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BusinessMinistry to restructure budget, cut capital spending to finance war economy

Ministry to restructure budget, cut capital spending to finance war economy

Government borrowing from central bank surges by 169.4 percent, despite promising T-bills auction

Officials at the Ministry of Finance passed a decision to restructure the budget and cut capital spending as government coffers have been drained by the war in the northern part of Ethiopia.

It is a measure precipitated by the one year old conflict that led to a surge in expenditure for war and humanitarian efforts.

The move comes just few weeks after a new report published by the National Bank of Ethiopia indicated that government borrowing from the central bank showed a 169.4 percent yearly increase during the last quarter of the last financial year.

Attributed to the law enforcement operation and COVID-19, the government borrowed 83.5 billion Birr in advance payment during the reporting period.

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Ahmed Shide, Minister of Finance, in a live interview broadcasted on Ethiopian Broadcasting Corporation, confirmed the budget squeeze faced by the federal government because of the war, while urging public institutions to efficiently use their financial resources.

“The cost of war is very high; even the government cannot bear it alone. While the public is providing a helping hand through various means, including by preparing food, order has already been given to restructure the budget,” said Ahmed.

For this fiscal year, the parliament has approved 561 billion Birr budget, showing an 18 percent yearly increase, though it is lowest in five years in dollars terms. About 183.5 billion Birr is allocated for capital spending, 20 billion higher than the recurrent expenditure for the budget year. Almost 200 billion Birr is allocated to subsidize regions.

“Subsidies to regions have been disbursed without any cut,” said Ahmed. He, however, underscored the uphill task to finance the growing government deficit at a time when grants from development partners are drying.

The fourth quarter of the last fiscal year saw no grants, according to the latest report by the National Bank of Ethiopia.

“The grant revenue amounts to 0.9 percent of GDP, which is not huge but it makes a difference when it is added to the budget deficit,” said Partick Heinisch, an Economist, adding that Ethiopia’s status as low-income country makes it hard for the government to raise taxes.

For 2021/22 fiscal year, the budget deficit is projected to reach 144 billion Birr, of which 66.8 is expected to be financed by foreign aid. With the continued challenge to secure grants committed by development partners, the government is seeking to finance the deficit through other debt instruments, including treasury bills, which is thriving since it became market-driven.

“Private sector participants significantly increase as the interest rates surge driven by the market forces, helping the government raise more funds. This shows that the market is promising as a means of financing budget deficits,” said Abdulmenan Mohammed, a financial expert with over two decades of experience.

The fourth quarter of the last fiscal year saw a 368 percent upsurge in treasury bills supplied to the bi-weekly auction. While the demand to buy the bills almost saw a similar increase, 127 billion Birr offer has been made for 130 billion Birr T-bills brought to the table.

Yet recent auctions showed little demand. Out of 36 billion Birr worth of T-bills up for auction by the Central Bank on November 03, 2021, only 19.4 billion Birr have been sold. Despite the low-demand witnessed recently, experts still applaud the government’s efforts to avoid direct central bank financing to the federal government.

“The government wants to avoid direct central bank financing by taking recourse to T-bills, a good decision given already high inflation, which would be fuelled further through central bank financing,” said Heinisch, the economist, whose special interest lies on conducting economic research in emerging markets.

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