US$130 m.Concess. Loan Commitments US$180 m. US$350 m. US$425 m.Debt Service Payments US$60 m. US$14) m. US$230 m.Average Interest on

all IDans (%) 3.9

Debt Service Ratio (%) a/ 11.5 17.0 22.4External Reserves

(oMnths of Imports) 2.5 1.8 2.0

Public Finance

Current Revenuesas % of GEP 19.7 213.1 20.1

Current Expeaditureas % of GEP 18.3 19.3 19.4

CUIrret Account Surplusas % of GIP 1.4 D.8 0.7

Capital Experxitureas % of GP 6.3 7.8 7.3

a/ As percentage of exports of goods and nom-factor services.

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4.15 This scenario assumes investment growth to be much lower. Totalinvestment is assumed to remain at around 11 percent of GDP during theprojection period. Given the constraints on external resource flows, thefinancing of this lower level of investment would still call for increaseddomestic savings. However, the terminal year domestic savings rate is 4.3percent of GDP and the marginal savings rate is about 7 percent. Thus, thetask is less challenging when compared with that discussed in Scenario A.Nevertheless, it would be quite difficult to achieve increases in privatesavings, given the projected behavior of private consumption. The implicitreal growth rate of total consumption of this scenario is 2.5 percent perannum over the projection period. Since population growth is estimated at2.8 percent per annum, per capita private consumption would decline unlesspublic consumption were reduced quite substantially.

4.16 This scenario (see Table 4.2) also indicates major tasks ahead ifthe external current account balance is to be kept within manageableproportions. With a low export growth rate of 4.7 percent per annum, totalimport growth at around 2.6 percent per annum, and lower capital goodsimports, the current account deficit is projected at the equivalent of 8.2percent of GDP in 1986/87, declining to about 7.8 percent of GDP by1988/89. Given the limitations of concessional assistance, this scenariosignals the need for even higher levels of non-concessional borrowing. Onthe assumption that the same level of grant aid as in Scenario A, i.e.,around US$115 million per year could be obtained over the projection periodand on the assumption of maintaining a lower level of external reserves,net disbursements on medium- and long-term loans are projected at aboutUS$340 million per year. The corresponding commitments are estimated ataround US$540 million per year during the projection period. Sincecommitments on concessional assistance are projected to total around US$350million per year the balance of US$190 million per year would have to comefrom non-concessional sources and commercial borrowing. The resulting debtservice ratio could thus reach a level of about 22 percent by 1988/89. Thedebt service ratio in this scenario is higher than that in Scenario A,entirely due to the lower level of export earnings in 1988/89. In sum,this low growth scenario points to the likelihood of a more worrisomebalance of payments situation.

4.17 As in Scenario A, current expenditure is projected to grow at arate of about 3 percent per annum (in real terms) from 1984/85 to 1988/89.Government revenue would also have to increase by at least the same rate inorder to avoid a current account deficit in the terminal year. On theother hand, if growth rates for the various categories of taxes, which maybe lower than those of Scenario A (see Appendix to Chapter 4), could beachieved, it would still be possible to achieve a small current accountsurplus in the terminal year. Although this task is less formidable thanthat discussed in Scenario A, it would still call for a concerted effort inimplementing the new indirect tax system, raising efficiency in the directtax system, and generating surpluses from public enterprises.

4.18 The overall deficit as well as capital expenditure as aproportion of GDP is lower than in Scenario A. This reflects the lowerlevel of investment projected to take place according to Scenario B.

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Table 4.3: KEY MACROECONOMIC IEDICATORS

SCENARIOS A and B

Item Scenario A Scenario B

Domestic Product

GDP Growth (1984/85-1988/89) 4.0 2.8Consumption Growth (1984/85-1988/89) 3.3 2.5Savings rate (% of GDP) (1988/89) 7.0 4.3Investment (% of GDP) (1988/89) 13.6 10.9

External Balance

Growth of Exports (1984/85-1988/89) 7.0 4.7Growth of Imports (1984/85-1988/89) 4.3 2.6Current Account Deficit (1988/89) US$;520.0 m. US$540.0 m.

as % of GDP (1988/89) 7.1 7.8Debt: Service Ratio (% of Exports of

Goods & non-factor Services) (1988/89) 20.3 22.4External Reserves in Months of Imports

(1.988/89) 2.5 2.0

Public Finance

Curr^ent Account Surplus as % of GDPiin 1988/89 3.0 0.7

CapJital Expenditure as % of GDPin 1988/89 9.2 7.3

4.19 The main differences between Scenarios A and B, expressed interms of selected macroeconomic indicators, are presented in Table 4.3.

