AFRICAN DEVELOPMENT FUND

PROGRAMME: BASIC SERVICES TRANSFORMATION PROGRAMME

(BSTP) SUPPLEMENTARY FINANCING COUNTRY: ETHIOPIA

APPRAISAL REPORT

RDGE/COET/AHHD

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TABLE OF CONTENTS

Acronyms and Abbreviations……………………………………………………………………. ii Programme Information ................................................................................................................. iii Programme Executive Summary .................................................................................................... iv Results-Based Logical Framework ................................................................................................. v I – INTRODUCTION: THE PROPOSAL ...................................................................................... 1 1.1 Objective of the Proposal .................................................................................................... 1 II – RECENT DEVELOPMENTS ................................................................................................. 2 2.1 Political Context .................................................................................................................. 2 2.2 Economic Context ............................................................................................................... 3 2.3 Social Context...................................................................................................................... 5 III – PROGRESS IN THE IMPLEMENTATION OF BSTP ......................................................... 6 Component 1: Enhanced Quality and Equity to Basic Services ..................................................... 7 Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement .................... 8 IV – JUSTIFICATION FOR THE SUPPLEMENTARY FINANCING TO BSTP ...................... 9 4.1 Supplementary Financing – Eligibility Criteria …………………………………………. .9 4.2 Rationale for Supplementary Financing ............................................................................ 10 4.3 The BSTP Supplementary-Financing Programme ............................................................ 14 4.4 Beneficiaries of the Supplementary Financing .................................................................. 14 4.5 Gender Equality and Women Empowerment .................................................................... 15 4.6 Coordination with other Development Partners ................................................................ 15 4.7 Relationship with Other Bank Operations ......................................................................... 15 4.8 Environmental and Social Safeguards ............................................................................... 16 V – IMPLEMENTATION, MONITORING AND EVALUATION .......................................... 16 5.1 Implementation Arrangement ............................................................................................ 16 5.2 Financial Management ...................................................................................................... 16

5.3 Disbursement ..................................................................................................................... 16 5.4 Audit .................................................................................................................................. 17 5.5 Procurement ....................................................................................................................... 17 5.6 Monitoring and evaluation system .................................................................................... 17 VI – LEGAL INSTRUMENT ....................................................................................................... 17 6.1 Legal Instrument ............................................................................................................... 17 6.2 Conditions Associated with Bank’s Intervention ............................................................. 18 6.3 Compliance with Bank Group Policies……………………………………………… ..18 VII – RISKS MANAGEMENT .................................................................................................... 18 VIII – RECOMMENDATION ...................................................................................................... 19

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Appendices Appendix 1: Government of Ethiopia Request ................................................................................ I Appendix 2: PRESS RELEASE: IMF Staff Completes 2018 Article IV Mission to the Federal Republic of Ethiopia ........................................................................................................................ II Appendix 3: AfDB-Ethiopia On-going Project Portfolio.............................................................. III Appendix 5: Ethiopia: Selected Macro-Economic Indicators ..................................................... VIII Appendix 6: Ethiopia Comparative Socio-Economic Indicators .................................................. IX Appendix 7: BSTP SF Operation Policy Matrix ............................................................................. X Appendix 8: Map of the Federal Democratic Republic of Ethiopia ........................................... XIII Tables Table 1: Key Macroeconomic Indicators Table 2: Evolution of Key Service Delivery Indicators Table 3: Summary on Key Action Areas in Policy Matrix Table 4: Progress on outputs - Enhanced quality and equity to basic services Table 5: Progress on outputs - Accountability, Transparency and Citizen’s Engagement Table 6: Supplementary Financing – Eligibility Criteria Table 7: Social Indicators in Underserved and Pastoralists Areas Table 8: Key Federal Budget Trends Table 9: Ethiopia Summary of Government Finance Table 10: PBS DPs' Contribution to Block Grants (in million USD) Table 11: List Disbursement Conditions for First and Second Tranche Table 12: Risk Management

CURRENCY EQUIVALENTS (As of August 2018)

1 UA = ETB 38.45 1 UA = US$ 1.40 1 US$ = ETB 27.37

FISCAL YEAR

July 8 – July 7

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Acronyms and Abbreviations ADB African Development Bank ADF African Development Fund ANC Antenatal Care BLT Budget Literacy Training BSDG Basic Services Donor Group BSTP Basic Services Transformation

Programme CBHI Community Based Health

Insurance CFRA Country Fiduciary Risk

Assessment COET Ethiopia Country Office of

African Development Bank COPCD Channel One Programmes

Coordinating Directorate CPI Corruption Perception Index CPIA Country Policy and Institutional

Assessment CSP Country Strategy Paper CSOs Civil Society Organizations DAG Development Assistance Group DFID Department for International

Development DHS Demographic Health Survey DPs Development Partners EPRDF Ethiopian People's Revolutionary

Democratic Front EMCP Expenditure Management and

Control Programme EMIS Education Management Information System EIO Ethiopia Institute of Ombudsman ESDP Education Sector Development

Programme ESAP Ethiopia Social Accountability

Programme ETB Ethiopian Birr (currency) FEACC Federal Ethics & Anti-corruption

Commission EU European Union FDI Foreign Direct Investment FRA Fiduciary Risk Assessment FTA Financial Transparency and

Accountability FY Financial Year GDP Gross Domestic Product GoE Government of Ethiopia GRM Grievance Redress Mechanism GTP Growth and Transformation Plan HDA Health Development Army HDI Human Development Index

HEWs Health Extension Workers HMIS health Management Information

system HSTP Health Sector Transformation

Plan IBEX Integrated Budget and

Information Expenditure System IFMIS Integrated Financial Management

System IGFT Inter Government Fiscal Transfers IIAG Ibrahim of African Governance JRIS Joint Review and Implementation

Support MEFF Macroeconomic and Fiscal

Framework MoH Ministry of Health MWIE Ministry of Water, Irrigation and

Energy NBE National Bank of Ethiopia OFAG Office of Federal Auditor General OPD Out Patient Department PBL Policy Based Loan PBO Policy Based Operation PEFA Public Expenditure and Financial

Accountability PFM Public Financial Management PHCU Primary Health Care Unit SA Social Accountability SARA Service Availability and

Readiness Assessment SDGs Sustainable Development Goals SBS Sector Budget Support SNNP Southern Nations Nationalities

and People UA Unit of Account USD United States Dollar WASH Water and Sanitation WASHCO Water. Sanitation, Hygiene Committees

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PROGRAMME INFORMATION INSTRUMENT Sector Budget Support PBO DESIGN TYPE Programmatic tranching

LOAN INFORMATION

Client’s information BORROWER: Federal Democratic Republic of Ethiopia EXECUTING AGENCY: Ministry of Finance and Economy Financing plan

Source Amount (UA million)

Instrument

African Development Fund (ADF)

88.66

Grant

ADF key financing information Grant

UA 88.66 million

Service Charge N/A Commitment fee N/A Duration N/A Grace period N/A

Timeframe - Main Stepping Stones (expected) Programme approval November 2018 Effectiveness December 2018 Last Disbursement 31 July 2020 Completion 31 July 2020

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PROGRAMME EXECUTIVE SUMMARY

Programme overview

The Basic Services Transformation Programme Supplementary Financing (BSTP-SF) seeks to address quality and geographic inequalities in access to basic services in health, education, and water and sanitation and is thus a continuation of BSTP. Specifically, supplementary financing will allow the government to expand basic services mainly in the pastoral and underserved regions with emphasis on improving quality and equity for inclusive transformation. In addition, the programme will also strengthen accountability and citizens’ engagement in basic service delivery. The BSTP-SF is a 2-year sector budget support supporting Fiscal Year 2018/19 and 2019/20. The programme cost is UA88.66 million to be disbursed in two tranches of UA60 million in FY2018/19 and UA28.66 million in FY2019/20. The supplemental financing to BSTP which is a grant will be closely coordinated with interventions of other DPs in basic services such as World Bank, European Union, Austria and Italy.

Programme outcomes

The programme outcomes are consistent with those for the original BSTP and comprise: (i) expanded and enhanced quality of basic services at the Woreda level; (ii) strengthened accountability and transparency in service delivery; and (iii) enhanced citizen’s engagement in service delivery. While the supplementary financing will support the same result areas as the original BSTP, emphasis will be placed on expanding access to and improving quality in basic service delivery for the pastoral and underserved regions. In addition, the programme will enhance current efforts by the government to promote citizens’ engagement and promote accountability and transparency by service providers in basic services delivery.

Alignment with Bank priorities

The supplementary financing to the BSTP is in line with Pillar 2 of the Bank’s CSP for Ethiopia ‘CSP Pillar 2 – Promoting Economic Governance’ –with emphasis on improving accountability and transparency in the delivery of decentralized basic services as well as improving the enabling environment for private sector development. The programme is also aligned with the Bank’s High-5s, particularly ‘Improve the quality of life of the people of Africa’. The proposed support is also consistent with the government’s Growth and Transformation Plan II (GTP II) 2015/16 – 2019/20), especially the strategic pillar on ‘Accelerate human development and technological capacity building and ensure its sustainability’.

Needs Assessment and Justification

Support to basic service delivery by the Bank and other development partners has contributed to Ethiopia achieve strong progress in human capital development. Key achievements include; increased net enrolment rate from 77.5% (2006) to 99% (2016); reduced maternal mortality (though remains high), child mortality reduced to from 72 per 1000 (2006) to 20 per 1000 (2016) improved rural water supply from 46% (2006) to 74% (2017). The government has also sustained its commitment to ensure citizens’ voice in basic services in order to enhance quality, equity and accountability of basic services delivery. However, while national averages in basic service show improvement, they mask important disparities among communities based on geographic location, regional economic endowments and gender. Shortfalls in service delivery targets are still significant and the quality of these services is generally low especially, underserved and pastoralists areas such as Afar, Ethiopia-Somali, Gambela and Benishangul Gumuz. Primary school completion rates remain low; school dropout and repetition rates are high and maternal mortality rates exceed national averages. In addition, citizens’ engagement especially Social Accountability (SA) and Grievance Redress Mechanism (GRM) initiatives are still at the earlier stage of implementation, coverage is low and more needs to be done to ensure consolidation and expansion of these initiatives if they are to bring meaningful citizen’s engagementt. Accelerating basic service delivery to the underserved regions and pastoralist communities is currently constrained by limited public resources due to the ongoing fiscal consolidation measures, aimed at stabilizing the public debt, and the weak tax revenue mobilization.

Harmonisation The programme will continue to be closely coordinated with interventions of other DPs under the Basic Services Donor Group (BSDG). The programme implementation will be consistent with the Basic services delivery common framework. The common framework promotes harmonized planning, review and dialogue with the Government on the delivery of decentralized basic services and crosscutting issues, including citizens’ engagement and PFM. The Basic Services Donor Group (BSDG) secretariat will continue to coordinate and harmonize DPs different initiatives in collaboration with Channel One Programmes Coordinating Directorate (COPCD) under Ministry of Finance and Economy. The Joint Review and Implementation Support (JRIS) coordination framework will continue to serve as a platform for monitoring performance and strategic dialogue of pertinent sector reforms with development partners, federal and regional stakeholders and beneficiaries.

Bank’s Added Value

The Bank is among the leading DPs in supporting decentralized basic service delivery. Since 2006, the Bank has been supporting the government in delivery of basic services at decentralized level. The Bank’s focus under original BSTP has been promoting reforms that will enhance quality and promote equity in health, education and water and sanitation. The Bank’s support will thus continue to focus on reforms (policies, strategies and programmes) that have demonstrated to be critical in delivery of basic services on the ground, which other DPs are focusing on.

