Attachment J.4 - GTP II English Translation Final_2016-2020.pdf

i

Federal Democratic Republic of Ethiopia

Growth and Transformation Plan II (GTP II) (2015/16-2019/20)

Volume I: Main Text

National Planning Commission

May, 2016

Addis Ababa i

Table of Contents Title Page No.

Table of Contents ........................................................................................................................... i

List of Figures .................................................................................................................................. iv

List of Acronyms .............................................................................................................................. v

Preface ........................................................................................................................................... ix

Introduction

PART I:

PERFORMANCE UNDER THE FIRST GROWTH AND TRANSFORMATION PLAN (GTPI) ...4

I. Macroeconomic Performance

1.1. Economic Growth and Poverty Reduction

1.2. Price Development

1.3. Fiscal Policy and Public Finance

1.4. Saving and Investment

1.5. External Resource Mobilization and Management

1.6. Monetary policy

1.7. Merchandize Export and Import

1.8. Private sector development

II. Economic Sectors

2.1. Agricultural Development

2.2. Industrial Development

2.3. Trade

2.4. Mining

2.5. Construction

2.6. Urban Development and Housing

III. Economic Infrastructure

3.1. Road Infrastructure

3.2. Railway Infrastructure

3.3. Telecommunication

3.4. Energy Infrastructure

3.5. Information and Communication Technology

ii

3.6. Potable Water Supply and Irrigation Development

3.7. Transport

IV. Social sector development

4.1. Education

4.2. Health

V. Capacity Building and Good Governance

5.1. Implementation Capacity Building

5.2. Good Governance

VI. Building the Democratic System

6.1. Strengthening Public Participation

6.2. Building and Enhancing National Consensus

6.3. Strengthening Multi Party Democratic System

6.4. Media

VII. Cross Cutting Sectors

7.1. Women, Children and Youth

7.2. Science and Technology

7.3. Sport

7.4. Social Welfare and Labour Affairs

7.5. Culture and Tourism

7.6. Population and Development

7.7. Environment and Climate Change

VIII. Monitoring and Evaluation System of GTPI

IX. Strengths and Challenges encountered in implementing GTPI

9.1. Strengths, Best Practices and Lessons Drawn

9.2. Challenges

X. Summary

PART II

THE SECOND GROWTH AND TRANSFORMATION PLAN (GTPII)

I. Basis, Departures, Objectives and Strategic Pillars of GTP II

1.1. Basis of the Second Growth and Transformation Plan

1.2. Major Departures of the Second Growth and Transformation Plan (GTPII)

1.3. Objectives of GTPII

iii

1.4. Pillars Strategies

1.5. Selected GTPII macroeconomic, social and economic development targets

II. Macroeconomic Plan

2.1. Macroeconomic Policy Objectives

2.2. Economic Growth

2.3. Structural Change

2.4. Merchandize and Service Exports, Imports and Balance of Trade

2.5 Ensuring Macroeconomic Stability

2.6. Fiscal Policy

2.7. Monetary Policy and Financial Industry Development

2.8. Saving and Investment

2.9. Employment and Poverty Reduction

III. Financing the Plan (Financial Plan)

3.1. Budgetary Financing Plan

3.2. Sources of off-budget Financing and Requirement for Investment Finance

V. Economic Development Sector Plan

4.1. Agriculture and Rural Transformation

4.2. Manufacturing Industry

4.3. Mining Sector

4.4. Construction Industry

4.5. Urban Development and Housing

4.6. Trade

4.7. Culture and Tourism

V. Economic Infrastructure

5.1. Integrated Transport and Logistics Services

5.2. Expansion and Ensuring the Qualities of Road Infrastructure Development

5.3. Expansion and Ensuring the Qualities of Railways Infrastructure

5.4. Air Transport

5.5. Maritime Transport services

5.6. Expanding Energy Infrastructure and Ensuring its Quality

5.7 Ensure Digital Infrastructure Expansion and its Quality

5.8. Potable Water Supply and Irrigation Development (GTPII)

iv

VI. Human Development and Technology Capacity Building

6.1. Education and Training

6.2. Health Sector Development

6.3. Science and Technology Development

VII. Developmental Good Governance and Building Democratic System

7.1. Ensuring Good Governance and Building Developmental Political Economy

7.2. Building Democratic System

VIII. Cross Cutting Issues

8.1. Women and Youth Empowerment

8.2. Environment and Climate Resilient Green Economy

8.3. Sport Sector

8.4. Strengthening social welfare and security

8.5. Labour Affairs

8.6. Population and Development Issues

IX. Opportunities and Threats

9.1. Opportunities

9.2. Threats/ Risks

9.3. Risk management strategies

X. Monitoring and Evaluation System of GTP II

List of Figures

Figure 1.1 GDP Growth by Major Economic Sectors (2009/10-2014/15)

Figure 1.2 Percentage share of GDP by major economic sector (%)

Figure 1.3 Domestic revenue, expenditure and deficit as a Ratio to GDP@CMP (%)

Figure 1.4 Gross Domestic Saving and Investment as a Ratio to GDP @ CMP

Figure 1.5 Export and import of goods and services as a share of GDP @ cmp (%)

