The fourth budget since Prime Minister Abiy Ahmed (PhD) assumed power had been unanimously approved by the House of Peoples’ Representatives (HoPR) on Monday, July 5, 2021.
Hailed as the highest budget in the history of the country, the 561.67 billion birr budgeted for the 2014 Ethiopian fiscal year (EFY) that runs between July 2021 to July 2022 is an increase of 15 percent compared to the previous year. This increase is four percentage points less than the increase the 2013 EFY budget saw from the 2012 EFY. The budget allocated for the just completed 2013 EFY was 476.1 billion birr, a 19 percent increase from the 386.95 allocated for the 2012 EFY. Abiy came to power in the last months of the 2010 EFY for which the budget allocated was 334.8 billion birr, to which his administration made a three percent increase as it allocated 346.9 billion birr budget for the year 2011 EFY. Although Abiy’s administration and the obsolete Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) vowed to scrap the tradition of supplementary budgets, these years saw subsequent supplements when the government’s coffers drained.
However, the budget saw an eight percent decline from the previous year in international currency terms. At USD 12.56 billion, this year’s approved budget is USD 1.15 billion less than the budget for the 2013 EFY budget, excluding the supplementary budget approved since then by the House of Peoples’ Representatives.
According to the budget proclamation and explainers attached to it, 29 percent – amounting to 162.2 billion birr – goes to recurrent spending. Capital spending takes the second largest part of the slice of the cake at 33 percent taking up 183.5 billion birr. Budget subsidy to regional states and budget for the implementation of the Sustainable Development Goals (SDGs) take up 203.9 billion birr and 12 billion birr respectively. They constitute 36 percent and two percent of the total budgetary allocation respectively.
Out of the 203.9 billion birr allocated for subsidy to regional governments, Oromia takes a huge chunk of the pie amounting to 69.13 billion birr, which is 34 percent of the subsidy. Amhara region follows at 43.3 billion birr taking 21 percent of the total subsidy. 16 percent, which is 32.3 percent, goes to Southern region followed by Somali region which takes 10 percent of the sum. The newly formed Sidama region takes up four percent (8.1 billion birr) while the Afar region follows at three percent with six billion birr subsidy. The Benshangul Gumuz region and the Addis Ababa City administration each take two percent of the subsidy with 3.7 billion birr and 3.3 billion birr respectively. Gambella, Harari, and Dire Dawa City Administration follow with 2.6 billion birr, 1.5 billion birr and 1.7 billion birr respectively.
Although the government plans to disburse 195.2 billion birr of this amount covering 96 percent of the total subsidy, it expects to get 8.7 billion birr in credits and grants from foreign sources.
The 183.5 billion birr capital budget allocations expect to get 15 percent and 13 percent of the appropriations from grants and credits respectively. Accordingly, the government will invest 132.7 billion birr from its coffers for capital expenditures while expecting 26.6 billion birr and 24.13 billion birr from grants and credits. The total allocated capital budget for the fiscal year exhibited an increase of 14.4 percent from the previous year.
Much of the capital budget allocation goes to economic sectors such as road and education sectors which take 19.5 percent and 19.1 percent of the total federal government expenditures with 67.45 billion birr and 66.06 billion birr respectively.
The third largest federal government expenditure is appropriated to debt servicing which amounts to 45.12 billion birr taking 13.05 percent of the total budget.
While the context in each fiscal year is peculiar in itself, the setting in which the current budget was approved is rather unprecedented. The budget that came in the middle of the war in Tigray, which the government said has already consumed 100 billion birr exclusive of military expenditures as well as international sanctions that limit the country’s sources of finance, is expected to be a burden for Abiy’s administration.
However, on the flip side, the increasing price of commodities such as coffee and gold in the international market is expected to potentially boost the nation’s export revenue. According to the home-grown economic reform progress report released by the Ministry of Finance on July 6, 2021, the country’s export revenue grew by 12 percent compared to the previous year reaching USD 2.98 billion in the 2012 EFY. Out of this, coffee fetched USD 856 million, followed by flowers, oilseeds, chat, pulses and gold which brought in USD 422 million, USD 345 million, USD 324 million, USD 235 million and USD 197 million respectively.
The country’s foreign currency reserve stands at USD 3.1 billion; this amount only covers just 2.5 months of imports and the financial limitations from the international community would place a strain in the future reserves of the nation. But projections show that the liberalization of the telecom sector as well as partial privatization of state-owned enterprises including ethio telecom and a number of sugar projects would give the administration a relief in terms of foreign currency gains.
But the foreign direct investment and remittance flow is reported to have declined by 20 percent and 13 percent respectively from those of the EFY 2012 due to the Coronavirus pandemic.
Hit with challenges of foreign exchange, the government is heading towards a market-based exchange rate regime with expectations that this would diversify sources of forex for the country. The exchange rate in the parallel market has a difference of more than 10 birr with the official exchange rate in banks for dollar denominations. The home-grown economic reform progress report also indicated that the average parallel market premium was eight percent higher than that of the official rate as of June 2019.
On the other hand, the government’s plans to register an economic growth of nine percent for the 2013 EFY were not achieved as the report states that the final figures have seen a 2.9 percent decline from the plan. Although this was also attributed to the coronavirus pandemic, the IMF had originally indicated in February that Ethiopia’s economy registered a 6.1 “robust growth.” The international financial organization projects that the 2020/21 economic growth will be just two percent.
Furthermore, the ever-increasing rate of inflation especially on food and non food items is also expected to be a hindrance for the budget. The inflation rate for June 2021 registered a 24.5 percent increase from the same season last year. The huge contributor for this is food inflation which grew by 28.7 percent compared to the same season last year; non food inflation expanded by 19 percent. The main drivers for the increase in food inflation are the increases in price of maize, sorghum, meat, edible oil, butter, spices, and coffee.
The budget proclamation and its attached documents also show that the government tried to maintain the budget deficit below three percent, the sum of domestic and foreign credit and grants take more 25 percent of the total budget.
While the debt service repayment rescheduling and efforts to adjust about four billion dollars in federal government and state-owned enterprises is expected to give fiscal space for the budget year, the consequences of these adjustments and rescheduling would affect the country’s future chance of getting credits especially from bilateral partners. The public sector debt stood at USD 53.8 billion as of March 2021 showing a slight decline from USD 55.1 billion on June 2020. This is attributed to the high rate of depreciation of the Birr. Out of the total outstanding debt, the federal government owns 58 percent while the rest is for state-owned enterprises. The government serviced USD USD 1.42 billion between July 2020 and March 31, 2021 out of which the central government serviced USD 180.59 million and state-owned enterprises serviced USD 1.24 billion.
Because of the Coronavirus pandemic, Ethiopia’s eligibility to the G20 debt service suspension initiative which totaled about USD 200 million led to the downgrading of the country’s credit worthiness by Fitch. Ethiopia also benefited from the International Monetary Fund’s (IMF) Catastrophe Containment and Relief Trust (CCRT).
While the country is stretched in every direction because of security concerns in various parts of the country as well as financial strains because of pressures from the international community, the upcoming fiscal year’s budget could be an uphill for the administration. Moreover, the growing depreciation of the Birr against the dollar and the fluctuating commodity market as well as the lingering impacts of the Coronavirus pandemic are going to be challenges during the fiscal year. Job creation is also going to be a huge challenge for the administration which experts view should be aligned with sustainable markets. The government plans to create 14 million jobs by 2025 out of which three million are expected to be created during the 2013 EFY.
