Exclusion From Federal Budget Subsidies Poses Risk To Addis Ababa’s Development: UN Study

Despite outpacing peer cities in resource mobilization, the Addis Ababa City Administration grapples with fiscal challenges that could hamper its ability to address the needs of its fast-growing population, concludes a study conducted by experts drawn from three UN agencies and the city administration.

The ‘Fiscal Assessment Report’ compiled by UNECA, UNCDF, and UN-Habitat praises Ethiopia’s capital for a substantial surge in assets and liquidity in the past six years.

Presented this week during a conference at UNECA headquarters, the report highlighted that Addis Ababa outperformed other African capitals, including Nairobi, Lusaka, Dar es Salaam, Kigali, and Yaoundé, in terms of resource mobilization and project implementation.

Addressing the conference, Mayor Adanech Abiebie said the strategic reforms undertaken by the city have significantly improved its global competitiveness and positioned Addis Ababa as a model of urban transformation for other African cities.

Addis Ababa managed the success by introducing a new strategy that targets covering up to 70 percent of its expenditures from its own revenues. This significantly helped the city to undertake huge corridor development projects that uplifted the face of Addis, according to the Mayor.

However, the report balances praise with caution about the city’s fiscal autonomy.

It highlights how the city administration finds itself in a dilemma where it contributes massively to national revenue but is excluded from the federal budget subsidies granted to regional administrations.

This year, the federal government has reserved 415 billion Birr for the subsidies, but, as chartered cities, Addis Ababa and Dire Dawa are excluded. The Addis Ababa City Administration received a 5.4 billion Birr subsidy in 2024/25—only a small fraction of the total subsidy budget.

“Addis Ababa contributes a significant share of revenue to the national treasury, through taxes, charges, fees and various business activities, but it has been largely excluded from the national revenue-sharing system. That exclusion places a considerable strain on the financial capacity of the City, undermining its ability to address the needs of its rapidly growing population and provide essential infrastructure and public services,” reads the report.

Its authors propose that the city could integrate into the national revenue-sharing framework or businesses registered in the city could fulfil their tax obligations directly to the city regardless of size or type as a way to strengthen fiscal autonomy.

“The Addis Ababa City should be empowered with greater control and autonomy over fiscal policies. This would require constitutional or statutory amendments or legal reforms. Addis Ababa should be included in the national budget allocation and revenue sharing formula to ensure that it receives its fair share from the national revenue allocation,” recommends the report.

It calls on the federal government to consider including Addis Ababa in the national revenue-sharing formula, highlighting its role as the economic, political, and cultural hub of Ethiopia.

The report also urges Addis Ababa’s officials to capitalize on additional revenue streams to deviate from dependence on federal disbursements, and to address challenges in process inefficiencies, weak enforcement mechanisms, fragmented systems and outdated database management.

It calls for the implementation of a fully integrated and automated billing, payment and reporting system to enhance efficiency, and recommends a centralized and unified platform for tax collection and reporting, integrating income tax, VAT, profit tax, property tax and other local taxes into one system to simplify tax administration.

On the other hand, the report lauds the city for averaging 8.7 percent GDP growth in the five years leading up to 2023 (686 billion Birr) while “reducing its reliance on unpredictable transfers from the federal government or development partners.”

The city recorded nearly 108 billion Birr in income in 2023, and managed a debt-to-income ratio of 28.2 percent, according to the study. However, its debt servicing costs ballooned by nearly 75 percent to 29 billion Birr per year between 2018 and 2023.

“Ongoing large-scale infrastructure projects, such as the integrated corridor development project, however, could have an impact on the municipality’s liquidity, potentially affecting its asset allocation and overall financial dynamics,” cautions the report.

Its authors laud the city for progress in improving its financial position and reducing indebtedness, but warn of the risks associated with growing arrears and heavy dependence on a limited number of revenue streams.

“The accumulation of arrears undermines fiscal autonomy, limiting the ability of the municipality to maintain financial stability and invest in essential development projects. Furthermore, the reliance on a limited number of revenue streams creates volatility, making the municipality vulnerable to economic shocks, reducing financial flexibility and increasing the risk of long term instability,” reads the report.