Prospects for Non Traditional Sources of Development Finance in Ethiopia

01 Apr 2012

Report Summary

Ethiopia has experienced strong economic growth in the last few years. To a large extent, public investment has been the key engine of this recent performance.

In particular, large public expenditure programmes for infrastructure and social
services have been undertaken with the objective of accelerating growth and progress towards the achievement of the Millennium Development Goals (MDGs). Ethiopia’s fiscal budget allocation is currently one of the most pro-capital and pro-poor in Africa.

Nonetheless, these scaling up efforts have been partly constrained by the lack of financial resources and the recent global economic crisis. The latter has required a fiscal adjustment (on the expenditure side), which only recently started to ease. The former is compounded by the difficulty in mobilising domestic resources and the current uncertainty about global foreign aid inflows. Moreover, Ethiopia is currently unable to access international capital markets or attract significant foreign investments.

Considering the magnitude of the MDG financing needs, the government requires further sources of finance in order to keep up this positive momentum and continue pursuing its ambitious public investment programmes.
UNDP Ethiopia Country Office commissioned a study that explored prospects of
non-traditional sources of development finance for Ethiopia. The study identified five non-traditional sources of finance namely: issuing Diaspora bonds, South-South cooperation, Public-private partnerships (PPP), tourism and carbon trading.

The study estimates that $500 million can be raised annually from these sources, which is equivalent to 1.7 percent of GDP, 8.7 percent of current government budget or some 20 percent of the $2.4 billion resource gap that is equivalent to $121 per capita expenditure to meet the country’s MDGs goals . The study further suggests that: first, attracting financing should be stable and sustainable, second, Ethiopia should see the various sources of finance as mutually reinforcing and third, a good deal of the non traditional sources should be channelled towards socially responsible and green growth projects. The synergies between the different sources of financing could be an integral part of the county’s development strategy focusing on inclusive growth and
meeting the MDGs.

The Government has began to apply some of the recommendations of this report, for instance, its recent high level delegation’s visit to North America and Europe to present the national Growth and Transformation Plan (GTP) and the Diaspora Bond initiative to the Diaspora in these regions. The Government is also strengthening its partnership with China, India, Brazil and others in addressing poverty and stimulating growth through investments and technology transfers.

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