4.20 To sum up, an attempt was made in this chapter to assess themedium-term prospects of the Ethiopian economy in terms of two scenarios,based on two sets of assumptions. While many such scenarios may bedeveloped on the basis of alternative sets of assumptions, the aim here wasto highlight one feasible and relatively desirable development path,represenited by Scenario A, and one less desirable development path,represenited by Scenario B, as frameworks for considering policy options.These opltions relate mainly to choices between: (a) consumption andsavings; (b) public consumption and private consumption; (c) expanding

- 60 -

exports and external borrowing; (d) concessional assistance and commercialborrowing; and (e) budgetary surpluses and deficit financing.

4.21 The achievement of moderate GDP and per capita consumption growthLrates, consistent with a sustainable current account deficit (as envisagedin Scenario A) should be feasible. Such achievement would, however, dependupon the implementation of a strategy involving a range of policy interven-tions. Key elements of such a strategy include:

(a) increasing agricultural output through higher levels ofinvestment in agriculture and related infrastructure and throughimplementation of appropriate policy measures (as discussed inChapters 3 and 4);

(b) increasing efficiency in public enterprises, increasedinvestment in industry and related infrastructure, and establish-ment of a clearer role for small-scale private industry;

(c) stepping up exports through appropriate projects andpolicies, particularly in regard to non-coffee exports;

(d) controlling consumer goods imports and stepping-up selectiveimport-substitution;

(e) mobilization of greater domestic resources throughimprovements in the direct and indirect tax systems, generatingsurpluses from public enterprises, controlling less essentialpublic expenditure, and encouraging rural and other non-publicsavings and investment activity; and

(f) attracting higher levels of concessional assistance frombilateral and multilateral sources while containing the volume ofborrowing at commercial terms so as to keep the debt serviceburden manageable.

The outcome of such actions might well surpass the "targets" of Scenario A,whereas actual performance might be worse than that illustrated in ScenarioB in the absence of appropriate policy actions.

4.22 The mission's recommendations concerning (a) and (b) above havebeen discussed in Chapter 3. In regard to (c) and (d), the country'sforeign trade policy needs to be clearly defined and developed moresystematically. The objective is to enhance import capacity throughexpansion of export earnings and through import-substitution. The policyshould aim at maximizing the earning or saving of foreign exchange per unitof domestic resource expended. The possibility of excessive expansion ofexport crop production at the cost of food production (or the reverse), canbe guarded against by determining the relative producer prices of alltradeable crops by their relative prices in the world market in relation tothe domestic resources required to produce them. Such a price policy wouldstimulate the foreign trade sector, and introduce some flexibility andpossibly diversity of exports, that can better adapt to changing worldmarket conditions.

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4.23 An expansion and diversification of exports will cELll for greaterefforts in implementing export incentive schemes, an adjustment of theexchange rate, strengthening the institutional framework, bet ter analysisof markets abroad, and other promotional measures. Ethiopia needs to giveserious consideration to using the foreign exchange rate of the Birr as animportant instrument of trade policy. As noted in Chapter 1, as a resultof Ethiopia's higher inflation rate in the mid-197Gs, and the appreciationin recent years of the US Dollar, to which the Birt is pegged, the realeffective exchange rate of the Birr appreciated by 37.5 percetnt (between1975 and 1982) against the major partners' currencies. Even thisovervalued exchange rate of the Birr may provide enough financialincentives for production and export of coffee, if the existi'ng coffeesurcharge iis not too high. In regard to non-coffee exports (Ipulses,oilseeds, live animals, etc.), the existing exchange rate does not appearto produce adequate financial incentives to growers for exports, as limiteddata on export/import parity prices relative to domestic market prices(Table 2.7, Chapter 2) indicate. Moreover, the overvalued exchange ratecould be an obstacle to the expansion of non-agricultural exports. Sinceoverall import demand is effectively managed by financial po:Licies andstrict control of imports (with priority to essentials), the case for anexchange rate adjustment in Ethiopia does not arise so much Eor curtailingdemand as f-or diversifying and augmenting supply. A realistic adjustmentof the exchange rate would make prices more closely reflect economic costsfor both public and private sectors, and help to imiprove resourceallocation. It is advisable to act when the exchange rate problem is lessserious; once the exchange rate becomes very excessively overvalued,effective adjustments are all the more difficult to achieve, as theexperience of some countries indicates. However, while consideringan exchange rate adjustment (involving devaluation and peggiing to a basketof currenc:Les), careful consideration need to be giLven to its likely effecton various prices and wages and on the public finances. The windfall gainsaccruing to some sectors (e.g., coffee) from a devaluation could provideopportunities to raise resources for the public sector while the localcurrency burden of external public debt will rise and there mnay be a moreimmediate ineed for some wage adjustment. T'he pros and cons 'have to beweighed carefully, while keeping in mind tthe object:ive of export expansionand diversification.

