Austere Budget

Next year's budget is 7.5pc higher than the current fiscal year budget

Amidst a tough macroeconomic situation, the Ministry of Finance & Economic Cooperation (MoFEC) has allocated a 346.9 billion Br budget for the coming fiscal year, of which 68pc will be covered by tax revenue.

The current fiscal year is one of the toughest as the economy has been hit with severe forex crunch, high debt stresses and double-digit inflationary pressures. Revealing all these holes in the economy, Abraham Tekeste (PhD), Minister of MoFEC, appeared before parliament last week to present the budget. In his presentation speech, the Minister stated that the budget considered the macroeconomic outlook and the fiscal policy of the country.

“My budget speech will highly focus on budget disciplines,” he told the parliamentarians. Before presenting the allocations for next year, he pointed out areas of bottlenecks in the economy and hammered institutional inefficiencies of governmental agencies.

“Many of the institutions were not efficiently utilising their budgets. They have difficulties in reporting their audits in a timely manner and they fail to use the suggestions they have been provided with,” he said.

Supporting his claim of deficiencies, a recent report by the Office of the Auditor General, announced the findings of a 20 billion Br audit gaps in 158 government institutions.

The Minister’s proposed budget is 7.5pc higher than the current fiscal year, and 35.7pc higher than the 2015/2016 fiscal year budget. It has surpassed the current year’s budget, which included an addition 14 billion Br of subsidiary funds. Experts point out that when adjusted for inflation, the federal budget might not show an increase rather than a decrease.

The new proposed budget allocates 113.6 billion Br for capital expenditure, 91.6 billion Br for recurrent spending and 135.6 billion Br for subsidiary appropriations of regional states. The remaining six billion Br is allocated for Sustainable Development Goals (SDG) projects. Based on these figures, the government hopes for an 11pc economic growth, and a continuing tax administration reforms that it anticipates will generate domestic tax revenues of 235.7 billion Br in the new fiscal year. The remaining balance of expenditures is expected to be covered by other non-tax sources including foreign aid and loans, and domestic loans.

Also, the bill puts the budget deficit for the coming fiscal year at 59.3 billion Br, up from 53.8 billion Br of the current fiscal year. This will put the budget deficit-GDP ratio at 2.3pc, below the 2.5pc the current year.

Despite all of these concerns, the government remains ambitious. It is assuming double-digit growth of the economy, 11pc, and single-digit rates of inflation, eight percent, according to the Minister.

The budget does not seem to properly consider the current macroeconomic conditions of the country, according to Alemayehu Geda (Prof.), a macroeconomist and a university professor with decades of experience. He points out that the country has huge debts, high inflation rates and multiple uncompleted mega projects that carry massive loans.

“As it did not consider the debts and the foreign exchange earning of the country, the government would require a supplementary budget,” Alemayehu told Fortune.

For the current fiscal year, which is on its final days, the Ethiopian Revenues & Customs Authority (ERCA) expects to collect 230 billion Br. Nevertheless, the trend observed during the last nine months does not seem to warrant the optimism of the Authority to meet its goals, as it has only collected 140 billion Br, 58.8pc of the target.

“It is expected that 50 billion Br of the targeted amount will not be collected,” Abraham told MPS.

Though the government seems to prefer higher dependency on tax revenues to fulfil its budget requirements and it has suspended commercial loans, the tax collection and administration systems lag behind. Annual tax revenue collections were growing by 31pc between 2012 and 2015. Hence, the rate of collections has drastically dwindled, by greater than half, declining to 15pc in 2016. Furthermore, tax revenues fell to 10pc in 2017. Last fiscal year ERCA failed to collect one fifth of the targeted tax proceeds.

“Studies we conducted show that the tax system has potentials,” Abraham explained.  “The problem is with our tax administration system.”

Depending on concessional loans, loans that carry generous terms than market loans, does not seem realistic for Alemayehu. He mentioned that the loan terms are conditional, the lenders may set structural reforms as a precondition for such loans, take time for negotiation and the amounts delivered may not be satisfactory.

Despite all of these concerns, the government remains ambitious. It is assuming double-digit growth of the economy, 11pc, and single-digit rates of inflation, eight percent, according to the Minister. However, the inflation rate has been stuck in double digits since August 2017. It reached its highest point in five years, 15.2pc, in March 2018.

Eyob Tesfaye, (PhD), a macroeconomic analyst, urges the government to address macroeconomics in conjunction with policy actions to attain what they have targeted.

Next year’s budget also assumes that the nominal GDP will grow by 19pc and the value of exported imported goods will grow by 9.7pc. This is amidst the nine-month report by the Ministry of Trade (MoT) that shows the country earned only two billion dollars from exports, a mere four percent increase from the same period last year. Lower commodity prices in the global market, lower productivity, low level of value addition and issues dealing with diversification of export commodities are all causes for the disappointing results, according to Abraham.

The Debt Sustainability Analysis (DSA) raised Ethiopia’s risk of external debt distress from “moderate” to “high” risk, according to the IMF report released in December 2017.

“The deterioration in the debt service-to-exports (DSE) ratio suggests liquidity risks have increased,” reads the IMF’s report.

On a yearly bases, Ethiopia is spending 1.2 billion dollars to service its debts.

The effects of weak exports, which are failing to contribute to sufficient foreign currency supplies, have caused import amount to decline. Most of the imported commodities in the market had drastic price surges in the last four months, or are unavailable in the market.

Abraham admits this.

“We are challenged in importing basic commodities, which are not locally manufactured,” he said.  “Tax revenue, export and external debt are the major areas we will keep an eye on in the next fiscal year,” he said.

One of the 546 MPs, found the issues, raised by the Minister redundant.

“This is what we have heard for the past years,” said Alemu Asefa, MP-ANDM, “Don’t you think that it is the time to focus on outlining a new direction to get out of the problems we are in?” he questioned.

Eyob Tesfaye, (PhD), a macroeconomic analyst, urges the government to address macroeconomics in conjunction with policy actions to attain what they have targeted. He suggests that the government needs to outline short and medium term goals for one-year and three-year targets, apply second-generation macroeconomic and implement reforms in the financial sector.

“Comprehensive reforms with brazen audacity, revamped foreign exchange rate management, rigorous review of the bank books, cleaning up non-performing loans by hiring international auditors, and widening the tax base are major policy instruments that can be used to cure the economy,” Eyob recommends.

To implement these reforms the government needs to mobilise capable and efficient experts, utilise genuine monetary and financial statistical reports, and seek assistance from the World Bank and IMF, according to Eyob.

The budget put forward is deliberated by Parliament’s Budget & Finance Affairs Standing Committee. After having heard from Abraham and having discussed the matter, the bill is expected to be approved in the coming three weeks and before Parliament goes into recess.



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