Thursday, July 25, 2024
InterviewEthiopia's path to fiscal sustainability

Ethiopia’s path to fiscal sustainability

Yakob Bekele has a diverse career leading economic initiatives for Ethiopia. He holds the position of Senior Program Manager at the Ethiopia office of the Forum of Federations, where he plays a vital role in shaping the country’s governance landscape. With an impressive track record, Yakob has contributed to several key federal government agencies, including the Secretariat of the House of Federation (HOF), the Ministry of Revenue, and the FDRE’s Ministry of Peace.

His extensive experience of over 12 years in intergovernmental relations (IGR) and intergovernmental fiscal transfer (IGFT) has solidified his expertise in navigating complex financial systems. Notably, Yakob’s leadership extended to overseeing the Department of Intragovernmental Fiscal Transfer at the HOF Secretariat, demonstrating his commitment to effective fiscal management.

Yakob shed light on the detrimental effects of unchecked spending by both regional and federal authorities, emphasizing the urgent need for fiscal discipline and responsible intergovernmental financial behavior. He believes decentralizing decision-making can empower local growth but emphasizes the necessity of a strong and vibrant democracy, underscoring the interplay between effective governance and economic progress.

Abraham Tekle from The Reporter had the privilege of engaging in an insightful conversation with Yakob, to gain insight into Ethiopia’s financial challenges and opportunities. EXCERPT:

The Reporter: One factor that is exacerbating Ethiopia’s current economic challenges is the absence of fiscal discipline, which is evident through the practice of resorting to money printing to cover government deficits. What are your thoughts on this matter?

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Yakob Bekele: Before delving further into the matter, it is essential to provide a straightforward explanation of fiscal discipline. In simple terms, fiscal discipline entails the prudent management of government expenditure and revenue. This involves avoiding excessive borrowing, maintaining control over deficits, and ensuring the long-term sustainability of the government’s finances.

In developing countries like Ethiopia, it becomes crucial for governments to carefully handle their spending and income. Any mismanagement in this aspect can lead to challenging repercussions that are arduous to rectify. Government involvement plays a pivotal role in this regard since the failure to exercise fiscal discipline can have detrimental effects on the national economy as a whole.

The collection of taxes by the government and utilizing the funds to develop essential services and infrastructure for the people are integral components of ensuring a prosperous economy and fulfilling the government’s obligations. Consequently, the government’s ability to provide these necessities relies heavily on the taxes collected from the public.

This fundamental aspect necessitates cautious handling. However, when it is not managed effectively, an imbalance arises between tax collection and government expenditure, resulting in the need for additional funds to cover costs. Such a situation arises when a country exhibits a lack of fiscal discipline.

Dealing with such imbalances once again underscores the need for disciplined action. Resorting to printing money in such circumstances often becomes an easy target for government abuse. In such cases, seeking access to credit from domestic or international financial institutions emerges as the preferable solution.

Governments sometimes opt for printing money instead of exploring credit options. If printing money becomes the sole recourse, it becomes imperative to establish strong and liberal institutional monetary policies to govern and oversee the process. The agency’s role is to conduct thorough investigations, determine the required amount of money, and ensure that the country maintains consistent fiscal discipline, facilitating adherence to institutional monetary policies.

Another crucial aspect to consider is the availability of funds. In this context, developed countries employ market-based strategies to secure credit, while countries like Ethiopia may resort to borrowing directly from central banks to finance budget deficits or raising funds by issuing government bonds to private financial institutions. Embracing such fiscal discipline effectively undermines the decision to print money without adequately considering the potentially catastrophic consequences.

It has become evident that the unwarranted inclination towards printing money can lead governments into economic and financial distress, ultimately resulting in the failure of monetary policies. Therefore, this approach is strongly discouraged.

What is your perspective on the unrestricted spending by regional and federal authorities? Have you observed any departure from these practices under the current administration?

Based on my understanding, regional governments’ access to loans is restricted in Ethiopia within the governmental system. Consequently, I observe no significant negative consequences when regional states finance their expenditures through tax revenue or funds obtained from the federal government. This is primarily because regional states lack the authority to engage in money printing. In any case, the central government closely monitors the activities of regional governments.

In Ethiopia, the majority of regional states do not cover their expenses with their income. Their spending capacity is limited to approximately 20 to 29 percent of their income. As a result, a significant portion of their expenditures, ranging from 70 to 80 percent, is covered by funds allocated from the federal government. This dynamic grants the central government unparalleled authority to enforce fiscal discipline on the regional states and prevent them from exceeding their spending limits.

