EU-Ethiopia Cooperation: the largest support programme in the ACP

by Heino Marius

Ethiopia possesses a rich cultural heritage and a long history, the country was never colonised and its inhabitants are very independent in spirit. Over the last 30 years Ethiopia has attracted international attention mainly through social upheavals, extended warfare and pro. longed droughts. Following the feudalism of the imperial time and the red terror of the 'Derg' regime, the Transitional Government of Ethiopia (TGE), which took power in May 1991, inherited a devastated economy with one of the lowest per-capita incomes in the world. The country now enjoys peace and has initiated economic reconstruction.

After two decades of cooperation between Ethiopia and the EC, now the EU, this appears to be a special juncture, as both parties are in a position, for the first time, to combine their efforts within the framework of progress towards a market economy and a democratic political system.

Ethiopia occupies a unique position in the development cooperation structure of the European Union. Taking into account all instruments of assistance, including both programmable and non programmable resources, the country is the largest recipient of EU support, ahead of any other ACP state. Allocations of programmable aid amounted to:

The LomV contribution includes ECU 225 million grant funds, out of which ECU 20 million have been earmarked for Eritrea, and ECU 40 million risk capital administered by the European Investment Bank (EIB).

Impressive non-programmable funds were designated in response to humanitarian needs and to compensate for losses in export earnings. Deliveries until 1993 total approximately ECU 600 million worth of food aid, ECU 120 million for emergency aid and ECU 250 million under the STABEX scheme. To this are added EIB loans out of regular resources and benefits from regional programmes. Total EU disbursements in Ethiopia have to date easily exceeded ECU 1.5 billion.

Historical perspective

Cooperation between Ethiopia and the EU dates back to 1973 when, still under the reign of Emperor Haile Selassie, the then Community supported a food aid programme to alleviate a serious drought affecting the northern regions at that time. In the event the Imperial Government was accused of ignorance of the plight of the affected populations, and this was one of the factors which led to the overthrow of the old regime by a group of junior army officers, later to become known as the Derg, who set the country on a socialist path. Negotiations for accession to the First Lomonvention were completed with the new Government, and Ethiopia has been a signatory to all further Conventions ever since.

Under Lom and LomI, collaboration focused primarily on the provision and upgrading of economic and social infrastructure to lay a foundation for the growth of the productive sectors. Major completed projects from this period include Addis Ababa water supply, Amibara irrigation, the Amarty hydropower scheme and the Ghimbi-Gambella road.

The LomII National Indicative Programme (NIP) was negotiated and signed in May 1986. In the aftermath of the 1984/85 famine the Government opted to give priority to agricultural development as the focal area for EC assistance. This approach corresponded with the LomII emphasis on food security and the move away from isolated projects towards support for policies and sectoral strategies. The resulting need for a more thorough policy dialogue led to some liberalisation in agricultural pricing and marketing, preparing the ground for a number of large rural development schemes, namely the Shewa Peasant Agricultural Development Programme (PADEP), a third phase of the Coffee Improvement Project (CIP) and the Lake Fisheries Development Project.

Confronted with steep economic decline towards the end of the 1980s, the Government, in what perhaps can be referred to as an Ethiopian version of perestroika, initiated the so-called New Economic Policy with a view to facilitating the participation of private-sector operators in the economy, while loosening the central planning doctrine. As a new feature of EC aid to Ethiopia this period saw the introduction of quick-disbursing operations through Sectoral Import Programmes in support of the productive sectors, which had the double effect of alleviating the foreign-exchange crisis facing the country while supporting selected budgetary targets through the generation of counterpart funds.

