Ethiopia has made good progress with respect to some of its health indicators and was one of the early achievers of the Health Millennium Development Goals targets. But as the country grows towards middle-income status, its share of external financing will fall as donors turn towards other projects. This drop in funding will require a significant level of domestic resources to fulfill financing needs and sustain progress in the health sector.
Like many other low- and middle-income countries, Ethiopia has a limited number of potential sources of fiscal space: development assistance, domestic revenue, borrowing, and efficiency savings. With donor funding stagnating and the need for macroeconomic stability and debt sustainability, this study argues that the Government should focus on domestic revenue mobilization (through structural and tax reforms) and on improvements in health expenditure efficiency (on both the demand and the supply side). Ethiopia’s recently adopted healthcare financing strategy recognizes some of the country’s funding risks, and its draft strategy aims to focus on domestic resource mobilization over the next 5-10 years. To supplement these efforts, the Government will also need to make improvements in its budgeting and public financial management systems.
Methods and Results
This paper is a retroactive study on health delivery in Ethiopia, with a particular focus on how Ethiopia will allocate resources as it becomes significantly less donor dependent. The researchers identified four ways to improve its financing.
Domestic revenue mobilization through structural and tax reforms. Ethiopia’s tax system has not been responsive to economic growth, and Ethiopia’s tax and non-tax revenue to GDP ratio has remained relatively constant for over a decade at around 15%. To address the tax gap, structural changes through improved educational levels and coverage, urbanization, growing manufacturing and tourism sectors, coupled with tax policy and tax administration capacity improvements, and reducing inefficient tax expenditures would be necessary.
Improving drivers of expenditure efficiency. While Ethiopia has achieved a higher level of health care expenditure efficiency compared to other comparator countries, spending just 7.8% of its budget, there is room for improvement—on the demand side, through better information dissemination and public outreach and reducing the barriers to access, and on the supply side, through more open and accountable budgeting, planning and coordination, procurement and human resource management, and greater discretion at the local level to respond more effectively to health care needs.
Better aid coordination. With global development assistance for health uncertain, domestic efforts should be focused on better aid coordination and more effective use of development assistance and technical expertise to strengthen the country’s health systems and institutions.
Limited government borrowing. While medium-term debt forecasts are not concerning, Ethiopia is exposed to heightened risk of external debt distress, fueled by revenue underperformance, rising public investments and weak public sector enterprises. The Government needs a cautious approach towards additional borrowing given Ethiopia’s infrastructural needs, and focus should be on expanding fiscal space from other sources.
Bill and Melinda Gates Foundation
Economic Governance, Health, Decentralization, Economics, Public Finance, Ethiopia