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Smarter Public Spending Will Maximize Ethiopia’s Return on Investment

World Bank Group

  • A recent analysis of the effectiveness of public spending shows Ethiopia’s investment in health, education and social protection have contributed to overall economic growth and poverty reduction
  • Investment in infrastructure has increased the country’s road network from 19,000km in 1991, to 100,000km in 2015, according to the report
  • The report also highlights public reforms and improved domestic mobilization as key to help the country raise additional revenue

WASHINGTON, July 8, 2016 – Ethiopia’s investments in health, education and social protection have helped reduce poverty and boost economic growth, according to a new analysis of public spending report.

The 2015 Ethiopia Public Expenditure Review (PER), an analysis of public spending effectiveness, also recommends public expenditure reforms and improved domestic revenue mobilization to help raise additional revenue and provide the country with much needed fiscal space.

According to the PER, Ethiopia’s investment in infrastructure has increased the country’s road network five-fold, reaching 100,000km in 2015.

Investment in education has also helped to increase net primary enrollment from 77.5% in 2006 to 92.6% in 2015, according to the report, and education has been extended from 10 million to more than 23 million students in the past decade.

Through smart investments in the health sector and only an additional $5 in per capita health spending, the GoE reduced child mortality by more than half from 72 to 31 per 1,000 between 2005 and 2015. This is a record, as no other country has achieved such results for the same level of spending, the report notes.

In addition, more people now have access to improved water and sanitation services than ever before, according to the report. By leveraging external resources to boost spending in pro-poor sectors, the GoE has created the largest social safety net program in Africa benefiting 8 million people.

Despite the progress, Ethiopia’s poverty challenges remain deep-rooted and require sustained efforts. Notwithstanding the progress in critical aspects of human development, as Ethiopia strives to become a middle income country by 2025, it needs to address several challenges including:

  • The declining share of recurrent spending for operations and maintenance, especially in the transport and communication, education, health and water and sanitation sectors because improvements in service delivery cannot be achieved without adequate budgetary provision.
  • Enhancing revenue mobilization: Significant effort will be required to improve revenue mobilization to match operation & maintenance needs for ongoing investments
  • Equity in access: targeting the bottom 40%: Positive results have been achieved in the health and education sector however there are important differences in access to services at household level that require urgent attention. For instance, while Neo-natal mortality reduced significantly for wealthier populations, it increased for the bottom 40%. Out-of-pocket spending accounts for about one-third of health expenditure, which is high compared with other low-income countries and undermines access for low income households. In education, while the poorest children are enrolling in primary school, they are increasingly dropping out at higher levels. Only 1% access technical and vocational training and 2% higher education.

Beyond service coverage the report underscores the need to increase technical and allocative efficiency, said Jane Kiringai, World Bank senior economist and lead author of the report.

“If we look at the health sector, more than half of current health spending is on primary care, the most cost-effective level of health care however, in some regions investments in the sector have exceeded the standard norms, creating idle capacity and undermining technical efficiency,” she said.  “So more needs to be done to improve efficiency as the average number of outpatient visits per health worker per day which varies currently between two and nine and the average inpatient case per health worker per day is only one.”

While spending on primary education remained stable, secondary education increased, TVET share declined slightly and higher education is now the biggest sub-sector by spending. Higher education accounts for almost 80% of the education capital budget, taken up mostly by the construction of universities. On the supply side, classroom shortage and high pupil teacher ratio remain binding constraints to technical efficiency of primary schools in about a quarter of all districts.

The report also pointed out the need to increase efficiency and coverage of social protection programs, through consolidation of existing programs (food aid, workfare and targeted cash transfers) along with reforms and elimination of inefficient and regressive general subsidies.

As Ethiopia lays the foundation to become a middle income country, and the changing global environment implies declining external assistance, it is imperative that domestic resources support this transition according to the report. At 12% of gross domestic product (GDP), the country’s tax ratio is low compared to peer countries. Therefore, the PER recommends introducing reforms in the sector to improve efficiency and provide an additional source of revenue. This will address the funding gap for future investments.