CIRCULATING COPY TO BE RETURNED TO REPORTS DESK FJIL EC .y. DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.P-1219a-ET REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE EMPIRE OF ETHIOPIA FOR A THIRD EDUCATION PROJECT June 14, 1973 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 It may not be published, quoted or cited without Bank Group authorization.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 EQUTVALENTS US$ 1.00 = 2.07 Ethiopian Dollars (Eth.$) E,th.$ 2.00 = US$ 0.48 Eth.$ 1 million = TJS$ 480,000 Government of Ethiopia Fiscal Year July 8 - July 7 INTERNATIONiT. DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATTON OF THE PRESIDENT TO THFE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE EMPIRE OF ETHIOPIA FOR A THIRD EDUCATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Empire of Ethiopia in an amount equivalent to US$10.0 million on standard IDA terms to help finance a third education project. PART I - THE ECONOMY 2. P. report "Cirrent Position and Prospects of the Ethiopian Economy" (AE-21) was circulated on November 18, 1971 (R71-257). The report of a recent economic mission is nearing completion. A Country Data Sheet is attached as Annex T. 3. Virtually isolated from modern science and technology until the middle of the twentieth century, Ethiopia is recognized to be one of the twenty-five least developed countries. The per capita income is $76 a vear and some 85 percent of the population of 25 million are presently farmers. Agriculture accounts for about 90 percent of employment, 58 percent of GDP, and almost all exports. Mantfacture contributes only around 5 percent of GDP. 4. During the last two decades the Government has made notable efforts to accelerate the pace of development. Ethiopia is now in its Third Five-Year Plan. The first two plans gave priority to the development of infrastructure, and the establishment of manufacturing industries (mainly government-financed) based on import substitution. The Third Plan emphasizes the development of agriculture and of activities such as feeder road construction which directly support agricultural development. However, progress has been below Plan targets. Institutions are changing only gradually, and this slow pace of institutional change has inhibited rapid growth. Additional cons- training factors have been the low and somewhat uneven capital inflow and fluctuations in the world price of coffee (which accounts for about 60 percent of Ethiopia's exports), leading to large fluctuations in investment. With respect to aid, Ethiopia, unlike many other -2- African countries which were formerly denendent, has no traditional source of technical and financial. help. W. Over the past decade, per capita GDP has grown at about 2 percent a year. Growth would have been even lower but for a 16 oercent annual rate of growth of the manufactluri.ng sector based on import substitution. The economy was particularly sluggish during the late 1960's, although there was a sharp upturn in the economy for abouit a year beginning in mid-1969, attributable to a rise in coffee prices. UJnfortunately, coffee prices declined in 1ate 1.970 and although they have risen again since mid-July 1972, future prices are uncertain. Partly becaulse the opportunities for further impo-t substitution were more limited, the growth of manufacturing during the nast several years was less rapid. than before and,the economy as a whole has grown at or below the l.5 percent average for the 1.960's, and below the 6 per- cent growth target of the Third Five-Year Plan whiich expires in 1974. Jith population growing at 2.5 percent, per capita GDP has not risen at the 3.5 percent envisaged in the Plan. As a result of these develop- ments, the investment and growth targets for the remainder of the Plan are not expected to be realized. Also, while total population grew at 2.5 percent a vear, the urban population rose at 7 percent a year and the problem of urbar tanemployment is becoming more significant. 6. Turning to the future, the last economic mission projected that the rate of growth of total export earnings after a few years of growth reflecting higher prices is likely to decline, particularly after 1975. Assuming there is a limit on external capital inflow, this implies that the availability of foreign exchange resources will increase at a decreasing rate, and finally decline absolutely. Foreign exchange resource availability largely determines the growth of invest- ment, production and large parts of consumption, and through them the growth of GDP. Thus, unless the inflow of external capital increases substantially, and unless the rate of growth of non-coffee exports and of total export earnings is significantly rai.sed, the economic growth rate may decline to below the populatiion growth rate during the nex:t fifteen years. Export. possibilities other than coffee include livestock, fresh fruit and vegetables, pulses, and oil seeds. Increas- ing exports, however, depends on providing the appropriate incentives to producers andi marketing intermediaries. Experience in other countries suggests that the pattern of agricultural output is respon- sive to changes in the relative prices of agricultural commodities. Furthermore, some preliminary work undertaken in Ethiopia concludes that the supply ci a number of export commodities has responded posi- tively tc changes in prices. It appears, therefore, that if the foreign exchange constraint is tu be confronted in an effective manner, policy measures should be taken which affect relative prices in a way which discourages imports and encourages exports. 