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News Analysis: Budget deficit warning lights drowning out deeper economic issues

Finance Minister Ahmed Shide presenting budget proposal to members of parliament (Photo: HoPR/Facebook)

By Samson Hailu

Addis Abeba – The Ethiopian federal government’s  budget deficit for the current fiscal year is projected to reach 309 billion birr, exacerbating the macroeconomic stress currently faced by the country. 

Accounting for nearly 40% of the total budget and hovering at around three percent of the gross domestic product (GDP), the budget deficit raises the risk of high fiscal stress for the country while signaling that the government will likely continue treading the same risky path on the fiscal front in the coming years.  

In recent years, the administration of Prime Minister Abiy Ahmed (PhD) has been dealing with a massive fiscal deficit due to the rising expenditure associated with the COVID-19 outbreak and the conflict that raged in the country’s north. Last year, the budget deficit reached 4.2% of the GDP, exceeding the global threshold set at three percent.  

The recently proposed 801 billion birr budget earmarked for the next Ethiopian fiscal year also comes with a 281 billion birr deficit. The budget proposal for the 2016 Ethiopian fiscal year which was approved by the Council of Ministers on 06 June, showed an increase of 15.05 billion birr over the current year and was referred to the House of People’s Representatives for additional discussion and final approval. 

Out of the total budget, 203.9 billion birr will be used for capital expenses, leaving a recurrent budget allocation of 369.6 billion birr. In addition to allocating 14 billion birr for the advancement of sustainable development goals, the budget also included 214.07 billion birr for regional subsidies. 

When Finance Minister Ahmed Shide presented the budget details to members of parliament (MPs) last week, he acknowledged that the nation has been experiencing a serious fiscal imbalance due to factors ranging from declining tax revenue and diminishing external loans to rising public spending due to factors like the militarized conflict and the unprecedented drought sequence that is taking a heavy toll on the country.  

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In the past two years, development partners have suspended a significant portion of the funds they pledged. As a result, the external assistance obtained remains less than 22% of the plan, according to the budget document presented to the lawmakers by minister Ahmed and seen by Addis Standard. 

A statement put forward by the International Monetary Fund (IMF) last week, the Ethiopian government has requested assistance to address key macroeconomic vulnerabilities. Yet, discussions are still ongoing as it requires a clear commitment from development partners.   

“The rising need for humanitarian and reconstruction spending is expected to drive up public spending even further,” Ahmed told MPs. Some lawmakers have a different perspective.  

According to Zegeye Muluye (PhD), an MP, there are two major factors that contribute to the budget deficit. Inefficient government spending is the first contributing cause of the budget deficit. 

“Despite the fact that there are numerous duties on the priority list, the government has spent a significant amount of money over the last four years reinvigorating government offices,” said Zegeye. 

The inability to raise sufficient financial resources domestically constitutes the second factor. “It is only personal income tax that is collected properly,” argued Zegeye, who served as the vice president of Addis Ababa University in charge of resource administration for close to six years.  

Ahmed acknowledges that the tax income collected falls short of its potential. The tax-to-GDP ratio has been declining in recent years, dropping from 10.7% five years ago to 7.1% last year. The ratio is much lower than the sub-Saharan African average of 17%. 

Tax collection for the first three quarters of this year stood at 282 billion birr, which was 70.5% of the annual target. Only 80% of the anticipated tax revenue (348 billion birr) is expected to be collected over the course of the entire year, according to the document.  

The meager capital budget allotted to fund development projects was also one of the major topics for debate when MPs discussed the draft budget proposal of the federal government last week. 

“The budget allocated to productive sectors like agriculture, irrigation, and energy is too small to have a big impact on the economy,” Desalegn Chane (PhD) of the National Movement of Amhara Party (NAMA) argued.  

Zegeye had a similar sentiment as well. “Even World Bank-financed projects are currently in limbo because there isn’t enough money to compensate those who will be relocated,” he said. “Giving such initiatives top priority will enable the nation to utilize the money received from donors effectively.” 

With an 80.8% contribution, taxes account for the largest portion of government revenue. Over the last three years, governmental revenue has grown by an average of 15.1% annually. On the other hand, public spending has increased by an average of 24% annually during the last three years. This forced the government to reprioritize its expenditures, according to the finance minister. 

Before referring the budget proposal to the planning, budget, and finance standing committee, lawmakers also stressed that it would be smarter to cut the recurrent budget than to compromise on capital projects. Next year, recurrent expenses will soar by 7.3%, while the capital budget will drop by over 6%.  AS

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