4.24 'The joint venture code on foreign investment could play a crucialrole in gaLning access to foreign markets, particuLarly in t'he case ofexport-oriiented industry. As presently formulated, this code does notprovide for the participation of small-scale private industry in jointventures. A suitable amendment to allow for the participation ofsmall-scale private industry could help in the acquisition of new andbetter tec]hnology and gaining access to markets abroad.

4.25 In view of the serious scarcity of resources, there is particularneed for improving the efficiency of resource use. In this regard it isimportant to use appropriate sets of prices to influence behavior of thelarge number of decentralized decision-making units regarding resourceallocation. Whether the decision-making untits are individual peasant

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families, co-operatives, private firms or public enterprises, the pricesprovide information and incentives at low cost and influence behavior. Theuse of such prices and incentive systems to influence behavior ofproduction units and to direct resource allocation is not inconsistent withsocialism and is pursued in other socialist countries. Ethiopia also usesprices as market signals and as administrative devices. The solution is tomake prices more closely reflect economic costs in order to improveresource allocation. Closely related is the need for better planning andproject selection in the public sector. In particular, project appraisalby the Development Project Studies Agency with the use of shadow prices offoreign exchange, capital and labor should be very closely adhered to, inthe final selection of projects.

4.26 Given the world economic outlook and the climate of foreign aid,domestic resource mobilization is all the more important. Theimplementation of tax reforms, improvement of surpluses of publicenterprises, and the curtailment of less essential current expenditurewould enable the Government to mobilize domestic financial resources toraise public investment. However, the public sector can neither mobilizeall domestic savings nor undertake all investments. It is essential toadopt measures to stimulate private savings and investment in both ruraland urban areas, in agriculture and non-agricultural sectors. For example,if the Government could act as a catalyst in providing a minimum level oftechnical services, farmer savings and labor could be mobilized toconstruct common grain storage facilities, access roads, workshops forimproved agricultural implements, etc. A further clarification of policyin this area would be very helpful. In addition to encouraging investmentLthrough removal of perceived uncertainties among many individual operatorsin industry, trade, transport and construction, there is scope to stimulatesavings through an expansion of the banking network in rural areas, andthrough selling to the public government bonds of small denominations. Tleinterest rates of savings and time deposits have remained unchanged for along time, and it may be advisable for the Government to consideradjustments to this rate, taking account of the rate of inflation.

4.27 A major objection to the extensive use of incentives and marketprices might be the likelihood of increasing concentration of income andwealth. Ethiopia is committed to developing a structure of productiongeared to meeting the essential needs of the population, and the Governmenthas the power to influence resource allocation in that direction by itseffective control over consumption and investment--through fiscal measures,through control of public enterprises, through control of bank credit andforeign exchange allocation. Also, the ceiling on private investment inenterprises and a highly progressive income tax will discourage increasingaccumulation of wealth. The dominance of the public ownership in largeenterprises and the potential influence of these policy instruments shouldsuffice to prevent a large scale accumulation of private capital.

