Summary: Context: Ethiopia’s public sector-led development strategy has contributed to considerable poverty reduction and progress toward achieving the Millennium Development Goals (MDGs) as envisaged under the authorities’ Growth and Transformation Plan (GTP). Economic growth has been robust, and inflation has declined to single digits. The investment requirements of the GTP are large and securing the associated financing remains a challenge. Without greater scope for the private sector the realization of the GTP’s objectives could be elusive. Growth and inflation prospects: Real GDP growth remains robust and is estimated by staff at 7 percent in 2012/13 and projected to increase to 7.5 percent in 2013/14 and 2014/15 before tapering-off slightly in subsequent years under current policies.1 Inflation has been brought down to around 7 percent at end 2012/13 and is projected to remain in single digits. Policy mix: The discussions focused on policies to sustain robust and inclusive growth and structural transformation in the context of prudent fiscal and monetary policies. Staff recommendations centered on maintaining pro-poor expenditure, improving the investment climate, and adjusting the overall fiscal stance with the aim of creating greater room for the private sector to further leverage large public investments. Enhancing external competitiveness and building adequate foreign reserves (to at least three months of imports) through greater exchange rate flexibility and improved productivity of the traded goods sector were recommended to enhance resiliency. Bolstering capacity at the National Bank of Ethiopia (NBE) for the formulation and implementation of financial sector policies to promote financial deepening and broader inclusion were considered important for the realization of the GTP objectives. Risks: Persistent shortfalls in the financing of planned infrastructure investment and a tightening of foreign exchange availability could constrain medium-term growth in the absence of policy adjustments. A significant slow - down of the major emerging markets could also hamper development plans and robust growth.

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