7. With respect to capital inflows, Ethiopia has attracted only modest amounts of private capital, and thus depends mainly on public capital inflow. Annual gross capital inflows have been only $1.25 per capita in the past five years (see page 3 of Annex 1 . Given Ethiopia's low GDP and the resultant low availability of domestic resources, this level is not adequate to support a rate of investment necessary for the achievement of a reasonable growth rate. With regard to public savings, performance has improved in recent years, but is below taxable capacity. 8. The Bank Group is pursuing a number of activities to support the Government's developmernt strategy. A mission visited Ethiopia to make a comprehensive study of the agricultural sector and the resulting report was recently circulated to the Executive Directors (R73-37). The Ethiopian Government, with IDA assistance, has undertaken a review of the education sector to enable it to design a strategy, policies, and curricula which will produce the trained manpower needed for Ethiopiars development. The Bank is executing agency for a UNDP- financed study of internal air transport with special regard to tourism development, and for a UNDP project which is providing a team of experts to help the Government in improving its planning. 9. The Agricultural Sector Mission has concluded that the prob- lem of Ethiopian agriculture is one of supply, mark-eting, and proces- sing, rather than demand. Livestock has the best export growth potential. The country's production potential and the international markets for its non-coffee exports are favorable. However, the development of this productive potential is constrained by inadequate infrastructure, shortage of credit facilities, shortage of skilled manpower, and existing land tenure systems. The Government is aware of these constraints and is taking some steps to deal with them. For example, the Agricultural and Industrial Development Bank (AIDB) has been established, and legislation for tenancy reform has been submitted to Parliament. 10. Three main difficulties confront Ethiopia - inadequate domestic resources, foreign exchange constraint, and an absorptive capacity problem. A large part of Ethiopia's investment, public and private, will need to be financed externally; since public savings are likely to fall short of needs, some part of the domestic cost of public investment will have to be financedfrom external resources. The present debt service ratio is about 11 percent. However, assuming that the external capital necessary to support a modest growth rate of only 4.5 percent is obtained on normal Bank terms and that exports continue to grow at the present low rate (3 percent a year or less), the debt service ratio wculd likely exceed 20 percent before 1980. Thus, needed capital should be provided to the greatest extent possible on concessionary terms. PARC II - BANK GROUP OPERATIONS IN ETHIOPIA 11. From 1950 through Naiay 31, 1973, Bank Group lending in Ethiopia has totalled $196.2 million, comprised of eleven IDA credits totalling $88.2 million and twelve Bank loans totalling $108.6 million. Two additional credits totalling $38.0 million were approved on June 7. Four loans have been fully repaid, and four others are fully disbursed. Two credits have also been fully disbursed. IFC has made four commitiments in Ethiopia totalling $14.1 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of May 31, 1973, and notes on the execution of ongoing projects. 12. Until 1969, the lending program concentrated primarily on assisting the construction of Ethiopia's infrastructure of roads, power and telecommunications. Aside from some small amounts for agriculture provided under loans to the Development Bank of Ethiopia, the Bank Group's first lending for agriculture in Ethiopia was the credit for the Wolamo Project (169-ET) in 1969. Since that time six additional credits have been approved for agricultural projects, the most recent of which are the credits for the AgricOfrtural Minimum Package and the Amibara Irrigation Projects approved on June 7. Additionally, the credit for the Agricultural and Industrial Development Bank (AIDB) was partly for agricultural credit and partly for credit for industrial development. Credits have also been made for a second education project and a highway project with emphasis on feeder roads, and a loan has been made for a water supply and sewerage project. This shift in the lending program reflects the Bank Group's emphasis on agriculture, the increased opportunity for agricultural lending brought about in part by improved sectoral knowledge, and the heavier emphasis on agriculture in the Govemrment's own priorities. This shift has been greatly assisted by the Bank's Permanent Mission in Easterm Africa (PMEA), which has played a major role in project identification and preparation in the agriculture sector. 