The Ethiopian Council of Ministers approved a government expenditure of ETB787 billion (11 percent of the estimated ETB7.46 trillion GDP) for the upcoming fiscal year 2022/23 in early July. This represents a nominal increase in spending of 40% over the previous year and will be funded through a combination of tax and non-tax revenues, grants, and domestic and foreign borrowings.

On revenue, a collection of ETB439 billion is targeted, representing a rise of 19% compared to last year’s documents and a growth of 37% from FY 2021-22 estimated outturns. The largest collections are expected to come from:

  • Income taxes (ETB125bn, 28% of total)
  •  VAT on imports (ETB64bn, 15%)
  • Custom duties (ETB62bn, 14%) and
  • VAT on services (ETB45bn, 10%)

According to Cepheus Capital, new broadening tax policies are being implemented, with a proclamation expected this fiscal year. Grants, on the other hand, are expected to be close to ETB39 billion ($706 million), with the World Bank, EU, AfDB, UK, and US providing the majority.

This year’s expenditure increase over last year’s results is expected to be 22% in nominal terms (essentially flat in real terms), but it will still represent a decade-low 10.5 percent of projected GDP. The budget appears to reflect more serious macroeconomic concerns about the need to control inflation and debt accumulation, with significant increases in spending on transfers and subsidies (9.6x increase), defense (ETB84bn, 3.8x), and debt service (ETB126bn, 2.8x).

As a result, the share of the budget devoted to directly poverty-reducing expenditure and capital expenditure has decreased, lowering the spending quality of this year’s budget. Rural and agricultural development, as well as urban development and construction, show modest growth, while prominent sectors such as health and education show virtually static levels when compared to last year’s allocation.

The expected income and spending for the FY 2021-21 disclosed above reflect a budget deficit of ETB308.8 billion, which is to be financed by:

  • Domestic borrowing: ETB266 billion (85% of total). Besides this, the government will also need to rollover the large volume of T-Bills (average of Birr 23bn in each of the coming 12 months, for a total of Birr 279bn during the FY2022-23). With such high demands on local debt markets, T-Bill rates (currently near 8%) will likely trend higher to 10% or the low teens during the course of the fiscal year.
  • Foreign Borrowing: ETB43 billion (15%) ; this amount is primarily expected to come from World Bank loans and a few small bilateral loans from nations like China and Italy.

As is clear, the composition of deficit financing has recently shifted away from foreign sources (70 percent in 2019-20 vs 14 percent in 2021-22). Due to the government’s reliance on domestic borrowing, more than half of public debt is currently held by domestic lenders; this change is slowing credit expansion to the private sector but increasing medium-term prospects for foreign funding should mitigate any negative effects moving forward.

Source: Cepheus


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