Contributions to Gender Equality and women’s empowerment.

Gender inequality is high and women’s access to services remain constrained. The programme will benefit women through reforms promoted in health, education and water and sanitation to enhance equity and quality of access. Women will also benefit from accountability and citizens’ engagement initiatives such as social accountability, financial transparency accountability (budget literacy) and participation in Water, Sanitation, Hygiene Committees (WaSHCOs). WaSHCOs are expected to increase women’s participation in rural water supply management. Gender disaggregated reporting across all indicators will be enforced and gender equity tracked for all the program result areas.

Policy dialogue and linked technical assistance

COET will continue to lead the Bank’s participation in policy dialogue. To maximize synergies and align with the basic services delivery common framework, the programme will benefit from technical assistance provided under the World Bank’s support to Enhancing Shared Prosperity through Equitable Services (ESPES) programme and EU sector budget support in strengthening monitoring and evaluation and procurement systems

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Results-Based Logical Framework

Country and project name: Ethiopia: Basic Services Transformation Programme – Supplementary Financing Purpose of the Programme: To expand and deepen the quality and equity in the provision of basic services (health, education, and rural water and sanitation).

RESULTS CHAIN PERFORMANCE INDICATORS MEANS OF

VERIFICATION

RISKS/ MITIGATION MEASURES Indicator Baseline

(2017/18) Target

(2019/20)1

IMPA

CT Reduced poverty

and improved standard of living of Ethiopians

Population below poverty line (%) 23.5% (2015/16)

16.7% CSA/ GTP II

.OU

TC

OM

ES

Expanded and enhanced quality of basic services at the local (Woreda) level

% Deliveries by skilled attendants Afar Ethiopia-Somali Benishangul Gumuz Gambela

71% -37% -32% -53% -31%

90%2 GTP II, HMIS

Risk 1: The risk of exogenous shocks remains high and threaten government commitment to expenditures to basic services Mitigation: Government’s ongoing reforms to diversity exports, such as industrial park development and establishment of business enabling transport and energy infrastructure are expected to accelerate the structural transformation process and mitigate the external shocks. Risk 2: Government’s commitment to delivery of quality basic services reduced due to competition for public funds arising from mega federal infrastructure projects. Mitigation: The fiscal consolidation strategy, notably the phased implementation of import-intensive public infrastructure spending, and the ongoing tax transformation program; and

Proportion of qualified primary school teachers (M/F) Afar Ethiopia-Somali

73%(68% -F) - 37% - 2%

84% (79%-F) EMIS

Rural Primary completion rate (grade 8) (M/F) Afar Ethiopia-Somali Benishangul Gumuz

54% (52%) 19% (16%- F) 27% (23%F) 57% (48%)

74% (74%-F)

GTP II, EMIS

Rural water supply coverage within 1 km radius Afar Ethiopia-Somali Benishangul Gumuz Gambela

74% - 54% - 77% - 66% - 75%

85% GTP II

Strengthened accountability and transparency in service delivery

PEFA: PI-10: Public access to key fiscal information – National average

C (PEFA 2014) B PEFA

PEFA PI-26: Scope, nature and follow-up of external audit – National average

B+ (PEFA 2014)

A PEFA

PEFA D2: Financial information provided by donors for budgeting and reporting

-D (PEFA 2014) C PEFA

Enhanced citizens’ engagement in service delivery

Citizens who report that Woreda officials have actively sought views of people in their Kebele3 on improving quality of basic services.

55% 60% (60% F)

Ethiopian SA/FTA impact assessment report

OU

TPU

TS

Component 1: Enhanced Quality and Equity to Basic Services Increased budget predictability to Woredas for basic services through block grants

Total amount of block grants allocated to regions and Woredas per year

(ETB115.10 billion)

(ETB157.59 billion)4

Ministry of Finance and Economy

Action Plan on implementation of recommendations of the Domestic Resource Mobilisation (DRM) study developed and approved

Not available Available and approved

Ministry of Finance and Economy

Improved quality of basic services

Proportion of health extension workers qualified to level 4

21% (7,644) (100%-F)

37,000 (100%-F) HMIS

1Targets are derived from GTP II end targets. 2 All national level targets apply to regions, as there are no region specific targets for these indicators. 3 Kebele is the smallest administrative unit of Ethiopia similar to a ward or delimited group of people. It is part of a Woreda, or district. 4 This is approximately 41% of the total federal budget proposed FY2019/20

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in health, education and water and sanitation at Woreda level

standard5 increased. Afar Ethiopia-Somali Benishangul Gumuz Gambela

- 18% - 26% - 0% - 22%

government has committed to sustain the minimum threshold in block grant transfers to Woredas. Risk 3: Weaknesses in democratic governance and fragile democratic consolidation process could weaken implementation of the reform agenda. Mitigation Participation and contribution of various stakeholders, including DPs, is necessary for the successful implementation of these reforms, government will be keen to sustain its reform agenda to guarantee support from its partners. In addition, DPs under the BSDG will maintain dialogue with government to ensure that the basic service delivery and human development reforms are implemented

Number of Health Development Army leaders tested for level 1 Health Extension Programme (HEP) competency6

3,234 600,000 HMIS

PPP Strategy in Health aligned to PPP law and operationalized.

PPP Strategy in Health finalized

Strategy aligned to PPP law and 1 project implemented

MoH

Roll-out teachers licensing based on new guidelines and teachers licensed (M/F)

2% 38% (M/F)

EMIS

Curriculum Development Institute established

Draft bill Draft bill approved EMIS

Proportion of health facilities in with water and sanitation services

14 56 HMIS

Percentage of Out Patient Department (OPD) staff trained on Primary Health Care Unit (PHCU) new guidelines (M/F)

PHCU guidelines developed

50% of OPD staff trained (M/F)

HMIS

Establishment of National Regulatory Board for Service Delivery in Water

Draft bill pending Council of Minister’s approval

Draft bill approved MWIE

Enhanced equity in delivery of basic services in health, education and water and sanitation at Woreda level

Alternative Basic Education 7Standards for Grade 1-6 revised (syllabus & text books) and approved

Standards not developed

Standards developed EMIS

Percentage of Woredas with established community-based health insurance scheme (CBHI) Afar Ethiopia-Somali Benishangul Gumuz Gambela

34% 0 0 2 0

80% HMIS

Optimization Strategy for Pastoralist Health Extension Programme implemented in 4 pastoral regions

0

4 regions (Afar, Ethiopia Somali, Oromiya and SNNP)

MOH

Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement Enhanced transparency and accountability through citizen engagement

Government framework on citizens’ engagement developed and approved

Not available Developed and approved

ESAP III reports

Social accountability programme/ initiative expanded to new Woredas

223 Woredas 300 Woredas ESAPIII/ Ministry of Finance and Economy

Guidelines for implementing Financial Transparency Accountability (FTA) –Social Accountability (SA) –Grievance Redress Mechanism (GRM) linkages developed and adopted

0 Guidelines developed

ESAPIII/ Ministry of Finance and Economy

Federal Budgetary organizations implementing FTA directive” increased.

27 50 Ministry of Finance and Economy

Roll out of guidelines on citizen’s score card in health sector

122 Woredas 600 Woredas MoH/ESAP III

Number of regions that adopt standardized procedure manuals for GRM

4 11 EIO

5 Equivalent to diploma and requires two years of practical experience and one year of additional training. 6 Based on Ethiopia’s Occupational Standards this is the entry level qualification

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Number of regions legalizing WaSHCOs

3 11 MWIE

Improved performance in public financial and procurement management

PEFA 2018 conducted Not available Report available Ministry of Finance and Economy

Assessment of Procurement Systems (MAPS-II) undertaken

Not available MAPS-II Report available

Ministry of Finance and Economy

Procurement KPIs rolled out to federal institutions involved in basic services

0 3 Ministry of Finance and Economy

KE

Y

AC

TIV

ITIE

S Components Component 1: Enhanced quality and equity to basic services Component 2: Strengthen Accountability, Transparency and Citizens’ Engagement

Inputs Inputs : - Funding in million UA ADF grant: 88.66 million

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I. INTRODUCTION: THE PROPOSAL 1.1 Objective of the Proposal 1.1.1 This proposal presents the context, technical justification and recommendation for supplemental financing of the Basic Services Transformation Programme (BSTP) to the Government of Ethiopia. (GoE). The overall goal of BSTP is to contribute to poverty reduction and improved standards of living of Ethiopians. The purpose of the programme is to expand and deepen the provision of basic services with a focus on enhancing quality and equity mainly in health, education and water and sanitation; and enhance citizen engagement in basic service delivery. The BSTP is aligned to the Government’s second Growth and Transformation Plan (GTP II) which is the GoE’s medium term framework for development from 2015/16-2019/2020. 1.1.2 Basic service delivery at decentralised level is supported by a Basic Services Donor Group (BSDG) that include the Bank, the World Bank, the European Union (EU), Italy and Austria. On 17 December 2015, the Board approved a sector budget support operation amounting to UA180 million to support the government budget framework of FY2015/16 to FY2017/18 to support decentralised basic service delivery through BSTP. The third and last tranche of this support was disbursed in July 2018 with nearly all national level milestones achieved albeit with gaps in pastoralists and underserved areas, which this supplementary financing seeks to address. The supplementary financing is an ADF grant amounting to UA 88.66 million and will be disbursed in two tranches of UA60 million and UA28.66 million in Fiscal Years 2018/19 and 2019/20 respectively upon satisfaction of the relevant conditions precedent to disbursement. 1.1.3 Through the Bank’s support under BSTP, its predecessor Promotion of Basic Services (PBS) and that of other development partners in Basic Services Development Group (BSDG), the Government of Ethiopia has made significant progress towards human capital development. Key achievements include; increased net enrolment rate from 77.5% (2006) to 99% (2016); reduced maternal mortality (though remains high), child mortality reduced to from 72 per 1000 (2006) to 20 per 1000 (2016) improved rural water supply coverage from 46% (2006) to 74% (2017). Basic services continue to be a key instrument for improving human development outcomes thereby contributing to the attainment of the High 5s and Sustainable Development Goals (SDGs) especially poverty reduction. Between 2012/13 and 2015/16, poverty declined from 26% to 23.5%. The government has also sustained its commitment to ensure citizens’ voice in basic services in order to enhance quality, equity and accountability of basic services delivery. Pro-poor sector spending as a share of the general Government spending has increased steadily from 43% (2000/2001) to 62% (2016/17). 1.1.4 Despite this national level progress, more needs to be done in ensuring quality and equity in health, education and water and sanitation services, mainly in pastoralist areas and underserved regions of Afar, Ethiopia-Somali, Benishangul Gumuz and Gambela. Primary school completion rates remain low; school dropout and repetition rates are high, and maternal mortality rates exceed national averages. In addition, the number of trained staff in education and health is low due to high staff turnover. To address these challenges, the government continues to implement and deepen critical reforms, including targeted special capacity strengthening and financial supports to these regions. However, accelerating basic service delivery to the underserved regions and pastoralist communities is currently constrained by limited public resources due to the ongoing fiscal consolidation measures, aimed at stabilizing the public debt, and the weak tax revenue mobilization. 1.1.5 Thus, BSTP supplementary financing will allow the government to expand basic service delivery in the underserved and pastoral regions, with emphasis on improving quality and

