Crunching the numbers…

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This week Sufian Ahmed, Minister of Finance and Economic Development (MoFED), appeared before parliament to present his government’s budget for the 2015/16 fiscal year. In his much anticipated budget speech Sofian highlighted the next budget year will mark the start of country’s structural transformation to industry and to do that his government is prepared to host a large number of Foreign Direct Investment into the manufacturing sector. The above pie chart shows 13 major spending items accounting for 60.4 percent of overall budget (223 billion birr) and the resources allocated to them…

This has been a busy few weeks for Ethiopian lawmakers. The House of Peoples’ Representatives (HPR) just go back to its regular sessions after the national election to review new bills and listen to reports. And immediately after its return, the house was received by a new bill that seeks to amend the country’s pension and social security scheme. The draft is bone of contention among urban private sector employees as it seeks to make the public pension scheme compulsory for all private and government employees abolishing previous provision that offered an option between the pension and a provident fund schemes. In the same week, the outgoing parliament also listened to a report by the Office of the Auditor General, a report which usually stirs controversy in government corridors. The report usually precedes one of the most punctuated and exhilarating debates in the house and in the various parliamentary standing committees. To add to that, the Federal Ethics and Anti-corruption (FEACC) also went to the lawmaker with yet again another critical report claiming that it has saved some 600 million birr from being embezzled from government funds and another 400 million are still being investigated.

Nevertheless, before the excitement started to subside another fundamental bill found its way into the house this week; the budget proposal for the fiscal year 2015/16. Under the custodianship of one of longest serving ministers in Ethiopia, Sufian Ahmed, the Ministry of Finance and Economic Development (MoFED), has proposed some 223 billion birr (11.2 billion dollars) for the upcoming fiscal year, which is also the start of the next generation of the much talked about Growth and Transformation Plan (GTP). Sufian oversaw the concoctions and the implementations of the handful of five-year economic plans in Ethiopia including the one that is running out its course this year. The plan which is dubbed the most ambitious from its very beginning is credited for 10.1 percent average GDP growth in the past four years and creating a trillion birr economy. Nevertheless, it is also criticized for having little to show by way of transformation to an industry based economy and curbing once and for all the debilitating foreign exchange shortage that besieged the Ethiopian economy for many years. 

With the next generation of the GTP still under works, the proposed budget for the fiscal year 22015/16 is perhaps the closet indications as to what the government, which is believed to have renewed its mandate during recent election, intends to do for the year to come.

Of the counter, the proposed budget which is 19.7 percent higher or some 40 billion birr more than the preceding year revolves around three important figures: 223, 195 and 27.6, all in billions of birr, representing the planned spending, revenue from deferent sources and anticipated deficit, respectively. According to Sufian, his government is planning to keep its deficit levels at a healthy level of 1.8 percent of the GDP and finance it in a way that is not inflationary. Sufian told MPs that the deficit financing plans are carefully designed to incorporate both central bank borrowing and open market operations to avoid inflationary pressure. 

“To a large extent, we will be relaying on our T-bills market to raise funds to bridge the budgetary gap,” he said. Although specific shares of the central bank borrowing and the open market operation was not stated by the minister, he did point out that his T-bills sales would target idle funds accumulated around private banks, the pension scheme and individual investors. According to past assessments, however, the T-bills market in Ethiopia has remained highly underdeveloped as they are less attractive to investors. Costentinos Berhe (PhD), lecturer at Addis Ababa University (AAU) Graduate School, says that in strict economic sense treasury bills have not been attractive to investors in Ethiopia. He argues that with an inflation rate of 8 to 9 percent and a stealth devaluation of the birr year after year, the low interest rate bearing treasury bills could not be attractive to a rational investors.

