Ethiopia’s vision is to become an African beacon of prosperity by 2030. Strategies to achieve this vision are outlined in the most recent 10-year development plan, Ten Years Development Plan: A Pathway to Prosperity, 2021–2030, and continue to focus on “homegrown economic reforms and policies” (Ethiopia 2021, 21), with the goal to reduce poverty levels from about 20 percent in 2021 to 7 percent in 2030.1 To achieve this goal, the plan estimates that the country’s GDP would need to grow annually by 10 percent until 2030.

Ethiopia’s moderate progress in economic transformation has not propelled the country to lower-middle-income status as envisioned by past development plans. A stalled economic transformation resulted in less income growth and poverty reduction than necessary to achieve lower-middle-income status. Instead, as the country has been affected by numerous shocks, macroeconomic imbalances emerged, including renewed indebtedness, creating challenges for private sector growth.

Institution building was challenged by rising conflict and fragility, confirming these as core development priorities for Ethiopia in the coming decade. During the evaluation period, Ethiopia’s governance indicators worsened on government effectiveness and the rule of law. In addition, the COVID-19 pandemic and multiple armed conflicts have persisted in Ethiopia since 2020, challenging state institutions and leading the World Bank to formally classify Ethiopia as a country on the fragile and conflict-affected situations list in FY22.

The Bank Group’s engagement showed resilience in a difficult context by achieving important outcomes, although some transformative reforms did not materialize as expected. The Bank Group’s support made notable strides in increasing climate resilience, agricultural productivity, and sustainable land management. However, the absence of significant improvements in access to finance and irrigation, the continued predominance of small-scale farms, and the outsize role of the state in the sector limited the Bank Group’s efforts to expand commercial agriculture, satisfy local demand, and contribute to exports. Furthermore, the Bank Group’s support for industrial parks to promote light manufacturing did not result in meaningful job creation or export competitiveness because this support was not accompanied by broader improvements to macroeconomic and business environment challenges, in addition to being affected by conflict.

The Bank Group adapted to the country’s restrictive conditions for private sector growth by preparing the country’s institutions for reforms. IFC’s work to improve Ethiopia’s business environment was relevant and helped create structures that will require further reform to be fully effective. The Bank Group’s support during the evaluation period for expanding foreign investment and improving trade was both relevant and moderately successful. These efforts laid the foundation for future reforms—including the exchange rate liberalization that occurred in July 2024 in the context of an IMF program and World Bank DPO—and their impact will rely on continued efforts to address macroeconomic imbalances and reduce the dominance of SOEs in the economy. The Bank Group also supported relevant measures to create the conditions, such as the financial infrastructure and product regulation, that will enable the financial sector to expand once further reforms happen.

The Bank Group was unable to exert influence on policy until reform opportunities arose. The Bank Group took a pragmatic, collaborative approach with the government, focusing on areas of mutual agreement, but it was less effective in developing the engagement and mitigating risks to the program in potentially transformative areas, where it could not reach consensus, such as macroeconomic and private sector reforms. When there was an opening for major policy reforms in 2018, the Bank Group quickly prepared a DPO that tackled several key reform areas, but the period of reform was short-lived and interrupted by the COVID-19 pandemic, conflict, and economic crisis. Once the conflict and economic crisis intensified, the Bank Group lowered its analytic work’s public visibility and even stopped publishing its regular macroeconomic updates, thus potentially missing opportunities to influence the public policy dialogue at a time when disbursements were increasing. The underlying policy constraint of exchange rate distortions did not experience notable progress until July 2024.

The Bank Group nearly doubled its portfolio during the evaluation, with limited strategic adjustments, despite escalating conflict and rising macroeconomic imbalances. This increased risks for the World Bank’s portfolio and weakened conditions for project preparation, implementation, and monitoring. Moreover, ongoing conflict since 2020 limited access to project sites for both the World Bank and the government. In response, the World Bank tried to adopt TPI and monitoring, but these only partially materialized. Instead, the World Bank continued to rely on government data and systems for these tasks. Despite these challenges, the World Bank maintained high levels of disbursement of IDA resources, including through investment projects and PforR financing.