13. With respect to Bank Group lending, a basic constraint is the Ethiopian capacity to prepare and implement projects, especially in the agricultural sector. Hence, we intend to provide assistance in project preparation, and, through technical assistance, to help strengthen the administrative capacity in the beneficiary institutions so that they may be able to utilize larger inflows of assistance. At the same time we plan to continue lending to such institutions as the Imperial Highway Authority (IHA), the Imperial Board of Telecoomunica- tioIns of Ethi-opia (1BTE), and the Ethiopian Electric Light and Power Authority (EELPA), institutions with which the Bank has worked for some years and which now have substantial capacity for channeling resources into development programs. l. We have a sizeable pipeline of projects at various stages of preparation. Several of these will be follow-ups to ongoing projects and others will be breaking new ground. Included in the first category will be a third livestock project, and follow-up credits for the Wolano, Hiunera, Coffee and AID3 n"ojects. Tncllrded in the second catesory are proposals for a land spttlennt project in the Shire Lowlands, a Grain Storage snd Marketing Project, and several regional agricultural projects ,,hinh will provide a base for eventual expansion of the ininmul PacTcaqe Prog-ran into other areas. The education sector is another pr-oritir for Bank l.ending and wJe hope to rresent a foarth education project for your consideration in the next 12 to 18 months; it w-ill be based on a major F-iucation Sector Review recently completed by the Government. Tn addition, we plan to present projects in telecommunicatiors, roads, and one in aviation which is linked to the promotion of tourism. iS. A summaryr of recent externol assistance to Ethiopia bv source and by sector can be seen on nag 3 of Amex I. Dttring 1967-71 the Bank and IDA contributed 36 percent of gross inflows on official account. This share is eroected to increase substantially during the next few years as amounts disbursed under Bank loans and IDA credits rise. Given the poverty of Ethiopia, the need for capital and at best moderate export prospects, most of the Bank Group's future lending should be in the form of IDA credits. PART? ITT - EDUCATION IN FIT{IOPIA 16. Modern public education in Ethiopia is of recent origin. Until the end of World War IT, most of the institutions at the nrimary and secondary levels were operated by the Ethiopian Orthodox Church or private organizations. Since then the Government has made subs- tantial efforts to expand public edbcation and t,raining. Over the past 15 years, enrollment in Government primary schools has grown at an average 11 percent annually and in secondary schools and Universi- ty at 19 percent and 20 percent respectively. 17. Despite the recent rapid growth, the literacy rate in the country is still estimated at only about 7 percent. Only 16 percent of the 7-12 age groups are in primary schools and participation rates at secondary and post-secondary levels are , and 0.4 percent respective- ly. Three-fourths of the school enrollment today is in Government schools with the rest mainly in primary schools operated by the Church, though some is in schools operated by missionary groups and private agencies. iS. The education system consists of a six-year primary course from age 7, a second level with a two-year junior cycle and a four- year senior cycle, and a third level of ITniversity and other courses. 19. The Government's increasing emphasis on education is evidenced -6- bv- the fact that budgetary expenditure on education has increased at. about 15 percent a year in the last five years. In 1970-71 exrpenditure amounted to Eth.$85 million or about 19 percent of recurrent expenditure. THowever, the education system falls far short of adequately meeting the develonment needs of the country. 20. A large proportion of the Ethiopian teachers are untrained and lack certificates of aualification. A high rroporti-on of secon- dacv school teachers are expatriates. Student "drop-ouit" and repeti- tion rates are high. in spite of a Drimary school building program assisted by the Swedish International Development Agency and the secondary echdcation expansion and imrnroerement helped by the first two TDA education projects, facili.ties remain inadequate and over- crowded. Tlittle use is made of mode(r ecuirnment and audio visual aids. The distribution of schools is heavily biased toward urban areas. There are also wide discaritier in particination rates at the provirncial andl sub-provi ncial eSel s The two universities (in Addis Abaha and Asmara) PTnroll som,e ,.nOO s+udHernts ;r facilities that were planned for about 4,000 ancd teaci;.ng suffers also because inecoming students are poorly prenared in science and ]anguages. 