Current expenditure is expected to increase slower than nominal GDP,
depending, however, on the pace of implementation of the SIPs and the
success of the civil service reform program. This would create space
for the capital budget while providing for a redirection of the recurrent
budget to priority areas, such as adequate infrastructure maintenance
and improved health, education, and agricultural extension services.
(This process will be facilitated in the transport sector by a separate
road fund, not shown in the budget, which will be self-financing and
responsible for road maintenance.) In addition, the ongoing reform of
the civil service at both the federal and regional levels should ensure
that the maintenance of adequate remunerations will be partly offset
by a restructuring of personnel, so as to maintain wage and salary outlays
under 6 percent of GDP. Defense expenditure would fall back to the range
of 2-3 percent of GDP, following a sharp rise in 1997/98 owing to the
border dispute with Eritrea. To strengthen financial management, all
accounts maintained by line ministries and other spending agencies will
be consolidated in a single treasury account.
Among other things, the study suggests different modalities of privatization
for each of the 114 enterprises to be divested. These proposals, along
with ways to strengthen the Privatization Agency, are to be examined
with technical assistance from Germany, which is expected to commence
in November 1998. During 1998/99, the government aims to develop a Privatization
Action Plan to accelerate the speed of privatization.
In light of the constraints noted above, it would not be prudent to
set a firm target date for completing the privatization of all 114 enterprises.
The government is committed to doing so at the earliest feasible date,
subject to these constraints, as well as to the objective of establishing
a transparent, corruption-free process that obtains reasonable prices
for public assets. Notwithstanding the uncertainties with regard to
the pace of the program and pending the completion of the action plan,
at this stage it is considered feasible to set a firm target of bringing
at least 80 enterprises to the point of sale by June 2001. The action
plan would examine how this target could be made more ambitious. In
any event, by December 1998, ten state farms and two large enterprises
(a brewery and a cement plant) are to be brought to the point of sale.
Ethiopia has one of the lowest levels of energy consumption in the
world-only 5 percent of the population has access to electricity. Private
sector participation will clearly be needed if this is to change in
the near future, and the government accordingly has recently decided
to remove restrictions on private sector participation in electricity
generation (see section on private sector development), and also to
privatize the Calub Gas Company. Parallel reforms include the elimination
of all subsidies to, and commercialization of, the public utility, and
the enactment of a new regulatory framework.
Four critical steps should follow. First, the new policy for the sector,
which foresees private participation, should be formulated in a telecommunications
policy statement; the statement would set out the objectives, the options
it proposes to achieve those objectives, and exactly how it plans to
allow private participation and to amend the legal framework to allow
private sector participation. Second, labor issues, appropriate levels
of capital expenditure in the run-up to privatization, the level of
the ETC's debt, and the rebalancing of tariffs in preparation for private
participation in ETC should be examined. Third, how sector policy and
structure can be set up in such a way as to attract as much private
participation in providing service in rural areas should be analyzed,
as well as what form of public-private partnership will be needed for
this purpose. Finally, appropriate advisors for the sale itself-usually
high-quality international investment bankers and lawyers-should be
recruited.
Policy Matrix 1998/99-2000/01
Initiate privatization of Construction and Business Bank (CBB). September
1998
Bring CBB to point of sale. December 1999
Bring ten state farms and two large enterprises (brewery and cement
factory) to point of sale. December 1998
Bring at least 80 enterprises to point of sale. June 2001
The pace of liberalization and deregulation began to pick up in 1998/99.
Following the privatization or liquidation of 175 enterprises in the
preceding two fiscal years, several large enterprises and state farms
were brought to the point of sale, and preparations began for the privatization
of the Construction and Business Bank (CBB). Limits were lifted on foreign
investment in joint ventures in the telecommunication and power sectors.
Administrative hurdles for exporters, concerning price verification
and foreign commercial borrowing, were dismantled. The surrender requirement
for exporters was replaced with a conversion requirement, permitting
the use of foreign exchange proceeds for current account transactions
within four weeks.
Considerable efforts have been made in recent years to ease regulatory
constraints on the private sector, but eliminating such impediments
remains an important area for future reform. The next step in this process
is to complete a comprehensive study, with World Bank technical assistance,
to identify the key regulatory constraints and the measures needed to
address them. The government recognizes that the task of fostering private
sector development would be greatly facilitated by establishing broad-based
fora for regular consultations between itself and the private sector,
along the lines of the "Export Promotion Council." Within
private sector economic activity, export development will receive much
attention in policy formulation; in particular, measures in favor of
export activity will need to improve the access of exporters to finance
and land. In support of private sector development, government will
accelerate the pace of the privatization of large industrial enterprises.
Progress has been made with the privatization of smaller enterprises,
especially in trade and other service sectors, which account for the
bulk of the enterprises privatized to date. Over the next two years,
the government will bring to the point of sale at least 80 industrial
enterprises. Participation of foreign investment in the Ethiopian Telecommunication
Corporation is envisaged in the near future, and for this purpose a
foreign consulting firm has been hired and has started work in August
2000 to undertake a study and prepare a bid document. The restructuring
of the telecommunications and electricity utilities will be finished,
regulatory frameworks put in place, and decisive progress made with
private participation in these activities in 2001/02.