The Bank Group’s reliance on additional financing may have limited opportunities for learning and adaptation. More than one-quarter of all projects approved during the evaluation period were additional financing—a figure that increased to 38 percent of projects between FY20 and FY23. This financing helped increase government resources during the COVID-19 pandemic and economic crisis to support social protection and poverty alleviation in non-conflict-affected areas, including during the Tigray and subsequent conflicts. However, this meant that the Bank Group extended the same interventions with limited adjustments. The reliance on additional financing limited the number of ICRs to only 15, which may have prevented the World Bank’s more thorough assessment of the relevance and effectiveness of its interventions and did not allow for more strategic corrections.

Looking forward, the Bank Group will need to adapt its strategic approach to remain relevant and effective amid fragility, difficult economic reform negotiations, and growing climate vulnerabilities. For example, the World Bank supported highly relevant reforms that opened opportunities for private sector involvement, but progress was reversed in some areas, and, despite reform progress in July 2024, the agenda remains unfinished. The transition of the World Bank interventions to a fragile medium-term operating environment is still ongoing and needs to go hand in hand with a thorough portfolio review and risk assessment that can guide and provide guardrails for future engagement in a weakened institutional environment. While the government recognized the country’s vulnerability to climate risks and was a proactive partner to the World Bank in building climate resilience, there is a need to ramp up support to the climate agenda and identify more scalable and sustainable solutions.

Lessons

This evaluation identified the following lessons to guide future Bank Group engagement in Ethiopia. These lessons may also be of relevance to other countries facing similar development challenges:

1. At times, the World Bank traded candor on transformational reforms with remaining engaged in Ethiopia’s policy dialogue. The World Bank’s impact hinges on its ability to find ways to frame policies on sensitive topics in a manner that is palatable to government decision makers, the public, and potential coalitions for change. However, on some potentially transformational reforms, the World Bank avoided public discussion—for example, discontinuing Economic Updates and reducing the visibility of other economic analyses as a platform to engage authorities and other potential stakeholders on sensitive reforms, such as liberalizing the agriculture sector, fiscal consolidation to reduce debt, and addressing an overvalued exchange rate and financial repression to reshape the development model. This approach enabled the dialogue to continue in other areas (such as climate resilience in sustainable land management, agriculture practices, and safety nets), but at the cost of addressing some fundamentally transformative reforms to support the private sector and address growing macroeconomic imbalances. While some difficult policy dialogue may need to continue behind closed doors, the World Bank should seek to balance this discussion with contributing to an open policy discourse and by active risk management, notably around critical economic reforms, for which delaying reforms may be more costly in the long term. Without such discourse, the Bank Group’s efforts to support improvements in areas such as the business environment or strengthening institutions may not have the desired impact.
2. Conducting regular strategy and program reviews and actively managing risks can create opportunities for strategic corrections and adaptation, particularly during times of portfolio expansion and emerging economic challenges and conflict. Specifically, repeated use of additional financing and the absence of a timely Performance and Learning Review risked potentially supporting unsustainable policies, extending the same interventions with minimal adaptation, and having fewer opportunities for learning and course correction.
3. Adapting the implementation of the Bank Group’s program to emerging conflict and fragility is a complex multiyear process that needs sufficient and timely M&E. The Bank Group’s program should be guided by well-developed and candid assessments of the potential development impacts and risks. The Bank Group should ensure that adequate M&E systems continue to be in place so that support for government-driven priorities remains consistent with, and can adapt to, the Bank Group’s mission of reaching targeted populations with the greatest development needs. This lesson is highlighted by the limited success in the use of third-party monitoring and implementation.
4. The Bank Group needs to consider how its interventions help address and interact with macroeconomic imbalances, including exchange rate misalignment, financial repression, and sustainable debt levels. The choice of World Bank financing instruments should consider their consistency and sustainability in the face of such macroeconomic imbalances. For example, several DPOs were approved despite backloading foreign exchange reforms. Additionally, while PforR operations gained traction and were particularly successful in supporting social programs, there could have been a more candid assessment of how the fiscal context and macroeconomic outlook undermined the sustainability of the program until broader imbalances were addressed.