List of Tables

Table 1.1 Selected GTPII Targets

Table 2.1 GDP growth rate under base case scenario (in %) valued at 2010/11 price

Table 2.2 GDP growth rate under high case growth scenario (in %) v

Table 2.3 Share of major economic sectors in GDP under base scenario (in %)

Table 2.4 GDP’s share of some major economic sectors under high growth scenario

(in %)

Table 2.5 Projection of merchandise export earring’s (in million USD)

Table 2.6 Projected share of merchandise export in GDP (in %)

Table 2.7 Government Revenue and Expenditure Projection (in billion birr)

Table 2.8 Government Revenue and Expenditure as a ratio to Nominal GDP (in %) .. 109

Table 2.9 Total consumption expenditure, investment and resource gap as a Ratio to

GDP @ CMP

Table 3.1 Percentage Distribution of projected capital expenditure requirements by major socioeconomic sectors (in %)

Table 3.2 Total Sources of Finance, (in million ETB unless otherwise specified)

Table 3.3 Percentage Distribution of Finance Sources in total Finance (in %)

Table 3.4 Sectoral Allocation of Domestic Credit, in million ETB unless otherwise specified

Table 3.5 Percentage Distributions of projected domestic Credit allocation in total domestic Credit (in %)

Table 3.6 Distribution of Demand and Supply of Foreign Exchange by Economic sector (In million USD)

Table 3.7 Demand and Supply of Foreign Exchange (Percent Share in total)

