Unprecedented Budget Proposal Draws Parliamentary Fire, Exposes Inequity, Inefficiency

It was with his usual nonchalance that Finance Minister Ahmed Shide presented the federal budget proposal to lawmakers last week, but a look at the documents calls into question his unassuming demeanor and the government’s handling of its fiscal responsibilities.

MPs must decide on a whopping 971 billion birr budget for the 2024/25 fiscal year set to begin next month. It is a full 21 percent higher than last year’s budget, and even more striking when compared to the previous annual budget growth of two percent.

Experts at the Finance Ministry prepared the budget assuming a 7.9 percent GDP growth rate, consistent exchange rates, and forecasting a halving in the inflation rate currently hovering near 27 percent, according to Ahmed. His elaborations were listened to very carefully by MPs, many of whom were itching to raise their hand and ask questions about the enormous figures.

For Ahmed, inflation, forex shortages, debt service and budget deficit remain top concerns.

“Tax revenues are very little considering the huge potential in the economy. Tax revenues are insufficient for investment needs. There were necessary government expenditures in the past few years due to unexpected problems. We were forced to take domestic credit to fill budget deficits. But this in turn is creating huge pressure on our fiscal position. In order to reduce this pressure, make our debt service sustainable, and cover development finance needs, we must extract domestic revenue. Though debt is falling, our debt stock is still at risk. Our negotiations with creditors to restructure debt are a must,” said the Minister.

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The budget he was proposing to lawmakers features 283 billion birr for capital expenditures, up 39 percent from last year. Ahmed wants to see the recurrent expenditure budget grow by 22 percent to 451 billion birr. The documents also propose 223 billion birr for subsidies for regional administrations and a further 14 billion birr for sustainable development goals (SDGs).

More than 28 percent of the recurrent budget is earmarked for salaries, per diems, and miscellaneous expenses. The remaining 324 billion birr is to be set aside for operational and administrative expenses.

“How can growth be achieved while the majority of the budget is allocated for recurrent spending? How can there be productivity in real sectors like agriculture and manufacturing? The capital budget is very small; why? Nine billion allocated to agriculture while 69 billion is for defense. Why not cut out unnecessary spending and focus on productive sectors?” asked Desalegn Chane (PhD), MP and member of the National Movement of Amhara (NAMA) party.

Ahmed’s response was to call the recurrent budget “small considering inflation” and attribute the large figures to the inclusion of debt service.

A total 139 billion birr of planned recurrent expenditure is earmarked for debt service. The number could have been much higher if the government had not managed to secure an interim debt payment suspension agreement with bilateral creditors, which postponed over USD two billion in payments, according to the Minister.

Ahmed did, however, concede that several capital projects are facing delays due either to conflict or a lack of financing. Almost all MPs who were given a chance to speak inquired about these delays. Some pointed out that newly-formed regional states in the country’s south lack the budgets to pay their civil servants, let alone finance large-scale projects.

“Several projects are listed in the budget document as ‘to be executed when loans and grants are secured.’ How can loans and grants be secured if there is no peace in the country?” asked one MP.

Ahmed told lawmakers that no new capital projects had been considered in crafting the budget proposal, with the priority being finalizing projects that have already started. Some of these have also been paused.

“So much development demand and problems to solve, but so little revenue. We also need to watch out for inflation. Disbursement of budget for some projects might take place with delays due to issues with cash flow. Some capital projects have been postponed, but no project approved by this Parliament will be left unexecuted. Every project will be implemented when the financing is secured,” said the Minister.

The budget deficit this time around stands at 2.1 percent of GDP, with total government revenue including external grants forecasted at 613 billion birr. Ahmed wants to see the vast majority (502 billion birr) generated from taxes. This would bring the deficit-to-budget ratio to nearly 37 percent, meaning more than a third of the proposed budget would be financed via domestic and external credit.

“The budget deficit is huge. Why does the government plan for such a huge budget without having the money?” asked Desalegn.

But Ahmed hopes to see new tax legislation slated for enactment in the coming fiscal year boost government revenue.

“We will introduce a new VAT law in the new year. it will increase government revenue. We are also introducing a new property tax, which we believe will boost regional states’ revenue,” said the Minister.

However, the MPs suggested that imposing new tax rates on the poor suffering from a post-conflict economy is unjustified and recommended the government to focus on taxing businesses that avoid paying their dues instead.

“The revenue the government will generate by imposing new taxes on the poor will not cover the huge budget deficit,” said Desalegn.

The budget document cites ‘macro-distortions’ brought on by a range of challenges for a shortfall in domestic revenue. It states that external revenue streams have also dried up. Lawmakers were quick to affirm the statements.

