Finance Minister Ahmed Shide presented an ambitious budget for the 2023-24 fiscal year to Parliament last week. It is a gamble, say critics, following a year fraught with conflict, revenue shortfall, and overspending; the budget relies heavily on a projected domestic revenue boom.

At the heart of the plan is an expectation that domestic revenues, combining tax and non-tax components, will rise to 479.5 billion Br in the coming fiscal year. This substantial hike equates to a 34pc leap from the current year's revenue. Critics, however, question the plausibility of such projections, indicating that realising these numbers might require significant improvements in tax administration and a healthier national economy.

Ethiopia's economic standing has seen turbulence in recent years, with domestic unrest and economic winds challenging its stability. Many view the new budget plan as daring, given its bold assumptions. Despite clear fiscal targets, the path to achieving these may be fraught with obstacles.

“Meeting this tax revenue goal may prove Herculean in light of the underperformance of the current fiscal year,” an anonymous Addis Abeba-based macroeconomist told Fortune.

This audacious budget is also tethered to external financing. The Minister anticipates 41.1 billion Br from foreign aid and 39 billion Br from external loans. This pattern echoes the narrative of the current fiscal year, where lower-than-expected domestic revenues and greater-than-anticipated expenditures seem to have amplified reliance on foreign aid and loans.

Budgeted spending for the 2023-24 fiscal year amounts to 801.6 billion Br, a modest increase of 1.91pc from the present fiscal year's expenditure. It is the smallest expenditure growth rate noted in the last two decades.

Unsurprisingly, the macroeconomic assumptions underlying Ahmed's strategy have stirred controversy. Following a year in which actual GDP growth dramatically missed projections, and inflation exceeded expectations, the 2023-24 budget anticipates GDP growth, inflation of an undisclosed double-digit, and nominal GDP growth of more than 20pc.

The budget also highlights significant debt repayments, a suspension of capital projects, and a freeze on public servant recruitment. Financial experts highlight that the budget's modest growth is eroded by surging inflation.

Sewale Abate, a finance lecturer at Addis Abeba University, underscored the importance of considering consumer purchasing power, which he noted, has been diminishing.

When evaluated in dollar terms, the budget plan illustrates a decrease in real growth. The expenditure of 14.5 billion dollars at the current exchange rate is nearly one billion dollars less than when the 2022-23 budget was approved the last year.

The Minister also outlined a strict fiscal and monetary policy poised to spur economic growth by 7.5pc, a significant reduction of two percentage points from an earlier projection. He responded to queries from parliament members on financing the Prime Minister’s Office's favoured projects, explaining that such initiatives are funded through alternative mechanisms and usually do not require parliamentary approval.

Within the budget allocation, road projects constitute 11.9pc of the total, while a substantial 159 billion Br is earmarked for debt repayments, underscoring the federal government's hefty debt burden. Debt repayment has increased by 34 billion Br from last year, accounting for nearly one-fifth of the total budget. Sustainable development goals were allocated 14 billion Br, and regional states were allotted 214 billion Br.

Ahmed candidly admitted that debt restructuring efforts were partially successful and disclosed plans to restructure the civil service, which employs two million people, hinting at a hiring freeze in the upcoming fiscal year. Addressing the estimated 20 billion Br for rehabilitating conflict-ravaged areas – also included in this year's budget – Ahmed claimed that development partners would fund this project.

In keeping with the broader narrative of austerity, the defence budget has been scaled back to 50 billion Br, reversing the upward trend of the past two years prompted by the war in the North. This represents a 34 billion drop from the previous year's allocation. Nonetheless, the Minister stressed the necessity of a capable defence force to maintain national stability.

The planned capital expenditure has decreased by 6.7pc from last year, continuing a trend seen over the past five years, whereas recurrent spending has increased by 7.2pc. This shift drew criticism from Tseganesh Gamato, a member of Parliament, who expressed concerns that cutbacks on capital projects could seriously hamper infrastructure development in regional states. The Minister pointed out the staggering one trillion Birr required to complete road projects and noted the government's plan to restructure project payment periods to lower expenditures.

As the federal government grapples with a gross budget deficit of 281 billion Br, it plans to cover the 39.01 billion Br gap through external borrowing, with the remaining deficit addressed through domestic borrowing. Ahmed projected that the net gross budget deficit would account for 2.1pc of the country's GDP.

Most of the deficit will be financed through the sale of treasury bonds and bills, avoiding direct borrowing due to fears of further fueling inflation. Sewale suggested selling bonds and bills to non-nationals or the Ethiopian diaspora community, offering a preferred alternative to money printing.

Desalegn Chane, a representative of the opposition National Movement of Amhara (NAMA), praised the Minister for acknowledging the connection between declining productivity and high inflation. But he also voiced concern over the budget's seeming lack of a pro-poor approach and criticized the reduced budget for sectors such as energy, mines, and agriculture.

The federal government's plan to generate 520 billion Br in revenue from taxes and the remainder from non-tax income aligns with the trend seen in the current fiscal year, where tax contributed 95pc of the treasury's inflows. The emphasis on tax policy in the proposed budget aligns with the lessons learned from the declining foreign funds due to the two-year war, Ahmed said, as the budget does not account for grants and loans currently being negotiated.

The proposed budget reflects a modest expansion over the current fiscal year, spurred by an optimistic outlook on domestic revenue growth and ambitious expenditure targets. However, the volatility that marked the previous fiscal year could present considerable challenges for Prime Minister Abiy Ahmed’s administration as it navigates the ambitious targets set in the proposed budget. High inflation signals an economically unstable year ahead. Causes could range from exchange rate pressures and supply chain disruptions to fiscal pressures.

However, the new budget appears to bank on a return to a more stable environment, with its projections of inflation and GDP growth rates similar to those budgeted during the turbulent 2022-23 fiscal year.

An anonymous macroeconomist warned against the overly optimistic projected macro figures, stating, "Achieving these targets will require effective domestic policy measures and favourable global economic conditions."

However, he acknowledged that the prudent budget is typical of a post-war economy and conceded that it was a fitting decision given the current economic circumstances. The expert, however, warned that the expanded gap between revenues and expenditures suggests that avoiding direct loans from the central bank seems unlikely. He suggested that anticipated tax revenues may not materialize as quickly due to the slowing economy.

"A bailout for the economy may be necessary," the expert told Fortune, hinting at potential foreign aid or loans.

PUBLISHED ON Jun 10,2023 [ VOL 24 , NO 1206]

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