List of Acronyms

AGOA Africa Growth and Opportunity Act

AMDAR Aircraft Meteorological Data Relay

APRs Annual Progress Reports

AWOS Automated Weather Observing System

AWS Aviation Weather Service

AWS Automatic Weather Stations System

BA Bachelor of Art

BDS Business Development Services

CBE Commercial Bank of Ethiopia

CCC Community Care Coalitions

CMP Current Market Price vi

CO2 Carbon Dioxide

COC Certificate of Competence

CO2e Carbon Dioxide Emission

CPR Contraceptive Prevalence Rate

CRGE Climate Resilient Green Economy

CSA Central Statistical Agency

DBE Development Bank of Ethiopia

EA Ethiopian Airlines

EBA Everything but Arm

EIO Ethiopian Institute of the Ombudsman

ENALCO Ethiopian National Logistics Coordination Council

ERA Ethiopian Road Authority

ETB Ethiopian Birr

EU European Union

FDI Foreign Direct Investment

FTA Free Trading Area

Gbs Gigabytes

GDP Gross Domestic Product

GDS Gross Domestic Saving

GEF Global Environment Facility

GER Gross Enrolment Rate

GERD Grand Ethiopian Renaissance Dam

GHE Greenhouse Gas Emissions

GHG Green House Gas

GIS Geographical Information System

GTS Global Telecommunications System

GTP Growth and Transformation Plan

GTPI The First Growth and Transformation Plan

GTPII The Second Growth and Transformation Plan

GVA Gross Value Added

GW Giga Watt

GWH Giga Watt per Hour

Ha Hectare

HDI Human Development Index

HEPP Hydro Electric Power Project

HICES Household Income Consumption Expenditure Survey

HIV/ADIS Human Immune Virus/Acquired Immune Deficiency Syndrome

HoPR House of Peoples Representative

ICAD Innovative Contractors for Advanced Dimensions

ICT Information and Communication Technology vii

IFMIS Integrated Financial Information Management Systems

ISO International Organization for Standardization

IT Information Technology

KG Kilo Gram

KILM Key Indicators of Labour Market

KM Kilo Meter

KM

Square Kilo Meter

KV Kilo Volt

KWH Kilo Watt per Hour l/c/d Litter Consumption per Day

LNG Liquefied Natural Gas

LRT Light Rail Transit

LTO Logistics Transformation Office

M

Meter Square

MA Master of Art

MDGs Millennium Development Goals

M&E Monitoring and Evaluation

MFIs Micro Finance Institutions

Mln/qt Million per Quintal

Mln/number In Million Number

MMR Maternal Mortality Rate

MTEC Metal and Engineering Corporation

MSME Micro, Small and Medium Enterprise

MW Mega Watt

NBE National Bank of Ethiopia

NER Net Enrolment Rate

NGOs Non-Governmental Organizations

NPC National Planning Commission

NSDS National Statistical Development Strategy

NSDS II The Second National Statistical Development Strategy Two

NWP Numerical Weather Prediction

PHD Doctor of Philosophy

PSD Private Sector Development

PV Photovoltaic

Qt/ha Quintal per Hectare

REDD

Reducing Emissions from Deforestation and Forest Degradation

ROW Right of Way

SADIS Satellite Distribution System for Information relating to Air Navigation

SARPs Standards And Recommended Practices

SDG Sustainable Development Goals viii

SMEs Small and Medium Enterprises

SMS/IVR Short Message Service/ Interactive Voice Response

Sq. KM Square Kilo Meter

SSA Sub Saharan Africa

SSB Services Selection Boar

Thnd/number In Thousand Number

Thnd/tons Thousand per Ton

TVET Technical and Vocational Education and Training

UFW Urban Fault Waters

U5CMR Under 5 Child Mortality Rate

UNESCO United Nations Educational, Scientific and Cultural Organization

USA United States of America

USD United States Dollar

WTO World Trade Organization ix

Preface

The first Growth and Transformation Plan (GTPI) culminated with registering remarkable achievements in real GDP growth, infrastructure development, social development and capacity building at all levels. During the implementation period of GTP I, public participation and common development spirit and sense of ownership has been stimulated on key national development issues. The achievements of the development Plan at all levels through community mobilization have set the foundation for economic transformation and the country’s Renaissance journey. To this end, during GTP I implementation period, significant achievements have been registered in domestic saving & investment. However, the gap between domestic saving and investment has been widening in the country during GTP I implementation period. Similarly, the gap between merchandize export earnings and merchandize import bill, the trade deficit, has been widening during GTPI implementation period. The share of merchandise imports bill financed by merchandize export earnings has been declining over the GTPI implementation period. Notwithstanding the encouraging achievements registered in the manufacturing sub-sector, performance has still fallen short of the targets set in the Plan. Despite the promising results witnessed in good governance, public satisfaction has not been realized as desired.

The positive achievements of GTP I and lesson drawn from its implementation have been taken as input in the formulation of the Second Growth and Transformation Plan (GTPII). The national vision; existing national and setoral policies, strategies and programs; performance under GTPI; commitment to Sustainable Development Goals (SDGs) and regional and international economic collaboration initiatives were the basis for the formulation the Second

Growth and Transformation Plan (GTPII) through high level political leadership, public participation & ownership. The formulation of the GTPII has also passed through broad based consultation processes with relevant stakeholders at both regional & federal levels to enrich its content & forge national ownership of the Plan. Subsequently, the final version of the plan was approved by the council of ministers endorsed the Parliament to guide development endeavours in the country during the next five years, 2015/16-2019/20.

The major objective of GTP II is to serve as a spring board towards realizing the national vision of becoming a low middle-income country by 2025, through sustaining the rapid, broad based and inclusive economic growth, which accelerates economic transformation and the journey towards the country’s Renascence. Thus, GTP II is primarily considered to be an important milestone towards realizing the national vision. In this context, during the GTPII implementation period, effective public participation in a coordinated and structured manner at all levels is critical to ensuring equitable development and to build developmental political economy. As such, GTP II will focus on ensuring rapid, sustainable & broad-based growth through enhancing productivity of agriculture and manufacturing, improving quality of production and stimulating competition in the economy.

x

The successful achievements of the first Growth and Transformation Plan will be taken as an additional input and developmental activities are expected to be implemented with greater commitment and diligence across the country by addressing implementation bottlenecks identified during GTP I implementation period and through coordinated and integrated developmental mind set of development actors. It is my conviction that with citizens’ commitment and concerted efforts, the objectives of GTP II will be realized.

Yinagre Desie (Dr.)

With the rank of Minister, Commissioner, National Planning Commission

Introduction

The first Growth and Transformation Plan (GTP) was articulated through four overarching objectives: (i) maintaining at least an average real GDP growth rate of 11% per annum and attaining the Millennium Development Goals (MDGs) by 2014/15; (ii) expanding access and ensuring the qualities of education and health services and achieve MDGs in the social sectors;

(iii) establishing conditions for sustainable nation building through the creation of stable democratic and developmental state; (iv) ensuring the sustainability of growth through maintaining macroeconomic stability. These four overarching objectives were in turn cascaded in to seven pillar strategies that cut-across all socioeconomic sectors.

The formulation of the first Growth and Transformation Plan (GTP) was conducted through high level political leadership. In order to render the formulation of the Plan more internally driven with full national ownership, a series of consultation forums at federal and regional levels were conducted with relevant stakeholders and through them with the ultimate actors and beneficiaries: citizens. Subsequently, the final version of the first Growth and Transformation

Plan (2010/11-2014/15) was discussed and approved by the Council of Ministers followed by discussions and endorsement by the Parliament and has been implemented across the nation during the last five years.

As a basis for the formulation of the successor plan entitled the second Growth and

Transformation Plan (GTPII), the implementation of the first Growth and Transformation Plan

(GTPI) was assessed against the set objectives, strategic directions and key targets across socioeconomic sectors. According to the assessment, remarkable achievements have been recorded in real GDP growth rate, infrastructure and social development as well as in cross-cutting areas. In areas of capacity building and good governance, capacity building and awareness raising activities have been undertaken to empower the public and there by exercise its rights to transparent, fair and equitable services at all levels. Moreover, in the course of implementation of GTPI, it was made possible to mobilize public participation, create a sense of ownership, motivation and national consensus around key development issues of national significance among the public and citizens at large across the nation. This would help in laying the ground for building an organized and coordinated capacity for subsequent development efforts.

On the other hand, there had been down side effects on the economy during implementation of the Plan. Global economic slowdown and the volatile external environment had negatively affected the Ethiopian economy especially during the first two years of GTPI implementation.

