The federal government continues to rely heavily on domestic sources to finance a growing budget deficit, under pressure from decreasing disbursement in external loans. Over the first half of the year, outstanding debt secured through the sale of the central bank's treasury bills (T-bills) shot up 110pc to 253 billion Br.

Funds raised from T-bills have grown over five-fold after Prime Minister Abiy Ahmed's (PhD) administration adopted a policy measure to tie T-bill auctions to market forces in late 2019. The administration has since been using T-bills to substitute direct lending from the central bank to address its budget deficit, which had hit 123 billion Br by the end of the last financial year. Cepheus Capital, a private equity firm, projected the budget deficit to reach four percent of the GDP, the highest since 2005.

Many countries have economies operating under fiscal deficits. The longer these deficits sustain and the higher their share to the size of the national economy, they spell trouble. Budget deficits crowd out private borrowing, undermine net exports, abuse capital structures and interest rates, and lead governments to impose higher taxes, higher inflation or both. How policymakers choose to finance the deficit tells on their convictions and priorities.

Prime Minister Abiy's administration wants to raise the funds entirely from selling T-bills to pay for the 122 billion Br supplementary budget Parliament approved last month, according to Eyob Tekalign (PhD), a state minister for Finance. The additional financing represents a fifth of the 561 billion Br federal budget bill Parliament voted for last year.

Experts are not surprised about the growing reliance on T-bills. They expect the administration to continue financing the fiscal deficit through T-bills until it hits a peak. The main buyers of the T-bills are financial institutions and the federal pension agency.

“It's likely to continue until these are no longer liquid,” said a macroeconomist who has over 20 years of consulting experience and requested anonymity.

The authorities had eschewed direct borrowing from the central bank since 2018/19. The following year, loans from the central bank declined to 31 billion Br, less than a sixth of the amount recorded in the preceding year. However, the policy has remained inconsistent, with borrowing bouncing back to 83 billion Br last year. By the end of last December, it had hit 113 billion Br. Officials had counted on borrowing 68 billion Br to finance the budget deficit this year, but the trend reveals a net 162 billion Br has been borrowed thus far.

"This isn't a normal budget year," says the macroeconomist. "It’s difficult to follow through on the plan."

It has been a year of enormous stress to the economy. It is a war-footing economy, the Prime Minister admitted in his address to Parliament earlier last week. Close to 75pc of the supplementary budget is apportioned to cover defence expenditure. A large segment of the population in three regional states in the north have been out of production. Supply and logistics chains were disrupted. Drought has displaced millions in the south and eastern parts of the country. These all came in the aftermath of the pandemic and floods that have haunted the economy since 2019.

What follows is a rising cost of living with runaway inflation. Year-on-year headline inflation reached 35pc last December.

The expert cautions increased direct borrowing from the central bank to tame inflationary pressure will inevitably be inflationary as the country does not produce enough to meet the needs brought on by the creation of new money.

"That's where they need to rethink," he said.

Alisa Strobel, a senior economist for Sub-Saharan Africa at IHS Markit, also raises concerns about the rising domestic debt levels.

Ethiopia's characteristically high twin deficits do not bode well for the economy and suggest a further national debt spiral in the near term. Strobel observes the direct advances crowd out the private sector as the public borrowing reduces the pool of available funds invested in other businesses. The sale of government securities used to finance the deficit also directly impacts interest rates.