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equity for inclusive transformation. Furthermore, the proposed programme aims at enhancing current efforts by the government to promote citizens’ engagement and promoting accountability and transparency by service providers in basic services delivery through Financial Transparency and Accountability (FTA); Social Accountability (SA) and Grievance Redress Mechanism (GRM) initiatives. The Bank Group support through the supplementary financing to BSTP will enable the government to maintain a non-declining share of block grant subsidy to regions and Woredas from the federal budget to finance basic service delivery in health, education, water and sanitation. 1.1.6 The Bank’s support to decentralised delivery of basic services is harmonized with the other development partners (DPs) within the Basic Services Donor Group (BSDG) through the Common Framework developed jointly to guide strategic engagement in basic service delivery. The World Bank approved in September 2017 additional financing to the government to strengthen the delivery of decentralized basic services at Woreda level. Several other DPs under the BSDG are at various stages of preparing their supplementary financing. II. RECENT DEVELOPMENTS 2.1 Political Context 2.1.1 Ethiopia has experienced considerable political stability since 1991 when the ruling Ethiopian People’s Revolutionary Front came to power. However, during 2016 – 2018 the country experienced widespread protests leading to the implementation of bold political reforms. The protests, which primarily affected Oromia and Amhara regions in 2016-18, were caused by lack of employment opportunities and concerns about corruption and democracy. These unrests affected service delivery as some facilities were damaged and service delivery was disrupted. In addition, internal conflicts escalated between August 2017 and March 2018, leading to several causalities and displacement of over 1.5 million people. The civil unrest led to the resignation of former Prime Minister Haile Mariam Desalegn in February 2018 as part of the political reform process. 2.1.2 In April 2018, H.E. Dr. Abiy Ahmed was subsequently inaugurated as new Prime Minister by Parliament. Several reforms have since been implemented by the new Prime Minister, including: (i) improving relations with Ethiopia’s neighbours, including the signing of the Joint Declaration of Peace and Friendship with Eritrea in July 2018, (ii) releasing political prisoners from detention, (iii) reducing restrictions on media and (iv) lifting, in June 2018, the six-month nationwide State of Emergency that was imposed in February 2018.. The Federal Government is working closely with the regional states affected by internal conflicts to strengthen security and address disputes. A major anti-corruption campaign was implemented in 2017, leading to the arrest and prosecution of public officials and business people suspected of corruption. The Prime Minister also pledged to improve transparency in government and to promote reconciliation. These reforms will strengthen political governance, improve Ethiopia’s economic outlook and boost the country’s structural transformation ambitions. 2.1.3 The aforementioned reforms, if sustained, will significantly improve Ethiopia’s governance rankings, which remain below the African averages. For instance, the country’s ranking on the Ibrahim Index of African Governance (IIAG) decreased from 33 in 2015 to 36 in 2016 (out of 54 countries); with its IIAG score also decreasing from 48.7 (out of 100) to 47.7, which is below the African average score of 50.8. Its IIAG scores indicate that even though the country performs well on sustainable economic opportunities and human development, it is weak on participation and human rights, safety, and rule of law. The 2017 Worldwide Governance Indicators revealed that Ethiopia’s scores on all dimensions of political governance were in the 7 – 40 percentile range. The country’s ranking on Transparency International’s Corruption Perception Index decreased from rank 103/176 in 2015 to rank 108/176 and 107/180 in 2016 and 2017, respectively.

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2.2 Economic Context 2.2.1 Ethiopia has experienced impressive real GDP growth, averaging over 10% per year during the past decade, driven by public investment and productivity gains. Real GDP grew by 10.9% in 2016/17, up from the 8.0% growth registered in 2015/16 (Table 1). On the supply side, real GDP growth was driven by the industry and services sectors, which increased by 18.7% and 10.3% respectively, in 2016/17. The share of GDP for the industry and services sectors at 25.6% and 39.3%, respectively, in 2016/17 compared to 23.9% and 39.5%, respectively, the previous year, are consistent with Ethiopia’s structural transformation process. Construction, manufacturing and electricity were the key contributors to the expansion in the industrial sector in 2016/17. Public investments in industrial parks and complementary infrastructure will improve the investment climate, such as transport and energy, enhanced construction activities and bolstered industry sector growth. Investments in industrial parks, which is part of government’s strategy to diversify exports and increased manufacturing sector growth, its share of GDP remains low at 6.4%. In the services sector, trade, transport and communications, and public administration were the main growth drivers. The agriculture sector recovered from the impact of the 2015/16 drought and increased by 6.7% in 2016/17, from 2.3% the previous year. Rising commodity prices and productivity improvements, particularly the use of improved seeds, fertilizers and irrigation, contributed to the recovery in the agriculture sector. Agriculture’s share of GDP decreased slightly from 37.8% in 2015/16 to 36.3% in 2016/17, reflecting the gradual structural transformation of Ethiopia’s economy. 2.2.2 On the demand side, private consumption and investment remain key growth drivers, which is consistent with strong foreign direct investments (FDI) and steady growth in public infrastructure spending. FDI grew by 27% to USD 4.2 billion in 2016/17 (equivalent to 5.5% of GDP), relative to 2015/16, and infrastructure and manufacturing are the leading FDI sectors.

Source: AfDB Statistics Department 2.2.3 Economic policies during 2015/16 – 2016/17 aimed to consolidate macroeconomic stability and boost structural transformation. The 2017/18 fiscal policy stance was designed to preserve spending on pro-poor activities while ensuring debt stability. As a result, total public spending remained stable at 18.2% in 2016/17 and 2017/18, with spending on the pro-poor and growth enhancing sectors notably education, health, agriculture, natural resources, and roads decreasing from 62% to 59.7%. Capital expenditures as a share of total spending also decreased from 46.2% to 42.1%, in line with government’s phased implementation of capital projects. In spite of the adoption of revised income tax and tax administration laws in 2016/17, the tax/GDP ratio has remained low, at 11.6% and 11.2% in 2016/17 and 2017/18, respectively which calls for a holistic public revenue mobilization strategy. As a result, the 2017/18 budget deficit (including grants) increased to an estimated 3.9% from 3.3% of GDP the previous year. Fiscal policy in 2018/19 is expected to sustain focus on fiscal consolidation, characterized by stable pro-poor spending and improvements in public revenue mobilization. In particular, a tax transformation program has been launched to improve tax collection, expand the tax base, and enhance efficiency in the tax system. Monetary policy was contractionary in 2017/18 to reduce inflation, which increased particularly

Table 1: Selected Macroeconomic Indicators 2017 2018(e) 2019(p) 2020(p) Real GDP growth 10.9 7.8 8.0 8.2 Real GDP per capita growth 8.5 5.4 5.6 5.8 CPI inflation 7.2 13.0 8.8 8.0 Budget balance % GDP -3.3 -3.9 -3.7 -3.4 Current account % GDP -8.1 -8.8 -5.8 -5.7

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during the second half of 2017 because of rising food prices. Nonetheless, annual headline inflation at 13% in 2017/18 was above the 7% recorded the previous year and the 8% central bank’s target. 2.2.4 A slow structural transformation process, leading to dependence on agricultural commodity exports, is the main cause of Ethiopia’s high trade deficits and other external sector vulnerabilities. Merchandise export revenues recovered to grow by 1.4% in 2016/17 from the 5% decline in 2015/16 because of increased volumes and higher prices, particularly for coffee. Coffee, oil seeds, and pulses were the leading exports in 2016/17 and accounted for 52% of total merchandise exports, up from 50% the previous year. Merchandise imports decreased by 5.5% in 2016/17 due to a reduction in all major import categories, except fuel. In particular, the phased implementation of import-intensive public infrastructure slowed down the semi-finished and capital goods imports, while prioritization of foreign exchange allocation to export and manufacturing oriented sectors reduced consumer goods imports. . Consequently, the merchandise trade and current account deficits decreased from 19.1% and 9.2% of GDP, respectively, in 2015/16 to 16% and 8.1%, respectively in 2016/17. Remittances are a major source of foreign exchange, but were unchanged at USD 4.4 billion (6% of GDP) during 2015/16 and 2016/17. Strong FDI growth increased the capital account surplus by 5% to USD 6.8 billion in 2016/17 compared to the previous year, improving the overall balance of payments position to a surplus of 0.9% of GDP from a deficit of 1.2% in 2015/16. However, gross official reserves remained low at 2.6 and 2.5 months of imports in 2015/16 and 2016/17, respectively. 2.2.5 Poor export performance increased the risk of external debt distress. Stagnation in export revenues and increased debt service following maturity of non-concessional debt obligations increased Ethiopia’s risk of external debt distress from ‘moderate’ to ‘high’ in January 2018, with public and publicly guaranteed debt increasing to 56.9% of GDP (30.4% of which is external debt) in June 2017 from 56% in June 2016. The government is implementing a number of measures to improve debt stability, including development of industrial parks and enablers for export growth, development of Addis-Ababa – Djibouti railway, and energy infrastructure to boost manufacturing and electricity exports. In addition, the Ethiopian Birr was devalued by 15% in October 2017 to improve external competitiveness. Implementation of import intensive public investments has been phased and efforts are underway to diversify the public investment financing sources, particularly following the ratification of the Bank financed public-private partnership legislation in January 2018. In June 2018, government started the process to liberalize key economic sectors, such as telecommunication, transport, electricity, and logistics to crowd-in private sector investment and address the foreign exchange shortages. Successful implementation of these reforms is expected to improve export performance, ease the foreign currency shortages, ensure debt sustainability, and accelerate structural transformation. 2.2.6 The economic outlook is positive. However, reduced public spending, to stabilize the public debt, and the negative impact of weather fluctuations on the country’s rain-fed agriculture sector are key downside risks. Structural reforms to improve export competitiveness and diversification are underway, particularly the development of industrial parks across the country and investments in energy, transport, and logistics infrastructure, which should boost growth in the industry sector and increase manufacturing exports. Investments in improved seeds, fertilizers, and irrigation will sustained growth in the agriculture sector, and offset the impact of weather fluctuations and uncertainty in commodity prices. On the demand side, lower public spending in line with government plans to ensure debt sustainability will dampen real GDP growth. However, sustained growth in FDI, measures to promote manufacturing and exports; and the peace dividend following the normalization of relations with Eritrea, are expected to reduce the impact of the reduced public spending. As a result, real GDP growth during 2017/18 – 2018/19 is projected to increase to 8.0% and 8.2% in 2018/19 and 2019/20, respectively.

