Latest Budget Besieged by Threats of Deficit, Inflation

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The Council of Ministers has approved a budget bill for the coming Ethiopian fiscal year, comprising of close to 179 billion Br. The Council has passed the bill for Parliament to ratify. Sufian Ahmed, minister of Finance & Economic Development (MoFED), is expected to defend his government’s policy of an ever increasing fiscal expansion.

The bill is due to arrive in Parliament in a week or two, according to people familiar with the legislative process. Delegated by the Prime Minister, the Finance Minister will give a budget speech. This will then be followed by a question time, which may extend to three days, according to an MP who has served in the Finance & Administrative Committee.

Sufian will have to explain to MPs about the macroeconomic context in which the latest federal budget, representing a 15pc increase from the current fiscal year, is designed, according to experts. It is a budget tabled from an administration wary of the inflationary trend, thus prides its accomplishments in the current fiscal year, taming it to single digits.

“It is amazing to see a government approving a new budget without us fully using the one that has already been approved,” said a businessman in the manufacturing sector.

His is a sign of frustration at the methods the administration of Prime Minister Hailemariam Desalegn used to contain inflation, whose unintended consequences were a slowdown in the economy and a cash strapped private sector. Critics point to a deliberate policy of tightening disbursement of approved budget where inflation has been arrested, but at the expense of growth in gross domestic product (GDP).

Both the International Monetary Fund (IMF) and the African Development Bank (AfDB) have projected expansion in GDP by 7.5pc in 2014/15 – much lower than the 11.2pc average growth targeted in the five-year Growth and Transformation Plan (GTP). Contrary to the views that an “economy shrinks when government grows too large,” the administration appears to be taking the policy of stimulating growth by increasing public expenditure, of which 70 billion Br is allotted to capital expenditure.

The federal government has several mega projects, such as roads, railways and electric power generation and transmissions, which take up much of its annual budget. However, subsidies to regional states claims 51 billion Br and financing to achieve the millennium development goals get 15 billion Br – an amount that has not changed much from last year.

Macroeconomists fear a boost in the budget without a parallel growth in GDP is a recipe for budget deficit, which may cause inflation in the economy. Although the proposed budget is lower than the 201.1 billion Br projected in the GTP document, and its growth rate is three percentage points down from its average record since 2011, those who follow Ethiopia’s macro economy caution that inflating the federal budget deficit from the 3.3pc of GDP registered in 2013/14 fiscal year is inevitable.

For a country whose domestic and external debt is ballooning to over 20 billion dollars, representing 25.7pc of the GDP, the concerns are that the administration may get compelled to print money to finance its deficit. Doing so would certainly push up the inflation rate of 9.10pc, registered in April 2014, to double digits, thereby eroding gains achieved in overcoming poverty.

Ethiopia has an economy ravaged by inflation in recent years, with an average of nearly 20pc in the eight years since 2006, where the peak of 64.2pc was recorded in July 2008. The inflationary pressure seen during these years has “undermined poverty reduction and the overall economic development effort by adversely affecting investment and the wellbeing of the urban poor,” a policy document issued last year by the MoFED conceded.

In order to alleviate inflationary pressure on the urban poor, the administration has had over six billion Birr expenditure since 2008, where it had bought wheat and edible oil to be distributed to the market through a highly subsidised rate.

Economists generally agree that persistent budget deficits – as in the case of Ethiopia –generate macroeconomic imbalances. Ethiopia has a history of budget deficit averaging at 3.45pc of the GDP ever since the EPRDF took power in 1991, reaching a record high of 6.6pc in 2003. The increase in budget deficit and the potential resurgence of inflation are the major threats to the economy next year, according to a macroeconomist who spoke to Fortune anonymously.

However, with hardly any detail on the budget now sent to Parliament, it is yet to be clear on the size of the budget deficit and the plans the administration has in financing them.