The volatile external environment coupled with the devaluation of the currency resulted in domestic inflationary pressure largely driven by prices of fuel and food items. This was overcome through concerted fiscal and monetary policy interventions complemented by regulatory and stabilization measures undertaken by the Government. Such commendable measures helped reverse the impact of negative external environment on the economy and brought down domestic inflation to single digits towards the latter years of GTPI implementation. This helped maintain macroeconomic stability and sustain the rapid double digit real GDP growth rate during the plan period.

With focus on key sectors that have significant bearings on growth and structural transformation, the assessment exercise on GTPI implementation has identified and thoroughly evaluated sectors in which the set targets were achieved, partially achieved and in those where performance significantly fell short of the targets. The assessment exercise has also brought up best practices, opportunities, challenges and constraints witnessed during implementation. The lessons drawn have been used as inputs in the formulation of the second Growth and

Transformation Plan (GTP II- 2015/16-2019/20).

The second Growth and Transformation Plan (2015/16-2019/20) is considered to be an important vehicle for Ethiopia’s renaissance. Accordingly, the Government as a developmental state is fully committed to mobilize the necessary resources including capacity for implementation of the

Plan. Modernization in the development of the agriculture sector, expansion of industrial development with primary focus on light manufacturing, significant shift in export development are at the core of GTPII. GTPII is an important milestone towards realizing Ethiopia’s vision of becoming a lower middle income country by 2025.

The formulation of GTPII has passed through a series of broad based consultation processes with relevant stakeholders at regional and federal levels in a structured and coordinated manner to enrich its content and forge national ownership of the Plan. Subsequently, the final version of the plan was approved by the Council of Ministers and endorsed by the Parliament as a blue print to guide development endeavour in the country for the next five years, 2015/16-2019/20.

This Plan document is divided into two major parts. Part I contain summary performance of

GTPI covering all socioeconomic sectors and serves as a springboard for the new Plan. This is in turn divided in to ten chapters. The first four chapters cover performance of macroeconomic sector, productive sectors, economic infrastructure sectors and social sectors, respectively.

Chapter five outlines summary performance on capacity building and good governance, while chapter six outlines performance on public participation, strengthening democratic system and building national consensus. Chapters 7 through 8 provide performance on cross-cutting sectors and review of the monitring and evalutaion system of the plan, respectively. Chapter 9 provides review of strengths, weaknesses, challenges and bottelenecks witnessed in the course of implementation of GTPI. Chapter ten outlines summary of major outcomes on the implementation of GTPI, lessons drawn in the course of implementation and issues to be taken up in GTPII .

Part II, divided into ten chapters, presents GTPII and is structured as follows: The first chapter presents the basis, objectives and pillar strategies of GTPII. The next chapter, Chapter two, presents macroeconomic development plan and policy goals, while Chapter three presents financing requirements and how the overall plan will be financed (financing the plan). Chapter four and five present detailed economic sector plans and economic infrastructure sector plans, respectively. Chapter six presents Human Resource and Technological Capacity Building sectors

Plan, while chapters 7 through 8 present good governance and building democratic system and cross-cutting sectors plans, respectively. Chapter nine presents opportunities, challenges and implementation risks and measures to address these risks. The last chapter presents the monitoring and evaluation system of GTP II.

PART I:

PERFORMANCE UNDER THE FIRST GROWTH AND

TRANSFORMATION PLAN (GTPI)

(2010\11-2014\15)

I. Macroeconomic Performance

1.1. Economic Growth and Poverty Reduction

The main macroeconomic policy objective of GTP I was achieving a rapid, sustainable and broad-based economic growth through creating conducive macroeconomic environment.

Accordingly, the following major macroeconomic goals were set in GTPI: (i) Maintaining broad-based and double digit economic growth within a stable macroeconomic environment, (ii)

Increasing the share of gross domestic saving (GDS) in GDP to 15 percent and (iii) Increasing the share of export in GDP to 22.5 percent.

The GTPI had set a goal to sustain the rapid growth performance registered during the last seven consecutive years before 2010/2011. Built on the remarkable growth achievements of the preceding seven years, real GDP growth averaged 10.1% per annum during the period of GTPI, a one percentage point shortfall from the base case scenario of 11 percent annual real GDP growth target for the plan period. The growth performance during the GTPI period was built on the fast and sustained growth achieved during the preceding 7 years. As a result, real GDP growth during the last 12 years averaged 10.8 percent per annum. This is more than double the SSA average of about 5 percent during the same period.

Most farmers, pastoralist, private sector, women and youth groups and other members of the society experienced the sustained, rapid and broad based growth of the country. This broad-based and rapid economic growth performance during the plan period, 2010/11-2014/2015, has in turn consolidated the aspirations of individual citizens and the country in general to achieve even better in the time ahead. Ethiopia’s achievements over the last five years have also attracted global recognition, and help the image of the country for the better, as can be observed from the increased inflow of FDI and strong performance of the country’s first ever sovereign bond in the international capital markets.