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2.3 Social Context 2.3.1 Ethiopia has made huge endeavour and commitment to improve human development outcomes and has made good progress though more needs to be done. Ethiopia ranked 174 out of 188 countries on the United Nations 2016 Human Development Index (HDI), an improvement of only two points since 2006. Weak human capital, inadequate infrastructure and low productivity characterize the country’s development context. This implies that the country needs to scale up public expenditure to accelerate reduction in poverty, income inequality, achieve the GTP II targets, and those of the SDGs. 2.3.2 The Government medium term framework for development 2015/16-2019/2020; GTP II has ambitious human development targets designed to enable the country attain lower middle-income status by 2025 and achieve the Sustainable Development Goals (SDGs). Building on MDG success in areas such as reduced child mortality and improved gender parity in education, the government commitment to basic services sector continues to be sustained. The GTP II emphasis is equity and quality of basic services, especially historically underserved areas. Government investment in basic service provision continues to be key for poverty reduction and improvement in human development outcomes. 2.3.3 In this context, the proportion of population below the poverty line in Ethiopia declined from 26% in 2012/13 to 23.5% in 2015/16. Life expectancy also improved to 64.6 years (2016) from 45 years (1990). Notable achievements have been made in expanding access to social services such as education, health; and water and sanitation under GTP II thus contributing to positive social indicators (Table 2). Nevertheless, progress in underserved regions remain low. There is high dropout and repetition rates in primary education. Transition rate from primary to secondary is also low, while maternal mortality rates remains high. Malnutrition also remains high in spite of a number of interventions government is implementing in community-based management in acute malnutrition. About 38% of children under five are stunted and thus suffer from chronic malnutrition. In particular, stunting is greater among children in rural areas (40%) than urban areas (25%). Regional variations in the prevalence of wasting exist, with Ethiopia Somali and Afar regions having the highest percentages of children who are wasted, 23% and 18%, respectively (EDHS 2016). 2.3.4 Ethiopia has a legal and policy framework for ensuring gender equality and women empowerment. The GTP II has addressed gender equality under the crosscutting pillar and as such each sector is required to mainstream gender in its plan and budget. Ethiopia’s ranking on Global Gender Gap Index (GGGI) continues to improve from 124 out of 145 countries (2015) to 115 out of 144 countries (2017). Significant improvements were registered in health/survival and political empowerment where the country ranked 44 out of 144 countries and 50 out of 144 countries respectively. Gender parity in primary school enrolment also increased to 0.9 in 2017. However, women’s access to services and opportunities remain constrained due to cultural norms and lower socio-economic status. Performance in educational attainment and economic participation and opportunity remains low ranked 134 out of 144 countries and 109 out of 144 countries respectively. Adult literacy among women at 42% is lower than the 62% recorded for men. Although the primary school enrolment rate of girls in Ethiopia has increased, transition to secondary and tertiary

Table 2: Evolution of Key Service Delivery Indicators Indicator 2006 2017 Health coverage - 98 Universal primary education - 100% Net enrolment rate grade 1-8% 77.5% 99% Primary school completion rate 34% 52% Child mortality per 1,000 72 20 Access to antenatal care 28 77% Full Immunization 72.6% 91% Gross gender parity index grades 1-8 0.84 0.92 Access to improved rural water supply 46 68.5% Access to improved latrines 38 67% Source: Sector progress reports

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institutions is low due to distance, personal security and economic challenges. The maternal mortality ratio remains alarmingly high at 420 per 100,000. In addition, the ratio of females to males in the labour force remained unchanged at 0.41 in 2016/17 and 2017/18. The government continues to make efforts to improve this situation. The Gender Directorate at Ministry of Finance and Economy has facilitated gender-responsive budgeting training for all federal ministries as well as tracking its operationalization through review of annual budget. The Financial administration proclamation has also been amended to reflect the need to make public budget preparation more gender-responsive. III. PROGRESS IN THE IMPLEMENTATION OF BSTP 3.1 The overall objective of the BSTP is to expand and deepen the provision of basic services with a focus on quality and equity. This was planned to be achieved by enhancing budgetary resource allocation and utilisation at decentralised level, leading to improved education, health and water and sanitation outcomes; establishing democratic and developmental good governance and enhancing capacity through citizen’s engagement and strengthened PFM system. Ultimately, this would contribute to accelerating human capital development thereby enhancing productivity and promoting rapid industrialisation, which is critical to attaining a middle-income country status by 2025. 3.2. Overall, the performance of BSTP has been satisfactory. Some of programme outputs were fully achieved and in some cases surpassed as discussed below. 3.2.1 Bank support to improving quality and access to basic service delivery through the BSTP was implemented during FY 2015/16 – FY 2017/18 and focused on promoting reforms in health, education and water sectors and supporting the government to provide block grants to Woredas. Table 3 below provides a summary on the progress of implementation of key reform actions under BSTP. Table 3: Status Update on the Implementation of Planned Reforms in the BSTP Policy Matrix

Component 1: Enhanced Quality and Equity to Basic Services

Status and Comments

Federal Government block grant transfers to regions (excluding Addis Ababa) increased to 39.1% in 2017/18 from 28.9% in 2014/15 enabling a further expansion of basic services and positive human development outcomes;

Achieved. However, Government needs to ensure that the level of block grant transfers is sustained.

Sector development plans for health, education and water and sanitation were finalized, approved by August 2015 and under implementation providing strategic guidance for enhanced equity and quality of services;

Achieved and implemented Sectors strategies are now undergoing mid-term review;

Primary Health Care Unit guidelines developed and operational. Partially achieved. Guidelines were developed. Training of staff on the guidelines is pending. Preparatory work ongoing.

Public – private Partnership (PPP) strategy in health developed and implemented. .

Partially achieved. Strategy developed. However, no project has been implemented. Projects could not be initiated until the guidelines are aligned to the PPP law, which was approved

Assessment conducted and legal framework developed and submitted to the Council of Ministers to re-establish the Curriculum Development Institute.

Achieved. Approval by Council of Ministers is pending.

Pastoral Education Strategy revised Achieved and operational. However, review of standards and curriculum for ABE Grades 1-6 is required

Establishment of National Regulatory Board for Service Delivery in Water

Partially achieved. Draft bill was submitted to Council of Ministers. Approval of the bill by

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council of Ministers and subsequent submission to House of Parliament is pending.

Strategy for Health Extension Programme in pastoral areas was developed.

Achieved. Health Extension Workers were deployed in the four pastoral regions

National Council for Pastoralist Education established Achieved. National Council on Pastoral Education formed.

Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement

Status and Comments

Directives on Woreda pre-budget discussions were issued by Ministry of Finance and Economy.

Achieved. About 37% of Woredas conducted pre-budget discussions with 46% women participation; There is need to scale-up to more Woreda.

Rollout plan for social accountability approved by Steering Committee and operational in Woredas.

Partially achieved. The rollout plan for social accountability was developed and approved. However, roll out of SA to new Woredas is planned for 2019 under ESAP III.

Guidelines for implementing Financial Transparency Accountability (FTA)-Social Accountability (SA) linkages developed and operational

Achieved. FTA-SA are conducting joint meeting at local level.

Report on State of Health Inequality in Ethiopia produced Reports have been published annually since FY2015/16. The reports informed the Health Equity Strategy.

Guidelines for the introduction of citizen’s scorecard in health is developed, approved and piloted. The Ministry of Health plans to scale-up to new Woreda in collaboration with the social accountability programme.

Achieved. Guidelines developed and operational. However, there is need to institutionalize citizens’ engagement in other service providers ministries and need for a ‘Government citizens’ engagement framework.’

Expenditure Management and Control Programme (EMCP) Action Plan approved.

Achieved.

Operational guidelines for PFM Woreda Benchmarking Rating developed

Achieved. Guidelines developed

3.2.2 The BSTP objective was designed to be achieved through the implementation of two programme components, namely: (i) Enhancing Quality and Equity in Basic Services; and (ii) Strengthening Accountability and Transparency and Citizens’ Engagement. Performance under these components is reflected in the sections below.

Component 1: Enhanced Quality and Equity to Basic Services 3.2.3 The expected outputs under this component comprise: (i) increased budget predictability for the Woredas for basic services through block grants; (ii) improved quality of basic services in health, education and water and sanitation at Woreda level and (iii) enhanced equity in delivery of basic services in health, education and water and sanitation at Woreda level. Government’s progress reports reveal that strong results have been achieved under this component (Table 4). Quality of health, education and water and sanitation has improved due to the increased number of qualified staff and the development and operationalization of service standards. However, challenges remain, especially in pastoral areas and some regions, which started on a very low base such as Afar, Ethiopia Somali, Benishangul Gumuz and Gambela where achievements in health, education, and water and sanitation remain below the national average.

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Table 4: Progress on outputs - Enhanced quality and equity to basic services Performance indicators Baseline

(2014/15) Target (2017/18)

Status at August 2018

Total amount of block grants allocated to regions and Woredas

ETB 62 billion

ETB 142.8 billion

ETB 135.6 billion. Government allocation to block grants has increased steadily from ETB 62 billion in 2014/15

Roll-out teachers licensing guidelines (number of teachers licensed)%

0% 38% Partially achieved. About 1170 of 585,000 teachers have been licensed as the rolling out of the guidelines (finalization, orientation, and printing) took more time than initially expected. This remains low as it amounts to only 2%

Number of health extension workers qualified to level 4 standard increased

4,000 10,000 7,644 were qualified and the government plans to reach 100% (37,000) by 2020 based on the current intensified enrollment of the HEWs in training institutions.

Number of model families/Health Development Army (HDA) competency assessed

0 600,000 Only 33,517 HDA assessed and 3,234 certified. The performance is far below the target due to limited Woreda level capacity and challenges at community level due to disruptions in the past two years in some areas.

Number of households enrolled in community based health insurance (CBHI)

157,553 2,009,053 2,920,435 households enrolled. However, there is need to increase the number of beneficiaries particularly in the pastoral and underserved regions. Afar, Ethiopia Somali and Gambela have not yet started CBHI enrollment of households (HHs) and Benishangul Gumuz have enrolled HHs only in two out of 20 Woredas

Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement 3.2.4 Two outputs were programmed under this component, namely: (i) enhanced transparency and accountability through citizen engagement and (ii) improved performance and financial management in Woredas. The performance under this component has been mixed as presented in Table 5 below. Table 5: Progress on outputs - Strengthen Accountability, Transparency and Citizen’s Engagement

Performance indicators Baseline (2014/15

Target (2017/18)

Status at August 2018

Rollout plan for Social Accountability (SA) approved by Steering Committee and operational in Woredas.

No rollout plan available

300 (77 new Woredas)

The road map developed and approved by the Steering Committee. The roll out to new Woredas has been delayed because of the protracted consultation process among stakeholders.

Number of regions which have Grievance Redress Mechanism (GRM) structures and standard regulations increased

6 11 8 – Regional offices have been established. Capacity to effectively expand to all regions has been a challenge. Regions like Afar and Gambela have not developed regulations.

Number of regions that adopt standardized procedures manuals for GRM

0 4 Achieved. 4 regions adopted the procedures manuals. -There is a need to expand to more regions.

Roll out legalization of WASH Committees (regions fully legalized WASH committees.

1 4 3 regions started the process of legalization of WASHCOs. One region did not start due to the lengthy legal and administrative processes it necessitated. It is expected that the rest of the regions will use the experience of the three regions as model to speed up implementation.

PFM Benchmarking Rating established in all regions

4 11 completed

Training manual developed and operational for Woreda Councils on budgeting, expenditure oversight and audit follow-up

Not available

25% of Woreda councils and standing committees trained.

Training manual developed and about 75% of Woreda council standing committees trained.

3.2.5 The activities under citizens’ engagement are designed to enhance citizens’ voices and strengthen demand-side accountability in the delivery of better basic services from the providers (health facilities, schools, Woreda administration). Bank support through the BSTP has contributed to improved planning and budgeting processes at the Woreda level and strengthened the delivery of decentralized basic services. In addition, support to basic services has contributed to improve monitoring. The processes are more inclusive, responsive, result oriented, and community

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centered. Publication of key information, pre-budget discussions at the Woreda/community level has increased transparency and facilitated interactions between service users and providers. As a result, citizens’ engagement in the governance of basic services delivery has improved and an informed society that articulates its rights and holds service providers to account is gradually being established. The participation of women in such community level processes has also improved. For instance, about 40% of the 2.4 million citizens who participated in basic budget literacy training since 2012 were women. In 2017, about 43% of the participants who attended pre-budget discussions conducted in 350 of the 1,000 Woredas were women. However, more needs to be done to scale-up women’s participation in the governance of public service delivery and to ensure that the pastoral and underserved regions – where service delivery has been historically low benefit from these improvements. 3.2.6 Key reforms have been achieved in public financial management (PFM). The rollout of the Integrated Financial Management Information System (IFMIS) for Federal public bodies is progressing well and is expected planned to be rolled out to regions by 2020. The Integrated Budget and Expenditure (IBEX) system is operational in all regions and Woredas and has improved financial tracking in terms of quality and timeliness of reports. The Government is also making progress in establishing the electronic Government procurement system (e-GP), which is essential for improving efficiency, cost-effectiveness, value for money and transparency in public procurement system. The system and culture of measuring and reporting procurement performance based on results through key performance indicators (KPIs) has also been operationalized. The PFM and procurement reforms have helped to ensure that basic services are delivered effectively and efficiently. However, deepening and sustaining these reform measures requires close follow-up and continued investment in institutional capacity strengthening.

