Identifying the importance of PB manner the government of Ethiopia has decided to replacernthe existing traditional line item budgeting approach by program budgeting. It has beenrnargued in this thesis that the government of Ethiopia has made some good progress inrnintroducing PB. It has been successful in initiating the shift in mindset of public servants andrnin instilling a performance culture in the public sector. The thesis uses in-depth interviewsrnwith the budget reform team members, questionnaires to budget experts in public bodies,rndiscussions in training sessions and secondary data which are analysed qualitatively byrncategorising into themes. According to the finding the shift to PB was necessary to be morernresult oriented and responsive. All the formats are completed and trainings are given, publicrnbodies are expected to prepare for the coming budget year, but there are a lot of challengesrnfaced which are among others: low capacity of both MoFED to control and follow up andrnministries to undertake the reforms genuinely and uniformly, methodological problems likerncomplexity, agreements in terminologies, variations in understanding of objectives,rnprograms, results/outputs, difficulties in costing methods and measuring outcomes, lack ofrnattention and commitment of top level officials and also all staffs of the ministries. Finallyrnbased on the findings of the study, it is recommended that MoFED has to strengthen itsrncapacity, keep the framework simple, ensure a genuine participation and ownership, designrnflexible and effective costing method and communicate it effectively in a gradual step by steprnapproach to bring out the change. Therefore, it is recommended to delay the implementationrnof PB to the next fiscal year