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Consultative Group Meeting For Ethiopia-December 2002

Statement From the world Bank

Mr. Chairman

Your excellency Ato Meles, Prime Minister of Federal Democratic Republic of Ethiopia,

Your Excellencies

Distinguished delegates and colleagues

It is a great pleasure to participate in this fourth CG for Ethiopia. The main themes today are how to enhance further the evolving partnership between Ethiopia and the donors' community and build a framework of mutual accountability. We are very happy to have Prime Minister Ato Meles with us here, his presence attests of the importance the Government is attaching to this meeting.

The PRS movement is in full swing in Ethiopia. This CG is the precursor to the PRS Status Report Meetings of the future. In these Meetings, the Government would report on progress made and would make commitments for future actions, and the donors would commit to specific support and harmonization efforts. This time around, the goal should be to establish this process and consolidate the gains achieved in the past year, which saw in addition to the PRSP, major reforms in the public sector, a new wave of decentralization to the district level, an ambitious drive to improve the capacity of key development actors, and renewed efforts to get private sector activity off the ground and to modernize agriculture.

The PRSP, together with the Joint Staff Assessment, was considered by the Bank's Board on September 19, 2002, and to Fund's Board on September 23. Executive Directors(EDs) hailed the participatory approach and the holistic result. They were supportive of the focus on the rural areas, capacity building and decentralization. They paid particular attention to the new emphasis on Private Sector Development. While most EDs noted that the country is now on the right road, they also all stressed that much work needs to be done to refine and implement the Government's strategies, especially in the areas of rural, PSD, and trade, and to find ways to mitigate the risks ahead.

The Government has started to respond to these concerns but more work, innovations and courageous actions are required.

Building on the PRSP, a recent CAS workshop on rural development, in which the PM and his cabinet participated, has started to lay down the specifics of a policy mix that can increase rural productivity over time, under the theme of the marketization of agriculture. Interventions to modernize the extension system and make it demand and knowledge driven have started. Policies to improve the perception of land tenure security, policies to strengthen cooperatives and rural finance and establish the basis for dynamic inputs and output markets are now bound to be initiated in the next months.

The Rural Development meeting also focused on specific policies to reduce the vulnerability to weather of the low productivity regions of Ethiopia. The recommended solutions involve managing risks better in the short term, and reducing risks in the long term. The Ministry of Rural Development has initiated a Food Security program involving local actions to rebuild livelihoods in vulnerable Woredas. Ambitious actions that include irrigation and improved labor demand are being carefully studied and should produce workable plans in the short term.

The Government is now putting heavy emphasis on dynamizing the private sector and on increasing and diversifying exports. Another of our CAS workshop, which was also attended by the PM, involved active participation by the private sector. The Meeting laid out a precise agenda to support the development of the private sector: improving the investment climate, actively encouraging the development on new industries especially to expand and diversifying exports, building up the financial system on a sound basis, and involving the private sector in infrastructure services. The improved dialogue between the Government and the private sector in promising and should start yielding targeted reforms and joint problem solving. The simplistic strategy of "liberalize, close your eyes, and hope for the best" is not good enough. Pro-active public-private partnerships are needed to solve the constraints brought about by history and geography. The lack of domestic private wealth, a small financial and entrepreneurial base, poor infrastructure, and fragmented small producers, constrain the working of the market as much, if not more than excessive regulation. These efforts need to be accelerated now so that a critical mass is reached, the perception of change takes roots, and results start showing up on the ground.

We believe that efforts to fight the scourge of HIV-AIDS also be accelerated. These efforts must now include, beyond broad awareness, more targeted actions that reduce the risks of infections where they are most prevalent. This will require among other things the development of a more sophisticated system of tracking the spread of the disease in real time and across communities.

These and other ongoing reforms also create new challenges for the donors community:

We recognize the far-reaching mature of the ongoing decentralization cum capacity buildings initiative. In time, it will yield enormous benefits. We are also heartened by the many innovations that we have observed at the local level to deal with the difficult transition and the constraints due to scarce skills and infrastructure. But it is imperative that as donors, we learn how to work on improving capacity at the local level, focus on the empowerment of local actors, and the incentives they face. We must remain open to experimentation and learning by doing.