1991 witnessed a dramatic intensification of the civil war and the seizure of power by a coalition of rebel groups led by Meles Zenawi, the current President, in May of that year. Owing to these events, the initial version of the National Indicative Programme for the LomV First Financial Protocol signed on 23 February 1991 became obsolete. A completely revised NIP was concluded on 18 March 1992, with the Transitional Government of Ethiopia (TOE) advocating a gradual reduction of the role of the State while strengthening the market economy, as laid down in the Economic Policy for the Transitional Period adopted in November 1991. It was agreed that EC-Ethiopia cooperation would be based upon the implementation of new approaches consistent with priorities spelled out in the LomV Convention, in particular the active promotion of the private sector in agriculture, industry and services. Rural development and support to small and medium-scale enterprises were identified as focal areas. The parties further agreed that Community assistance would be placed within the context of a structural adjustment programme with major objectives outlined in a Policy Framework Paper (PFP).

From rehabilitation to structural adjustment

Initial priorities for cooperation with the Transitional Government were clearly focused on rehabilitation efforts. The EC responded swiftly to the precarious nature of Ethiopia's economic situation by participating in the multi-donor Emergency Recovery and Reconstruction Project (ERRP) with a contribution of ECU 98 million out of a ECU 550 million package. Funds were allocated from existing sources including STABEX, Sectoral Import Programmes, Food Aid, Shewa PADEP and others.

The ERRP was not subject to policy conditionalities but addressed urgent short-term needs such as import requirements to revitalise the productive sectors, both public and private, the rehabilitation of war-damaged infrastructure and the restoration of facilities in the social sectors. The component allocated to the private sector has been disbursed particularly fast.

Tableau 1: Total EU Assistance to Ethiopia (1975-1993) - (ECU millions)

At the time the ERRP package was negotiated it was already assumed that the TGE would prepare a comprehensive structural adjustment programme to ensure medium-term donor support. In parallel with the Bretton Woods institutions, Commission Vice-President Marin pledged ECU 75 million in EU structural adjustment support to Ethiopia in order to reinforce the country's macroeconomic reform process. The related Financing Agreement was recently signed and a first tranche amounting to ECU 40 million in balance of payments support was released in December 1993. The scheme is designed as a General Import Programme whereby the funds are channelled through the fortnightly foreign exchange auction system initiated in May 1993. Associated deposits in local currency will generate counterpart funds and contribute towards budgetary expenditure in the health and education sectors to offset possible negative social effects of the adjustment process.

The practicalities of the use of counterpart funds are set out in a Memorandum of Understanding (MoU) negotiated between the EU along with other major donors and the Government, allowing for the full integration of such funds as part of regular public expenditure while providing for periodic discussions on the substance and quality of the budget.

Rural development and food security

Agriculture remains by far the dominant sector of Ethiopia's economy and therefore deserves the priority attention it receives as part of EU Ethiopia cooperation. The large rural development programmes which were launched during the final years of the Derg were designed to increase crop yields in the target areas, thus containing the country's overall food deficit and, in particular in the case of coffee, enhancing foreign exchange earnings.

However, it is now evident that these programmes cannot be completed as originally planned, as they have become entangled in administrative complications and management difficulties. In the case of Shewa PADEP, the largest rural development programme the EU is currently funding in all ACP countries, the need for a reallocation of remaining unspent resources towards small-scale irrigation, soil conservation, afforestation and micro projects has been identified. A similar situation applies to the Coffee Improvement Project. It was agreed with the Government not to launch any new major rural development programmes unless it is assured that existing funds will be effectively disbursed.

Ethiopia is still unable to sustain its growing population through local food production. The deficit is largely made up by way of food aid imports. The EU as the biggest donor in this area contributed the equivalent of ECU 126 million in 1992 and 1993. As part of a global shift from relief to development assistance a pilot programme of structural food aid was implemented in various impoverished areas of Addis Ababa, whereby 50000 tons of wheat were sold at subsidised prices to needy target groups. It is anticipated that the EU's food aid policy will undergo a further reorientation towards food for work or cash for work programmes in order not to stifle domestic production of foods crops.

