Tuesday, January 17, 2023

Embracing fiscal discipline

The improvement of the strained ties between Ethiopia and Western governments and various international financial institutions in the wake of the November 2022 peace deal which brought to an end the bloody two-year civil war in northern Ethiopia is sure to engender, among others, economic dividends for Ethiopia. The Ethiopian government and donors though do not see eye-to-eye on the areas of intervention of the post-conflict reconstruction and redevelopment plan, featuring reform elements, that was developed by various government agencies. Donors insist macro-economic issues bedeviling Ethiopia, including debt, foreign exchange rate, inflation, and balance of payment, should be at the center of the new plan. The Ethiopian government, however, is of the view that the plan must focus on the real sectors—agriculture, industry and service sectors. Regardless of the path the government chooses to tread, there is an important factor on which the success or failure of its endeavor, namely fiscal discipline.

Fiscal discipline is generally defined as the exercise of control over total government expenditure, including central and local government budgets, state-owned enterprises and extra-budgetary funds. It’s vital to boost and sustain economic performance, assure macroeconomic stability, and minimize vulnerabilities. Furthermore, it is instrumental to ensuring that both industrialized and developing nations rise to the challenges and reap the benefits deriving from the globalization of the economic and financial spheres. In this regard it enables them to make use of the opportunities offered by increased levels of free trade and open capital markets as well as to enhance their longer-term economic prospects. Aside from this, it is equally essential when it comes to lessening their exposure to plummeting market sentiment and massive capital outflows, and in helping them limit the risks of debt-fueled calamities.

Lack of fiscal discipline is largely attributable to the imprudent use of policy discretion. It has often compromised stability and growth, and in the worst cases has induced economic and financial crises. One of the manifestations of weak fiscal discipline is a government’s propensity to engage in off-budget transactions. Implemented outside the budgetary and other laws and regulations of a country, such transactions are not subjected to the same level of reporting, regulation, or audit as other public finance items. The fact that it is not entirely clear on what terms the funds for these transactions are obtained or if the funds’ mismanagement entails accountability renders them susceptible to irregularity and illegality. This will entail a steep political cost for the government by robbing it of credibility in the eyes of the public. 

Ethiopia has seen a dramatic rise in off-budget transactions recently. The federal government, in particular, has been fond of undertaking projects worth billions of dollars. By some estimates the cost of the projects is equivalent to around ten percent of Ethiopia’s GDP. The administration of Prime Minister Abiy Ahmed (PhD) has defended its execution of projects which have not undergone any semblance of budgetary hearing, saying Parliament has oversight power solely over projects for which it has earmarked a budget. It should be noted here that we are not implying that the government has perpetrated any wrongdoing or criminal act by implementing off-budget projects. In the opinion of many though its full-throated justification of such projects not only signal its low regard for lawmakers, but is also proof that constitutional safeguards placing the executive branch of the government under the legislature are under assault.

The legislation governing the administration of public finances in Ethiopia unambiguously lays down various obligations of the federal government must abide by. It states that the heads of public bodies, defined as any organ of the Federal Government which is partly or wholly financed by Government allocated budget, have the duty to ensure that all of the resources for which they are responsible are used for proper and approved purposes and that they are used in the most economical, efficient and effective way. It also stipulates that they are responsible for developing a system for financial administration which ensures transparency and accountability and monitoring the system developed within the public body to ascertain it is functioning well. This reinforces the notion that one of the hallmarks of a responsible government is to institute a system promoting fiscal discipline and implement same strictly. Fiscal discipline is not something the Ethiopian government can dispense with as it sees fit; it’s a principle it must be guided by at all times. Failure to do so is bound to have unpleasant consequences that do not bode well for the country and its people. 

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