Figure 1.1 GDP Growth by Major Economic Sectors (2009/10-2014/15)

This rapid growth performance and its sustainability are primarily the result of the development policies and strategies the Government has been pursuing during the last two decades, as well as the active participation of the public in the execution of these strategies. In 2013/2014, for the first time in the history of the country, its sovereign rating was assessed by three international credit rating agencies. Their assessment reports have well recognized the broad based economic growth and development performance of the country. Similarly, the assessments also confirmed the sustainability and continuity of the rapid economic growth and development gains of the country. This global recognition from independent rating agencies has put the country in the radar screen of international investors and thereby helped it to attract foreign investors. This was reflected both in the oversubscription of Ethiopia’s first ever sovereign bond and in the increasing inflow of FDI. Overall it has strengthened the confidence on the country’s investment and trade potentials and opportunities. All these are in turn expected to give additional impetus to sustaining the double digit growth performance that has been unfolding during the last 12 years.

Annual average income per capita increased from 377 USD in 2009/2010 to 691 USD by

2014/15. By sustaining the robust growth performance witnessed during the last five years, which in turn helped accelerate income per capita growth, social development and environmental protection and management capacity, the country is set to realize its vision of becoming a lower middle income country by 2025.

Over all, during the GTP I period, Ethiopia has registered rapid, broad-based and inclusive economic growth that has led to substantial decline in income poverty. This rapid, inclusive and broad based economic growth has raised income of the citizens witnessed by a significant decline in income poverty over the same period.

The rapid, inclusive and broad-based economic growth registered over the last 12 years has generated employment, increased income of households and reduced poverty. The resultant decline in poverty over the period was witnessed in both food and non-food consumption poverty. According to the analysis based on the 2004/05 household income consumption expenditure survey (HICES), a one percent economic growth contributed to 1.7 percent reduction in poverty. This figure increased to 1.94 percent based on the 2010/11 household consumption expenditure survey (HICES). These are indications that economic growth has been strongly associated with a marked decline in poverty headcount.

Given the bulk of the rural population derives its livelihood from agriculture and poverty is by and large a rural phenomenon, agricultural growth has been a major driver of poverty reduction in Ethiopia. The proportion of the population living below the national poverty line fell from

38.7% in 2003/4 to 29.6% in 2010/11. This study clearly indicated that the proportion of the population living in poverty has fallen in both rural and urban areas .By the end of 2014/15; the proportion of the population living below national poverty line was estimated to decline from

29.6 to 23.4 percent. This progress shows that the country is on track to achieve the target of reducing income poverty by half by the end of 2014/15.

Besides economic growth, the implementation of the productive safety net program in rural areas and the investments in to essential social services throughout the country had contributed directly and indirectly to poverty reduction. Different studies have indicated that income inequality measured by the Gini Coefficient remained low over the decade of rapid growth. The national

Gini Coefficient remained close to 30% from 2004/05 to 2010/11.

The above mentioned welfare and poverty indicators are based on the analysis of the 2010/11

House Hold Consumption and Expenditure Survey data sets. This survey has been conducted by the Central Statistical Agency every five years since 1995/96. The latest survey was the one conducted in 2010/11 whose findings served as a base line on poverty for GTPI. The upcoming

2015/16 poverty analysis will help update the situation of poverty in Ethiopia after 2010/11. The development policies and strategies that resulted in the rapid reduction in poverty have continued to be executed even with greater effectiveness after 2010 too. The land policy, the agriculture and rural development strategy, the industrial development strategy, social development programs, the productive safety net and infrastructure development programs that are pro-growth and pro-poor strategies have continued to be implemented during GTP I period. Thus, the poverty reduction is expected to have even been accelerated during the period of GTP I. The

Gini Coefficient is also expected to have remained stable. This will be confirmed when the outcome of the analysis based on the 2015/16 HICES is issued soon.

As noted above, during the last 5 years (2010/11-2014/15), real GDP growth rate averaged 10.1 percent. This overall real GDP growth rate is accounted by agriculture, services and industry sectors with respective annual average value added growth rate of 6.6 percent, 10.8 percent and

20.2 percent, respectively. The value added of the manufacturing sub-sector (within industry sector) registered an annual average growth rate of 14.6 percent during the same period. During the five years of GTPI period, the share of agriculture, service and industry in GDP averaged

41.5 percent, 45.6 percent and 12.9 percent, respectively in 2009/2010 and 38.5 percent, 46.3 percent and 15.1 percent by 2014/15, respectively. Within the industry sector, the share of the manufacturing sector in total GDP by 2014/15 remained below 5 percent. This showed that the manufacturing base has remained very narrow during GTPI implementation period. The share of construction industry subsector in GDP increased from 4 percent in 2009/10 to 8.5 percent by

2014/15. This showed that during the last five years (2010/11-2014/15), the construction sector has been the major driver both in terms of growth and structural change within the industry sector.

Despite the rapid economic growth witnessed during GTPI period, there has been limitation in terms of structural change. The GTPI envisaged the agricultural sector as the major source of growth and thereby to lay the foundation for rapid industrialization and economic structural transformation by developing the industry sector more rapidly than the agricultural sector.

