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RESTRICTED FILE COPY Report No. AF-38 Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF ETHIOPIA Public Disclosure Authorized FILE COPY October 29, 1965 Public Disclosure Authorized Africa Department EQUIVALENTS Currency Currency Unit: Ethiopian $ Eth. $2. 50 = U.S. $1.00 Eth. $1. 00 = U.S. $0. 40 Eth. $1 million = U.S. $400,000 Weights Weights are expressed in metric tons unlless otherwise stated. Area 1 hectare = 2.471 acres Time The Ethiopian calendar year begins on September 11. In order to simplify the report the Gregorian calendar has been used unless otherwise stated. INTERNATIOANAL BANK FOR RECONSTRUCTIOiV AND DEVELOPM41ENT CONFIDENTIAL R65-169/1 FROM: The Secretary November 12, 1965 ETHIOPIA With regard to the report entitled "Current Economic Position and Prospects of Ethiopia" (AF-36) dated October 29, 1965, which was circulated on November 4, 1965 (R65-169), the second sentence of paragraph 52 thereof should read "Total investment remained about 20% below the Plan targets and the shortfall was very serious in the dominating agricultural sector where monetary investments were around 50% of the targets and where progress with respect to other measures embodied in the Plan - e.g. agrarian reform ancd considerable expansion of agricultural services - remained very limited." Distribution: Executive Directors and Alternates President Ptesident' s Council Executive Vice President, IFC Department Heads (Bank and IFC) CONTENTS Page BASIC DATA iMAP SUIH1ARY ANID CONCLUSIONS I. INTRODUCTION ..........................1 II. RECENT DEVELOPMENTS .. .* . ...... 1 A. Production ........ e@e@Xss*@ 1 Gross Domestic Product ..................... 1 Agriculture ...................... 2 Industry ..... ....... 4 Transport and Communications 6 B. Investment 7.. .......oo*********7 Co Finance *......*.......................... * 11 Internal Finance ...... .. .........*... **.... 11 External Finance .o*ooso#*s*o* **.. o*o*o* 13 III. PROSPECTS FOR ECONO,IC GROWJTH so7............ .7 A. Production and Investment 17 B. Finance ......................... 19 Internal Finance 19 .External Finance, Creditworthiness ......... 19 ANNEX I': Projections STATISTICAL A,UTEX BASIC DATA AREA: 450,000 square miles POPULATION: 22 million Rate of growth: 1.8% Population density 49 per square mile POLITICAL STATUS: Independent since ancient times. GROSS NATIONAL PRODUCT (1962/63, prel.) US$ 880 million Rate of growth (long term) 3.5% (recent year) 3.8% Per capita (1963) US$ 40 GROSS DOMESTIC PRODUCT AT FACTOR COST (1962/63 prel.) Eth$ 2,210 million of which, in per cent, Agriculture: 70 Mining, Manufacturing and Power: 2 PER CENT OF GDP AT MARKET PRICES: 1962/63 1957-62 Gross investment (monetary only) 9 7 Gross savings 6 5 Balance of payments current account deficit 3 2 Government revenues 10 8 Investment income (net) 1 1 RESOURCE GAP AS % OF INVESTMENT: 33 30 MONEY AND CREDIT: (Eth$ million) 1964 1952-64 Total money supply 3(v.2% Time and savings deposits 68.6 19.7% Commercial Bank credit to private sector 157.5 25% PUBLIC SECTOR OPERATIONS: (in Eth$ million) 1965/66 Rate of change in 1960/61-1965/66 Government receipts 298 9% Government recurrent expenditures 3'72 9% Deficit '74 Government capital expenditures '78 16% Total external assistance to public sector 124 n.a. (incl.countervalue of technical aid) - 2- EXTERNAL PUBLIC DEBT:(in US$ million) December 1964 Total debt 114 Total annual debt service 10.7 Debt service ratio 10% BALANCE OF PAYMENTS:(in US$ million) 1964 Rate of change in 1958-1964 Total exports 105 9% Total imports 109 9% Net invisibles -5 Net current account balance -.9 Commodity concentration of exports(coffee) 60% 50%(av.1958-64) Gross foreign exchange reserves 76 60 (av.1960-64) or 8 months imports | y@s !\ . s X~~~~~~~~~~~~~~~~~~~~~~AU D I y<J / r' | n \ ~~~~~~~~RA8 I AETH10PI ~~ ~~~~~~~~~~~A ., SAUDI ~ETHIOPIA ;I/ i)% tsk ES @ \J MAIN ROADS .--'.-5. RAILWAY/ A t G_/ASMRj o. s b C50 00.Io20?0- co~~~~~~~~~~~~~~Eo MEKEL| , s / < Korok~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O,cOM 0/ 00i El.h., D. di. D Oz f Aden Ghi.1 Alooot // D .AA I -*-*7 20.)/7Ago 0100 UGANDA 80ngo E N Y A 0h.sh-n- t/~~~YRALE j f<)Wo. 4~~~~~~~~~~~ / {. °b >~~~~F, t S r F1 l 1f U 9 _ . _ * _ > A :23GAD K E N..__ y 8Dl8 MAY 1963 Summary and Conclusions 1. Though in some sectors of the Ethiopian economy - e.g. industry, power and transport - encouraging signs of progress can be observed, the overall rate of growth of gross domestic production is still rather low, viz. 3.8% per annum, but thanks to a relatively slow growth of the population it is about 2% per annum on a per capita basis. 