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World Bank Document - FIL-O- DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Public Disclosure Authorized Report No. P-1575a-ET REPORT AND RECOMMENDATION OF THE Public Disclosure Authorized PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO ETHIOPIA Public Disclosure Authorized FOR A TELECOMMUNICATIONS PROJECT April 23, 1975 Public Disclosure Authorized This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS US-$1.00 = 2.07 Ethiopian Dollars (Eth.$) Eth.$1.00 = US$0.48 Eth.$ 1 million = US$480,000 Government of Ethiopia Fiscal Year July 8 - July 7 iNTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO ETHIOPIA FOR A TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed development credit to Ethiopia for the equivalent of US$16.0 million on standard IDA terms to help finance a telecommunications project. The proceeds of the credit would be relent to the Board of Telecommunications of Ethiopia for 20 years, including 5 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. Events in Ethiopia during the past year have been dominated by the political revolution which began in late February 1974. Widespread political and economic discontent, inflamed by the Government's slow response to the famine in the drought areas of Wollo and Tigre provinces, and to other press- ing economic and social needs, gave rise to demonstrations in the streets of Addis Ababa. Riots over the cost of living, strikes by teachers, taxi drivers and others, and pay mutinies by the armed forces, led to a general military revolt that precipitated the resignation of the cabinet on February 27. From February to September a new cabinet, appointed by the Emperor and apparently acceptable to the armed forces, administered the country, but power gravitated increasingly to the military. 3. The first actions of the new cabinet were to grant pay increases to the armed forces, police, teachers and civil servants, and to promise political and social reforms, including a new constitution and a free press. In spite of these moves, political and economic unrest, as well as criticism of the regime, continued through the spring. In late April, at the demand of the armed forces, the Emperor agreed to the arrest of some 20 former ministers and certain military officers on charges of corruption. From June through September the armed forces ordered further arrests of some 200 con- servative leaders, including senators, provincial governors and members of the Emperor's Crown Council. Additionally, they moved to take over or dissolve the institutions used by the Emperor to rule the country. Finally in September the armed forces arrested the Emperor, suspended the constitution and Parliament, and proclaimed rule by a Provisional Military Administrative Council (PMAC) pending the election of a new parliament and the approval of a new constitution. General Aman Michael Andom, the Defense Minister, was appointed head of the Provisional Government. The former Prime Minister was appointed Minister of Information and other cabinet ministers, government officials and civil servants were requested to continue in their posts. - 2 - 4. On November 23, the revolution, which until then had been almost completely bloodless, took a violent turn. In an apparent confrontation over control of the revolution, the PMAC attempted to arrest General Aman, who was killed in an ensuing gun battle. Following the death of General Aman, the Provisional Government, apparently fearing a counter-revolutionary coup, carried out summary executions of 59 political prisoners, including two former prime ministers, other former ministers, provincial governors, senior army officers and aristocrats. The killing of Aman and the executions sent shock waves through Ethiopia and the international community. In recognition of the adverse reaction at home and abroad, the Government declared that all prisoners still being held would be given a fair trial. Recently, however, the press has reported that persons caught organizing armed opposition to Government reform measures have been executed. 5. On December 20 the PMAC declared that Ethiopia would become a socialist state. This was followed on January 1, 1975, by a decree nation- alizing the financial sector (banks, insurance companies and savings asso- ciations). In early February some 100 medium- and large-scale manufacturing and distributing firms owned by Ethiopians and foreigners were nationalized; seventy-t'wo were taken over entirely, and the Government acquired a majority ownership in twenty-nine others. The Government declared its intention to pay full compensation. 6. In early February, fighting broke out between the armed forces and the Eritrean Liberation Front. Most of the fighting has been concentrated in and around the principal city of Asmara, which is still held by the Government. At this time fighting apparently continues, but since no inter- national press coverage is permitted, little is known about the situation. 7. On March 4, 1975 the PMAC issued the long-awaited land reform proclamation which nationalized all land and restricted individual holdings to a maximum of 10 hectares. This brought to an end the old feudal structure oF land ownership under which about 90 percent of the rural population were engaged in agriculture as tenants. In preparation for this step, the Govern- ment had replaced the old provincial and district governors with carefully chosen administrators who were given training and orientation in land reform and other rural development measures. In addition, about 30,000 students were sent to the rural areas for the purpose of explaining to the peasant farmers the implications and beneflts of land reform while participating in a work campaign for rural development. There have been, not unexpectedly, some reports of resistance and opposition to the land reform measures, but it appears the measures have received general acceptance by the vast majority of the Ethiopian population. Another development in early March was a change in the civilian cabinet which brought in a number of well trained technocrats who had in their previous positions demonstrated considerable ability and achievement. 8. Throughout this period of upheaval, the civilian cabinet and the Ethiopian bureaucracy have continued to function reasonably well. The Govern- ment's takeover of banks and industries has led to a diversion of some scarce, -3- trained manpower from Government ministries to the management of the national- ized enterprises. In addition, the Government has transferred a large number of officials from the ministries and other government agencies to local govern- ment institutions as a part of a government program to decentralize functions to the subprovincial and district levels. The effect of these transfers on the efficiency of operation of the ministries and agencies of the central govern- ment is not immediately clear but some loss of efficiency is likely. 9. In this changing atmosphere, Bank Group operations for the most part have proceeded satisfactorily. Appraisals and supervisions are continuing to proceed normally, and an economic updating mission visited the country in March. Regarding existing projects, the execution of two projects (Humera Agricultural Development, IDA Credit 188-ET, and the Lower Adiabo, IDA Credit 516-ET) have been adversely affected due to their proximity to Eritrea. Other projects have not been seriously affected by recent developments, and decisions have continued to be made and normal work has continued. The Government has indicated to us that, despite its preoccupation with political events, it is desirous of pursuing an accelerated program of economic development, with emphasis on the lower-income groups. 10. A report, "Recent Economic Performance and Future Prospects in Ethiopia," Report No. 9a-ET (R73-162) was circulated on June 15, 1973. An economic updating mission was carried out in March of this year. Annex I contains country data. 11. Ethiopia, with an annual per capita income of only US$80 in 1972, is classified by the UN as one of the 25 least developed countries of the world. The population is predominantly rural and depends on agriculture for its livelihood. In recent years the agricultural sector has contributed 50 to 60 percent of GDP and over 90 percent of export earnings. The leading exports are coffee, hides and skins, pulses and oilseeds. Manufacturing, including handicrafts and small-scale industries, contributes only 10 percent of GDP, and the output of the mininR sector is negligible. 12. An estimated 85 to 90 percent of the people are subsistence farmers living in isolated rural villages. Although some large commercial farms did exist, most farming units were small. A recent survey in one province showed that 92 percent of the cultivated holdings were less than one hectare. Agri- cultural productivity is, in general, very low. Methods of cultivation used by most farmers have changed little over many centuries; the soils in many highland areas are seriously depleted from prolonged overgrazing and over- cropping, and the prevailing systems of land tenure generally did not provide adequate incentives for investments which would raise farmers' productivity. The development of agriculture is also inhibited by the lack of transportation. There are few secondary and tertiary roads, and perhaps three-fourths of Ethiopia's farms are more than one-half day's walking distance from a road. This means transport costs are often too high to make it profitable for subsistence farmers to expand production for the market. As a consequence, - 4 - there has been little or no improvement in rural living standards in recent years. Difficult though the development of agriculture may be, the lack of other resources means progress in developing the Ethiopian economy rests almost entirely on developing agriculture.
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