Figure 1.2 : Percentage share of GDP by major economic sector (%)

Overall, although the registered economic transformation from agriculture to industry fell short of the planned target, there has been structural transformation from agricultural sector to the service sector and within the industry and agriculture sectors themselves. During the plan period, priority has been given to the manufacturing industry. However, the manufacturing industry fell short of the GTPI target both in terms of growth performance and structural change. The share of manufacturing industry value added in GDP has remained low compared to the average for Sub

Saharan Africa (SSA) countries. The low level of private investment in manufacturing, low level of promotion of entrepreneurship particularly among the young, low level of job creation in rural areas in non-farm activities and low level of small and micro enterprises development in manufacturing are the factors behind the slow pace of structural transformation from agriculture to manufacturing.

Economic structural transformation is central for sustainable growth and development. Without industrialization and structural transformation, the journey towards the middle income economy will not be feasible. The development of the manufacturing industry is essential to build national technological capacity, industrial capability, and create broad based job opportunity and improve income. In addition to this, the development of the manufacturing industry helps to improve the total factor productivity and competitiveness of the overall economy. Experience from developed countries showed that manufacturing industry development is the basis for sustainable growth of agriculture and service sectors. Thus the realization of the transformation agenda calls for concerted and coordinated efforts among key actors and long-term leadership commitment.

In sum, despite the massive progress made so far, it is recognized that close to one fourth of the population still lives under the poverty line. Urban unemployment still remains very high and has increasingly become a problem of rural areas too. This indicates that unemployment and poverty remain the major developmental challenges of Ethiopia. Thus, the government has remained committed to sustaining inclusive and pro-poor development strategy during the coming years to further scale up the poverty reduction and employment generation efforts. Utmost emphasis will be given to engage those sections of the society that have not yet benefited from the development effort with focus on women and youth to render the development effort more inclusive.

41.5 44.7 43.1 42.0 40.1 38.5

12.5 10.5 11.5 13.0 13.8 15.1

45.6 45.5 45.9 45.5 46.6 46.3

Base year(2009/10)

2010/11 2011/12 2012/13 2013/14 2014/15

P er ce n t sh a re i n

G D

P

Fiscal year

Agriculture and allied activities Industry Service

1.2. Price Development

The GTPI set a target to keep general inflation within single digit. However, inflation emerged as a major macroeconomic challenge during the first two years of the GTPI period. The 12 months moving average general inflation rate increased to 18 percent in June 2011 and further to 33.7 percent in June 2012. The price increase was so high particularly in 2012 and it was very likely to have adversely affected the wellbeing of people and efforts to promote private investment. In addition to prudent macroeconomic policy measures (fiscal and monetary), a new trading reform and price stabilization interventions such as distribution of basic commodities like sugar, edible oil and wheat to low income households have been carried out. Thus, prices had stabilized and general inflation rate dropped to a single digit in 2013/14 and 2014/15. As a result, the 12 months moving average general inflation rate declined to 8.1 percent and further to 7.7 percent in

2013/14 and 2014/15, respectively. However, the government recognizes that the lasting solution to a recurring inflation is to accelerate inclusive growth that creates decent employment opportunities. To this end, improving the productivity of smallholder agriculture sector and expanding investments in manufacturing industries coupled with the creation of decent employment opportunities becomes crucial.

1.3. Fiscal Policy and Public Finance

During the past five years, fiscal policy has been aimed at scaling up tax revenue performance through administration of effective tax policies, and prioritizing allocation of government expenditures to poverty oriented sectors and capital investment. The objective of fiscal policy is primarily aimed at ensuring macroeconomic stability for sustainable economic growth through financing expenditures mainly from tax revenues and maintaining budget deficit below 3% of

GDP. The role of fiscal policy goes beyond achieving macro-economic objectives. It also plays a role in shaping the political economy of the country in such a way that it is conducive for inclusive development and productive investments. One of the sources of rent seeking is the tax system. Therefore, combating rent-seeking through strengthening the tax administration system such that the political economy becomes more conducive for inclusive development and structural economic transformation is critical. Moreover, enhancing domestic resources through increased tax revenues means that Ethiopia can have greater policy space, autonomy and ownership in implementing its development strategy and its priority programs.

As a result, during the past five years, encouraging results have been registered through improving tax administration system, increasing domestic resource mobilization through tax revenue generation and financing development from domestic revenue sources. Accordingly, total domestic revenue increased more than threefold during the GTP I period from Birr 53.9

Billion in 2009/10 to Birr 186.6 Billion by the end of 2014/15. In 2014/15, tax revenue accounted for Birr 165 Billion (88.4%) of the total domestic revenue collected, while the remaining was collected from non-tax revenue sources. During the GTP I period, tax revenue has increased from Birr 43 Billion in 2009/10 to Birr 165 Billion by the end of 2014/15, indicating an average growth rate of 31 percent per annum. The increased tax performance has enabled the country to decisively finance its development strategies including mega projects from domestic revenue sources. Although tax revenue has increased rapidly over the last five years, the increase was not commensurate with the growth of nominal GDP. The target was to collect tax revenues that amount to 15% of GDP by 2015, which itself was still lower than the average tax/GDP ratio for SSA countries. However the total tax revenues collected during 2015 amounted to only

13.3% of GDP. This clearly falls short of the GTP target and is much lower than the average of

SSA countries. Thus it is recognized that Ethiopia has to strengthen its tax administration system to ensure the collection of the potential revenue that the rapidly growing economy offers.

