Executive summary

1. The objective of the Public Expenditure and Financial Accountability (PEFA) assessments is to review the current performance of the public financial management (PFM) systems, processes, and institutions of the Federal Government of Ethiopia. The assessment aims to assist the government in identifying PFM weaknesses that may inhibit effective delivery of services to its citizens and the realization of its development objectives in general. Furthermore, the findings of the PEFA assessment will assist the government in refining the PFM Reform Strategy that it has already developed and provide the basis for a coherent PFM reform program that can be supported by development partners, as well as through the government’s own initiatives.
2. The Federal PEFA assessment covered federal government budgeted units, extra-budgetary units (EBUs), the Office of the Federal Auditor General (OFAG), and Parliament. Civil society organizations were also contacted to solicit their views on the general PFM environment, especially on issues relating to procurement and taxation. The list of stakeholders met is presented in Annex 3B.
3. The fiscal years (FYs) for the assessments are Ethiopian Calendar (EC) 2008, 2009, and 2010 (Gregorian Calendar [GC] FY2015/2016, 2016/2017, 2017/2018). The period covered for each of the 94 dimensions (summarized into 31 performance indicators [PIs]) depends on the dimension and is in accordance with the PEFA measurement framework. Some dimensions were measured at the time of assessment (November–December 2018 and February–March 2019) during the first and second field missions, respectively. The cut-off date was March 2019; the assessment reflects the status of PFM systems and processes as of that date. Other dimensions were assessed at the relevant period, which is the last completed fiscal year FY2017/2018, or FY2018/2019 for the last budget submitted to Parliament.
4. The assessment management framework, oversight, and quality assurance are summarized in Box 1.1. The assessment was funded by the World Bank, Irish Aid, the U.K. Department for International Development (DFID), the European Union (EU), United Nations Children’s Fund (UNICEF), and UN Women. It was managed by the World Bank.

Impact of PFM systems on the main budgetary and fiscal outcomes

Aggregate fiscal discipline

5. The good rating of PI-1 (‘A’ score) provides a reasonable assurance of budget discipline at aggregate level; this was however negatively affected by budget reallocations across functional and economic classifications (PI-2 ‘D+’) within the last three completed fiscal years largely due to some socioeconomic (drought that affected 8.5 million Ethiopians) and political instability, necessitating rapid financial response. These challenges equally affected federal government revenue targets (PI-3 ‘D+’) especially in terms of the type of revenue generated against planned revenues. The revenue shortfalls however did not significantly affect payment of expenditure commitments (PI-22.1 ‘A’), indicating that the government took cognizance of its limitations in terms of revenues to spend within its available resources.
6. Another key element that affects fiscal discipline is the quantum of government resources that are outside the regular government budgeting and reporting system. Available evidence suggests that 5–10 percent of government expenditures and revenues are outside the budget and financial reports, but the government has ensured that these EBUs report on time to the central government (PI-6 ‘B’). In spite of this positive view, fiscal risk monitoring and reporting is weak (PI-10 ‘D’), thereby indicating a significant financial risk exposure for the government. The same could be said for public investment and asset management (PI-11 and PI-12, both scoring ‘D+’); weaknesses in public investment management (PIM) lead to misallocation of funds which affects fiscal discipline and asset management, indicating that the government lacks the ability to effectively monitor and safeguard its assets. Furthermore, the nonexistence of a medium-term perspective in expenditure budgeting (PI-16 ‘D+’) limits the government’s option to exercise a longer than one-year horizon for its policies and make resources available to execute those policies. That said, payroll management and control are reasonable (PI-23 ‘C+’), one key element that usually distorts the government budget and consequently has a negative impact on fiscal discipline; this is currently not the case.

Strategic allocation of resources

7. Strategic resource allocation is key to efficient service delivery. Macroeconomic and fiscal forecasting score well (PI-14 ‘B’), providing an indication of the government’s intention to allocate its scarce resources for the benefit of the ordinary citizen through improved service delivery. Whereas both the budget preparation process and the legislative scrutiny and approval of the annual budget are reasonable (PI-17 ‘B’ and PI-18 ‘B+’), providing reliable resource allocation for service delivery, the absence of a fiscal strategy—a policy document that outlines the government revenue and expenditure framework in terms of how it wants to generate revenue and for what expenditure—does not guarantee that the government could make resources available to fund its policies (PI-15 ‘D’). However, available resources are quite predictable (PI-21 ‘C+’) for budget institutions (BIs) for the execution of their mandate.
8. The classification of the budget (PI-4 ‘B’ good) indicates the traceability (and transparency) of government resources according to the government’s programmes; also, information provided in the budget documentation available to the public is reasonable (PI-5 ‘C’), although this could be improved further. Comprehensive expenditure plans and approval processes are not enough to render services; these must be backed by revenue generation, monitoring, and reporting. Both revenue management and accounting show signs of credibility and reasonableness (PI-19 ‘C+’ and PI-20 ‘C+’) to fund government expenditure. There are, however, weaknesses in in-year reporting of budget execution; information is not readily and timely available to the public.

