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Budget breakdown

Budget breakdown

Last Thursday, Abraham Tekeste (PhD), Ethiopian finance minister, walked in parliament building, which is located off Niger Street, carrying a dark brown briefcase in anticipation of his budget speech. This was a tradition initiated by Sufian Ahmed, the longest serving finance minster of Ethiopia, towards the end of his tenure. It appears that Abraham, who served as state minister under Sufian, is carrying the torch. But not only with the traditions; the proposed budget bill for Ethiopian Fiscal Year 2010 EC in amount of 320.8 billion birr is 17 percent higher than the previous year keeping up with the trend of ever expansionary fiscal policy in Ethiopia, reports Asrat Seyoum.

We are all too familiar with the saying “democracy is a culture”; or use it without even considering its deeper meaning. The phrase usually pops up in more serious, formal and often intellectual theoretical discussions with little or no connection to day-to-day life on the ground. But for those having the patience to observe the smallest quirks and traditions in some of the oldest democratic systems in the world, the concept of democracy as a collective culture and tradition would suddenly become clear.

The best example for this is perhaps the so-called “Budget Day” in the UK (and few other countries) and all the ceremonial and customary practices surrounding this day. Nonetheless, it is a pure practice of democracy where the country’s lawmakers would listen to and latter pose challenging questions to the minister of finance (Chancellor of the Exchequer) who delivers its budget speech that day.

While being an integral part of the democratic practice at heart, the “Budget Day” and the ceremonial undertakings few days before and after this day is the perfect embodiment of democratic values devolving into seemingly inconsequential traditions and customary practices. Indeed, these traditions descended from the 1800s with minor or no change to date.

For example, the preparation of the budget document and the speech to the parliament starts weeks before the actual “Budget Day”.  Amazingly, a wrap up meeting held between treasury officials and members of the budget preparation team, usually a week before the speech, is always convened at a location outside of London and it is always on weekends. Initiated by former chancellor Geoffrey Howe, this weekend budget meeting is now part of the annual budget preparation tradition in the UK.

Another custom, which stick to this day, is the display of the “Red Dispatch Box” a red portfolio bag carried by all chancellors, as they leave their office at 11 Downing Street making their way to the parliament, purportedly carrying the anticipated budget speech. As admitted by many chancellors in the past, the bag serves little practical purpose than being a mere display for the customary photo occasion for the media. But, the symbolic meaning is far more than that, they say. Traditionally, the content of the budget speech is supposed to be kept a top secret until it is revealed at the parliament and the photos with the chancellors holding the dispatch box is some sort of reassurance that the content of the speech is kept safe inside.

Customarily, the monarch is the first to learn of the appropriation bill and traditionally chancellors are invited in the palace for dinner a day prior to the “Budget Day”. However, not even the cabinet is trusted to receive the details of the budget speech before the day. In fact, it was on the morning of the “Budget Day” that the cabinet will be convened to be briefed on the proposal and although the council has the right to amend the bill, the practice makes it so that there was no enough time to have adequate debate and amendments.

It is around midday that finally the chancellor walks into the House of Commons, the lower house of UK’s parliament, to delivers his anticipated speech. Although no lawmaker is allowed to consume alcohol beverages during session, the chancellor can actually drink anything while presenting his budget speech; and there is recorded history of chancellors drinking whisky, gin, brandy and the like during their speech. Although discontinued after 2011, chancellors are also expected to make televised broadcast about budget in the evening of the Budget Day while opposition parties in parliament also getting equal airtime to reflect on the same bill.

Last Thursday, Abraham Tekeste, Ethiopian finance Minister, walked into the parliament carrying a dark brown briefcase in anticipation of his budget speech. This was a tradition initiated by Sufian Ahmed, the longest serving finance minster of Ethiopia, towards end of his tenure. It appears that Abraham, who served as state minister under Sufian, is carrying the torch. But not only with the traditions; the proposed budget bill for Ethiopian Fiscal Year 2010 EC in amount of 320.8 billion birr is 17 percent higher than the previous year keeping up with the trend of ever expansionary fiscal policy.

According to some historians, the importance of budget in Ethiopia’s fiscal administration can be traced back to early references to budget appropriation and fiscal revenue in the 1931 constitution. Nevertheless, the significance of the budget instrument evolved slowly in the coming years. The overall size of the budget has grown by leaps and bounds even in the last two decades since the consolidation of the parliamentary system in the EPRDF era.

