Members of parliament have voted in favour of a record-high supplementary budget bill Prime Minister Abiy Ahmed's (PhD) administration motioned last month. The bill met objections from nine of the 309 parliamentarians in attendance last week, while seven abstained.

The supplementary budget - 122 billion Br - represents a fifth of the 561 billion Br federal budget Parliament approved for 2021/22. It comes when the budget deficit is projected to reach four percent of the GDP, and as year-on-year headline inflation reached 35pc last December. How the administration plans to finance the supplementary budget exacerbates worries that it will fuel the inflationary pressure in the economy.

Much of the additional budget (90 billion Br) is earmarked for the Ethiopian National Defense Forces (ENDF), which has been in a militarized conflict for over a year in the north and flared up insurgency in the south-western parts of the country. The military receives four-fold the initial budget Parliament approved in July 2021. The military, along with the justice and security sectors, has consumed a third of the 49 billion Br allotted for the recurrent expenditures in the first five months of the fiscal year, reveals a report by the Ministry of Finance.

Emergency food assistance and market stabilisation procurement for wheat accounts for eight billion Birr of the supplementary budget, while an equivalent amount is earmarked for contingency. Of the balance, five billion Birr will be spent on reconstructing infrastructure damaged by the civil war, and two billion Birr will go to the rehabilitation of irrigation dams at state-owned sugar estates.

These include the Omo-Kuraz, Tana Beles, Tendaho and Kesem estates, all run by the Ethiopian Sugar Corporation (ESC). Initially planned for sugarcane, the Ministry of Irrigation & Lowlands wants to use them for wheat production, according to Birhanu Megersa (PhD), a state minister for Irrigation & Lowlands.

"The full potential is not utilised by sugarcane plantation," he said.

The motion tabled before Parliament by the Ministry of Finance attributed the supplementary funds to budget restructuring and insufficient domestic revenues collection to cover public expenditures. The federal government targets to collect 368 billion Br this year. Over the first five months of this fiscal year, the Ministry of Revenues collected 147 billion Br, 16pc higher than last year and close to 90pc of its initial target. Though the figure has grown numerically, it has stagnated or even fallen when factored to inflation.

Eyob Tekalign (PhD), a state minister for Finance, told Parliament last week COVID-19 has had detrimental effects on revenues collection.

However, funding from external sources has also been sluggish. In the first quarter, the federal government received 137 million dollars in external loans, 32pc lower than the same period last year. According to individuals familiar with the external debt process, the government hopes to source a 300 million dollars loan from the World Bank and 150 million dollars from other sources.

Fundraising domestically and in the Diaspora is one avenue officials aspire to mobilise additional financing. The ministries of Education and Health have been granted nods to kick start campaigns. The Ministry of Education has already raised 42 million dollars, which its officials say will be used to rebuild 40 schools in the north damaged by war.

Disaster financing has been an issue officials of the Finance Ministry have mulled over in the macroeconomic framework. Although using available contingency funds is included in the budget, the administration has already spent the 11.3 billion Br in contingency budget.

Reallocating funds from other budget items to respond to rehabilitation and reconstruction needs is considered. According to State Minister Eyob, the administration has reassigned about 25 billion Br through a project restructuring regime this year though he declined from disclosing which projects have been restructured. Five billion Birr has been saved for recurrent expenses as well, he disclosed.

Governments often finance budget deficits through raising taxes, cutting back on public expenditures or borrowing from domestic sources. In contrast to the past few years, the administration has opted for domestic borrowing to finance the supplementary budget Parliament approved last week fully.

Eyob says the resources to finance the supplementary budget will be raised from financial institutions through the sale of treasury bills (T-bills).

Financing the budget deficit using treasury bills is not a bad option, says Patrick Heinisch, an economist and capital markets researcher.

“That is what has been done for a long time in Europe and the US without exerting burdensome inflationary pressure,” he said.