The report, which evaluated the effectiveness of public finances, states that the country is moving in the right direction, despite rising economic pressure. The positive steps taken by the Government of Ethiopia over the past decade to reorient expenditure from recurrent to capital, the decentralization of resources from federal to regional governments, and the focus on infrastructure have led to broad-based growth.

By leveraging external resources to boost spending in pro-poor sectors, the Government of Ethiopia has created the largest social safety net program in Africa benefiting 8 million people. The country has also achieved remarkable health and education outcomes using cost effective approaches. However, the report points out the urgent need to ensure equity in access to services to address major differences at household level. For example, neo-natal mortality reduced significantly for wealthier populations, but increased for the poorest. Out-of-pocket spending accounts for about one-third of health expenditure, which is high compared to 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.

“Ethiopia’s investments in key sectors have had a positive impact on poverty reduction, now the key is for the country to develop a more effective budget allocation in order to maximize the returns on investment,.” said Carolyn Turk, World Bank Country Director for Ethiopia, Sudan and South Sudan.

In order to ensure that new investments translate into enhanced service coverage and delivery, the report underscores the importance of supplementing the current public investment-led strategy with increased budgetary provisions for operations and maintenance. This is especially essential in key sectors such as transport and communication, education, health as well as water and sanitation. 

As the changing global environment implies declining external assistance, the report suggests that Ethiopia needs to focus on domestic revenue mobilization. This will help create the much-needed fiscal space to increase funding for operations and maintenance and support fiscal sustainability. At 12.7 percent of GDP, Ethiopia’s current tax revenue is lower than peer countries. According to the report more efficient tax administration stimulated by tax reforms, improved capacity and quality of tax administration as well as expanded tax bases could be a major sources of additional revenue.

"Domestic resource mobilization will lay the foundation for Ethiopia’s journey to middle income status,” said Jane Kiringai, World Bank Senior Economist and Lead Author of the report.

The Ethiopia Public Expenditure Review is produced by the World Bank Group in collaboration with the Government of Ethiopia. The policy note is intended to make a contribution toward how the government and development agencies design and implement their policies and programs.