Are there any instances of financial misbehavior among regional states in terms of intergovernmental finances?

Ethiopia’s intergovernmental fiscal relationship reveals inherent flaws and has negative implications, stemming from its constitutional foundation to its implementation. The federal system in Ethiopia tends to be more centralized in terms of income and expenditure, despite its intended decentralization. This is because regional states have substantial expenditures mandated by the country’s constitution.

There is an imbalance of power when it comes to the Revenue Allocation Formula, favoring the federal government. The federal government collects over 80 percent of total revenues, while state governments collect only 20 percent. Consequently, the federal government possesses a significantly larger revenue stream than the regions, leading to a pronounced fiscal disparity in vertical relationships.

As mentioned earlier, regional states have substantial expenditures related to their spending authority, including infrastructure development and the provision of essential services. In contrast, the federal government’s spending primarily focuses on national security, designing and implementing fiscal and monetary policies, executing economic and developmental policies, setting public service standards, and fulfilling other interstate governmental responsibilities.

However, the overall expenditure in the country heavily relies on the central government, which accounts for 66 percent of total expenditure, leaving the remaining portion under the control of regional states. This highlights the overwhelming power of the federal government, while the regional states remain highly dependent. Alongside the lack of fiscal autonomy, there is also a lack of political autonomy for regional states.

It is important to note that this analysis provides a general overview of the federal-state relationship, and it does not deny the possibility of instances of financial fraud occurring among regional states. Moreover, given the current situation in Ethiopia, the federal government itself is not immune to allegations of financial impropriety.

Financial fraud is unfortunately prevalent in the country due to the absence of an effective democratic government and the challenges in apprehending and prosecuting criminals for their actions.

Regional governments often face criticism for alleged misappropriation of funds received through intergovernmental transfers. Is there any legal basis for such practices? How would you assess the effectiveness of Ethiopia’s intergovernmental fiscal transfers?

Federal and state governments establish their respective roles and responsibilities. Once regional officers are elected, they are empowered only to fulfill their constitutional obligations. The Constitution also provides for an intergovernmental transfer system, enabling the federal government to provide financial support for local government development initiatives.

The practice of regional governments providing financial or social aid to other local governments lacks a legal basis in the Constitution or any other applicable laws and regulations. It is the responsibility of the federal government to provide financial assistance, including funding for social programs, as supported by the constitution.

Consequently, the effectiveness of regional leaders relies on their ability to develop strategies that ensure the provision of essential and sustainable services to the residents of their respective regions.

However, when funds are misused, it hinders access to critical services such as healthcare, education, and infrastructure. This has a detrimental impact on the most vulnerable members of society and can contribute to poverty and inequality. This is particularly impactful for the poorest and most marginalized populations who rely heavily on government services.

It is important to highlight that these are just a few of the significant consequences resulting from the misappropriation of funds by regional governments. To address this issue, robust oversight and transparency measures need to be established to ensure effective and transparent utilization of funds. This can include independent audits, public disclosure of financial documents, and whistleblower protections.

Those responsible for misappropriating funds must be held accountable, through criminal charges, civil fines, or other appropriate sanctions. Public education initiatives can also play a role in preventing regional governments from misusing funds and ensuring their proper utilization for their intended purposes.

What are your thoughts on the controversial issue of fiscal decentralization in Ethiopia’s policy? Some proponents argue that granting local government’s greater taxing authority is crucial for promoting equitable economic growth. On the other hand, opponents claim that fiscal decentralization could potentially weaken the central government. Where do you stand on this matter?

Decentralization offers various theoretical and practical advantages, and I find it perplexing why some perceive it as weakening the central government. Firstly, the economic theory of fiscal decentralization posits that it can enhance economic efficiency. Regional governments, through decentralization, gain the ability to customize public services to meet the specific needs of their residents. Increased public accountability becomes more likely as regional governments are held responsible by the public, leading to improved delivery of public services.

The political theory of fiscal decentralization is also significant, as it can foster greater democratic participation and accountability. This is due to the fact that regional governments are more accessible to residents compared to the central government. Moreover, they have a higher likelihood of addressing societal needs, potentially resulting in elevated levels of national well-being.

Crucially, this policy empowers the public to identify those responsible for crises and enables tailoring of public services to better serve the people.

Both perspectives are vital for achieving good governance and public accountability. In my opinion, decentralization is particularly suitable for the general public. However this system doesn’t work, especially in a country like Ethiopia without a democratic framework.

In general, decentralization enables more efficient management of resources in underprivileged areas, thereby facilitating economic growth. Consequently, a decentralized system, accompanied by sustainable democracy and an effective distribution of power, can significantly benefit the economy of any given country.

