Unity at the Budget Vote Tensions at Question Time

Jul 6 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

The federal legislature gave Prime Minister Abiy Ahmed (PhD) what he wanted: a 1.9 trillion Br budget passed unanimously and without dissent.

But what looked like a choreographed display of parliamentary consensus quickly gave way to sharp looks from some of the MPs once the Prime Minister remained on the floor for over five hours, fielding pointed questions that laid bare his Administration’s economic conundrum.

The numbers speak of constraint rather than transformation. Of the nearly two-trillion-Birr budget for the new fiscal year, 61pc is absorbed by recurrent spending and 21pc set aside for capital projects, leaving little room for expansionary programs. The weight of civil service spending, utilities, and debt servicing has crowded out pro-poor initiatives, wage adjustments, or stimulus for youth employment.

Opposition lawmaker Abebaw Desalew of the National Movement of Amhara (NaMA) encapsulated the mood.

“Budget lines on paper are easy,” he said. “But, when will your pro-poor reforms walk off the page and into people’s homes?”

The Administration's answer rests on a tenuous blend of revived multilateral support, export-led recovery, and renewed confidence in macroeconomic management. The Prime Minister cited a one-billion-dollar World Bank package, a 3.5 billion dollar restructuring deal with the Paris Club signed last week, and improved foreign exchange reserves, reportedly covering over three months of imports, as signs of fiscal traction.

Yet, the fundamentals remain stubborn. Domestic revenues still fall short of even two-thirds of official targets. Tax compliance is low, with 46,000 registered taxpayers reportedly failing to file returns. The federal government collects less than 0.5pcof GDP from personal income taxes, a far cry from Kenya’s 14pc, according to the Prime Minister.

Despite a commendable 96pc collection rate reported by Revenue Minister Aynalem Nigussie, the structural weaknesses in the tax base are evident.

She reported to Parliament 815.34 billion Br in collections, meeting 96pc of her target. Domestic taxes amounted to 48pc on the year, while customs brought in 378 billion Br, also above plan. Lending grew 75pc, with private firms taking four-fifths of the new credit, yet young entrepreneurs say collateral rules still lock them out.

“Financing youth-led ideas remains risky,” said association membership lead Fozia Mohammed, who is lobbying for duty-free imports and special procurement windows.

The Commercial Bank of Ethiopia (CBE), the country’s largest financial institution, is burdened with 900 billion Br in non-performing loans. Its bailout, the Prime Minister conceded, was meant to forestall systemic collapse. Analysts say the rescue merely postpones deeper balance sheet restructuring unless economic growth revives and tax administration is reformed.

The IMF noted a narrowing current account deficit, now at 2.2pc of GDP, but warned that without a surge in private capital, the trend is reversible. FDI has flatlined at three percent of GDP for four consecutive years, imperilling large-ticket infrastructure and industrial projects, including gas terminals and fertiliser plants that Abiy touted as flagship projects on the pipeline.

Economic pundits see that the trade balance has improved only because imports shrank faster than exports rose. While export earnings exceeded eight billion dollars, this came with steep underperformance in sectors like leather and textiles. To combat under-invoicing, authorities have imposed minimum export prices across 29 categories; however, this has yet to close the gap between export volumes and earnings meaningfully.

The import-substitution strategy remains central to the Administration’s ambitions. According to official data, nearly 699 investors pledged 322 billion Br in new industrial commitments, and import savings of three billion dollars were recorded over nine months. Still, the manufacturing ecosystem is plagued by familiar bottlenecks: erratic power supply, foreign currency constraints, and weak backwards linkages.

Strategic sectors, such as chemicals and machinery, exceeded their input targets, but food processing and textile manufacturing suffered from poor cotton quality and foreign exchange delays. Leather exports fetched less than 40pc of expected revenue, while only 58pc of export earnings materialised relative to volume targets. State support included six billion Birr in working capital loans and another 4.3 billion in lease financing for SMEs, but the scale of structural inertia dwarfs this.

The National Bank of Ethiopia (NBE) absorbed 378 billion Br in liquidity and oversaw 482.3 billion Br in interbank transactions. Yet, a controversial rule that requires banks to reinvest 60pc of repeat loans into five-year bonds has tightened private sector liquidity.

“This is pinching balance sheets,” said Demisew Kassa, Ethiopian Bankers Association Secretary-General. "They [banks] could not collect their loans."

