Inside Ethiopia's ETB 1.5 trillion record-breaking budget

Ethiopia's federal budget for the fiscal year 2024-25 has reached a monumental milestone, crossing the ETB 1.5 trillion mark for the first time in history. This record-breaking budget has sparked conversations and analysis on whether it signifies a bold growth strategy or a risky fiscal overreach. Mered Fikireyohannes, Founder & CEO of Pragma Investment Advisory, shed light on the structural shifts, risks, investor sentiment, and geopolitical implications surrounding this landmark budget. The Ethiopian government embarked on significant macroeconomic reforms in July 2024, including the floatation of the Birr and debt restructuring, which have influenced the budgetary decisions. The initial budget plan of 950 billion Birr was revised to 1.5 trillion Birr to accommodate the pressing needs and cushion the impact of the economic reforms. The government aimed to generate 900 billion Birr in tax revenue with an estimated deficit of 450 billion Birr. As of the nine-month mark, approximately 620 billion Birr had been collected, reflecting both the challenges and progress in fiscal management. One key shift in fiscal policy was the avoidance of monetary financing, a departure from decades of reliance on central bank injections. This move exerted pressure on the government to expedite tax collection, prompting revised timelines for businesses and consumers to declare and pay taxes. The focus on customs duties as a significant revenue source saw immediate impacts from the Birr floatation, albeit with heightened tax burdens on the business community and consumers due to the limited tax base. While the government is on track to meet its revenue targets by leveraging treasury market reforms and attractive treasury bill rates, concerns linger over the sustainability of the current tax regime. Business sentiments are divided, with a need for comprehensive tax reforms to align with the broader economic changes witnessed in the country. Ethiopia's low tax-to-GDP ratio of 6.3% compared to the regional average underscores the urgency for tax system revamps to ensure debt servicing and fiscal stability in the long run. The push for tax reforms has not been without consequences, as evidenced by recent strikes by doctors and public sector workers protesting the tax burdens and outdated taxation codes. The demands for equitable taxation and income tax revisions have garnered support from various stakeholders, including the Ethiopian Employees Federation Association, highlighting the widespread impact of fiscal policies on both public and private sectors. As discussions unfold on addressing the grievances and recalibrating the tax system, the roadmap for Ethiopia's fiscal sustainability and economic resilience will hinge on striking a balance between revenue generation and social welfare, in the face of evolving global investment dynamics and domestic demands.