Private sector development and trade promotion

Following recent reform efforts, namely the lifting of investment restrictions and the liberalisation of trading activities, the EU has already contributed substantially towards the revival of the private sector in Ethiopia through foreign exchange allocations using Sectoral Import Programmes and STABEX funds. This commitment will be further consolidated through the promotion of small-scale enterprises, which are to benefit from a comprehensive support programme including policy advice, credit support, export promotion and entrepreneurship development. The European Investment Bank (EIB) plans to provide a credit line for medium-sized firms through a local handling bank.

The EU is Ethiopia's most important trading partner, yet the country's trade balance with the Union has undergone a substantial deterioration in recent years. The TGE and the Commission aim to address the structural weaknesses of the country's export sector through the Foreign Trade Development Programme by actively promoting non-traditional exports with hands-on marketing operations and by boosting the participation of private operators in export trade. Beyond that, the EU will continue to sponsor Ethiopia's participation in international trade events.

Under the Stabex scheme, a substantial part of foreign exchange allocations in compensation for export income losses is made available to enterprises engaged in the coffee, hides and skins, import substitution and export diversification sectors to enhance overall trade performance. For forthcoming trenches the Commission is currently looking into the possibility of integrating Stabex funds into general balance of payments support through the foreign exchange auction system.

Future plans

Although, owing to political and administrative changes, the implementation of the LomV National Indicative Programme is somewhat behind schedule, a variety of project preparatory activities have been carried out. These will bear fruit in the near future and should also have implications for cooperation under the Second Financial Protocol.

To complement the TOE's policy and strategy paper on transport the EU will carry out a road sector study to put its future assistance in this field on a sound basis. To date, agreements have been reached to rehabilitate the Addis-ModjoAwassa road and to prepare a feasibility study for the Addis-Jimma road.

At the regional level, studies will be carried out to assess the viability of the Ethiopia-Djibouti railway. This will include a comparative evaluation of road and rail traffic, an analysis of the institutional framework of the railway and the identification of emergency rehabilitation needs.

A further major infrastructure project will aim to improve the water supply and sanitation system in Addis Ababa, provided issues related to tariff structure and improvements in the management and operations of the city's Water and Sewerage Authority can be resolved.

The EU will continue to support human resources development activities in Ethiopia through the Integrated Training Programme. A new project about to start is the restoration and preservation of the historic rock-hewn churches in Lalibela in cooperation with UNESCO.

The country will also benefit from a special rehabilitation initiative for war affected African countries, recently launched by the Council of Ministers in Brussels, to provide additional funds in support of refugees, returnees and demobilised soldiers by way of NGO-implemented programmes.

Conclusions

Recent achievements of EU-Ethiopia cooperation have to be seen within the framework of the transformation of the Ethiopian economy from a centralised, war-focused structure to a decentralised, market-oriented system. Although the initial success of the reform process is commendable, it appears that the time required for transition will be longer than originally anticipated. The regionalisation policy, which involves the shifting of a major share of government responsibilities to local and regional authorities, has added further complexity to the process. The question is whether the TGE can sustain the momentum of reforms by further encouraging the involvement of so far neglected groups in the development process, in particular the private sector. Initial priorities in EU-Ethiopia cooperation after May 1991 were clearly directed at rehabilitation efforts to help ensure immediate benefits from the peace dividend. However, during the time of transition, the implementation and preparation of regular projects were affected by considerable uncertainty. A recent programme review mission from the Commission in Brussels held fruitful discussions with the Ethiopian authorities on how to increase the effectiveness of assistance and how to speed up programme implementation. Meanwhile, the preparation of future programmes has gained considerable momentum.

In view of the radical changes the Ethiopian economy has been through during the recent past, cooperation between the two parties has shown considerable continuity as well as flexibility in order to take account of new priorities on both sides. The partnership, which was initially based on the principle of ideological neutrality, has grown in quantity as well as in quality over difficult years, as more and more importance was attached to policy dialogue to fulfill certain performance standards in programme design and project implementation. The LomV Convention, with its enhanced emphasis on the private sector and human rights, puts the EU in a good position to support the country's new development path.