IV. JUSTIFICATION FOR THE SUPPLEMENTARY FINANCING TO BSTP 4.1 Supplementary Financing – Eligibility Criteria 4.1.1 The supplementary financing proposal has been prepared in response to the government’s request for additional financing to expand access and quality of basic services under the BSTP. In its letter dated 25 June 2018 (Appendix 1), the government requested the Bank to provide additional financing for basic service delivery. Table 6 summarizes the eligibility criteria for supplemental financing, as per section 6.4 of the revised PBO policy:

Table 6: Supplementary Financing – Eligibility Criteria Criteria Status The PBO is being implemented in compliance with provisions of the loan or grant agreement

The government has fully complied with all provisions of the BSTP loan agreement and implementation is satisfactory. The BSTP loan is fully disbursed.

The country is unable to obtain sufficient funds from other sources on reasonable terms or in reasonable time

Growth in nominal tax revenue collections has not been consistent with the country’s real GDP growth rates, increasing by 10.3% and 15% in 2016/17 and 2017/18, respectively, which is low compared to the average headline inflation rates of 7.2% and 13%, respectively. As a result, the tax to GDP ratio has decreased consistently from 12.4% of GDP in 2015/16 to 11.6% and 11.2% in 2016/17 and 2017/18, respectively, due to weaknesses in tax administration. Revenue enhancing measures, such as income tax and tax administration laws (approved in 2016/17) and a tax transformation program are underway to improve tax collection, expand the tax base, and enhance efficiency in the tax system in the medium to long term. In addition, the government has embarked on a fiscal consolidation strategy, which emphasizes the prioritization of capital and import-intensive public spending to stabilize the public debt and create fiscal space for poverty related spending.

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However, these revenue-enhancing measures are only expected to increase tax revenue collections in the medium to long-term. In addition, the ongoing fiscal consolidation measures will reduce the expansion in the federal budget, and subsequently moderate the growth in subsidies to the regions, which necessitates supplementary financing from development partners to address the short-term financing shortfalls.

The time available is too short to process a further freestanding Bank operation

Bank Group support to the BSTP is fully disbursed and the program is scheduled for completion in December 2018. Given the urgent need for additional resources to finance basic service delivery to the underserved and pastoral areas, it is important to accelerate the processing of the Bank Group’s supplementary financing to the BSTP. This will ensure that the first tranche is disbursed during the first half of FY 2018/19 (before December 2018) as programmed in the government’s federal budget, which will also enhance predictability. Preparation of a freestanding Bank operation is not expected to be completed prior to Q3 of FY 2018/19 (March 2019), which will force the government to use inflationary budget deficit financing measures, such as advances from the central bank and issuance of Treasury Bills. These second best budget deficit-financing options have broader macroeconomic consequences, such as creating inflationary pressures, increasing the domestic debt, and reducing access to credit for the private sector, thereby reducing real GDP growth and increasing poverty and income inequality.

The country is committed to the programme and the implementing agencies have demonstrated competence in carrying it out.

The Government has demonstrated strong commitment to the BSTP. For instance, implementation of the program is coordinated by the Ministry of Finance and Economic Cooperation (Ministry of Finance and Economy), which works closely with pertinent sector ministries to ensure that all BSTP supported policy reform measures are implemented as jointly agreed with the Bank Group. The Joint Review and Implementation Support (JRIS) missions, which provides a platform for joint monitoring of implementation progress and identifying solutions to implementation challenges, are organized semi-annually under Ministry of Finance and Economy’s leadership and draw wide participation from all concerned sector ministries and development partners.

4.2 Rationale for Supplementary Financing 4.2.1 Although the Government has made progress in improving overall access to basic services, spatial inequalities and variances in quality of basic services persist particularly in the underserved regions of Afar, Ethiopia-Somali, Benishangul Gumuz and Gambela. Positive results have been registered at national level. While national averages in basic service show improvement, they mask important disparities among communities based on geographic location, regional economic endowments and gender. Shortfalls in service delivery targets are still significant and the quality of these services is generally low. Underserved and pastoralists areas such as Afar, Ethiopia Somali, Gambela and Benishangul Gumuz continue to register low human development outcomes as indicated in Table 7. Therefore, more needs to be done to achieve Government’s strategic objective of GTP II, notably ‘accelerating human development and technological capacity building and ensuring the sustainability’. Bank support through BSTP concludes in December 2018 and the program was fully disbursed in July 2018. Continued funding for the government’s Woreda block grant system is required to ensure that: (i) reforms necessary for enhancing quality of services and reducing disparities are sustained and scaled-up; (ii) reforms initiated to expand citizen’s engagement in basic service delivery are institutionalized; and (iii) predictability of funding to basic services is improved, including through ensuring a non-decreasing share of block grants to the regional governments and Woredas in the federal budget.

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Table 7: Social Indicators in Underserved and Pastoralists Areas Indicator National Ethiopia

Somali Afar Gambela B-Gmuz

% skilled attended births 71 31.5 37.2 31.3 53 Access to Antenatal Care+4 (%) 76.6 61 61 13 55 Net enrolment grade 1-8 (%) 99.9 72 50 114 96 Primary School Completion rates for grade 8 (%) 54 27 19 112 57 Primary school dropout rate 0.09 0.16 0.11 0.06 0.02 Proportion of qualified primary (1-4) teachers (%) 73 2 37 90 82 Rural water supply coverage within 1km radius (% of population)

74 77 54 75 66

Access to latrines (% of population) 46 2.4 10 20 45 Source: sector reports 4.2.2 Bank Group support through the supplementary financing to BSTP will enhance quality and equity in basic service delivery, particularly in pastoral and underserved areas. Key challenges to enhancing quality of basic service delivery comprise: (i) inadequate number of qualified teachers and health workers, necessitating teacher licensing and upgrading of health workers’ skills; (ii) absence of updated service standards guidelines in education and health; and (iii) limited number of competency assessed Health Development Army HDA) leaders, at 3,234, which is far below the target of 600,000 and affecting quality of services. In addition, the majority of Health Extension Workers (HEWs) who have been trained at level 4 need to undertake formal competency tests. HDA leaders are yet to be assessed at level 1 Health Extension Programme (HEP) competency because of limited Woreda level capacity and disruption in community level services during the past two years due to civil unrest. Implementation and optimization of HEP in pastoral/semi pastoral areas is lagging, though a pastoral extension strategy has been developed to accelerate progress. These shortfalls are negatively affecting the quality of health services. Other challenges include delays in the rollout of the CBHI, a key initiative to enhance equity in access to quality health services, to the undeserved regions. Therefore, the Bank Group support will focus on: (i) improving quality of frontline staff in health, education and water and sanitation at Woreda level through training and upgrading skills, (ii) revision of service standard guidelines in education and health in pastoral areas. Emphasis will be placed on unmet targets for the pastoral and underserved regions, including; (i) roll out of the teachers’ licensing programme and (ii) improving Alternative Basic Education (ABE) for Grade 1-6 in pastoral areas by revising of syllabi and, textbooks. Other targets include: (iii) establishment of the Curriculum Development Institute, which is critical for improving quality of education; and (iv) training and upgrading the skills of Health Extension Workers (HEWs) and HDA. Sanitation in health facilities, an important contributor to quality health services, will be improved and CBHI will be scaled-up to ensure access of quality and inclusive health services. 4.2.3 Bank Group support will also enhance citizens’ engagement and performance in PFM and procurement functions. The government recognizes that citizens’ engagement is fundamental in achieving equal access to quality basic services for all citizens. The sub-components under citizen’s engagement include: (i) Social Accountability (SA), (ii) Grievance Redress Mechanism (GRM) and (iii) Financial Transparency and Accountability (FTA). Good progress has been made in various areas of citizens’ engagement, including posting of the budget expenditure and service delivery standards at Woreda; development of social accountability roll out plan; and establishment of regional GRM structures – see Table 5. However, key challenges and opportunities remain including: (i) limited coverage of social accountability, with only 223 Woredas implementing social accountability out of about 1000 Woredas; (ii) citizen’s engagement is not institutionalized in service delivery sector ministries, apart from the Ministry of Health, due to lack of a holistic government framework on citizens’ engagement. Other challenges comprise: (iii) weak institutional framework in the water sector: for instance, only three regions have initiated the process of legalizing the Water, Sanitation, Hygiene Committees (WaSHCOs), which promote accountability and continued functionality of water points; and (iv) adoption of GRM procedures manual by regions is limited,

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with only 4 of 11 regions adopting standardized GRM procedure manuals. In addition, PFM and procurement reforms initiated under BSTP need scaling up to sustain the envisaged fiduciary improvements). Under citizens’ engagement, the supplementary financing will support (i) expansion of coverage of social accountability to new Woredas; (ii) development of citizens’ engagement framework to inform institutionalization of social accountability in service providers institutions; (iii) roll-out of implementation of FTA directives by federal budgetary organizations; (iv) development of guidelines to enhance linkages between FTA-SA-GRM; (v) roll-out of GRM procedures manual to more Woredas; and (vi) legalization of WASHCOs in regions. Under PFM and procurement, reforms to improve efficiency in basic service delivery will be supported, including publication of the 2018 PEFA report and operationalization of the existing procurement KPIs by federal basic service delivery institutions. 4.2.4 The supplementary financing will improve predictability in funding for Woredas by ensuring non-decreasing shares of block grant transfers in the federal budget. A key constraint to basic service delivery is that the Woreda budgets are not sufficient to cover the non-salary operational expenditures required for quality basic service delivery. This lack of funding also makes Woreda level planning challenging as the resource envelope does not match the plans. Broadening access to basic services whilst improving the quality of these services requires increasing the fiscal space at the local levels. As observed from the BSTP JRIS field visits, the unmet service delivery needs are considerable and Woredas could absorb thrice more than the current available financial envelope. Addressing the pressing financing challenges will require supplementary financing from DPs, while longer term and more sustainable measures comprise increasing public revenue mobilization. Increased emphasis will be placed on improving domestic resource mobilization to gradually reduce the need for development partners’ financial contribution to block grants. In particular, development of an action plan for domestic resource mobilization is one of the key sector policy reform actions that will be supported during the implementation of the supplementary financing. In this context, supplementary financing to BSTP will ensure the sustainability of the human development achievements to-date, while supporting the expansion of basic services to the pastoral and underserved regions. 4.2.5 While, general Government expenditure continues to focus on pro-poor and growth enhancing sectors, its pace of growth has decreased since 2014/15. Public spending on poverty reducing sectors, such as education, health, agriculture and water, and roads decreased from 62% to 59.7% during 2016/17 – 2017/18 due to reduced capital spending on these sectors, consistent with the government’s phased implementation of import-intensive capital projects. However, public spending on these sectors is projected to increase to 62.8% in 2018/19 due to the anticipated supplementary financing from key development partners and in line with government’s commitment to improve quality and access to basic services. Nominal tax revenue collection has not grown in tandem with the country’s real GDP growth rates, increasing by 10.3% and 15.1% in 2016/17 and 2017/18, respectively, compared to the average headline inflation rates of 7.2% and 13%, respectively. Consequently, the tax to GDP ratio has decreased consistently from 12.4% of GDP in 2015/16 to 11.6% and 11.2% in 2016/17 and 2017/18, respectively, in part due to weaknesses in tax administration, and remains one of the lowest among peers in sub-Saharan Africa. Income tax and tax administration laws were approved in 2016/17 and a tax transformation program is underway to improve tax collection, expand the tax base, and enhance efficiency in the tax system. The Government has also embarked on a fiscal consolidation strategy, which emphasizes the