The move to budget support goes in the direction of history: it supports policy space and the PRSP, it seeks to fix the systems of the state rather than create islands of quality, and it fits well a decentralized system where the attention should go to actors and the incentives they face. But for Budget Support to be sustainable and grow over time, local systems have to evolve. This includes budgeting, reporting, audits, monitoring, and evaluation. The Government has plans in all these areas and the donors community is involved in all these plans: the Country Financial Assessment is become joint effort with the Government.

We must also continue to encourage the development of regional solutions whenever possible. Ethiopia continues to be at the center of these initiatives. We are encouraged that Ethiopia signed on to NEPAD's peer review mechanism and are eager to see concrete actions coming out of NEPAD and enhancing its credibility. COMESA offers important potential for regional trade that can strengthen local competitiveness. And the Nile Basin Initiative has already shown that there are valuable win-win opportunities that use the resources and skills of the riparian countries better and at the same time reduce regional tensions.

While the needs are immense, financing challenges are also daunting. We must seek to increase the overall financing of Ethiopia so it can meet its MDG goals-from $15 to $20/capita. This means that we should seek to raise about $4 billion for the next 3 years. In doing so, we must also redress the balance between loans and grants, and gradually move away from the provision of food relief to financing development within new focus on reducing risks and vulnerabilities.

However, Ethiopia's debt sustainability has deteriorated considerably since the Decision Point in June 2001. Then, the NPV of Ethiopia's debt-to-export ratio was expected to peak at 175% in 2003/04. Due to largely exogenous shocks since then (especially lower interest rates and significantly reduced exports), the debt-to-export indicator is now expected to peak at slightly over 200% in 2003/04. With this higher debt profile, HIPC considerations may constrain IDA's ability to extend the full performance-based amount unless there are positive developments on interest rates and export performance, or a decision is taken by the Board at the Completion Point to support additional topping up of debt relief.

Trade-offs are stark and requires the attention of the whole donors' community Donors can help by taking on more of the burden of financing the PRSP and by helping create headroom for World Bank financing. This can be done by increasing and announcing the additional bilateral debt relief, and possibly, with new creative means such as delivering joint activities with the Bank where donor finance buys down IDA debt. Such arrangements would allow donors to leverage their resources 2-1 (i.e, one dollar of donors grant plus two dollars of IDA loans produce jointly two dollars of grants).

In sum, mutual accountability is a powerful theme today. The Government has a lot on its plate, and so do we. We will need to work harder together to find innovative solutions, to keep improving local systems, and to put ideas into action. This can indeed be a very fertile moment if we rise to the occasion. We are on the cusp of a rare African success story. Let us seize the moment and make the best of it for the benefit of effective pro- poor development.

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Joint EU Statement for the Consultative Group for Ethiopia Addis Ababa, 7/8 December 2002

Draft of 29 November 2002

1. Greece in its present capacity as holder of the local presidency of European Union has the honor to present the following statement on behalf of the European Union's Member States and the European Commission.

2. The European Union commends the Federal Democratic Government of Ethiopia for its commitment to pro-poor development reinforced by and ambitious and broad reform agenda of transparency, accountability and economic liberalisation set out by Prime Minister Meles Zenawi in his reports to the parliament in October 2001 and October 2002. The commitments made by Prime Minister Meles were critical in further enhancing the European Union's support under the Cotonou Agreement and other bilateral agreements with EU Member States. Ethiopia's commitment to implement provisions of the above agreements that relate to good governance, democracy, the rule of law and the respect of human rights should be underlined. A series of important measures have been initiated in order to make the political system and the administration more responsive and efficient as part of the Government's National Capacity Building Programme, including decentralization and the civil service reform. The European Union encourages the government of Ethiopia to complete the programme of reform, to remain a reliable partner in securing peace and stability in the Horn, and to continue to play a constructive role in NEPAD.