Efficient use of resources for service delivery

9. Primary service delivery is not a prime function of the Federal Government of Ethiopia; nonetheless, tertiary facilities such as referral hospitals, colleges, and universities provide service to the public. Also, regional governments and woredas deliver primary service on behalf of the federal government with significant funding (earmarked grants from the federal government). Tertiary institutions develop medium-term and annual strategic plans with measurable performance indicators which are published. Furthermore, ‘Volume 2’ of the 2018/2019 federal government budget contains information on government policy objectives, planned performance outputs, and outcomes for all sectors. This is published on the Ministry of Finance (MoF) website (PI-8.1 ‘A’); however, the performance outcomes and outputs are not made public to allow citizens to judge the efficiency of tertiary service delivery as well as primary service delivery by regional governments and woredas (PI-8.2 ‘D’) even though evaluations of these performances are carried out each year. Information on resources to the regional and woreda levels where the service delivery units operate is collected and recorded by the Ministry of Health (MoH) and the Ministry of Education (MoE), disaggregated by source of funds. A report compiling the information is prepared at least annually, allowing citizens to track resource allocation. Efficient service delivery is negatively affected by the poor PIM framework (PI-11 ‘D+’) as most of the capital investment projects that are required to improve service delivery will not be adequately funded. The assessment also shows that those projects that were funded may be poorly managed (PI-12 ‘D+’).
10. Another fundamental element for efficient service delivery relates to effective procurement management. Available evidence shows a weak procurement complaint management mechanism in terms of its independence, lack of public access to important procurement information such as procurement plans and contract awards, and lack of comprehensive and complete procurement database—all these necessary for the private sector to adequately plan and take advantage of government procurement, thereby reducing unit cost of service delivery (PI-24 ‘D+’). Internal controls (PI-25 ‘B’) provide reasonable assurance of government financial management system for improved service delivery; nonetheless, weaknesses in internal audit (PI-26 ‘D+’, mainly due to delays referencing management response to internal audit findings) pose a threat to efficient service delivery. There is adequate segregation of duties with the financial management structure both in law and in practice (PI-27 ‘B’); this is key to ensure protection of scarce government resources. Whereas both external audit functions and legislative scrutiny of these reports are good (PI-30 ‘C+’ and PI-31 ‘B’), the continuous infractions by public officials and failure to fully implement audit and legislative recommendations are cause for serious concern, meaning scarce resources are wasted without any punishment.

Performance changes since the last assessment in 2015

11. On the basis of the 2011 method, between the 2015 and the 2018 assessments, there have been more deteriorations in performance (7) than improvements (3), as shown in Table 0.1. Fifteen indicators have remained unvaried and six are not comparable. Annex 4 gives the details of performance change since the 2015 assessment.

Table 0.1: Changes in the ratings since 2015 using the 2011 framework

Fiscal discipline

12. Aggregate fiscal discipline, though satisfactory, appears to have deteriorated when compared with the 2015 performance—PI-1 from ‘A’ in 2015 to ‘B’ in 2018, mainly due to almost 12 percent and 6 percent over-budgeting of capital expenditure in 2015/2016 and 2016/2017. The economic situation in the country affected the government’s ability to secure the projected loans to execute its policies, coupled with foreign currency challenges. There has been a sharp decline in performance of expenditure composition outturn (PI-2) mainly due to unutilized sector budget allocations which were reallocated as well as payments for unbudgeted customs duties for public entities’ imports; that said, the federal government continues to respect the use of contingency vote (below 1 percent of budget). Likewise, revenue outturn (PI-3) has deteriorated from ‘B’ in 2015 to ‘C’ in 2018 mainly due to low domestic tax revenue collection. The stock of expenditure arrears has remained unchanged in principle except that dimension (ii) appears to have been overrated in 2015; the current situation is that data on arrears are generated annually as against quarterly, as was described in 2015. Payroll controls (PI-18) have generally remained unchanged except that there is marginal improvement in dimension (i) as a result of the link between personnel and payroll database through the Integrated Financial Management Information System (IFMIS).

Strategic allocation of resources

13. The timeliness and reliability of information on transfers to regional governments (PI-8.2) has improved from ‘B’ in 2015 to ‘A’ in 2018; nonetheless, there are significant delays in the release of actual cash to regional governments, thereby affecting primary service delivery. Resource allocation according to the originally planned government policy has been affected by the poor performance in expenditure composition outturn (PI-2) and the numerous numbers of in-year budget reallocations. There is also serious limitation on dissemination of information on resource allocation to sectors, thereby limiting transparency and accountability.

Efficient service delivery

14. Service delivery has been affected by the reallocation of sector budgets (PI-2); also, the frequency of in-year budget adjustments leaves much to be desired. Whereas there has been no change in cash management (PI-16), delays in the release of actual cash for payment of expenditure have contributed to inefficient service delivery even though primary service delivery is not the remit of the federal government. Nonetheless, some federal services such as referral hospitals and tertiary institutions have been affected. Weaknesses in public procurement remain unchanged; there are no reliable data to assess the extent to which a non-competitive procurement method is justified. Therefore, it is unclear whether services are delivered at an affordable cost.