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prioritization of capital and import-intensive public spending to stabilize the public debt while creating fiscal space for poverty related spending. In the short-term, the fiscal consolidation measures will reduce growth rates for the federal budget, and subsequently moderate the expansion in subsidies to the regions (Table 8) which necessitates supplementary financing from development partners to address the short-term financing shortfalls. 4.2.6 A key-shared principle of BSTP is that the share of federal regional block grants in the budget (regardless of source of financing) should be increasing each year relative to the BSTP base year, which has been the case so far. In line with the common framework for basic service delivery, there is an understanding that in the event of any shortfall in domestic resources multilateral development partners, (including the World Bank) would consider providing supplementary financing to ensure that BSTP objectives are achieved. The World Bank has already approved UA427.09 million supplementary financing to basic service delivery in line with the common framework for basic service delivery. Therefore, in addition to ensuring compliance with the common framework, the Bank Group’s supplementary financing will guarantee a non-decreasing share of block grants in the federal budget, which is important for sustaining the delivery of basic services, particularly to the underserved regions. 4.2.7 Table 9 depicts the recent performance and the projections for the government’s public finances. While spending on poverty reducing activities has increased steadily in nominal terms, the growing fiscal deficit calls for urgent measures to ensure sustainable financing for basic service delivery. Thus, the BSTP supplementary financing will enable the government to reduce the financing gap in the short term as long-term measures to increase public revenue mobilization are consolidated.

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4.3 The BSTP Supplementary-Financing Programme 4.3.1 While the supplementary financing will support the same result areas as the original BSTP, emphasis will be placed on expanding access to and improving quality in basic service delivery for the pastoral and underserved regions. The programme components for the supplementary financing will remain unchanged i.e.: (i) Enhancing quality and Equity in Basic Services; and (ii) Strengthening Accountability, Transparency and Citizen’s Engagement. While progress has been made in quality and access to basic services overall, some regions are still lagging behind. Thus, the programme will continue to: (i) emphasize on quality and access to basic services mainly in underserved and pastoralists areas; (ii) strengthen governance and accountability of basic service providers through citizen engagement and (iii) improve predictability in funding for basic services to address the spatial disparities and quality variances in basic service delivery. 4.4 Beneficiaries of the Supplementary Financing 4.4.1 The BSTP supplementary financing will continue to focus on expanding access to and improving quality in basic service delivery for the majority of the population. Thus, in line with the BSTP, the supplementary financing will target about 80% of the population who live in rural areas and women who constitute about 50% of the population. The underserved regions, like the pastoralist areas, and the rural poor and women will particularly benefit from the supplementary financing and this will be specifically tracked through the region-disaggregated indicators.

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4.5 Gender Equality and Women Empowerment 4.5.1 Women will continue to be one of the main focus group of the programme. Social indicators (health and education) remain low for Ethiopian women. BSTP recognizes gender as a key social determinant of human development outcomes and thus places emphasis mainly on women and girls access to services, and participation in service delivery governance. The programme will benefit women through the reforms promoted in health and education. These include further capacity development of HEWs and HDA who are all women and are expected to promote women’s uptake of services affecting maternal mortality, child mortality and sanitation. Other areas of focus are women participation in pre-budget and budget literacy sessions and management of WASHCOs. Also facilitating gender mainstreaming in the local level planning and budgeting process through the SA and FTA processes. The operation will also continue to ensure that gender disaggregated reporting is enforced and gender equity is tracked consistently across the indicators, particularly in the areas of teachers’ qualification/licensing, primary completion rates and other capacity building interventions. 4.6 Coordination with other Development Partners: 4.6.1 Basic services at decentralised level is supported by five development partners; namely, AfDB, World Bank, EU, Austria and Italy. DPs have provided support to basic services delivery since 2006 as per Table 9 below. The DPs in basic service delivery are coordinated through the Basic Service Donor Group (BSDG) and governed by a common framework. The DPs in the delivery of decentralized services will continue to use the Joint Review and Implementation Support (JRIS) coordination structure, and will aim to strengthen the follow-up on the recommendations coming out of the JRIS missions. The DPs’ coordinate the support through the common results framework that is to be updated to ensure it remains relevant and provide guides for strategic dialogue. Table 10: PBS DPs' Contribution to Block Grants (in million USD)

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

IDA 91.0 100.0 181.9 234.0 224.0 204.0 208.0 186.0 186.0 135.0 176.4 133.0 200.0

DfID - 169.1 124.9 94.6 98.7 109.2 118.8 88.3 145.0 126.2 - - -

EU - 99.5 96.3 - 32.7 33.0 - 50.3 33.0 20.0 19.5 89.0 40.0

AfDB - 64.7 59.0 74.8 46.4 159.3 - 86.1 83.5 84.2 84.2 84.2 80.0

KfW - 13.4 15.9 - 27.0 14.3 - 13.0 - - - - -

Austria - - - 3.5 - 1.8 2.7 3.3 3.1 4.1 - 4.6 -

Ireland - - - 17.3 10.7 7.9 - 11.3 - - - - -

Spain - - - 12.9 14.4 13.1 - 6.4 - - - - -

Italy - - - - - - - - - - 4.4 - -

Total 91.0 446.7 477.9 437.2 453.9 542.6 329.5 444.6 450.6 369.5 284.5 310.8 320.0

Share from total FBG

11.2 42.0 32.6 27.5 29.9 34.2 18.6 22.8 20.2 11.9 8.2 7.9 6.5

4.7 Relationship with Other Bank Operations 4.7.1 The BSTP supplementary financing directly responds to Pillar 2 of the Bank Group Country Strategy Paper (2016-20) for Ethiopia. The pillar focuses on promoting economic governance, with emphasis on improving basic service delivery. Consequently, the supplementary financing will complement and strengthen the Bank’s ongoing operations in Ethiopia such as: (i) national One Water, Sanitation, and Hygiene (WASH) national program that prioritizes

16

undeserved Woredas in the country’s four pastoral regions; and (ii) the road construction/rehabilitation projects that are enhancing national and regional transport connectivity to social amenities and centres of basic services. Other complementary ongoing operations comprise: (iii) the Mekele-Dallol & Semera-Afdera Power Transmission project that aims to enhance the electric connectivity of social service delivery institutions, among others, in the pastoral Afar region. 4.8 Environmental and Social Safeguards 4.8.1 The Programme has been classified as category 3 in the Bank’s environmental classification. It is not expected to generate any negative impacts on the environment and climate change, since it focuses on enhancing service delivery in basic social services in the health, education, and water and sanitation sectors, through social spending and policy reforms. V. IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation Arrangement 5.1.1 The overall implementation arrangement of the supplementary financing remains the same as for BSTP original programme. (Ministry of Finance and Economy) will continue to be the executing agency – primarily responsible for the implementation of BSTP-SF in collaboration with relevant sector ministries (health, education and water and sanitation) and Ethiopia Institute of Ombudsman (EIO). Channel One Programmes Coordinating Directorate (COPCD) within Ministry of Finance and Economy will continue to be responsible for monitoring, liaison and coordinating activities across the basic services ministries, institutions and sub-nationals for ensuring compliance of the grant legal agreements. The COPCD will be responsible for reporting results on BSTP-SF activities bi-annually. 5.2 Financial Management 5.2.1 The 2015 Public Expenditure and Financial Accountability (PEFA) Assessment for the Federal Government and selected Regional Governments indicated that the PFM systems have been improving in line with the Government’s ongoing commitment to PFM reforms with overall positive trajectory since 2010 PEFA. Government leadership and ownership of its PFM reforms is high. The Expenditure Management and Control Program (EMCP) Directorate in the Ministry of Finance and Economy coordinates and implements most the PFM reforms in the country. The Government has prepared a PFM Strategic Plan for 2018-2022. The Strategic Plan identified critical gaps in the PFM systems and put in place a realistic plan to implement the Strategic Plan. Based on the PFM diagnostic review done in 2015 and the quick assessment of the PFM performance during the appraisal of this Supplemental Financing, the overall Country Fiduciary Risk remains medium after taking into account the mitigation measures undertaken by the Government. The Public Financial Management Systems of the country are reasonably adequate to provide reasonable assurance that the financing proceeds will be used for intended purposes.

5.3 Disbursement 5.3.1 The resources for BSTP-Supplementary Financing amounting to UA 88.66 million will be channelled to the Special Account opened in National Bank of Ethiopia (NBE) by Ministry of Finance and Economy. There will be two tranches in the proportion of UA 60 million and UA 28.66 million in to the FY2018/2019 and FY2019/2020 respectively based on disbursement conditions agreed with the Government. The government budget framework for FY2018/19 includes the Bank’s contribution of UA60 million. Ministry of Finance and Economy will continue to use the

17

Special Account opened for BSTP. Ministry of Finance and Economy will then transfer the equivalent ETB to the Central Treasury account to be disbursed to regions and sector Bureaus as a Block grant based on the Federal Budget Formula approved by the House of Federation.

5.4 Audit 5.4.1 In accordance with the General Conditions (section 9.09), the Borrower must have the accounts of the program audited each year, in accordance with generally accepted rules, by the independent accountants herein the Office of the Federal Auditor General (OFAG) that meet the Bank’s requirements. The Recipient shall furnish to the Fund, as soon as approved by Parliament, a certified copy of the audit report conducted by the Office of the Federal Auditor General. 5.5 Procurement 5.5.1 Procurement for the BSTP Supplementary financing will be carried out using country procurement systems in accordance with the Bank’s commitment to aid effectiveness i.e. use of country procurement system in accordance with the Public Procurement Proclamation. Public Proclamation No.649/2009 enacted on 9 September 2009 governs the procurement in Ethiopia. The assessment of the Public Procurement Proclamation and Procurement Directives issued in 2011 shows that the provisions of national procurement legal and regulatory framework are largely aligned with international standards and consistent with the Bank’s procurement rules and procedures. The Government is in the process of revising the existing Proclamation governing public procurement and property administration in the country. In addition, a number of procurement reform activities are being implemented at the national and regional levels that are deemed to strengthen and improve the procurement system. It is expected that the revision of the procurement legislative framework, together with the other ongoing procurement reform activities, will address the gaps identified in the existing system and help towards creating a robust and an effective public procurement system. Overall, the current country procurement system is considered acceptable to support the operation. 5.6 Monitoring and evaluation system 5.6.1 The programme will continue to use the bi-annual Joint Sector Implementation Review (JRIS) to assess implementation progress on programme indicators and reforms. The COPCD under Ministry of Finance and Economy will continue to be responsible for reporting results on BSTP SF indicators as an input to the JRIS and also separately on a bi-annual (twice a year) basis . COPCD will also be responsible for co-ordination with implementing ministries for improved BSTP-SF performance monitoring/reporting. COET will actively participate in the country dialogue through the Basic Services Donor Group (BSDG) common framework, which will be reviewed and updated in 2019 in collaboration with Ministry of Finance and Economy. The Annual National Audits by OFAG will be used to monitor the expenditure performance of the quality basic services delivery. A joint Bank-GoE Programme Completion Report (PCR) will be prepared at the end of the programme. VI. LEGAL INSTRUMENT 6.1 Legal Instrument: The financing instruments used for this operation is an ADF Grant of UA88.66 million be governed by a Protocol of Agreement to be signed between the Fund and the Federal Democratic Republic of Ethiopia.

