Despite the government's aspiration of implementing a restrictive economic policy model, parliament approved this fiscal year's budget that shows an 11.5pc expansion from the previous fiscal year.
Prime Minister Abiy Ahmed (PhD) disclosed that his administration would be diverting from the previous economic policy approach that had been based on ‘aggregate demand’ to ‘aggregate supply.’
"For the past 15 years, we've been using 'big push' policy to drive the stagnated economy," he said last week at the parliament while defending a budget bill tabled by the Finance Ministry. "With this, lots of positive achievements were made based on aggregate demand."
In the 1970s and '80s, there was stagflation [a condition of slow economic growth and high unemployment accompanied by inflation] in the economy. This led to the implementation of developmental economic policy in the 1990s, where the government has been using expansionary monetary and fiscal policy to motivate the economy.
When EPRDF came to power, the total government budget was 4.9 billion Br. The value has shown close to an 8,000pc increase over the past 28 years, not adjusting for inflation, reaching 386.9 billion Br for the current fiscal year.
The aggregate demand approach is very common in most developing countries, according to Getachew Asfaw, an economist who has published a couple of books on the macroeconomic conditions of Ethiopia.
"However, it has created income inequality, caused higher inflationary pressure in the economy and macroeconomic imbalances," Getachew told Fortune.
In the context of this shift of economic policy approaches, this fiscal year’s federal budget allocated 130.7 billion Br for capital spending, 109.5 billion Br for recurrent expenditures and 140.7 billion Br for regional subsidies. The remaining six billion Birr will go to finance the Sustainable Development Goals (SDG).
This year's capital expenditure shows a 14.8pc increase from the past fiscal year, an increase of 16.4 billion Br. Recurrent spending will also see a 19.5pc spike, 7.9 billion Br in absolute figures. Subsidies for regional states saw a marginal increase of 3.8pc with 5.2 billion Br more allocated in the budget.
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.
This year’s budget is 11.5pc higher than the just-ended fiscal year and 20.6pc higher than the budget of two years ago.
In terms of foreign currency, the budget stands at 13.4 billion dollars, a slight increase from last fiscal year's budget of 12.6 billion dollars. However, it is on par with the 13.3-billion-dollar budget of two years ago.
Given the double-digit inflation in the economy, the approved budget is not expansionary, according to Alemayehu Geda (Prof.), a macroeconomist and a university lecturer.
In allocating the budget, the government forecasts that the economy will grow by 9.2pc, based on the growth rate of the just-ended fiscal year.
However, Alemayehu is skeptical of the economic growth rate forecasted by the government.
"Considering the situation in the country, the growth rate could not exceed seven percent," he said. "The exaggerated forecast would have a negative impact on the target of tax revenue.
The government targets to cover 253 billion Br, or 65pc, of the budget from domestic tax revenues. Foreign aid, loans and domestic loans are expected to cover the balance. Foreign aid and loans are expected to cover 9.3pc and 10.3pc of the budget, respectively.
As of the beginning of July, the Ministry of Revenues collected 197.2 billion Br from domestic taxes out of the planned 235.7 billion Br in revenue, 83.7pc of the target.
Alemayehu argues that in targeting tax revenue collection, the government considers the forecasted economic growth, which is inflated in this case, making revenue forecasts wrong.
"This will lead the government to request a supplementary budget," said Alemayehu.
The Ministry of Finance has also targeted the budget deficit to be 56.8 billion Br, lower by three billion Birr from the last fiscal year’s target. However, due to the failure in meeting the tax revenue collection target, the country had a 77.1 billion Br budget deficit in the first 10 months of the just-ended fiscal year.
To fill the budget gap, last year parliament approved nearly 34 billion Br in a supplementary budget.
"The supplementary budget will push the inflationary pressure high," he said.
Headline inflation, which indicates the cost of living, stood 15.4pc in June pushed by 19.8pc and 10.2pc, food and non-food inflation rates, respectively.
"Our main aim will be controlling the inflationary pressure in the economy," Abiy said.
The administration of Prime Minister Abiy is also undertaking reforms including revamping the tax regime, encouraging more private sector involvement in the economy, easing business regulations, improving the efficiency of the logistics sector and relaxing the investment law.
A week ago parliament legislated the value-added bill. The draft excise tax proclamation has already been tabled to parliament.
The government is also working on economic reforms to enable the private sector to become more involved in the economy, eventually replacing the state's dominance. Partial and full privatisation of large and medium state-owned enterprises is one of the government's approaches to bringing the private sector on board.
The political uncertainty in the country would be a challenge for the economy, according to a report by Moody's Investors Service, which provides data on credit ratings and research covering debt instruments and securities.
"The new administration's efforts to embark on a set of wide-ranging reforms have intensified underlying political tensions, which risks derailing economic activity," reads the report.
Getachew, the economist, shares Moody's assessment.
"The existing political uncertainty would have a negative impact on the economic growth of the country," Getachew told Fortune.
Alemayehu also says that inflation would stay in the double digits in the coming fiscal year.
Searching for a grant can be an option to escape from a budget deficit and a supplementary budget, according to Alemayehu.
"However, the grants have to be used for the procurement of essential goods like wheat, instead of injecting it into the economy, converting it into Birr," Alemayehu told Fortune. "If so, it could cause inflation."
With the main aim of efficient budget administration, four months ago the Finance Ministry formed a 12-member public finance management advisory council, which will be tasked with facilitating government finance administration. Reporting to the Ministry, the team is composed of intellectuals from Addis Abeba University, the private finance sector, non-governmental institutions, the central bank and the Ministry.
Getachew said that the major problem of the government is bringing the plans down to earth.
"They need to be practical in implementing what they promise and plan," he said.
PUBLISHED ON Jul 13,2019 [ VOL 20 , NO 1002]
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