Government Defends ETB 1.5 Trillion Budget Increase Despite Warnings from Economists

Yesterday, Ethiopia’s House of People’s Representatives approved a significant budget increase, adding ETB 582 billion to the 2017 fiscal plan and bringing the total to ETB 1.5 trillion. The government argues that this increase is necessary to revitalize the economy and fund critical subsidies. However, concerns are growing among experts who warn that the expanded budget could increase inflation and strain already fragile public finances.

Wassihun Belay, a well-known advocate for Ethiopia’s economy, cautioned in a recent social media post that the enlarged budget could pressure the economy. He noted that it might affect government revenue, impose additional tax burdens on a limited pool of taxpayers, and compel government service providers to raise their fees. He also warned that the ETB 1.5 trillion budget could lead to a higher budget deficit due to limited government revenue. “The government’s strategy to manage the deficit will pressure the economy and could discourage investment,” he added.

Concerns were echoed by Desalegn Chane (PhD), a member of the House of People’s Representatives. He expressed worry about existing confusion among businesses due to macroeconomic reforms, stating that the additional government expenditure might exacerbate this situation. He criticized the lack of clarity on how the extra spending will affect key macroeconomic variables and highlighted that the budget allocation for capital projects is minimal, which could hinder the country’s structural transformation. He suggested that the government should focus on expanding its revenue base by bringing informal businesses into the formal economy.

In response to these concerns, Finance Minister Ahmed Shide emphasized that there would be no borrowing from the National Bank of Ethiopia (NBE), ensuring that no new money would enter the economy, which should help stabilize inflation. He explained that the government would rely on borrowing from local financial institutions at higher interest rates and that the budget shortfall would be covered through increased tax revenue and support from development partners, rather than through deficit financing.