18

6.2. Conditions Associated with Bank’s Intervention 6.2.1 Entry into force: The Protocol of Agreement will enter into force upon signature by the parties. 6.2.2 Conditions precedent to disbursement of the first and second tranche of UA60 million and UA28.66 million in FY2018/19 and FY2019/20 respectively will be subject to fulfilment of the conditions outlined in Table 11 below and submission to the Fund of the bank details for a Treasury account with the National Bank of Ethiopia for purposes of receiving the Grant resources. Table 11: List of Disbursement Conditions for First and Second Tranche

First Tranche Disbursement Conditions – FY2018/19 Disbursement Conditions for Second Tranche FY2019/20 Condition Evidence Condition Evidence Submission of an approved action plan by Ministry of Finance and Economy on the implementation of the recommendations of the Domestic Resource Mobilisation study.

A letter from Ministry of Finance and Economy confirming the approval of the action plan and submitting a copy of the approved action plan

The expansion of Social Accountability to new Woredas.

A letter from Ministry of Finance and Economy confirming the expansion of the Social Accountability to 77 new Woredas and confirmation of the signing of agreements between the Social Accountability Implementation Partners (SAIPs) and the Management Agency for the implementation of SA in the new Woredas.

Submission by the Minister of Education of a draft bill to the Council of Ministers on establishing the Curriculum Development Institute

A letter from Ministry of Finance and Economy confirming the submission of the draft bill to Council of Ministers by the Minister of Education

The number of federal budgetary organizations implementing the Financial Transparency and Accountability (FTA) directive increased to 50.

A letter from Ministry of Finance and Economy confirming the number and submitting the list of federal budgetary organizations implementing the FTA directive.

Optimization Strategy for Pastoralist Health Extension Programme implemented in the 4 Pastoral regions.

A letter from Ministry of Finance and Economy confirming the Implementation of the Optimization Strategy for Pastoralist Health Extension Programme in 4 pastoral regions (Afar, Ethiopia Somali, Oromiya and Southern Nations Nationalities and People (SNNP) and submitting a copy of the strategy.

Citizen Engagement Framework developed and approved by Ministry of Finance and Economy.

A letter from Ministry of Finance and Economy confirming the approval of Citizen Engagement Framework by Ministry of Finance and Economy and submitting a copy of the approved framework

Alternative Basic Education Standard for Grade 1-6 in pastoral areas revised

A letter from Ministry of Financing and Economy confirming the revision of Alternative Basic Education Standard for G 1-6 by Ministry of Education.

6.3 Compliance with Bank Group Policies: The proposal complies with the Bank Group policies in particular the Bank Group Policy on Programme Based Operations (PBOs) and the Revised Operational guidelines on the Programming, Design and Management of Programme Based Operations

VII. RISKS MANAGEMENT 7.1 Key risks to implementation and achievement of program objectives and measures for the mitigation of the risks under the programme are outlined in the Table 12 below:

19

Table 12: Risk Management Description of Risk Mitigation 1 The risk of exogenous shocks remains high

and threaten government commitment to expenditures to basic services.

Government’s ongoing reforms to diversity exports, such as industrial park development and establishment of business enabling transport and energy infrastructure are expected to accelerate the structural transformation process and mitigate the external shocks. .

2 Weaknesses in democratic governance and fragile democratic consolidation process could weaken implementation of the reform agenda.

Government, under Prime Minister Abiy Ahmed, has implemented holistic democratic and economic governance reforms since April 2018. Since participation and contribution of various stakeholders, including DPs, is necessary for the successful implementation of these reforms, government will be keen sustain its reform agenda to guarantee support from its partners. In addition, DPs under the BSDG will maintain dialogue with government to ensure that the basic service delivery and human development reforms are implemented.

3 Government’s commitment to delivery of quality basic services could be reduced due to competition for public funds arising from mega federal infrastructure projects

The fiscal consolidation strategy, notably the phased implementation of import-intensive public infrastructure spending, and the ongoing tax transformation program will enable the government to preserve poverty related public spending to education, health, and water and sanitation, among others. In addition, in line with the performance indicators for this programme, government has committed to sustain the minimum threshold in block grant transfers to Woredas.

VIII – RECOMMENDATION 8.1 Management recommends that the ADF Board of Directors approve the proposed supplementary financing to the BSTP amounting to UA88.66 million to the Federal Democratic Republic of Ethiopia from the resources of ADF-14 for the purposes and subject to the conditions set out in this report.

I

Appendix 1: Government of Ethiopia Request

II

Appendix 2: PRESS RELEASE: IMF Staff Completes 2018 Article IV Mission to the Federal Republic of Ethiopia September 26, 2018 End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

x Growth is expected to step up in 2018/9 to 8.5 percent.

x The mission supports the ambitious reform agenda announced by the Prime Minister aimed at opening up important parts of economy to competition and encouraging private sector investment.

x The authorities succeeded in reducing the external current account deficit to 6.4 percent of GDP in 2017/18 through policies to constrain public sector imports and borrowing and tightened monetary policy to reduce external imbalances and contain inflation.

An International Monetary Fund (IMF) staff team led by Mr. Julio Escolano visited Addis Ababa from September 10 to 26, 2018 to conduct the 2018 Article IV consultation discussions with Ethiopia. At the conclusion of the visit, Mr. Escolano made the following statement: “Over the last decade, Ethiopia has maintained high economic growth and made commendable progress in considerably reducing poverty and improving living standards. In 2017/18, real gross domestic product (GDP) is estimated to have grown by 7.5 percent, harvest and rapid growth in air transport and manufacturing exports. However, political uncertainty, foreign exchange shortages, and weak prices for traditional exports hampered economic activity. However, the authorities succeeded in reducing the external current account deficit to 6.4 percent of GDP in 2017/18 through policies to constrain public sector imports and borrowing and tightened monetary policy to reduce external imbalances and contain inflation. Prudent budget execution led to a lower-than-planned fiscal deficit, estimated at 3.7 percent of GDP, although tax revenue continued to disappoint. Growth is expected to step up in 2018/9 to 8.5 percent, supported by stronger confidence as the uncertainty of the previous year recedes, and the availability of domestic and foreign direct investment improves. The authorities’ strategy to shift the engine of economic activity to private sector development while the public sector consolidates is appropriate to maintain strong growth. The mission supports the ambitious reform agenda announced by the Prime Minister aimed at opening up important parts of economy to competition and encouraging private sector investment. At the same time, measures to reduce public sector borrowing and bring inflation back to target need to be intensified, as external imbalances and indebtedness remain a source of macroeconomic risk. The mission encourages the authorities to maintain an appropriately tight monetary and fiscal policy stance, along with a more flexible exchange rate regime, and implement reforms aimed at developing the financial system and markets. These macroeconomic policies, combined with the announced reforms, will improve competitiveness, reduce external imbalances and rebuild buffers, while raising the growth potential of the economy over the medium term. The IMF staff team had the opportunity to present its key findings and recommendations to Prime Minister Abiy Ahmed, National Bank of Ethiopia Governor Yinager Desse, Minister of Finance and Economic Cooperation Abraham Tekeste, and other key policymakers. Substantive technical and policy discussions were also held with officials of other government agencies, representatives of public enterprises and the private sector, labor unions, and development partners. The staff team would like to thank the authorities for their hospitality and constructive discussions.”

III

Appendix 3: AfDB-Ethiopia On-going Project Portfolio

IV

Ser. No. Project/Study Loan/Grant No. Source Approval

DateDate

SignedEffective

DateCumulative Disb. Ratio

1 Derba-MIDROC-Cement Factory 2000120001619 LOAN 16-Apr-08 23-Jun-08 23-Jun-08 100%

2 Ethiopian Air Lines 2000120003219 LOAN 23-Mar-11 16-May-11 17-May-11 100%

3 Ethiopian Air Lines 2000130017030 &2000130017032 LOAN 14-Dec-16 24-Jan-17 25-Jan-17 100%

Ser. No. Project/Study Loan/Grant No. Source Approval

DateDate

SignedEffective

Date Cumulative Disb. Ratio

1 Arba Mench Sanitation & VC Project 5600155004251 AWF 11-Jun-16 13-Jan-16 13-Jan-16 26.27%

PRIVATE SECTOR (2008-2018)

Cumulative Disbursemenets

Cumulative Disbursemenets

55,000,000

NOTE:- Currency of the Grants is EUR

38,670,764

158,824,789

OTHER OPERATIONS(2018)

315,240

V

Appendix 4: BSTP Logframe and Implementation Status

RESULTS CHAIN PERFORMANCE INDICATORS

Colour Code Indicator Baseline (2014/15)

Target (2017/18)

Status as at July 30, 2018

IMPA

CT

Reduced poverty and improved standard of living of Ethiopians

Population below poverty line (%)

26.0% 22.2% 23.5%

OU

TC

OM

ES

Expanded and enhanced quality of basic services at the local (Woreda) level

% skilled attended births 65% 80% 71%

Proportion of qualified primary school (1-4) teachers (disaggregated by gender)

70.2% (58%-F)

84% (79%-F) 73% (68% F)

Rural Primary completion rate (grade 8) (sex disaggregated)

47%

75%

54% (52%)

Rural water supply coverage within 1 km radius

59% 85% 74%

Strengthened accountability and transparency in service delivery

PEFA: PI-10: Public access to key fiscal information

Amhara – B Oromia – C SNNPRG – C Tigreh – B Ethiopia Somali - C

A B+ B+ A B+

PEFA assessment will be conducted by Nov. 2018

PEFA PI-26: Scope, nature and follow-up of external audit

Amhara – C+ Oromia – C+ SNNPRG – D+ Tigreh – B+ Ethiopia Somali - C+

B B B A B

PEFA assessment will be conducted by Nov. 2018

HLG-1: Predictability of transfers from higher-level government

Oromia – B+

A PEFA assessment will be conducted by Nov. 2018

Enhanced citizens’ engagement in service delivery

Citizens who report that Woreda officials have actively sought views of people in their Kebele on improving quality of basic services (sex disaggregated)

36% 55% 56%

OU

TPU

TS

Component 1: Enhanced Quality and Equity to Basic Services Increased budget predictability and additionality to Woredas for basic services through block grants

Total amount of block grants allocated to regions and Woredas per year

ETB 62 billion ETB142.8 billion ETB 135.6 billion

VI

Improved quality of basic services in health, education and water and sanitation at Woreda level

Health Sector Transformation Plan (HSTP) approved (prior action)

draft HSTP approved approved

Education Sector Development Plan (ESDP V) approved (prior action)

draft ESDP V approved approved

# of health extension workers qualified to level 4 standard increased.

4,000 (100%-F)

10,000 (100%-F) 7,644 (100%F)

PPP Strategy in Health developed

0 1 (implemented in 3 projects)

Strategy drafted

Roll-out teachers licensing guidelines (# teachers licensed) %

10%

38%

2%

Establishment of Curriculum Development Institute

0 1 Not established

Proportion of households using latrine.

