Despite Ethiopia announcing a higher budget total for next year, factors like high inflation and currency devaluation have actually reduced the budget’s real value in dollars by hundreds of millions. As damaging economic policies continue under pressure from the IMF and World Bank, unsustainable budget priorities threaten to worsen issues for Ethiopian businesses and citizens unless adjustments are made.
Ethiopia needs to chart an independent fiscal course that places stability and the needs of its people above nominal increases in budget figures.
Recently, Ethiopia’s Minister of Finance, announced an increase in the country’s budget, from 786.6 billion birr to 801 billion birr. While Ethiopia’s raised budget received praise from some economists, it is important to examine more closely the impact of inflation and currency depreciation on this seemingly positive development.
Upon closer examination, it becomes clear that the budget increase is not what it seems. Due to a drop in the actual value of the Birr against the USD, the budget has actually decreased from USD 15.2 billion to USD 14.7 billion. This represents a significant drop of USD 500 million, before even considering inflation.
The Ethiopian Statistical Agency’s reported inflation rate of around 37 percent for 2023 contrasts with Steve Hanke (Prof.) from Johns Hopkins University, who estimates Ethiopian inflation at 66.8 percent using his own method. “Hanke’s Inflation Satellite” provides up-to-date inflation figures for the 44 countries monitored by the Johns Hopkins-Cato Institute, placing Ethiopia’s annual inflation rate at 66.8 percent as of June 2023.
If the Agency’s result is accurate at 37 percent, the budget’s purchasing power has diminished by 29 percent versus last year. Therefore, the Ethiopian budget is in reality 29 percent less than last year, signifying a substantial decline.
It is imperative to recognize that this budget increase is not a reason for celebration but rather a cause for concern. The combination of currency devaluation, high inflation, and rising taxes on housing will make life difficult for many Ethiopians. Furthermore, vanity projects excluded from the budget will only exacerbate the problem.
These economic difficulties find their origin in acquiescing to the International Monetary Fund/World Bank’s Structural Adjustment Programs (SAP). The WB/IMF impose five actions regardless of a country’s economic circumstances.
One reason for concern is the currency devaluation in a country that lacks surplus products to export and increase revenue. After devaluation, pressures to privatize and liberalize become more urgent. Critics argue why privatization did not precede devaluation, but the prescribed order enables acquiring assets inexpensively.
Third, is ending subsidies simply abolishes pro-poor policies. In Ethiopia, fuel price increases from 33 to 61 birr place a huge burden on businesses and transport. Cuts may be made to programs such as free healthcare and education
A fourth concern is increasing tax burden. For example, anyone living in a modest condominium now must pay an additional 10,000 birr annually just for the privilege of residing in their own home. The annual pension for many civil servants is less than 10,000 birr, so if they cannot afford the housing tax will they be evicted from the condominium they own?
In the past month, many businesses received surprise letters requesting payment of additional tax liabilities claimed to cover past years – even after those years were audited and closed. This reveals the desperation the government finds itself in as a result of following WB recommendations and will eventually lead to business closures.
The final WB-prescribed action is tightening the government’s belt by freezing hiring in government offices, followed by reducing the number of public sector workers, soldiers, and universities. The defense budget was cut in half, leading to large-scale layoffs of service members.
It is crucial to critically examine how the economy is being managed to avoid a potential crisis. The economic challenges could be far greater than currently imagined without prompt action. Reducing essential services and the number off public sector workers will only worsen problems by contracting the economy and decreasing aggregate demand.
While a budget increase may seem positive at first glance, it accurately reflect cause for concern. We must consider the effects of inflation and currency depreciation when analyzing economic data to make informed decisions about our financial future.
The World Bank’s promises must be weighed against the suffering and desperation of a government fighting a losing battle. It is time for Ethiopia to take control of its economic destiny and chart a new course towards stability and prosperity.
Contributed by Yared Haile-Meskel