With the reservation over the tax collection performance of the country, the Ministry of Finance & Economic Cooperation (MoFEC) has allocated a 320.8 billion Br budget for the coming fiscal year. Out of the total budget, 61pc will be covered by tax revenue.
The budget for the coming fiscal year, which the Minister of Finance & Economic Cooperation, Abraham Tekeste (PhD), presented to the Parliament last Thursday, June 8, 2017, seemed to put the macroeconomic outlook and the fiscal policy of the country into context, according to his presentation for the 305 parliamentarians out of the total 547, who attended the session.
The current budget is 16.9pc and 40pc higher than of the 2016/17 and 2015/16 fiscal years, respectively. It also surpasses the current year’s budget, which witnessed an addition of 17 billion Br, by 9.6pc.
The new current budget allocates 114.7 billion Br to capital expenditure, 81.8 billion Br to recurrent expenditure and 117.3 billion Br to subsidise regional states. The remaining seven billion Br will be allocated to Sustainable Development Goals (SDG) projects.
Hence, it is based on this that the government hoped an economic growth rate of 11pc with a continuous tax administration reform, which foresees domestic tax revenue of 196.4 billion Br for the new fiscal year. The remaining balance of the expenditure will be covered from non-tax sources, foreign aid and loans.
For the capital expenditure, government treasury, loans and grants contribute 70.2pc, 12.5pc and 17.7pc, respectively.
“This amount is too ambitious and unrealistic,” comments a macroeconomist who wishes to remain anonymous. “Tax cannot cover this amount of money as the economy of the country remained very inactive for the past 12 months.”
For the current fiscal year, which is on the verge of completion, the Ethiopian Revenues & Customs Authority (ERCA) targeted to collect 170.6 billion Br. Nevertheless, the trend observed during the past nine months does not seem rewarding for the Authority as it managed to collect only 98 billion Br, 57.4pc of the target set for the year.
“The performance of tax revenue collection is at an alarming stage, as our tax administration and collection system is failing,” Abraham explained to the parliamentarians.
This is against the plan of the government, which aspires to increase tax revenue by 15pc annually.
“We don’t have a capacity problem in collecting tax revenue, rather an issue in commitment and taking responsibility by stakeholders,” Abraham told the parliamentarians.
During the presentation of the report, one of the parliamentarians raised his concern on filling the budget deficit.
“In the presentation, it was mentioned that there is a gap in collecting tax revenue so to avoid the budget deficit, why does the government not look for loans and grants,” said Dube Jillo, Member of Parliament (MP).
Nonetheless, Abraham insisted that eyeing international loans and grants is not viable as the international economy is suffering ups and downs. Thus, the Ministry, according to him, decided to depend on sourcing the balance locally.
The decline in tourism, import and export earnings, an enormous amount of money pledged to the Great Ethiopian Renaissance Dam (GERD) and a foreign currency crunch are the major reasons for the economic slowdown, according to the macroeconomist.
MoFEC has assumed double-digit growth of the economy and a single-digit rate of inflation throughout the year of 2017/18, according to Abraham.
Headline inflation has been increasing from 5.6pc in October 2016 to 8.7pc during the previous month. The Ministry has relied on eight percent growth over the past years to predict 11.1pc growth for the coming year.
However, the growth rate projected by the International Monetary Fund (IMF) and the Word Bank (WB) are contrary to the forecast of the government, which have estimated the economy to grow by 7.5pc and 8.3pc, respectively, in 2017.
Also, the bill put the budget deficit for the next fiscal year at 53.8 billion Br, which is below three percent of the Gross Domestic Product (GDP).
“The deficit can surge from the stated amount mainly due to a drop in tax revenue,” said a macroeconomist.
Low amounts of cash in the hands of the government, the delay of many projects and an enormous amount of tax evasion may create a budget gap, according to the macroeconomist.
This does not seem persuading for the MPs.
“The budget deficit to GDP ratio is at 2.5pc, below the three percent standard set globally,” said a member of the Parliament’s Budget & Finance Affairs Standing Committee.
The budget has also assumed that the nominal GDP will grow by 19.1pc and the value of imported goods will grow by 12.5pc. This is amidst the nine-month report by the Ministry of Trade (MoT), that shows the country earned only 1.95 billion dollars from exports, declining by 4.5pc from the same period last year. In the past three quarters, export earnings cover only 17pc of the import.
“To increase our export proceeds, we need to ship more manufactured goods than the agricultural commodities and mineral products,” said Abraham.
Export decline is also a concern for the MPs, including Alemu Aseffa.
“Because of a decline in exports revenue, our debt to GDP ratio is increasing,” he said.
The Debt Sustainability Analysis (DSA) raised Ethiopia’s risk of external debt distress from “low” to “moderate”, according to the IMF report released in August 2016.
Admitting the increase of external debt distress, Abraham noted that the government has decided to temporarily refrain from taking commercial loans, a debt-based funding arrangement typically used to fund major capital expenditures.
Out of the total budget, 61pc of it will go towards infrastructure developments including, road, education, agriculture, water, health and rural electrification projects.
“The major thing that has to be done is budget administration,” comments a member of the standing committee pointing out the recent report from the Office of the Auditor General, who reported 20 billion Br in audit gaps in 158 government institutions.
The budget put forward was deliberated to the Budget & Finance Affairs Standing Committee, after hearing Abraham’s speech and having discussions over it. The document is expected to be approved in less than a month’s time before the Parliament recesses.
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