Fortune News | Jun 03,2020
The Ministry of Finance has drafted a bill that proposes 470 billion Br for next year's federal budget, a figure highly influenced by fears of the repercussions the Novel Coronavirus (COVID-19) could cause to the economy. The proposed budget is 83 billion Br higher than the current fiscal year's value.
In terms of foreign currency, the budget stands at 13.7 billion dollars, a slight increase from the current fiscal year's 13.4 billion dollars and a considerable increase from the 12.6 billion dollars that was ear marked two years ago.
The bill that is expected to be tabled to the Council of Ministers this week aims to cover a little over half of the budget from domestic tax revenues. Out of the total, 100 billion Br will also be raised through external loans. The remaining balance of expenditures is expected to be covered by other non-tax sources, including foreign grants and domestic investments.
The Ministry's proposed budget is 21.5pc higher than that of the current fiscal year and 35.5pc higher than the amount that was allocated two years ago. However, the growth rate also remained modest, considering the 52.3pc growth rate that was recorded 13 years ago, when the federal budget jumped to 45.7 billion Br.
Out of the total budget, 180 billion Br of it is allotted as subsidy appropriations to the regional states, higher by 40 billion Br from the current fiscal year's budget.
Next year is going to be a difficult one, according to Eyob Tekalign (PhD), state minister for Finance, pointing that the pandemic has already battered the economy.
"We needed to be more flexible," Eyob told Fortune.
Evolution of federal budget over the last five years.
To offset the challenges the economy is facing due to the pandemic, the parliament has approved 48.6 billion Br as the second supplementary budget of the year. The latest approval made the total extra budget of this year 76.5 billion Br. The supplemental budget will be directed to food support for 30 million people who are part of vulnerable groups and to procure additional medical equipment and medicine to combat the pandemic.
Two months back, the government approved a 27.9-billion-Br supplementary budget for the implementation of the Homegrown Economic Reform Agenda that was launched by the administration. The two additional budgets are on top of the 386.9 billion Br federal budget that was approved last July.
For the current fiscal year, the government intends to raise 253 billion Br from domestic revenue, of which 225 billion Br was expected to be generated from tax revenues. However, the pandemic, which was first reported in mid-March in the country, hit the economy hard and paralyzed almost all economic sectors and industries.
With decreased government income from tax and non-tax sources and increased government expenses, 11 billion Br is expected to be lost by the end of this fiscal year, according to Ahmed Shide, minister of Finance.
Since February there has been a significant drop in the collection of taxes. The tax revenues generated in February as compared to the same month in the last fiscal year shows a decline of 14.8pc. The government is expecting the growth rate of the country's GDP to fall by two to three percentage points from what was expected.
To address the adverse effects of the pandemic on fiscal policy, the country needed 64 billion Br. Out of that sum, 15 billion Br was raised by restructuring the budget of this year from different government offices.
To fill the remaining balance, the government intends to borrow 10 billion Br from the central bank, raise another 10 billion Br by selling treasury bills and bring in 28.6 billion Br from various grants and loan.
Alemayehu Geda (PhD), a macroeconomist and a lecturer at Addis Abeba University, projects that the deficit will be more than double what is mentioned by the authorities.
The impact of the pandemic will increase the current expenditure of the government by 30pc and shrink its total revenue, including grants by 16pc, according to Alemayehu.
"With this figure, the expected deficit just to maintain the country's fiscal posture will jump to 145 billion Br," said Alemayehu. "Financing this will be a headache for the government."
Alemayehu said that the government needs an additional 228 billion Br in the coming months to cover the deficit of this fiscal year along with the 83 billion Br in additional expenditures the government planned for the next fiscal year.
"This will lead the government to print cash that will automatically increase the broad money supply by 10 percentage points," he said. "This in the end will cause 24pc inflation."
The country is already grappling with a higher rate of inflationary pressure since the beginning of this year. April's inflation rate stood at an annualised rate of 22.9pc, the highest figure in the last seven years. Food inflation stood at 25.9pc, while non-food inflation hit 19.2pc.
The coming fiscal year's budget is very expansionary, and it did not consider the inflation rate, according to Alemayehu.
Eyob, the state minister, also admits that the coming fiscal year budget is expansionary, considering the previous years' experience.
"But it isn't too expansionary," Eyob told Fortune.
The nation's total outstanding debt increase also reached 29 billion dollars as of this February. Of that amount, 16.7 billion dollars is external debt. In the first half of the current fiscal year, Ethiopia secured 1.7 billion dollars in the form of loans and grants.
Despite the debt stress, the double-digit inflationary pressure and the negative impact of the pandemic, the government seems ambitious in hoping to control the budget deficit.
"We'll carefully watch to make sure the budget deficit does not exceed three percent," Eyob told Fortune.
To mitigate the challenges, Alemayehu recommended the government cut its expenditures as much as possible, try to finance the deficit from external loans and avoid domestic borrowing altogether.
"Part of the loans secured from external sources should be used to import food items, basic commodities and medicine to avoid import inflation and depreciation of the Birr," Alemayehu recommended.
Alemayehu also suggested that the government avoid depreciation since it will increase government expenditures and employee elective credit policies, and instead use a strategic shift in some sectors and allow major economic sectors to function.
PUBLISHED ON May 30,2020 [ VOL 21 , NO 1048]
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