The tax administration reform undertaken to enhance tax revenue and the transparency and accountability of the taxation system comprised of four major strategies during the GTPI period.

The first strategy concerns strengthening the institutional capacity of the taxation and customs authorities at all level. At the centre of this capacity development of the taxation and customs offices is human resource capacity development both by building the technical tax administration skills, and strengthening the integrity, motivation and commitment of tax officers and managers.

Thus, in this regard significant investment has been undertaken in the development of the human resources of the tax authorities. The second component of the tax administration reform has been improving the tax information system and advanced utilization of the tax information for effective tax administration. Ethiopia has invested in modernizing its customs and domestic tax systems over the past five years with resultant improvements in its tax information.

The GTPI period has also seen a significant improvement in utilizing the resultant tax information systems in the administration of customs duties and domestic taxes. However, the reform still leaves much to be desired both in terms of modernizing further its tax information systems and also in utilizing the available tax information systems to administer customs and taxation. The third strategy is public mobilization for more transparent and effective tax administration in the country. Extensive public tax education and mobilization, as well as education and mobilization of taxpayers has been undertaken over the GTP I period with resultant improvements in awareness and compliances. Yet, tax education and mobilization of the public need to be strengthened further in order to enhance transparency, fairness and effectiveness of tax administration in the country.

Finally, law enforcement is also an important element of the tax administration reform pursued.

The government has taken visible measures during the GTP I period to enforce the laws across all tax payers and thereby ensure compliance, fairness and rule of law. For instance, in 2013, higher officials and their collaborators were prosecuted on suspicion of corruption and rent seeking in tax administration. A number of such prosecution and enforcement of the tax laws have been undertaken both at federal and regional levels. Such enforcement measures taken to combat corruption and rent seeking in tax administration, tax evading and avoidance, illegal and contraband trading as well as over and under invoicing practices are clear testimony to the

Government’s full commitment to address the root cause of corruption and rent-seeking, and thereby improve the governance system of the country’s tax administration system.

The expenditure side of the fiscal policy focused on allocating the majority of the revenue mobilized to poverty reducing priority sectors and on following tight fiscal policy to maintain budget deficit below 3% of GDP. The budget allocation system aimed at fully financing recurrent expenditure from domestic revenues and increasingly covering the capital spending from domestic sources. Accordingly, of the total annual government expenditure, on average

60% was allocated for capital investment, while the remaining was allocated to recurrent expenditure during the GTP I period. This showed that the actual government budget allocation was well aligned with the fiscal policy pronouncement, leading to increased capital accumulation. It is also worth noting that 70% of government expenditure was disbursed on pro-growth and pro-poor sectors as roads, education, health, agriculture and food security, and water and sanitation. In a nut shell, the structure of Ethiopia’s budget allocation during the GTP I period indicated the strong commitment of the government to long-term development and poverty eradication. This pattern of public spending with strong focus on capital investment, pro-growth and pro-poor sectors should be maintained until the level of infrastructure and human capability of the country reaches a critical minimum.

Figure 1.3 Domestic revenue, expenditure and deficit as a Ratio to GDP@CMP (%)

The fiscal policy that has been implemented during GTP I helped to maintain inflation within single digits. Accordingly, budget deficit was kept below 3% of GDP by implementing tight fiscal policy. Budget deficit was largely financed from external loan and grants as well as through domestic bank borrowing that has had modest impact on inflation.

From Government expenditure management side, more attention has been given by policy makers to proper administration of allotted budget. However it is recognized that with the continuously growing size of the government budget, enhancing the efficiency and effectiveness as well as transparency and accountability of the public finance has far reaching implications on

-20.0

0.0

20.0

Base year

(2009/10)

2010/11 2011/12 2012/13 2013/14 2014/15 p er ce n t sh ar e in G

Total domestic revenue Tax revenue Total expenditure

Recurrent expenditure Capital expenditure Total poverty orriented expenditure

Deficit including Grants Deficit financing development and governance outcomes. Therefore, ensuring efficient and effective public finance utilization and eradicating corruption and reducing wastage of resources, prioritizing budget allocation towards development and proper management of public financial resources remain of highest priority and hence call for high level attention from policy makers. To this end, strengthening of public finance management, procurement and property administration and monitoring systems needs to be given utmost priority.

1.4. Saving and Investment

Implementation of the growth and transformational plan required huge investment. One major implementation challenge was therefore related to mobilizing adequate resources to finance the plan. , The strategy devised focused on increasing domestic savings so as to provide the required finances to deliver GTP I. To realize the objective of boosting domestic saving, a host of reform measures were undertaken during the GTP I period. The measures include: awareness creation and community mobilization activities, expanding financial institutions (banks) and services, raising the minimum deposit rate, strengthening existing and introducing new saving mobilization instruments such as saving for housing program, Renaissance Dam Bond, introducing private social security schemes, strengthening government employees social security scheme, etc. . Of course these measures have to be accompanied by rapid economic growth and structural economic transformation so as to ensure sustained saving growth. Hence GTP I’s focus on rapid economic growth and structural change coupled with job creation was indeed a critical element of the strategy to enhance domestic savings for the delivery of GTP goals. Besides these measures, allocating government expenditure on capital investment that augments capital accumulation has also helped in increasing domestic saving. Accordingly, the share of gross domestic saving in GDP increased from 9.5 percent in 2009/10 to 21.8 percent in 2014/15.