“We cannot cover it up. The conflicts in the country over the past six years have had a huge economic impact. There is a huge macro imbalance. The economy is teetering. It is good that the Minister admitted the impact of conflict on the economy in the budget document. Oromia has been in conflict for six years. Western Ethiopia in general as well. Tigray, Afar, and Amhara have also been in conflict for several years. It’s similar elsewhere. How long will we remain in conflict? Why doesn’t the government secure peace and restore the pre-2018 stable economy? You, Ahmed Shide, held the same position before the [political] change. There was double digit inflation. Why doesn’t the government solve the underlying problem of peace first to solve this macro distortion? The national dialogue has not onboarded armed groups and opposition parties. What can the [National Dialogue] Commission do alone?” said Desalegn.

Ahmed said he is optimistic that the protracted conflicts will be resolved.

“We prepared this budget document assuming that in the coming fiscal year, Ethiopia will be peaceful, stable and united. The government is trying everything to solve the conflicts peacefully,” said the Minister.

The statement was not enough to quell MPs like Tola Hailu.

“Western Oromia particularly has been at war for seven years. Almost all infrastructure has been damaged. There have been no federal projects there, particularly in the four Wolega zones, for the last seven years. There is only a single road project. Several other projects approved for western Oromia have lapsed due to the conflict. No budgets are allocated. Why hasn’t a recovery plan been prepared for parts of Oromia, just like in Tigray, Amhara, or Afar? On top of war, the outbreak of diseases such as malaria is increasingly common in Oromia now. Oromia needs a separate conflict recovery office, budget, and program,” said Tola, who represents a constituency in Oromia.

The Minister stated that a recovery office for Oromia is in the pipeline, and hinted that reconstruction works will begin as soon as peace is secured in west Oromia.

Lawmakers were not done yet. They raised issues with budget equity, expressing disapproval over the absence of considerations for growth potential and resources in budget allocation. Some parts of the country, MPs argue, receive larger budgets than others.

The proposed budget will see the Oromia regional administration receive 75 billion birr in federal subsidies, followed by 47 billion birr for the Amhara regional administration. Gambella will see no more than three billion birr from federal coffers, while Addis Ababa will receive nearly double that.

Inflation was another hot issue during the parliamentary budget discussions.

“The budget document states inflation will be 12 percent in the next year, from 27 percent currently. How can it halve? Last year, during the same budget presentation, you stated that inflation would drop to 15 percent from the 36 percent at the time. It did not happen. Again, we are making unrealistic plans today,” said an irate MP. “If inflation remains near 30 percent and if the GDP grows at even the planned rate of 7.9 percent, what would be the benefit? The growth would be canceled out by the high inflation.”

The Finance Minister attributed inflation to factors that cannot be controlled by the government, like global supply disruptions, the Red Sea conflict, and rising prices for commodities like fuel and fertilizer. Ahmed assured MPs the government is taking measures to tame inflation, including cutting direct advances, placing a 14 percent credit growth cap on private borrowing, and introducing a ‘conservative’ budget to control the money supply. However, Ahmed said the supply side economy must improve to effectively control inflation.

The budget document also considers the second Homegrown Economic Reform (HGER 2) programe, which runs for three years starting in 2024. The first iteration of the program was implemented between 2020 and 2023. MPs questioned the significance of the Homegrown episodes.

“HGER 1  failed in correcting the macro-distortions. Again, we are going for HGER 2. Why continue when the first failed?” asked Desalegn.

This question drew a strong reaction from Ahmed, who used a strong tone and matching gestures to argue that HGER 1 saved the economy from collapse.

“It registered a huge success,” said the Minister.

The reply was in contrast with previous statements he made to Parliament, in which he conceded that HGER 1 was not fully implemented.

“The economy grew strong, against all odds. Ethiopia’s economy doubled every year. GDP doubled in the past six years. Under all conflict, war, international pressure, desert locust, drought…the economy was affected by war, inflation. Peace is decisive to tame inflation and achieve development. The government is still financing imports of basic commodities such as fuel and fertilizer. But there is still pressure. To achieve the targets failed in HGER 1, we must execute HGER 2. We reduced direct advances. So we are managing the deficit. This is to reduce inflation. Even during the northern conflict, we did not stop development projects in other parts of the country. If such a war occurred in another country, they would divert their entire budget. The defense budget grew to deter threats, and maintain this nation. Even the defense budget is still small. The state must exist as a state,” said Ahmed.

The Minister also expressed hopes that protracted negotiations with creditors would soon bear fruit.

“The Debt-to-GDP ratio has been reduced significantly. We paid off a huge amount of debt. We are negotiating with the creditors committee. Ethiopia’s debt will drop to medium from high. We diverted the huge debt risk. This government deserves thanks for absorbing all the shocks and maintaining the economy resiliently. Nothing should worry you, we are leading the economy cautiously,” said Ahmed. “We hope the new year will bring stability. We expect the national dialogue will ensure peace. We also expect a stable macro economy, and recovery.”