2. Serious structual impediments continue to stand in the way of a more rapid development of the all-important agricultural sector. The bulk of agricultural production is still carried on in a traditional, primitive way, often on a mere subsistence level, and its expansion is strongly hampered by the prevailing system of land tenure and landlord- farmer relationships which gives little, if any, incentive to the farmer- tenant to increase his production. Thus far, little progress has been made with land reform. Some expansion of agricultural services took place, but the smallness of the extension service and of the agricultural cooperative system, as well as the absence of an agricultural credit system and the limited marketing system, still hamper development in agricultural production and in animal husbandry. However, the fertile soil, the range of climate and the level of rainfall indicate a con- siderable, if still unrealized, potential. Greatly intensified efforts to overcome. these impediments undoubtedly would be a crucial element in accelerating Ethiopia's economic growth. 3. Industrial output is still very small in relation to total GDP, viz. not yet 2%, but it is growing at a rate of about 13% per annum. The expansion of the textile industry and of several food industries in particular was most encouraging. The plans for a number of large factories are in an advanced stage and others are under execution. Generation of electric power has been greatly expanded and sales went up by about 30% p.a. As a result of the expansion and improvement of the road system, transportation costs in several key areas, have decreased substantially, and areas of subsistence agriculture have been brought into the money economy. 4. Gross fixed investment in recent years remained on the low side, amounting to about 11% of GDP, including investment in kind of some Eth$ 50 million p.a. Monetary investment in 1964/65 is estimated at Eth$ 210 million, of which Eth$ 100 million is private, The latter amount is much less than hoped for in the Second Five-Year Plan, which assumed that entrepreneurship and financing would be more amply supplied from abroad than proved to be the case. Government investment dropped from Eth$ 109 million in 1962/63 to Eth$ 83 million in 1963/64; and 1964/65, and this was accompanied by a fall in public capital inflow from Eth$ 65 million to Eth$ 23 million. To a large extent this was due to lack of well-prepared projects, while insufficient co-ordination in and between Government levels was also not conducive to the implementation of development projects. Moreover,the generation of public savings has been hampered in recent years by a considerable increase in current expenditures - mainly those on security. ii 5. IHission estimates suggest that the execution of a reasonable pro- gram, comprising the main projects on which Government and Public Corpora- tion have focussed their attention for development in the various sectors, would require a gradual increase of the present annual public investment volume of Eth.$110 million to roughly some Eth.$150 milliorl in 1970/71. This would, however, also necessitate a considerable rise in external aid. 6. Since Government capital expenditures have been on the low side :in recent years, while at the same time the favorable revenue effect of the sharp rise in exports and imports on the collection of custom duties offset to a large extent the increase in recurrent expenditures, overall deficits in fiscal operations remained rather small: Eth.$7 million in 1963/64 and Eth.$16 million in 1964/65 ("lexpecteel actual"). The Budget for 1965/66 shows an overall deficit of Eth.$27 million, but this may well turn out to be much smaller. 7. Until 1964 monetary expansion appears to have been reasonably commensurate with the growth of the economy and its increasing monetiza- tion. In 1964 a large surplus in external payments and a sharp rise in bank advances to the private sector caused an increase of over 20% in money supply, and there are indications that this has led to upward pres- sures on domestic prices. However, the rather liberal import policies pursued by the Government are likely to offset such pressures. 8. There has been a substantial improvement in Ethiopia's foreign exchange position in the past year. In the period 1960-63 the continuing downward trend in coffee prices adversely affected the value of exports, but due to a favorable rise in volume total exports increased by 23%. :Imports went up by 32% but foreign financial assistance more than com- pensated for the ensuing deficit on goods and services, and foreign exchange reserves increased by Eth.$38.5 million in that period. The sharp rise in coffee prices, combined with a larger quota for Ethiopia under the International Coffee Agreement led to a further increase of reserves of Eth.$26.8 million in 1964, so that they stood at Eth.$181 million (net; = US$72 million) at the end of that; year.