On the deficit aside, the overwhelming 195 billion birr spending is planned to be covered by the government revenue expected to be pooled from various sources. By far, the biggest source of the government revenue is its domestic tax collection. According to the proposal, the tax, which is specially overseen by MoFED, is expected to collect 141.2 billion birr tax revenue followed by 24.6 billion birr foreign loan, 15.8 billion non-tax revenue and some 14 billion birr grant from both international organizations and donor countries. As far as tax revenue is concerned, foreign trade tax claims the lion’s share of the collection with 59.3 billion birr, mainly composed of tariffs, VAT on imported goods, excise tax and surtax levied on the imported goods. From this category, VAT on imported items registers the highest intake with 21.5 billion birr mainly raised from imported vehicles, automobiles and spare parts. Import tariffs as well do well with 19.7 billion birr planned collection, still from imported automobiles and spare parts imported into the country. 

Automobile and spare parts imports contributes a lot to the foreign trade tax category paying 4.8, 4.7 and 3.6 billion birr under VAT, tariff and excise tax categories at a time. Apart from the three, surtax is also expected to raise some 11.6 billion birr in the budget year putting foreign trade tax on top of the tax revenue classes in the plan. Furthermore, indirect tax also looks to be important for the planned tax revenue collection in fiscal year 2015/16, contributing 41.2 billion birr too the tax coffers.

Here too, VAT on goods and services that are produced locally and sold locally is leading sources of revenue. VAT on domestic services sector is slightly higher than on the products’ sector with 18.5 billion birr, of which Ethio Telecom is the highest taxpaying client at 5.8 billion birr. Contractor firms follow telecom in this category with 5.4 billion birr VAT on services they provide the local market. From side of products as well, VAT that is expected to be collected in the fiscal year under question is also quite considerable; 16.2 billion birr. Here, the recently privatized beer sector and the sugar producers take the leads each expected to turn in 1.5 billion VAT in the budget year.

Nevertheless, the tax sector also owes its planned collection to the direct tax category, which includes income, profit and capital gain taxes all together. As far as individual income or parole taxes are concerned, the authority is expected to collect 4.8 billion birr in the period. However, the real money looks to be in the corporate or business profit tax category which plans to raise some 30.9 billion birr. The nontax income, however, heavily depends on revenues accrued to the government’s investments in various sectors. This mainly incorporates, according to the proposed budget, the dividend from Commercial Bank of Ethiopia and government profit form National Bank of Ethiopia among other things. For Sufian, this is the most domestically financed budget in Africa. He said in his budget speech that most African nations are not at the level of domestic financing Ethiopia is in at the moment. 

“Now, we consider foreign sources as an important addition to our own resources; not a sole financing source,” the minister gloated. Nevertheless, a macroeconomist, who wanted to stay anonymous, argues that such a claim looks to be a little bit off base. He goes on saying that with Ethiopia’s tax to GDP revenue still far lower than many sub-Saharan countries, the country revenue structure is far from claiming self-sufficiency. According the budget speech, tax to GDP ratio is 12 percent at the current budget year. This even the finance minster said is way below the Sub-Saharan average of 18 to 22 percent and even falls far behind the 15 percent target set at the start of the GTP period.

As far as foreign sources are concerned, the proposed budget envisages to obtained loans from both international organizations and bilateral sources in the fiscal year. From the multilateral sources, International Development Association (IDA), one arm of the World Bank Group, claims the lion's share of the proposed loan to the Ethiopian government. IDA is single handedly responsible for 9.5 billion birr project loan, a 3.8 billion birr loan under Protection of Basic Services (PBS) program and 1.7 billion birr in the form of a project grant. While on multilateral sources, the role of Africa Development Bank (AfDB), which recently chose a new president – Akinwumi Adesina – in a race where Sufian himself was in, was not to be taken likely. AfDB is expected to provide 2.3 billion birr in form of project loan in addition to 1.8 billion birr loan it is offering under PBS program. 

China is leading the bilateral pack in the loan department with 4.7 billion project loan planned to be accessed from the Asian giant. Meanwhile, countries like UK, via its DIFD program would be availing 2.3 billion in grants for different projects, if all goes according to plan. Government’s expedition of finding foreign financial sources is also not free from criticism. According to the macroeconomist, when talking of debt in Ethiopia the case of the public enterprises activities in the debt market is something that is unsettling. Usually, the government claims that the public enterprises debt level is not part of the budget consideration in Ethiopia – a claim which is highly refuted by the international organizations like the International Monetary Fund (IMF).