At the same time, the share of gross domestic investment in GDP increased from 22.3 percent in

2009/10 to 39.3 percent by 2014/15. This domestic investment ratio is believed to have made significant contribution to the rapid economic growth registered during the planning period. This very high investment rate is the result of both private and public investment spending. The role of private investment has been encouraging including that of the FDI. Over the last five years of

GTP I period, a total of USD 7.2 billion net foreign direct investment inflow was registered.

Thus, sustaining such encouraging performance is going to be very important in the next five years and beyond in delivering GTP II goals.

Figure 1.4 Gross Domestic Saving and Investment as a Ratio to GDP @ CMP

Notwithstanding these positive developments with regard to saving and investment, the challenge remains in that a significant proportion of the investment is still financed through foreign savings. As the widening saving-investment gap continues to be financed through external sources, it could become unsustainable. It could not only compromise policy sovereignty but also could lead to accumulation of unsustainable debt. Thus, sustaining the gains made so far in enhancing domestic resource mobilization is critical. To boost household and business savings, consolidating the measures undertaken so far is essential. In line with this, stabilizing inflation, public education and mobilization around domestic savings, expanding and strengthening of saving instruments and services and accelerating economic growth and expansion of job opportunity are all essential. To enhance government saving, efficient allocation and effective utilization of public resource, reducing wastage and making transparent expenditure deserve utmost attention. Enhancing the institutional capacity in public investment management, project planning and management, monitoring and evaluation of public projects are found to be crucial for ensuring utmost efficiency and effectiveness in the delivery of mega infrastructure projects. Thus, such efforts will be further consolidated during the GTPII period.

1.5. External Resource Mobilization and Management

During the last five years, the government has strived to increase external resource mobilization and disbursement, through improved project monitoring system and establishing data intensive problem solving mechanisms. In view of this, external resource mobilization for implementing development projects has been undertaken and encouraging results have been registered in strengthening bilateral and multilateral cooperation for development. Over the last five years, respectable amount of finance was mobilized from bilateral and multilateral development partners.

Total External Resource Inflow: this is the sum of aid and loan disbursed out of total aid and loan commitment from different bilateral and multilateral development partners in a given fiscal year. During the past five years, a total of 19.7 billion USD was disbursed. This translates to a disbursement of about USD 3.9 billion on average annually over the plan period.

External Loan Management: out of the total external resource inflows registered during the

GTP I period, USD 16 billion was secured for different development programs in the form of external loans. Of this, USD 7.1 billion was central government loan, USD 4.6 billion public

22.3

31.4 30.6 29.8

40.3 39.3

9.5

17.2 19.2 19.2 22.5 21.8

Base year(2009/10)

2010/11 2011/12 2012/13 2013/14 2014/15

P er ce n t sh ar e in G

Gross Domestic Capital Formation Gross Domestic Savings enterprises’ external loan with government guarantee and USD 4.3 billion without government guarantee. This indicates that on average USD 3.2 billion loans was disbursed annually. The data also shows that aid per capita stood at about USD 37.1 per annum on average. This amount is lower than the per capita aid received by other African countries that are at similar level of development. Thus, most of development expenditure was financed through domestic revenue sources. In the coming five years, increasing domestic revenue and improving foreign development finance inflow in a timely and predictable manner is of paramount importance to improve aid effectiveness.

Foreign Debt Repayment: During the past five years, a total of USD 2.9 billion debt repayment was effected in interest and principal payments for loans taken by the central government, and public enterprises with and without government guarantee from different sources

During the plan period, foreign loan contracted by the government has increased. However, since the economy has also been expanding significantly, the country’s capacity of debt repayment and the debt situation has remained sustainable and healthy. According to the debt sustainability analysis regularly undertaken, Ethiopia has been among the countries with low level of debt stress. The latest annual debt sustainability analysis conducted by IMF and World Bank also indicates that the country’s debt is sustainable. The government remains committed to sustain this sustainable and healthy external debt with tight monitoring of developments in the area.

Besides, the government remains committed to allocate the borrowed money for the development of infrastructural and energy projects that enhance the productive capacity of the economy, promote export and industrial development. Similarly, to ensure effective utilization of the external resources, improving project planning and management capacity to execute projects on time and with the given budget and quality will be given utmost emphasis.

1.6. Monetary policy

During the GTP I period, Ethiopia’s monetary policy continued to focus on maintaining price and exchange rate stability thereby creating conducive macroeconomic environment that promotes rapid and sustainable economic growth. Despite inflationary challenges during the first two years of the GTP I period, the government succeeded in stabilizing inflation throughout the last three years of the GTP I period.

The monetary policy assumed a stable but slowly declining velocity. Broad money has been therefore assumed to grow on par with the growth rate of nominal GDP. Minimum deposit rate was set to be slightly higher or equal to the average annual rate of inflation. The policy has also given emphasis to maintaining an adequate level of foreign reserves.