Friday, April 19, 2024
In DepthFiscal autonomy: a pipe dream

Fiscal autonomy: a pipe dream

When Ethiopia’s existing constitution was drafted in the early 1990s, its authors ushered in a significant departure from the country’s previous centralist approach, which it had followed for decades since its formation as a modern state. The constitution not only established ethnic-based federalism, but it also granted states constituted along ethnic lines unprecedented authority. Nonetheless, the autonomy was purely political.

The federal states have never achieved the autonomy for which they have yearned, despite having their own constitution, electing president, and having a council resembling parliament. There has been no significant change to the political system in almost a decade, with the ruling party continuing to administer the country, locking the states under the façade of central party leadership, and exercising direct control over the daily affairs of the regions.

It is even worse from an economic standpoint.

Without federal government funding, the regions cannot even carry out a basic small-scale project. The federal government finances more than 70 percent of their budget. It’s strange, since the regions themselves are a source of tax revenue for the federal government, which allocated about 210 billion birr in subsidies to regional states last year, with a substantial portion going to Oromia (71 billion birr), Amhara (44 billion birr), and SNNPR. (26.5 billion birr).

“The regional states of Ethiopia already have political and administrative autonomy on a large number of subjects but lack full fiscal decentralization which would allow them to collect themselves the means to support their political choices and administrative capacity,” says Eva Renon, senior analyst in Country Risk for Sub Saharan Africa at S& P Global, one of the leading global credit agencies.

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The Analyst’s observation is consistent with the statement made by lawmakers from the Amhara and South Nation Nationalities People (SNNP) regional states last week.

Meles Mena, a parliamentarian from SNNPR, said, “Some of our offices can’t pay the salaries of civil servants every month because of critical shortage of budget.” Amhara region parliamentarian Talef Yitawek had the same view. More dire than being unable to make payroll every month is the present state of affairs. “Some regional offices are in a place where they can’t function,” said the MP.

According to researchers, the budget deficit faced by regional governments today is a result of the improper implementation of fiscal decentralization in a country with 11 regions, two city administrations, and two more in the process of formation following a referendum held just two months ago.

For as long as the current constitution has been in place, no ruling administration has ever fundamentally opposed fiscal decentralization. The trouble is that none of them were brave enough to make the budgeting system in the country less centralized, which is where the problem lies.

In Ethiopia’s pursuit towards decentralization, two major turning points stand out. Between 1991 and 2001, the first wave of autonomy created regional governments and zonal administrations. The second phase took place between 2002–2003, when woredas were officially recognized as units of local administration. This was made possible by giving power from areas and zones to the woreda level of government.

Though this has greatly aided in the delivery of public services to communities, it has not been accompanied by fiscal independence, with the Woredas dependent on regions and the regions reliant on the federal government.

Proper fiscal decentralization would have given taxing and spending power from the national government to regional and local governments. Evidence from other countries suggests that in a highly decentralized system, local governments have tax authority with great power to mobilize resources.

Fiscal autonomy: a pipe dream | The Reporter | #1 Latest Ethiopian News Today

“Ethiopia should move towards power devolution including the fiscal space. This will boost innovation and service efficiency, and involves local actors in planning processes,” said Girum Kassa, an economist. “Ethiopia shall have as many devolved admin states as possible. We need more devolution, and more empowerment with the responsibility, necessary resource and capacity. The fiscal space has to be factored in that context.”

Prime Minister Abiy Ahmed (PhD), like his predecessors, made some efforts to expand regional autonomy in terms of budgetary policy. Two years after assuming power, his administration modified the revenue sharing formula, allowing the regional states to receive a larger portion of the income tax, VAT, royalties, and other revenues the government collects.

Following the change, the proportion of some regions increased by more than 2,000 percent. And recently, in response to a proposal from the federal Ministry of Finance, the House of People Representative and the House of Federation passed a resolution that authorizes regional states and city governments to collect property tax. Even while this is a huge breakthrough for fiscal decentralization in Ethiopia, Eva acknowledges that making it a reality will be challenging.

“If the government pursues this policy, it will eventually lower the burden of regional budgets on the federal budget but will take years to achieve due to the complexity of issuing the relevant legislation. For example, the recent property tax enacted by the government could be implemented only once a valuation of the land and building is decided upon, and the question of how to collect this tax on homeowners with small income is solved, among many other questions,” said Eva.

On the other hand, economist Mussie Delelelgn, who shared his opinion with The Reporter, asserts that budget centralization or decentralization has little or nothing to do with budget deficits.

“There are countries with political and budgetary centralization that are not as high budgetary deficit as Ethiopia,” said Mussie, who is an Acting Head and Productive Capacities and Sustainable Development Branch, Division for Africa, LDCs and Special Programs at UNCTAD.

Mussie, whose views do not reflect those of UNCTAD or the United Nations, concluded that the budget deficit faced by regional and federal governments in Ethiopia is a result of imbalances between income and expenditure and when expenditures exceed income, regardless of political or budgetary decentralization or vice versa.

“There are also countries with both political and budgetary decentralization that run excessive fiscal deficits,” he stressed.

Budget deficit is normal, not only for Ethiopia but also across the world. Even the world’s richest nation, the United States, faced a USD 1.3 trillion deficit during the last year. Its rival superpower, China, in its part, had to deal with USD 561 billion in budget deficit in the same period.

Governments across the world experience budget deficit no matter how capable they are and efficient in tax allocation but what matters is whether they have the mechanism to fill the gap or not. Ethiopia is not an exception.

During the existing fiscal year, ending on July 8, 2023, Abiy’s administration is utilizing all options at hand to finance a record-high 308 billion birr deficit the federal government faced.  

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