In this regard, one of the primary components of the current budget table is a whopping 11 billion birr earmarked for debt services to dispense some of the debt obligations of the country accumulated over the course of the past decades. This figure showed a 3-billion birr increase from the last budget year. According to commentators, the with the one billion birr Euro bond due in matter of 10 years hungering over its head, the gradual increase in allotment to debt servicing is a rational move by the government.

This brings one to the expenditure side. The proposed spending shows no shift from the usual large allotment of capital budget earmarked for vital infrastructure projects that the country has been undertaking in the past. Over all, the government spending plans of the proposed 223 billion is divided in to four usual major components that includes recurrent expenditure of 50.3 billion, capital expenditure of 84.3 billion, regional subsidy component of 76.8 billion and 12 billion birr allotment to the Sustainable Development Goals (SDGs), successor of the Millennium Development Goals (MDGs). Under the recurrent expenditure, the administrative and general component received some 16.8 billion birr which is 19.56 percent more than what has been allotted to it last year. This, according to the budget speech, is due to the additional budget allocated to the Ministry of Defense, Federal Police, Ethiopian Revenues and Customs Authority (ERCA) and Information Network Security Agency (INSA) among others. Looking at the budget from a sectoral point of view, defense stood only fourth to Road, Education and Debt Services with 9.5 billion birr allocated to it. Next to Administration and General Services, Social Services component claimed the larger slice of the recurrent expenditure budget with 15.9 billion birr, which showed the highest increase in the new budget, something close to 40 percent. Here, the increase is attributed to the planned increase in higher learning institutions in both undergraduate and post graduate programs. Meanwhile, Economic Services component had 2.9 billion birr allotted to it, 10.99 percent more than last years, with greater shares of this increase going to Ethiopia Agricultural Research Institute (EARI), Transport Authority, Ethiopian Civil Aviation Authority (ECAA) and Ethiopian Roads Authority (ERA).

As to the capital budget component it has showed 25 percent increase from last year’s. Among the many, the increase is attributed to road maintenance and construction, which consumed some 30 billion birr from the capital budget slice. However, the construction of new and the expansion of older universities comes in next from this component with close to 17 billion birr dedicated to it. Others like the health sector (5.6 billion), safety net program (4.8 billion) and industrial park development (3.0 billion) also have significant share from the capital budget. 

In fact, the regional subsidy part is also another area of the budget that attracted a lot of attention. At face value, this component can be seen to rise to 34.4 percent of the overall budget increasing from 62.8 last year to 76.8 billion birr. Solomon Nigussie (PhD), a fiscal federalism expert, told The Reporter that the amount of total subsidy that is allocated to the general regional subsidy pool is what should be well understood first. For him, the grant worked by House of Federations (HoF) is not that significant; rather it is the amount of an overall grant pool. He says in other federalist states, there are two way of accommodating the determination of the level of the overall grant pool. For one, there is an established system where the grant pool increases in proportion to the federal budget increase, while in other states the federal grant pool is determined based on the need and request of regional states. In the later system the federal government has no say in determining the final grant pool level except accommodating the needs of the regions. In the first system as well, he argues, the federal government raises the level grant pool at par with increase in their own budget; irrespective of the need of the regions. “But in Ethiopia this has to be clearly worked out,” Solomon argues. 

In the grand scheme of the matter, however, budget document and the budget speech seems to have less real link to one another. In this, the finance minister told the MPs that focus of his government would be on structural transformation and alleviating long standing foreign exchange shortage of the nation. In this regard, Sufian said, “..we can go on like this..and the problem in our economy for the past eight years is all the same which is generating adequate foreign exchange,” he said. Nevertheless, the budget document hardly reflected such commitment to the problem except 3 billion birr allotment to the industrial park development. In fact, the overall shape of the budget appears to be not that different from what was proposed and endorsed in the past. 

But, one can see that the outgoing parliament has a rare opportunity to digest how the federal agencies have spent the money allocated to them by the house from the reports of the auditors’ general and FEACC and review a fresh budget proposal all in manner of two weeks. That ought to put things into perspective doesn’t it?  Source (The Reporter)