Overview of ongoing and planned PFM reforms and main weaknesses identified

15. The Federal Government of Ethiopia is currently undertaking a PFM project with funding from the World Bank at a cost of US$33 million over a five-year period ending in April 2021, the main components of which are the following:

• Component 1: Improving Expenditure Management and Information Systems
• Component 2: Strengthening Accountability Institutions
• Component 3: Project Management, Monitoring and Evaluation

16. Major achievements in terms of the ongoing PFM reforms include the following:

• Under Component 1, the IFMIS rollout contract has been awarded and implementation is progressing steadily but with some challenges such as weak and insufficient technical capacity to provide technical support to IFMIS rollout and weak Internet connectivity. As of June 2018, IFMIS has been rolled out to 67 sites, with 47 successfully tested, and 25 out of the 47 handed over to the IFMIS Project Management Office (PMO). In all, 149 sites have been envisaged for IFMIS rollout; this means that 102 sites (149 less 47) are planned for completion by December 2019. There are plans to roll out the Integrated Budget and Expenditures (IBEX) payroll module to all woredas by December 2019. Since June 2018, around 35 more branch sites have been added under IBEX (online version) with an overall coverage of a little over 98 percent. The training and capacity building of IBEX are also progressing, with more than 150 staff trained since June 2015.
• Under Component 2, some progress has been made on e-Government Procurement (e-GP). These include the establishment of a technical committee on e-GP and the recruitment of a consultant for system upgrade based on recommendations from the technical committee. Also, 621 public servants have been trained on public procurement, including trainer-of-trainers, out of which 36 percent are female. Not much has been achieved with OFAG, except for negotiations on the terms of reference (TOR) for the recruitment of technical assistance to support and improve OFAG’s operations. Also, the development of the Accounting and Auditing Board of Ethiopia (AABE) is still in the early stages; there are vacant positions for board members, which retards the smooth implementation and approval of AABE’s decisions. While there has been support to the Federal and Regional Ethics and Anti-Corruption Commissions, there is little information in terms of progress achieved, to effectively report on progress made thus far.
• Under Component 3, project management is still weak mainly due to inadequate staff to effectively provide monitoring and evaluation of the entire PFM reform program. It has therefore been recommended that additional short-term experts be recruited to fill the gap.

17. In addition to the major PFM project, a number of piecemeal parallel reforms are also ongoing, the main one includes the following:

• DFID’s Tax Transformation Programme (TTP) at a cost of GBP 35 million over a 4-year period starting 2019 and co-funding of the 2018 PEFA assessments.
• The EU is co-funding the 2018 PEFA assessments. Until now, the EU’s PFM capacity development support was provided at a subnational level through its contribution to the Promoting Basic Services Multi-donor Program. In addition, the EU is increasingly using budget support for which the improvement of PFM systems is a precondition and also includes PFM disbursement-linked indicators. The EU budget support portfolio includes the following:

• Budget Support Transport: EUR 138,000,000 + EUR 100,000,000 additional financing
• Budget Support Health: EUR 115,000,000 + EUR 50,000,000 additional financing
• Budget Support Jobs Compact: EUR 50,000,000
• Budget Support in Climate Change: EUR 36,000,000
• Finally, two PFM capacity development operations are in the pipeline:

• EUR 2,270,000 grant to the MoF
• EUR 10,000,000 to be formulated in 2019, expected to be operational in 2020, and covering revenue and expenditures

• Irish Aid is also co-funding the 2018 PEFA assessments. Irish Aid works with the Government of Ethiopia in different sectors and currently is designing its next country strategy paper.
• UN Women. In September 2018, UN Women funded and technically guided the study on the ‘Gender Gap Analysis of the PFM System in Ethiopia’ in partnership with the MoF Gender Directorate—mainly bringing out the gaps that hinder gender responsiveness of the PFM system in Ethiopia and making recommendations for further actions. It is also co-funding the 2018 PEFA assessments.
• UNICEF is co-funding the 2018 PEFA assessments. It also provides technical support and capacity building to the MoF on PFM studies.
• The International Monetary Fund (IMF) is providing technical support for the macro-fiscal forecasting for the MoF. The World Bank, DFID, and IMF are supporting the government on fiscal risk reporting, public-private partnerships (PPPs), and PIM.

18. As a medium- to long-term view, the federal government has developed a PFM Reform Strategy covering 2018–2022, linked to the national medium-term development plan Growth and Transformation Plan 2015/16–2019/20 (GTP II), with an estimated cost of ETB 5.34 billion. Though this is laudable, a number of weaknesses have been identified referencing the reform strategy. Key among them include, but are not limited to, the following:

• Exclusion of support to the external oversight functions, namely OFAG and Parliament
• Exclusion of support to revenue administration, absence of a clear sequencing and prioritization framework, and weak PFM reform monitoring framework

19. Other weaknesses identified in the entire PFM system are inadequate technical and human capacity, delays in the rollout of IFMIS and inadequate training on IFMIS, and internal control and procurement weaknesses.