22. The nrina-v school. cu.rrfulT77im is still dnsi7ned, mainl:r to crepare stu,dents for general secenda-- eder_to.^ n and is not as relevtant aS n t should be to the rural economic enmu.ronment in which 90 percent cf Ththiopians live. Al+horgh second:ary educctioP has. been broadened to include rractica2 subjects, '.t iS still basically acadenic and its 7-rad-utes are inadequiately prepared for the labor market. The techni- ofT schools have yet to devel.on the kind of coTrhmiz7rcatAon with industry wbiJh will ersicre a surply of graduate trainee-s Cor its reeds. -ittle -rrhasis has so far been given to agn cultuiral education. 2?. Thn developmert of a better loncer tern stratey- for supply of essential manpower and hurarn resource development -s necessary Vor suc essfutl ilmlementation of Ethiopi a s develeorment rrn-ran. To fit th>e Fthioniar situation, the stratev wil-l need to t3ke `nto account the varied ecology of the col.untry and ethnic. comoosition of the people, the existing traditionail learning syster, the limitations of Governnent finance, the manpower refnu.rements of the modern sector of the economy and the need for an improved and more relevant learnincg system in the -iral areas. 23. The Government ic swell awarc of these probl]ems and has recertly completcd a c-iStia. revie -T of ins ~dncation seetor. This. review was ornanized and conduicted almost entirely bv Ethio ians with the Association cuosoeratin.7. mairly by helvnir tc identify foreign advisors andl consultants, most, of whom Tsere financed by the Second Eubication credit. The obWectives of the review were to mnprove the edination endl training systen ef Ethiopia and its capabi- lity for promoting economic, social and cl41.tural development, suggest -7- ways in which education could best be utilized to promote the integration of the nation, and to identify priority studies and investment in education and training. 2)h. The report published following the review proposed changes in the structure and content of the education system aimed at the rapid expansion of the first level of education, restriction in the expansion of the second level to about 2.5 percent a year and pegging of both the second and third levels to manpower require- ments of the economy. Proposed changes in curricula emphasized practical subjects, particularly in the rural areas, for those who leave schools at either the primary or secondary level. A national comnission for higher education was proposed for planning and coor- dinating post-secondary education. The report explored ways of reducing the costs of schooling, including more practical standards of teacher training and qualifications, increase in pupil-teacher ratios, extension of the school year and use of extension agents, artisans and the like for teaching practical courses in the lower levels in the schools. It proposed locating schools so as to bring about better distribution of educational opportunities throughout the country. Non-formal education was emphasized for both adults and younger people through various practical courses using existing schools and Government buildings and through the establishment of development centers in the rural areas. It proposed restructuring of the Ministry of Education and gradual decentralization of the administration of educational system in line with projected local Government reforms. Voluntary contributions by the people, includ- ing contributions of labor and materials, were proposed to cover an increasing proportion of the costs of the education system. 25. The Government has accepted the basic findings and recommendations of the Sector Review and is now examining the implications of its various proposals with a view to planning their gradual implementation. This exercise is being conducted within the framework of discussions on the country's fourth Five-Year Develop- ment Plan (1974-1979), which is also currently in preparation. PART IV - THE PROJECT 26. A report entitled "Appraisal of a Third Education Project in Ethiopia" (No. 19a-ET dated May 31, 1973) is being circulated separately to the Executive Directors. A Credit and Project Summary is provided in Annex III. Background 27. The implementation of the reforms adopted as a result of the Education Sector Review will require major new investment. - 8 - A.ssistance from the Association in financing this investment will be considered once specific plans and projects have been prepared. 1eanwhile, however, there are some urgent educational needs to be satisfied which do not have to await the completion of investment planning stemming from the Sector Studly. The proposed credit is to finance an interim project designed to meet urgent needs for aefined manpower and educational requirements which are of high priority. It was iaentified with the assistance of an IDS mission during the first part of the Education Sector Review work in January 1972. A credit application was received by the A.ssociation in Iahv 1972 and a mission to Ethiopia appraised the project in July 1572. 