With the ratification of a towering 801 billion Br federal budget last week, a country once heralded as a developmental state model primarily built on extensive public infrastructure investments appears to be on the brink of a potential policy shift.

The freshly sanctioned budget earmarks 203 billion Br for capital expenditures while allocating 159 billion Br towards debt repayments. While these figures might seem substantial on the surface, they represent a stark departure from the country’s past spending patterns. The capital budget experienced a 1.9pc increase from the previous year, a growth that, albeit small, takes on a different hue considering the 33pc inflation rate.

In real terms, this represents a significant decline in capital expenditures by 15 billion from the previous year. It marks a continuation of an emerging trend over the past six years. The consequence of the reduced capital expenditure is that no new capital projects are on the horizon, with allocations strictly dedicated to ensuring that ongoing projects are not halted.

It is a far cry from what Parliament has approved for the 2022/23 fiscal year at 786.6 billion Br, a 40pc increase from the previous year. The federal government had proposed to cover 61pc of the budget from domestic tax revenues. The sources of funds for the current budget would be no different, with tax revenues expected to account for a massive 60pc. Domestic borrowing is directed to cover 30pc, leaving the rest to foreign assistance and non-tax revenues.

Arega Shumete (PhD), an economist and member of the Ethiopian Economics Association, argues that the reduced capital expenditure budget is an uncertain sign of austerity rather than an economic policy shift towards the liberalisation of infrastructure development. Developed nations, he reasons, tend to have smaller capital expenditure budgets since they have already established most of their critical infrastructure, a scenario far from Ethiopia’s situation.

“The need for capital projects is self-evident,” Arega told Fortune.

He believes that the previous regime’s five-year plans for growth and transformation led to a considerable wastage of funds due to corruption within the bureaucratic machinery. According to him, this underscores the necessity for a more careful balancing act between budget planning and execution.

As the budget bill underwent scrutiny in the Plan, Budget & Finance Affairs Standing Committee, chaired by Desalegn Wodajo, it faced criticism for its meagre allocation for infrastructure projects, mainly roads. This dissatisfaction was particularly acute among regional states struggling from the fallout of a two-year war.

Residents from Seqota, an area in the war-ravaged Amhara Regional State, travelled 700Km to express their deep concerns over the reduced capital budget allocations. Alemu Damtew, an MP from the regional state, voiced his surprise at the substantial 92.6pc budget cut for the 69Km Mila-Mile Road, between the Oromia and Amhara regional states. He noted that the cost plummeted from 94 million Br to a mere seven million Birr, lamenting, “It barely covers a single kilometre.”

In an attempt to soothe the rising discontent, Prime Minister Abiy Ahmed (PhD) stressed that the stringent budget was aimed at slashing the budget deficit, restoring macroeconomic balance and serving external and public debt. This response, however, was met with scepticism.

Abebaw Desalegn, an opposition MP, emphasised during the budget hearing that forecasting a growth rate of approximately 7.5pc amid rampant inflation and regional conflicts was unrealistic.

Despite these concerns, the Prime Minister reiterated that Ethiopia boasts one of Africa’s largest economic growth rates, even claiming the highest economic growth rate in East Africa this year at around 6.5pc. However, this assertion does not take into account the difference between nominal and real GDP rates. Governments typically use nominal GDP rates, which consider current prices and multiply them with output, to report economic growth.

In contrast, international think tanks and investors prefer real rates that account for inflation or deflation when conferring economic development.

Arega illustrated teff, a staple grain in Ethiopia, whose price skyrocketed from 4,000 Br a quintal five years ago to 10,000 Br last week. Without an increase in production volume, he argued, an increase in the monetary value of the output could be misleadingly portrayed as economic growth, while it is merely a reflection of inflation.