Budget Deficit Weighs Heavy Despite External Debt Relief

Purported, and temporary, savings of USD 1.44 billion in external debt service payments following an agreement with bilateral creditors have done little in easing budget deficit impacts on regional administrations and capital projects.

“Regional states and several [government] institutions are raising budget deficit issues. They’ve complained to us that they’re unable to discharge activities because there is no financing. Some have budgets allotted, but there is no disbursement. They say the budget for this year was allocated without the availability of cash,” said Debebe Admassu, an MP and member of the parliamentary standing committee for Budget and Finance affairs. “There is no money now. We’ve also seen projects, including those awarded to foreign contractors, stopping due to a lack of funding for compensation.”

Debebe was among several lawmakers who grilled heads of the Ministry of Finance on May 22, 2024, during a performance review.

The Ethiopian Roads Administration (ERA), for example, has been unable to pay out nearly 14 billion birr in compensations to people who have been displaced or whose properties have been appropriated for road projects, according to the Ministry’s nine-month report.

Ahmed Shide, minister of Finance, argued the problems are an outcome of the government’s attempts to balance between budget deficit financing and inflation taming.

– Advertisement –

This fiscal year’s budget deficit stands at 139 billion birr, according to the Minister.

“We’ve been careful not to take much in direct advances from the central bank because such injections would fuel inflation,” said Ahmed.

He told MPs the government has taken 57 billion birr in direct advances from the National Bank of Ethiopia (NBE) this year, down from 157 billion birr last year.

The Minister attributed some of the budget disbursement issues to the government’s cash flow, which he says is affected by problems in collecting tax revenue on time and in cash.

“We’ve disbursed all budgets to regional administrations. Some regional states are already taking credit from next year’s budget,” said Ahmed.

He and his deputies told Parliament that Ethiopia’s budget deficit problems could have been worse were it not for the temporary debt service suspension agreement reached with bilateral creditors, including China, at the end of 2023.

Though Ethiopia is still negotiating with the IMF and creditors’ committee to secure overall debt restructuring and new financing under the Common Framework agreement, the interim debt suspension offered by China and other creditors have offered relief for the budget deficit, according to Ahmed.

The Ministry puts the relief at USD 1.44 billion thus far this year. The suspension is scheduled to last for the coming two years, and officials are attempting to negotiate for the rescheduling of a further half a billion dollars in external debt service. If approved, Ethiopia will see its external debt burden eased significantly for the coming year.

Ahmed hopes to see the IMF’s pending approval of debt restructuring reduce Ethiopia’s budget deficit for up to six years.

“Negotiation for debt restructuring under the Common Framework is ongoing. Once negotiations are finalized and external debt restructuring is approved, we will be able to manage the budget deficit for the next five or six years,” said  the Minister. “We’re working hard to make our debt sustainable.”

Last week, Julie Kozack, IMF communications head, indicated “progress” in negotiations with Ethiopian authorities, but did not mention how close the talks were to a definite decision.

She recalled a two-week IMF mission visit to Addis Ababa in late March, subsequent talks during the World Bank/IMF Spring Meetings in Washington, and virtual meetings in the weeks since have made “substantial progress towards establishing how the IMF can support the authorities’ economic program.”

Ethiopia’s external debt stands at USD 28.4 billion, slightly higher than last year’s figure due to fresh disbursements from the World Bank. The federal government owes its creditors USD 20 billion, while state-owned enterprises account for the remainder.

Finance officials stress that boosting tax revenues is critical to addressing budget deficit issues. The government collected 338 billion birr from taxes over the last nine months, or 68 percent of the target for the fiscal year set to end in a couple of months.

Some 153 billion birr of the total revenues has already been disbursed to regional administrations, according to the Finance Ministry. However, Ahmed notes that regional states are not generating sufficient revenue. In total, government disbursed ETB470 billion in the past nine months, which is 64 percent of the current fiscal year budget.

“We’ve prepared a medium-term revenue strategy and soon it will be approved by the Council of Ministers and implemented. The property tax proclamation is also finalized and will be approved by Parliament soon. The proclamation will be implemented next year. We expect it will boost tax revenues in regional states and city administration substantially,” Ahmed told MPs. “We’re also preparing a VAT proclamation.”

A draft tabled to lawmakers proposes the inclusion of value-added tax (VAT) on utilities and services such as electricity, water, telecom, and transport as the government struggles with a falling tax-to-GDP ratio.