84 90 68

Guidelines for PHCU developed and operational

0/no staff trained

Operational (25% staff trained)

Guidelines developed; training not started

Number of Health Development Army leaders and model families competency assessed based on new assessment framework

0 600,000 3,234

Establishment of National Regulatory Board for Service Delivery in Water

Non Regulatory body established

Draft Bill submitted to Council of Ministers

Enhanced equity in delivery of basic services in health, education and water and sanitation at Woreda level

Pastoralist Education Strategy Revised

Old strategy Strategy Revised Revised and approved

National Council for Pastoralist Education established

0 1/Council members appointed

Council established

Health Extension Programme Developed and operational

0 1 (501 HEWs deployed)

Program developed and operational

Report on State of Health Inequality in Ethiopia produced

None Available Available

Number of households enrolled in community based health insurance (CBHI)

157,553

2,009,053 2,920,435

Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement

Enhanced transparency and accountability through citizen engagement

Directive on Woredas’ pre-budget issued by Ministry of Finance and Economy

0 15% of Woredas have conducted pre-budget discussion (25% women)

36.3% Woredas have conducted pre-budget discussion (40% women)

Rollout plan for social accountability approved by Steering Committee and operational in Woredas

0 (0) 1 (300 Woredas) Partially achieve. Roll-out plan was approved but expansion has not started

VII

Guidelines for implementing FTA-SA linkages developed and operational

0 1 1

Guidelines for the integration of citizen’s score card in health sector developed

0 1 1

Number of regions which have GRM structures and standard regulations increased

6 11 8

# of regions that adopt standardized procedures manuals for GRM

0 4 4

Roll out legalization of WASH Committees (regions fully legalized WASH Committees)

0 4 3 regions started the process of legalization

Improved performance and financial management in Woderas.

EMCP Action Plan approved 0 1 1

Training manual developed and operational for Woreda Councils on budgeting, expenditure oversight & audit follow up

0 1/ (25% of Woreda councils and standing committees budget standing committee trained– at least 25% women)

Woreda councils standing committees in 75% of the Woredas have been trained

Operational guideline for PFM Woreda Benchmarking Rating developed

0 1 Completed

PFM benchmarking rating system established in all regions

4 11 Completed

VIII

Appendix 5: Ethiopia: Selected Macro-Economic Indicators

Indicators Unit 2000 2013 2014 2015 2016 2017 (e) 2018 (p)

National Accounts

GNI at Current Prices Million US $ 7,973 44,442 53,327 59,634 67,223 ... ...GNI per Capita US$ 120 470 550 600 660 ... ...GDP at Current Prices Million US $ 7,970 56,942 63,970 74,892 83,141 104,044 111,768GDP at 2000 Constant prices Million US $ 7,970 24,059 26,513 28,528 31,438 33,975 36,623Real GDP Growth Rate % 5.9 10.3 10.2 7.6 10.2 8.1 7.8Real per Capita GDP Growth Rate % 2.9 7.5 7.5 5.0 7.5 5.5 5.3Gross Domestic Investment % GDP 19.2 38.0 40.8 38.0 39.0 39.9 40.4 Public Investment % GDP 15.1 27.3 30.2 28.1 27.7 28.1 28.3 Private Investment % GDP 4.0 10.7 10.6 9.9 11.3 11.8 12.1Gross National Savings % GDP 16.7 28.1 30.7 32.4 32.7 32.1 31.2

Prices and MoneyInflation (CPI) % 6.2 7.7 7.4 10.1 7.8 8.1 7.7Exchange Rate (Annual Average) local currency/US$ 8.2 18.6 19.6 20.6 21.7 22.9 24.5Monetary Growth (M2) % 58.0 ... ... ... ... ... ...Money and Quasi Money as % of GDP % 50.0 ... ... ... ... ... ...

Government FinanceTotal Revenue and Grants % GDP 17.4 14.9 15.9 15.9 14.9 14.9 14.7Total Expenditure and Net Lending % GDP 26.7 17.5 17.9 18.2 18.2 18.4 18.4Overall Deficit (-) / Surplus (+) % GDP -9.3 -2.6 -2.0 -2.3 -3.3 -3.5 -3.7

External SectorExports Volume Growth (Goods) % 20.6 15.4 6.5 -2.7 4.9 -1.4 14.3Imports Volume Growth (Goods) % -42.3 10.6 17.9 32.5 12.6 -5.3 -1.4Terms of Trade Growth % -41.1 -16.7 2.2 0.7 0.3 3.1 -1.7Current Account Balance Million US $ -335 -3,576 -6,580 -6,643 -6,552 -8,799 -9,839Current Account Balance % GDP -4.2 -6.3 -10.3 -8.9 -7.9 -8.5 -8.8External Reserves months of imports 2.3 2.1 1.9 2.0 2.0 1.9 2.2

Debt and Financial FlowsDebt Service % exports 7.7 8.1 10.5 22.0 32.4 34.8 27.6External Debt % GDP 66.2 23.5 25.2 37.9 34.9 33.5 29.8Net Total Financial Flows Million US $ 681 3,864 3,874 4,116 4,935 ... ...Net Official Development Assistance Million US $ 687 3,886 3,584 3,234 4,074 ... ...Net Foreign Direct Investment Million US $ 135 1,281 2,132 2,168 3,196 ... ...

Source : AfDB Statistics Department; IMF: World Economic Outlook,April 2018 and International Financial Statistics, April 2018; AfDB Statistics Department: Development Data Portal Database, April 2018. United Nations: OECD, Reporting System Division.Notes: … Data Not Available ( e ) Estimations ( p ) Projections Last Update: May 2018

Ethiopia: Selected Macroeconomic Indicators

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

%

Real GDP Growth Rate, 2006-2018

0

10

20

30

40

50

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Inflation (CPI), 2006-2018

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2,006

2,007

2,008

2,009

2,010

2,011

2,012

2,013

2,014

2,015

2,016

2,017

2,018

Current Account Balance as % of GDP,2006-2018

IX

Appendix 6: Ethiopia Comparative Socio-Economic Indicators

X

Appendix 7: BSTP SF Operation Policy Matrix

Programme Medium term objectives

Policy actions Institution responsible

Output indicators Annual output targets 2018/19 2019/2020

2018/2019 2019/2020

(cumulative)

Component 1:Enhanced quality and equity of basic services Increased budget predictability and additionality for basic services through block grants

Total amount of block grants allocated to regions and Woredas per year

Block grant transfer to regions (excluding Addis Ababa)

Ministry of Finance and Economy

Value of block grant (ETB115.10 billion) (ETB157.59 billion)8

Action Plan for implementation of recommendation of the Domestic Resource Mobilization (DRM) study developed and approved

Implement Action plan Ministry of Finance and Economy

DRM Action plan developed and approved

Action plan approved

Action plan implemented

Improved quality of basic services in health, education and water and sanitation at Woreda level

Upgrade Health Extension Workers to level 4 standard

Upgrade Health Extension Workers to level 4 standard

MOH Number of Health Extension Workers qualified to Level 4 standard

27,000 38,000

Optimization Strategy and implementation manuals for Pastoralist Health Extension Programme developed

Strategy implemented MoH Optimization Strategy and implementation manuals for Pastoralist Health Extension Programme Implemented in 4 regions

4

Assess competency levels of Health Development Army leaders based on new assessment framework

Assess competency levels of Health Development Army leaders and model families based on new assessment framework

MOH Number of HDA leaders assessed

200,000 600,000

Implement the PHCU guidelines

Scale up the implementation of the PHCU guidelines

MOH % of OPD staff trained 25% staff trained on new guidelines

50% staff trained on new guidelines

PPP Strategy in Health aligned to PPP law

PPP projects developed and implemented

MOH Strategy aligned with PPP law.

for PPP strategy reviewed and aligned with PPP law

PPP strategy operationalized in one selected project

Curriculum Development Institute established

Curriculum Development Institute fully functional

MOE Curriculum Development Institute established and operational

Draft Bill Bill approved

Roll-out teachers licensing based on new guidelines

Scale-up teachers licensing based on new guidelines

MOE Percentage of teachers licensed

2% of primary and secondary school teachers licensed

38% of primary and secondary school teachers licensed

8 This is approximately 41% of the total federal budget proposed FY2019/20

XI

Increase # of qualified primary school teachers (G 1-8)

Increase # of qualified primary school teachers

MoE % of qualified primary school teachers

75% (70% F) 84% (79% F)

National Regulatory Board for Service Delivery in Water

Bill for the establishment of National Regulatory Board for Service Delivery in Water approved by Council of Ministers

MoWIE Draft bill approved by council of Ministers

Draft Bill approved by Council of Ministers

Draft Bill submitted to Parliament

Enhanced equity in delivery of basic services in health, education and water and sanitation at Woreda level

roll out enrollment of households in CBHI

Scale-up the enrollment of households in CBHI

MOH Percentage of Woredas with established community-based health insurance scheme (CBHI)

34% 80%

Alternative Basic Education Standards for Grade 1-6 revised (syllabus & text books) developed and approved

Alternative Basic Education Standards for Grade 1-6 revised (syllabus & text books) rolled out

MOE Revised Standards for Grade 1-6 developed

Revised standard developed and validated

Revised standard implemented

Component 2: Strengthen Accountability, Transparency and Citizen’s Engagement Enhanced transparency and accountability through citizen engagement

Develop Government framework on citizens’ engagement

Approval of Government framework on citizens’ engagement

Ministry of Finance and Economy

Government Framework on Citizen Engagement approved place

Draft framework Framework approved.

Expand coverage of Social accountability initiatives.

Roll-out expansion of Social accountability initiatives to new Woredas

Ministry of Finance and Economy

Social accountability expanded to new Woredas

Social accountability expand to additional 25 Woredas

Social accountability expand to additional 77 Woredas

Guidelines for implementing Financial Transparency Accountability (FTA) –Social Accountability (SA) –Grievance Redress Mechanism (GRM) linkages developed

Guidelines for implementing Financial Transparency Accountability (FTA) –Social Accountability (SA) –Grievance Redress Mechanism (GRM) linkages developed and adopted

Ministry of Finance and Economy

Guidelines for linkages of FTA-SA-GRM developed

Draft guidelines available

Guidelines approved and implemented.

Federal Budgetary organizations implementing FTA directive

Federal Budgetary organizations implementing FTA directive scaled up

Ministry of Finance and Economy

Number of federal budgetary organizations implementing FTA directive

27 50

Roll-out adoption of standardized procedure manuals for GRM

Scaled up adoption of standardized GRM procedure manuals

EIO Number of regions adopting GRM standardized regulations

6 11

Roll out of guidelines on citizen’s score card in health sector

Scale up roll out of score card system

MOH Number of health facilities using score cards

300 600

Roll out the legalization of WASH Committees

Scale up the legalization of WASH Committees

MWIE Number of regions legalizing WASH Committees

3 10

Improved performance and

PEFA 2018 conducted PEFA report made available Ministry of Finance and Economy

PEFA Conducted PEFA Conducted PEFA Report shared with stakeholders

XII

financial management /procurement in Woredas

Assessment of Procurement Systems (MAPS-II) undertaken

Assessment report made available MAPS-II Report available

Assessment report on Procurement Systems (MAPS-II)

Draft report available Final report available

Procurement KPIs rolled out to federal institutions involved in basic services

The roll out of procurement KPIs to FIAs initiated

3 Number of federal institutions involved in basic services rolled out procurement KPIs

1 3

XIII

Appendix 8: Map of the Federal Democratic Republic of Ethiopia