3. At the same time it remains a challenge to the Government of Ethiopia to advance the democratization of the country. Still the overwhelming majority of the ruling party coalition at all levels of government does not facilitate a major role of the opposition in parliament and outside. The problems of an uneven democratic empowerment in this ethnically diverse country are rising to the surface and could be witnessed in serious incidents in the Southern Region earlier this year. In addressing these problems, the EU attaches also highest importance to the setting up of the Ombudsman's Office and the Human Rights Commission, as well as to a comprehensive justice system reform programme. Capacity building for the judiciary and the police forces should help in improving Ethiopia's human rights record. The EU noted with satisfaction that the Prime Minister very recently declared the judiciary reform as the 'top most priority' of his government.

4. The Government of Ethiopia completed its Poverty Reduction Paper, SDPRP. The elaborate consultation process for the SDPRP preparations is considered a positive step. The participation of civil society organizations in policy, planning and monitoring should be institutionalized. The EU welcomes the commitment in the CG paper- Partnership for Enhanced Aid Delivery - that non-state actors are Expected to participate in the SDPRP monitoring process, including the annual progress review forum, and looks forward to receiving more details of how this participation will work in practice. The recently established partnership forum with the private sector is a good start. Overall the objectives of the SDPRP offer a solid basis for support to Ethiopia as well as for the policy dialogue between the Government and the international donor community.

5. The SDPRP recognizes private sector development as the engine of growth. The EU fully subscribes to this and regards the private sector as an important factor for the diversification and consolidation of the economic base of the country. The EU will continue to support the promotion of private initiative, through investment, capacity building and other assistance. Initial steps by the Government are welcomed and specific implementation measures, to be elaborated in consultation with the private sector, are encouraged. The creation of an improved investment and trade climate, should also be considered of paramount importance to the development of the country. The EU is therefore looking forward to the White Paper on Private Sector Development, as was promised by PM Meles Zenawi earlier this year, as the basis for enhanced EU support in this area.

6. The EU also considers the development of the private sector crucial in light of the gradual integration of Ethiopia in the world economy. On 27 September, the EU and ACP countries have started negotiations on Economic Partnership Agreements (EPA) which will facilitate this integration through a strengthened and deepened regional integration in the sub-regions. Trade will also promote social and economic development, with the participation of all concerned actors. The development of the internal economy will be a key element for Ethiopia, in order to take full advantage of the EU's market, which has been fully opened for all products as a result of the Everything But Arms initiative. In the context of regional integration, the EU encourages the involvement of the Government of Ethiopia in initiatives, which aim at strengthening regional market integration through organizations as COMESA, IGAD, or regional cooperation on natural resources such as the Nile Basin Initiative.

7. The focus of the government on Agricultural Development led Industrialization is central for its pro-poor policies given that around 80% of population lives in rural areas. However, implementation is crucial if poverty is to be reduced. Increases in production have not translated into higher incomes of growth for the sector. Moreover, restrictions on security of land tenure, the lack of access to credits as well as the absence of a free market for farming inputs such as fertilizers and transportation, often resulted, in combination with fluctuating prices of agricultural products, in an increased indebtedness of farmers, further discouraging their efforts for coming harvests. There is consensus that the demand side of rural market development need greater attention. Diversification of the economic base is essential to address the desertification process that affects a large part of the country. The exposure of the Ethiopian agriculture to erratic climate developments poses a high risk for the economy. Therefore, Strategic decisions in the area of water harvesting and irrigation should aim at making harvests more steady and predictable.

8. The second Health and Education Sector Development Programmes offer a solid framework for the expansion of the social sectors over the next three years. The EU remains committed to continue the dialogue with the Government on these programmes in light of the attainment of the Millennium Development Goals. EU assistance for the social sectors shall be primarily delivered in the context of these sector programmes. In the dialogue, particular attention should be given to capacity and quality issues and the monitoring of the agreed indicators. It is important to have a clear mechanism to monitor these outcomes and that the current high degree of substantive dialogue will continue. Tackling the capacity constraints will be of particular importance in view of the HIV pandemic. This is not simply a health issue. If not curbed, it could put formidable strain on the social and economic development of the country.