For example, in July 1996, the ministry of finance presented a budget bill for the fiscal year 1989 EC worth 9.58 billion birr to the first Ethiopian parliament in the post Derg era. In subsequent years, the house approved budget bills in order of 10.45 billion, 11.12 billion, 13.93 billion, 15.6, 15.01, 17.24 and 19.26 for fiscal years 1990, 1991, 1992, 1993, 1994, 1995, 1996 EC. These figures clearly show the rather slow evolution in the budget structure taking roughly some seven years to pass the 20 billion mark.

One can also learn that after 2004, the budget started to expand aggressively jumping, for instance, from 22.07 billion to 30.04 billion birr between fiscal year 1997 and 1998 EC. The figure again jumped to 43.95 billion for fiscal year 2000 EC and nearly doubled to 77.23 billion for 2003; EC while crossing the 100 billion birr barrier to reach 121.81 billion birr the next fiscal year. Again, only after four more years the Ethiopian budget peaked to 241.34 billion birr in 2008 EC. Nevertheless, it took only two years to gain another 100 billion birr in 2010 EC proposing 320.8 billion birr.

In a nut shell, the proposed spending would see 117.3 billion birr out of next year’s budget redirected to the nine regional states and two city administrations, allocated based on a special formula devised by the House of Federation (HoF). The second largest chunk, in tune of 114.7 billion, is allotted to federal government’s capital spending complementing the 81.84 billion birr recurrent expenditure of the federal bodies. The last component which is a seven billion allocation is the support for regional states in their effort to meet the Sustainable Development Goals (SDGs).

Based on HoF’s formulation, which takes into consideration the revenue potential and expenditure needs of the regional states, Oromia is entitled to 39.85 billion birr out of 117.3 billion subsidy fund followed by the Amhara and Southern regional states each looking to cash a check for 24.98 and 23.25 billion birr, respectively, in the coming fiscal year. Somali Regional State is the next biggest earner on the subsidy budget taking home 11.54 billion birr followed by Tigray securing 6.97 billion birr, Afar 3.49 billion, Benishangul-Gumuz 2.11 billion, Addis Ababa 1.64 billion, Gambella 1.54 billion, Dire Dawa 1.02 billion and Harari 878.74 million birr.

Both Dire Dawa and Addis Ababa seem to be the latest inclusions to the subsidy illegibility list in connection to their status of being federal cites and not regional states. According to the principles guiding the subsidy grants, it is only the nine regional states which are original founders of the federation which are entitled to subsidy and to that end the likes of Dire Dawa has been appealing their case to HoF for many years.

Apart from the subsidy grant, Oromia is set to bag 2.41 billion birr from the support for SDGs fund while Ahmara gets 1.51 billion, South 1.41, Somali 698 million, Tigray 422.1 million and so on. The combined budget spending dedicated to regions under the subsidy and support for SDG categories is now 38.7 percent of the overall budget while the others (recurrent and capital) accounting for 25.5 and 36.5 percent each.      

In terms of its sectoral distribution, the Ethiopian budget table looks to have retained a more or less similar figure over years with infrastructure projects like roads and housing, hydro power and electricity coming at the forefront accompanied by social services like education and health. This year too, the Road and Construction sector is by far the biggest spender with 50 billion birr out of the capital budget dedicated to this sector.

Araya Girmay’s Ethiopian Road Authority (ERA) stands to gain more than 45 billion out of this allocation; while the Ministry of Urban Development and Housing, the newly restructured ministry led by Ambachew Mekonnen (PhD), is set to receive three billion from next year’s budget. The other big ticket item on the top of the budget table is education. This sector will be receiving 43 billion birr this year with 4.8 billion set aside for the Ministry of Education (MoE), and the rest divided between public universities and few other agencies under the ministry.

Public universities are indeed among some of the biggest federal institutions in the country getting billions in funding from the budget every year. For example, Addis Ababa University, the biggest university in the nation is set to spend 2.21 billion in the fiscal year in question while other universities like Jimma, Bahir Dar, Mekelle, Gondar, Hawassa, Haromaya and Arbaminch are allotted 1.89 billion, 1.83 billion, 1.73 billion, 1.72 billion, 1.64 billion, 1.57 billion and 1.5 billion birr, respectively, from next year’s budget. The second tier, which encompasses Dilla, Ambo, Jigjiga, Wollo, Debre Markos, Wolayta, Wollega, Askum and Meda Welabu, gets an annual budget which is above 900 million birr each.

Surely, public universities are budgeted generously by the federal government with most of them getting between one billion and 7oo million birr every year to finance their academic year.  So far, Asosa University is the lowest recipient with allotment for 2010 E.C at 648.03 billion birr.