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Appendixpage 1 of 4

APPENDIX TO CHAPTERL 4

I. The Revised Minimum Standard Model.

The projections presented in this chapter are based on the WorldBank's Revised Minimum Standard Model (RMSM). This is essentially amacroeconomic trade gap model which links national accounts and the balance ofpayments with special emphasis on external borrowing and debt serviceimplications. The model has been kept simple by design so as to suit economieswhere data are weak and limited. Sectoral growth rates and exports by majorcommodity groups are specified exogenously depending on feasible targets andpolicies to be adopted. Total investment is related to GDP while consumptionand domestic savings are calculated as residuals from standard nationalaccounting identities. Import requirements are endogenous and are linked viaimport elasticities to broad categories of demand in the economy arising fromoutput, consumption and investment. The gap between the external currentaccount deficit and probable levels of grants and external assistance byvarying degrees of concessionality is then computed. This gap is filled bycommercial borrowing at commercial terms of interest and repayment. The RMSMalso provides for a simple treatment of the government budget.

II. Assumptions used for Scenarios A and B.

GDP Growth Scenario A Scenario B

Agriculture Av. growth of 3.9% p.a. Av. growth of 2.4% p.a.

Industry Av. growth of 4.4% p.a. Av. growth of 3.0% p.'a.

Services Av. growth of 3.9% p.a. Av. growth of 2.7% p.a.

Export Volumes

Coffee Exports Progressive increase of 1% increase p.a.4.5% p.a. up to a level of100,000 tons in 1986/87and maintained at thatlevel up to 1989/90.

Non-Coffee Exports 10% increase p.a. 4.5% increase p.a.

Non-Factor Services 11% increase p.a. 9% increase p.a.

Total Exports of 7.0% increase p.a. 4.7% increase p.a.Goods and Non-Factor Services

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AppendixPage 2 of 4

Scenario A Scenario B

Export Prices Based on World Bank Commodity Price Forecasts

Import Volumes

Consumer Goods 1% growth p.a. 1% growth p.a.

Raw Materials Based on value added in industry, utilitiesand construction

Intermediate Goods Based on value added in industry, utilitiesand construction

Petroleum Imports Based on Value added in industry, and all services

Capital Goods Based on Investment Based on Investment

Overall Import 1.1 0.9Elasticity

Import Prices Based on World Bank Commodity Price Forecasts

Investment Progressive increase to Maintained at 10.9% oE GDP13.6% of GDP in 1988/89.

External Assistance Grant aid averaging about Grant aid averaging aboutUS$115 million p.a. (in US$115 million p.a. (innominal terms) over pro- nominal terms) over projec-jection period. An in- tion period. An increase increase in commitments on commitments on concessionalconcessional loans from a loans from current level ofcurrent level of about about US$200 million toUS$200 million to about about US$425 million inUS$430 million in 1988/89 1988/89 (nominal terms)(nominal terms)

- 65 -

AppendixPage 3 of 4

Scenario A Scenario B

].ublic Finance

ta) Revenue:

I'axes on Income 4.0% increase in real terms 3.0% increase in real terms& Profits

T'axes on Domestic 4.0% 3.'5%Siales

Taxes on Imports 4.6% " 3.0)%

Taxes on Exports 6.0% " 3.0)%

Rural Profits Tax 4.0% 4.0% "

Non-Tax Revenues 4.0% 4.0%

(b) CurrentExpenditure: 2% increase in real terms 3% increase in real terms

- 66 -

AppendixPage 4 of 4

III. Balance of Payments Projections

(US$ million at current prices)

Actual Projections1981/82 1988/89

Scenario A Scenario B

Exports of Goods and Services 593.3 1,328.5 1,097.6

Imports of Goods and Services 911.7 1,850.2 1,635.6

Current Account Balance -318.4 -521.7 -538.0

Grants 67.6 131.0 131.0

Net Medium- & Long-Term Loans 264.3 403.3 386.9

Of which Official (245.4) (309.6) (302.7)

Other Capital 44.2 20.0 40.0

Changes in Reserves -57.7 -32.6 -19.9(increase = -)

Memorandum Items

Current Account Deficit as % of GDP 7.2 7.1 7.8

Net Reserve Level 178.6 385.5 272.6

Net Reserves in months of Imports 2.5 2.5 2.0

Debt Service Payments 60.9 243.4 228.6

Of which: Interest 28.3 100.1 99.0Amortization 32.6 143.3 129.6

Debt Service as % of Exports ofGoods and Non Factor Services 11.5 20.3 22.4

Loan Commitments:Concessional 180.0 429.0 425.0Non-Concessional - 235.1 211.9

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