Is it your opinion that the ethnic federalism enshrined in Ethiopia’s constitution fosters regional autonomy in relation to the economy?

Ethiopia’s federal system is commonly referred to as a multinational or ethnic-based federal system, setting it apart from other countries with similar systems. One of the key distinctions lies in the division of the country into ethnically distinct states, each having its own government, territory, and parliament. There is no greater inequality anywhere else in the world.

Commentators say that certain aspects of the constitution are not explicitly outlined within the federal system. Article 39, for instance, grants “the nation and nationality of Ethiopia” the right to determine their own destiny, including the possibility of secession, granting them absolute freedom in this regard. Each nation and people within the country possess their own distinct territory, identity, and language. Consequently, the system that determined the authority of regional states is established based on this provision.

Another provision is Article 40(3), which grants exclusive ownership of rural and urban land as well as natural resources to the government and the people. According to this article, land cannot be sold as it is considered the collective property of the state, nationality, and people.

These two articles of the Constitution play a crucial and distinct role in Ethiopia’s federal system, and they remain subjects of controversy. Article 40(3) establishes land rights as the collective property of all nations, nationalities, and peoples, while Article 39 recognizes the right to self-determination.

From an economic standpoint, a thriving national economy necessitates the freedom of trade and movement. This requires the establishment of a unified common economy where individuals can equally capitalize on their comparative advantages, enabling them to create and sell goods and services without constraints.

However, Ethiopia’s federal structure promotes a nation-state system, where each regional state government represents its respective constituents and emphasizes the territories under their control. This characteristic is inherent in the Ethiopian federal system. Consequently, criticism has been directed at the system for perpetuating inequality by granting excessive power to ethnic elites, who may utilize their positions to advance their own interests and those of their followers.

Despite the controversies and artificial divisions that have arisen as a result of this system, Ethiopia’s federal system remains in effect throughout the country.

What is your opinion on the assertion that Ethiopia’s heavy dependence on international fiscal transfers, including development assistance, multilateral aid, bilateral aid, and others, has fostered a mindset that excessively relies on aid to address issues? Some argue that placing greater emphasis on commerce or investment rather than aid could yield long-term impacts.

Certainly, foreign aid can still play a role in Ethiopia’s economic development. However, I do believe that foreign aid alone will not effectively support Ethiopia in achieving its development goals. This is particularly true when there are challenges both on our end and on the part of those providing the assistance.

The ultimate objective is to make Ethiopia self-sufficient and no longer dependent on international aid. This necessitates a long-term commitment to investment and development. Unfortunately, in many cases, the aid provided to the country falls short of addressing the pressing issues and aspirations we face.

In light of this, Ethiopia has received aid and financial assistance from various parts of the world. However, it is crucial to utilize aid in a manner that fosters self-reliance and sustainable progress. This involves directing efforts towards developing Ethiopia’s resources and capacities. Regrettably, due to the inefficiencies within the government bureaucracy, a significant portion of the grants, over 80 percent, has been lost without achieving their intended objectives.

If the current situation persists, it is likely to perpetuate a mindset that relies heavily on aid to solve problems. While foreign aid does lay the foundation for long-term development and prosperity, it is important to assess the government’s ability to fulfill its responsibilities under the prevailing circumstances.

As it stands, I believe it reinforces the mentality of seeking solutions through external assistance. When a country becomes excessively dependent on foreign aid, it may become complacent and less motivated to improve its own economy. This can create a detrimental cycle where countries increasingly rely on aid and struggle to become self-sustaining.

Last but not least, it is often argued that many African countries, including Ethiopia, carry a significant burden of debt due to the dominance of the Western-centered world financial system. There is also a growing sentiment that the global community should explore the need for a new financial system. In light of this, what are your thoughts on debt relief schemes?

In my opinion, it is evident that many African countries, including Ethiopia, are burdened with significant levels of debt. However, I personally do not support such ideological nonsense. It is worth noting that several African leaders have recently emphasized the importance of addressing these issues. While I may not oppose the exploration of a new financial system, there are other crucial concerns that should be prioritized and addressed first.

It is undeniable that the global financial system is heavily influenced by the West, which often results in disadvantageous loan terms for poorer countries. Building trust and ensuring the ability to repay debts bridges that gap.

Nevertheless, it is important to recognize that debt relief alone cannot be seen as a panacea in this complex scenario. It is essential to address the root causes of debt, such as high levels of corruption and poor governance.

Failing to tackle these underlying issues may lead to a recurrence of debt burdens in the future, putting the government at risk of further financial challenges.

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