Parliament unanimously passed the federal government’s current fiscal budget last Monday, July 8, 2019. Totalling 386.9 billion Birr, it is 11.5pc higher than last year’s budget. The government plans to cover 65pc of it from domestic tax revenues, while external assistance and loans will cover the rest.
In the parliamentary session, Prime Minster Abiy Ahmed (PhD), while answering questions from members of parliament, indicated that the macroeconomic policy the country has been following for the last 15 years would be changing from the ‘aggregate demand’ to ‘aggregate supply’ model.
However, the just passed budget does not seem to strictly reflect that shift as the ‘aggregate supply’ model discourages heavy government spending. The budget has allocated 130.7 billion Br for capital spending, which is a 14.8pc, or 16.4 billion Br, increase from the last fiscal year. Recurrent government spending has gone up by 19.5 Br to 109.5 billion Br.
This shows the dilemma the government is facing. The impressive economic growth of the last 15 years was primarily government driven and necessarily fueled by debt. The country is currently carrying a foreign debt of 27 billion dollars and local debt of 731 billion Br. Since this trend is unsustainable, the government is trying to change its policy and encourage more private sector participation in the economy. However, the private sector in Ethiopia is not strong enough yet to fill the gap. Solving this dilemma will be testing the government’s economic leadership capacity in the coming year.
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