23. The project airs at improving the teaching of science and the supply of manpower needed for carrving out the agricultural investment rrogram and making more effective the existin7 self- sluDnorting riral learning network of the Ethiopian Orthodox Church. The total cost of the project i.s estimated. at UTStI2.7 million an.d the foreian e-xchange component at US-6.7 mi.llion. 29. Negotiations for the credit took place from April 25 to May 3, 1973. The Ethi.onian delegation was led by H. E. Ato Seifu. Mnhteme Selassie, M--n-Lster of Fdication, ass;sted by H. F. Nibured ,rm.ias Kabede, General. Manager, Ethiopian Orthodox Church; Dr. Ak] ilu Habte, President, Hsaile Selassie T University (HSTUT); Dr. :ev-.Aml-k Worku, Director General, Education Division, Ministrv of Agriculture; Ato K'assa Gabre, Marager, Construction and Mainte- nance Divisicn, Ministrv of .Education; ard Ato Teferra Wolde-Semait, Finarcial and Fconomic Counselor. Embassy of Fthiopia, Washington, Project Descriotion 20. T.he project has seven orincipal. components as described below. (a) F-xansion and Renovation of the Science Center of ITSET. Thi.s part of the project would assist exoansion of the facilities of the Science Center fron the present enrollment. capacity of about 1,100 to ]_,7?0. It would pro-vifde a scdence libraryT, two I -ct'ire ball.s, and instruc- tional and research laboratories, staff cfices, and supporting facilities for the various departments of the UTniversitv. The new con&-?0 1 i.7- 7 10.L5 6.LX 2.8 6.h -2.0 11 .2 13.2 21.& 31 AitJEX II Pa-Co I of 6 THE STATUS OF EA.K GF.OUP OPERATIC'IS R. ETIHIOPIA A. STATE2,:NT CF L.NK IOA';S AND IDA CF_DITS (as at May 31 ,T973) US$ Million Loan or Amount Credit Undis- Num.ber Year Borro-er Purpose Bank IDA bursed Eight loans f ally disbursed 56.7 Two credits fully disb'irsd 20.7 523-ET 1568 Ethiopia Fourth Highway 13.5 2,7 111-Er 1968 Zthiopia Fourth Highway 7.7 1.6 596-E7' 1969 EZLPA /h Power II (Finchaa) 23.1 3-5 6D5-ET 1969 BTEE /2 Telecom. IV I.5 2.0 169-ET 1969 Ethiopia Wolamo Agriculture 3.5 .9 185-ET 1970 Ethiopia Humera Agriculture 3.1 .8 2h3-ET 1971 Ethiopia Education II 9.5 8.9 269-Er 1971 Ethicpia Dairy 4-4 3.9 816-ET 1972 Al;SA /3 Addis Alvaba Water Supply & Sow3rage 10.8 10.b 250-ET 1972 Ethiopia Coffee Processing 6.3 6.3 304-ET 1972 Ethiopia Agricultural & Industrial Development Bank 11.0 9.8 332-1Er 1972 Ethicpia Fifth Highway 17.0 17.0 365-ET : 1973 Ethcplia Second livestock 5.0 5.0 TOTAL .................................... 108.6 88.2 of which has beon repaid ..... ............ 25.! TVotal now cutstaid`ing . . .................... T6-2 2 Amount so3d ........ ........ 6.0 of which has teen repaid ... 5.8 0.2 Total nowr held vy Bar.k £nd TD,A 83.0 88.2 (prior to cxcharnge adjustn:onts) 18.6 51.2 72.8 Total undinbursed * not yet effoctiv' /1 Fthiorian ,eztric lgI't I tcwr Authority 72 Ir il iSarc! cf Ti'c unioC3''0,,S of Ethiopia 73 Addis Albta Water & Soweragc Authority N.B. In addition to the credits listed above, a credit of $21 million for the Agricultural Minimum Package Project and a credit of $17 million for the Amibara Irrigation Project were approved on June 7, 1973. AMNEX II Page 2 of 6 STATEA,SNT OF IFC IN1VEST!PENTS (as at Mby 31, 1I73) US $ Million Type of Amount Obligor iasiness Loan Eitity Total '265 Cotton Company of Ethiopia I Textilos 1.5 1.0 2.5 1966 Ethiopia Pulp and Paper Co. Paper 1.9 1.9 1968 HVA Mbtahara Sugar 5.5 3.5 9.0 1970 Cotton Comapany of Ethiopia II Textiles 1/ 0.5 0.2 0.7 Total gross connitments 7.5 6.6 14.1 leas cancellations, terminations, rupaymirnts and sales 2.9 2.3 c.2 Total coywdtmn.its now held by IFC h.6 4.3 & 9 Total tunn > su.srsed , 1/ A third investment in thF Cotton Company of 7thiopia.in the ano-Unt of $1.7 million ($I.b5 -million loan and $236,000 equity) was approved by the Board of Directors of IFC on May 10, 1973. ANNEX II Page 3 of 6 pages C. PROJECTS IU EXECUTICU - ETMIOPIA 1i Ln 'lo. 523 Fourth Ylirhway Project; US$13.5 rmillion Loan and US$7.7 Cr No. t11 million Credit of January 15, 1968; Closing Date: December 31, 1973. Project comprises: (a) primary road construction - 303 km of road between Awash and Tendaho, 113 km between Bedelle and Metu; (b) bituminous surfacing of primary roads - 125 km between Nazareth and Awash, 45 km between Jimma and Agaro; (c) consulting services for construction, supervision and preparation of feasibility studies and review of design for 500 km of high priority roads; (d) advisory services and training. The project was late in starting because initial bids were high requiring changes in specifications and new bid invitations. Subsequent progress has, however, been good. Of thie three civil works contracts, two have been completed - one a year ahead of schedule and the other about fifteen months ahead of schledule: the third contract is expected to be completed at the end of 1973, about three rnonths behind schedule. Ln No. 596 Pow!er II, Ffnchaa T1hdroelectric Project; US1$23.1 rillion LToan o>: May 9, 1969; Clesing Date: Decebor 31, 1973. 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