Sound Public Financial Management: Economically Cheap, Politically Expensive

Effective public financial management has been a challenge to the government, with billions of Birr reported each year either missing or not properly accounted for. Improving it requires policy reforms as well as political will, writes Solomon Gizaw, managing director of HST Consulting. The views reflected here are only his and do not represent any institution.

We live in a time where key public offices are still sources for personal wealth creation, rather than privileged positions to serve society. Corruption will remain a challenge if winning political parties fill vital public offices with individuals who do not have a shared aspiration and there are no checks-and-balances put in place to protect the misuse of power.

Good governance in any country will be compromised if accountability is low. It is also a challenge if the political leadership turns a blind eye to financial mismanagement by the executive branch of the government. If a country has a political system where money and positions are used to buy loyalty and financial resources are limited, an institutional breakdown will occur.

In Ethiopia, the public sector has a unique and historic responsibility as it plays a dominant role in building the nation. Due to the current policy direction and lack of accumulated long-term financial and physical capital in the economy, the public sector carries a great deal of weight.

Thus, in a small economy, the damages done by a single public servant – let alone by many – can have a pervasive impact on the economy. If the public sector continues to be dominant in the economy, the level of ethical responsibility it shoulders should be on par.

Without responsibility and accountability, corruption can eliminate the meritorious and entrepreneurial value creations we are witnessing in the nation and can result in public unrest.

Given the current unhealthy trends of get-rich-quick schemes and low-level of accountability, the huge efforts required in fighting corruption cannot be underestimated. It is naive to expect that corruption can be wiped out, or reduced to a level where it does not have high economic costs in the months and years to come. Over the years, we have observed many officials fail despite their rhetoric.

We cannot fight corruption by empty slogans and weak institutions that work solo. People with power and in pursuit of personal gain can easily circumvent isolated institutions through casual and informal interferences.

The Ethiopian economy has been growing at an impressive rate over the years to achieve this goal. To sustain the development, it is high time for a modern financial management discipline to be enshrined nationwide. This primarily requires political commitment and a coherent action plan to implement.

Improving public financial management can be a quick win by itself and is also an important institutional strength for sustainable job creation and nation-building in the economy.

Improving governance is not impossible, but it is a daunting task that requires unreserved political commitment at all levels and systemic interventions. Hence, the starting point in reducing extensive public-sector corruption is to improve the nation’s public financial management system.

Financial management has been significantly undermined over the years in the efforts to get political support for the country’s state-centric development. If there is a strong political will to fight corruption, the accounting and finance profession has a lot to offer. There is a well-developed body of knowledge and proven international standards to tackle the agenda systematically.

In its successive regimes, Ethiopia has had a solid tradition in managing public finances with strong social detest for theft in public offices. But budget accountability has since been eroded, and the current checks on government agencies to protect against offences has been weakened. Thus, there is a need for the government to work to remove legal and institutional barriers that undermine effective cooperation for the proper functioning of the public financial management system in both federal and regional government institutions.

Such a program can be designed with the help of the Ministry of Finance & Economic Cooperation (MoFEC), the Office of the Federal Auditor General, the recently established Accounting & Auditing Board of Ethiopia and the regional Finance & Audit Bureaus. They can be designed to create robust programs that improve the current public financial management system throughout the nation.

Equally, such institutions need to be supported to overcome their internal limitations by recruiting top talent and working with local and international experts. One of the challenges of the Ethiopian public sector is a forced attempt to use a hierarchical organisation structure to deliver services. This proves unnecessary – all of us should not be on the government payroll to deliver public services. The private sector is capable of contributing to the development efforts.

Ethiopia also has an outdated business law, weak transfer pricing regulations and poor accounting and audit infrastructure to efficiently impose discipline on the private sector. Parts of the public also see this as another version of the plunder against the nation’s treasures.

Ethiopia is the leading East Africa country in losing national income through illicit financial outflows (excluding hot money outflows) as high as 31pc of its 2014 merchandise trade volume, according to the 2017 Global Financial Integrity report. These illicit financial outflows mainly take place through deliberate misuse of invoicing practices.

Effective combating of illicit financial flows requires cross-border collaboration. Improving our public financial management will have a significant role to play in the global effort of implementing the Addis Tax Initiatives, which focuses on the effectiveness of domestic revenues and efficiency of tax administration. The Addis Tax Initiatives are accepted by many countries as one instrument to fight illicit financial outflows.

It is also high time to give priority to the business law that is currently under revision. The revised business law needs to create a legal link to the detailed and complete Financial Reporting law that has been put in action by former Prime Minister Hailemariam Dessalegn’s cabinet at the end of 2014.

The financial reporting law, which is under implementation, gives recognition to the well-designed global Financial Reporting Standards for broader application in Ethiopia. This law should be the backbone of the national financial system infrastructure that can promote transparency and accountability. It will have immediate tangible benefits in the country’s current financial institutions and in support of the growing economy.

It may eventually also serve as the infrastructure for establishing a national stock market trading floor. If properly implemented across the country, the law will also have positive spillover-effects in improving tax collection. However, its proper implementation requires coordinated efforts by federal and regional institutions, active support by the Office of the Prime Minister, heads of local governments, and close monitoring by the parliament and the regional councils will be paramount.

Improving the public financial management, the business law, and the country’s accounting and audit infrastructure does not require significant financial resources. But the measures need a strong and unreserved political buy-in by leaders at all sides. This will have tremendous and immediate positive impacts on our economic resources for the benefit of all.

Gradually, the system will become a strong foundation for transparency and accountability in the public and private sectors. This will realise the vision of Prime Minister Abiy Ahmed (PhD) in building strong institutions but will also transcend the will of any political party that may come to power in the country.

There is a saying that money is the source of all evils. If we are smart, it does not have to be.

By Solomon Gizaw
He is managing director of HST Consulting.

Published on Jun 02,2018 [ Vol 19 ,No 944]



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