9. Gender issues have been addressed in the SDPRP, Rightly so, since inequality between women and men is still major development problem in Ethiopia. The situation for Ethiopia women, including grave human rights violations such as early marriage, female genital mutilation, rape, abduction and trafficking, is a serious concern. Assistance to the government and civil society to improve the present situation will continue to be extended by the European Union.

10. The positive results from policy reforms in the Transport Sector need to be further consolidated with the adoption and implementation of the Road Transport Regulations and the related initiatives. The management capacity of the sector could be enhanced with and greatly benefit from the involvement of private sector resources allowing government bodies to perform their strategic and policy orientation tasks. The implementation of sector wide programmes has still substantial room for improvement and efficiency gains.

11. The government is involved in an unprecedented and ambitious programme of decentralization. The EU welcomes the decentralization programme as a means to bring decision-making closer to the citizen. The EU welcomes the commitment in the CG paper - partnership for Accelerated and Sustainable Development and poverty Reduction - that decentralization will be a process of 'learning by doing' and that the government is committed to ongoing communication, monitoring and exchange of information regarding developments on the ground. The EU also recognizes that disbursement at regional and sub-regional levels have been low over the last two years and that as part of the decentralization process efforts should be made to improve this.

12. The process of decentralization, will do little to enhance good governance if the reforms are limited to fiscal decentralization and fail to address the ability of Ethiopian citizens and local communities to participate in the decision making process. Free and fair elections are the most effective means of achieving this empowerment. While the commitments to strengthen participation and deepen democracy in the SDPRP are welcome, it is essential that the Government of Ethiopia adopts a more explicit commitment to holding those national, regional and local elections that fall within the current PRSP cycle in a fully democratic manner. Within the framework of the ongoing revision of indicators, the EU would advocate the adoption of clear, specific and measurable indicators to support this commitment by the Government of Ethiopia.

13. The Ethiopian government and its development partners have embarked on a constructive dialogue to harmonise procedures. The European Union hopes that this will lead to a strengthened partnership for development. We subscribe to the overall objective of the Harmonisation Agenda and commit ourselves to reducing transaction costs for the government where possible. In this respect the European Union is committed to enhance efforts for more coordination and harmonization of development assistance to Ethiopia among Member States and European Commission. In supporting the Ethiopian development strategy, the European Union will use a variety of instruments ranging from development projects, to sectoral strategies, to budget support . Some of the Member States and the European Commission see budget support as a useful addition to existing aid delivery mechanisms. For Direct Budget Support the progress made with SDPRP implementation is important, especially the efficient and effective service delivery to the poor. Prerequisites for budget support are sufficient government capacities to ensure timely disbursements as well as a transparent and accountable financial management system.

14. The EU commends the government for the progress made over recent years to strengthen financial management in Ethiopia. As the government acknowledges in the CG paper - partnership for Enhanced Aid Delivery - it will be important for current government plans to take full account of the recommendations that will come from the Country Financial Accountability Assessment Report. There are some important weaknesses remaining that the EU wants to help the government address urgently.

15. The EU recognizes the government's support for the development of national capacity to implement the SDPRP, at federal, regional and woreda level, in the public- and private sector and civil society. The European Union will continue to work closely with the government and multilateral partners to support development and implementation of these plans.

16. Ethiopia is threatened by a national emergency through the effects of a severe drought in vast areas of the country. Given the potential dimension of this emergency situation in 2003, simultaneous mobilization of international support as well as government's own financial and logistic resources to the extent possible are essential for managing this crisis. The EU is committed to play its full part in responding to this situation. However, the crisis can only be addressed adequately if, in parallel to the emergency response, substantial efforts are devoted to tackle the underlying structural problems and improving food security in Ethiopia. In this context, we welcome the Government's initiative to reform the Emergency Appeal and introduce a window for multi- annual financing in certain woredas. More generally, it is important to assess the impact of the national emergency on the government's long-term development plan, and that the government, with EU support, should not be distracted from its structural development agenda.

17. Ethiopia faces fundamental development challenges. In the spirit of true partnership, the EU will do its best to accompany and support Ethiopia in this challenging process.