He warned that the 18pc credit cap, foreign competition, and higher capital requirements could compress profits and slow new lending. Credit growth has plunged by nearly 12pc, an inversion that the IMF expects to rebound sharply to 34pc next year.

Headline inflation for May stood at 14pc, primarily driven by a 17.8pc spike in non-food items. Governor Mamo Mihretu has vowed to push this figure into single digits, echoing the Prime Minister’s claim that easing inflation will not necessarily mean falling living costs, a sobering admission in a country where food insecurity remains widespread.

In a striking revelation, Prime Minister Abiy announced that the Productive Safety Net Programme (PSNP), once Ethiopia’s flagship poverty alleviation scheme, has seen its beneficiary count plummet from 27 million to four million. He hailed this as a sign of economic resilience.

Yet, anecdotal evidence shows a more mixed picture.

Senayit Beja, a former street sweeper in Addis Abeba, was one of many laid off with modest seed capital. Her attempts at micro-entrepreneurship — selling food and clothing — quickly failed.

“The programme became more of a burden than a solution,” she told Fortune.

The IMF, meanwhile, has reaffirmed its support, describing the PSNP as among the most cost-effective programs globally and backing a supplementary budget that boosts its funding to 0.5pc of GDP.

The IMF projects real GDP to grow at 7.2pc this fiscal year and average above seven percent through 2028, with inflation moderating to 7.2pc. But optimism is tempered by fragility. Diaspora remittances, once a lifeline, are lagging, in part due to an unresolved parallel market gap.

Whether Ethiopia’s economy is navigating recovery or merely averting collapse may depend on how far the Administration is willing to go with structural reform.

Overseas banks do see room for profit, said London-based analyst Mekbib Tesfaye, citing Safaricom’s entry into telecoms as proof that better service can win share. He opposes forced mergers, arguing that recapitalised first-generation lenders can survive on their own, but conceded that high operating costs may still push some to combine.

“They need to persuade the shareholder first,” he said.

Debt relief has brought breathing space. Besides the Paris Club deal, the government deferred 8.5 billion dollars of bilateral loans for 14 years. Two Eurobonds remain in default, and negotiations with private creditors continue.

Tewodros Makonnen, a senior country economist at the International Growth Centre (IGC) and a former researcher at the National Bank, described the problem as one of liquidity, not solvency.

“Our debt-to-GDP ratio (20pc) is well below the 50pc benchmark,” he said. "Stronger export and investment flows will ease future payments."

Diaspora remittances, despite being Ethiopia’s third-largest source of hard currency, have lagged.

“The parallel market rate is still too wide,” he said. “With the right strategy, we could do better.”

While parliamentarians mostly stuck to the economy, one moment veered into surreal territory.

As echoes of laughter rang out when Ashebir Weldegiorgis (MD), an MP, proposed a military-led diversion of Ethiopia’s main rivers for sea access, Parliament’s mood swung between jocular and uneasy. Abiy dismissed any notion of armed conflict with neighbours, insisting on “positive seeds of cooperation.”

But Eritrea’s recent rebuke of Addis Abeba’s rhetoric reminds all that diplomatic goodwill can sour swiftly, potentially imperilling the very external support on which the budget hinges.

Tensions with Eritrea have been on the rise lately, with its strongman, Isaias Afwerki, mentioning Ethiopia in a negative tone during his recent public address in Asmara, which displeased Ethiopia’s leaders.

Foreign Minister Gedion Timotheus (PhD) sought the attention of the United States, addressing a letter of concern to Secretary of State MarcRubio.

“The most alarming and insidious development in this regard is the unrelenting cooperation and coordination between the faction of the TPLF, the Eritrean Government and other armed groups under their tutelage, to undertake major offensive operations during the upcoming rainy season,” said Gedion in his letter dated June 20, 2025. “Even when faced with these violations of sovereignty, territorial integrity, and interference in the country’s internal affairs, the Government of Ethiopia has exercised maximum restraint.”

However, Prime Minister Abiy declared that “not a single bullet will be fired from Ethiopia, dismissing widespread anxiety on the prospect of renewed war with Eritrea.

“We don’t want war because we have many promising projects ahead to focus on instead,” he told MPs.

PUBLISHED ON Jul 06,2025 [ VOL 26 , NO 1314]