Surprisingly, the other big ticket item on the current bill is debt servicing. An overwhelming 17 billion birr is kept to service the country’s foreign debt obligation, which, according to experts, is about USD 45 billion and most of it is held by China. The nation’s foreign debt stock has long been a point of worry for commentators for it has shown fast acceleration over the year. The International Monetary Fund (IMF) classified Ethiopia’s foreign debt stress at mild level with due side note on methodological departure from government on the exclusion of public enterprises debt from the national debt basket.

Agriculture and defense are among the institutions receiving biggest budget in 2010 EC – 12 billion each. The two are followed by heath with nine billion for which close to seven billion is expected to be secured from assistance.

Still on the expenditure side, it is not only the spending that has changed over the past two decades, but the type as well has shifted over the years. This distinct feature manifests itself in the extra focus given to recurrent expenditure throughout the 1990s and early 2000s. For the fiscal years ranging from 1990 to 1997, the budget schedule shows a distinct advantage in favor of recurrent expenditure financing government agencies wage bill and other expenses falling under the variable cost category. Meanwhile, starting from 2004, the gap between capital and recurrent started to narrow down and then capital spending took the lead in Ethiopian budget. This trend coincides with government’s focus shifting to infrastructure investment.

On the revenue side, the national treasury is also aiming big this year planning to cover over 70 percent of budget spending from domestic sources. For that to happen, it is eyeing 221.18 billion birr domestic revenue in the fiscal year (196.4 billion from tax and 24.6 billion from non-tax sources) apart from 45.7 billion birr foreign assistance and credit (17.13 billion birr in assistance and 28.62 billion birr in loan and credit). This leaves 53.88 billion in deficit, another macroeconomic variable which has shown a steady increase over the years in Ethiopia.

Nevertheless, one question that is been asked of the ministry (ministry of finance) is whether the revenue forecast which it has put forward for the fiscal year is realistic altogether. In fact, some of the commentators argue that given the widespread unrest in Ethiopia in the past few years, the tax ambitions expressed in the next year’s budget is utterly attainable.

Haji Ebssa, Corporate Communications Directorate Director at MoFEC, disagrees with this assessment. He says the ministry’s forecast is made after a detailed analysis of tax collection potential and the current situation in the country. “We do recognize that the condition in the previous two budget years were less than ideal for tax collection due to political instability in various parts of the country,” Haji told The Reporter. However, he argues that with the state of emergency in place and still three months remaining to the end of the year, the tax authority is currently getting close to (75 percent) attaining its 171 billion birr target for the current fiscal year.

“You see what matters most to our tax revenue is the collection rate among category A and B taxpayers (businesses having annual turnover of one million and above and those between 500,000 to one million, respectively). This is where we get 80 percent of our tax revenue from,” he told The Reporter. It is Haji’s view that if the current stability is maintained, the tax authority would definitely meet its 221 billion birr target by the end of next budget year; or at least attain something like 90 percent of it.

Said Nuru (PhD), macroeconomist at Ethiopian Economic Association (EEA), believes that Ethiopia economy holds the potential for generating the indicated tax revenue. He also shares the argument that the impact of turmoil is devastating, “when the government is focused on something else, people would feel that they would get away with not paying their tax obligation”.  “It is a mindset thing,” he said.

“We have recently amended the tax proclamation and the tax administration directive which is coming out shortly and it would immensely boost the tax collection potential; and in this regard the targets would not be that aloof,” he explained to The Reporter.

Nevertheless, close to 45 billion birr foreign assistance and credit which the budget relays on is another concern raised on the budget bill. Said feels, given current trends in the global economy, it certainly is not a good time for Ethiopia to relay on foreign resources. According to the budget schedule, close 45 billion or 15 percent of budget is planned to be covered either by foreign assistance or loan and credit.

Haji is not worried about default on side of donors and creditors because the amount which is included in the budget is usually what the ministry is sure to secure. “Foreign financial resources incorporated in the budget are usually as good as in our coffers,” Haji told The Reporter.

Nevertheless, securing the pledged assistance is not the only concern with foreign capital, another macroeconomist who prefers to remain anonymous says. It is his view that forex denominated assistance or loan and credit are as inflationary as domestic borrowing if the monetary policy managers are not taking steps to neutralize this impact. “There must be an appropriate sterilization (withdrawal of equal amount in local currency) measure to dampen the pressure on inflation,” he maintains.

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