Fiscal Decentralization in Ethiopia

 

Legal and Constitutional Framework

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Devolution of power, responsibilities, and resources from central to local governments has been the foundation of decentralization reforms in developing countries like Ethiopia. The 1995 Federal Constitution is the basic document that lays out the legal and institutional framework for decentralization in Ethiopia. The decentralization reforms focus on strengthening local governments as institutions of democratic governance and efficient service delivery. It also outlined the respective spheres of authority and responsibilities of the Federal Government and the Regional States 1. Since then, Ethiopia has been enjoying the federal and decentralized system of the ethnic-based federal governance structure. The country follows a federal system where the government power is divided between central government and nine regional states of governments as well as two special administrative cities. The regions are divided into zones, woredas/urban administrations, and kebeles (village areas, with an average population of 5,000) creating a four-tier level of government. The city administrations of Addis Ababa and Dire Dawa have different structures but are considered equivalent to regions 2.

The Federal and Regional constitutions, as well as the subsequent proclamations, delineate different expenditure and revenue assignments to the federal and sub-national level of governments. Thus, the principles of fiscal decentralization, which is emanated from federal and regional constitutions, devolve fiscal decision-making power to lower tiers of governments, minimize vertical fiscal imbalances and provide complementary resources for effective and efficient delivery of public services. The government also attempted to introduce decentralization to reflect expenditure and revenue assignments and overseeing mechanism at the district level. Thus, in Ethiopia, two waves of fiscal decentralization have been in place, one from the federal government to regional states and the other reform regional states to Woredas with the view of revitalizing the Regional constitutional mandate for Woredas 3.

The prime legal basis for fiscal decentralization is the 1995 constitution, Article 97 & 52 which provides autonomy for revenue and expenditure responsibilities to Regional states respectively. Article 62 indicates the prevalence of budget subsidy and hence the approval of budget subsidy formula by the House of Federations. Article 94 states the need for providing loan and assistance to support regions and areas. The proclamation No. 33/1992 enacted through Ministry of Finance and Economic Development (MOFED) is the other legal document that describes the expenditure responsibilities of the subnational governments (SNGs) 4.

The fiscal decentralization strategy in Fiscal Year elucidates the landscape for the general and specific grant to different tiers of government. It incorporates the principles governing fiscal decentralization, i.e., to devolve fiscal decision making power to lower tiers of governments, minimize fiscal gaps and provide the complementary resource for effective and efficient delivery of services. In addition to this line, the specific objectives of fiscal decentralization in Ethiopia are also mentioned as follows 5.

  • To devolve fiscal decision-making power to lower tiers of government.
  • To enable regional and Woreda governments/administrations provide standard services in accordance with their functional assignments
  • To narrow the horizontal fiscal gap and ensure horizontal equalization
  • To promote efficiency in the allocation of financial resources.
  • To maintain consistency between macroeconomic stability and fiscal decentralization.

Fiscal Decentralization

The Ethiopian government fiscal year starts on 8th July and ends on 7th July. Both Ethiopian calendar and fiscal years fall in two Gregorian calendar years. The parliament approved $13.9 billion budget for the financial year 2017/18, the amount represents an increase of nearly 17 percent on the previous year keeping up with the trend of ever expansionary fiscal policy. Of the total, $4.9 billions are allocated for capital expenditures while $3.55 billions are stated for regular expenses including administrative, economic and social services 1.

The allocation of budget for the nation’s development reckons national development priorities and the corresponding implementation capacity of various sectors and projects on the basis of the Second Growth and Transformation Plan (GTP II). This includes institutions and projects that are integral to the national economy such as ministries, agencies, commissions, and departments as well as major mega projects that hinge on promoting the country’s industrialization.

Based on the propositions by the House of Federation (HOF), 36.6% of the allocated budget was redirected as subsidy grants to the nine decentralized regional states and two city administrations. The HOF considers the revenue potential and expenditure needs of the regional states, thus Oromia is entitled to $1.44 billion out of $4.2 billion subsidy fund followed by the Amhara and southern (SNNPR) regional states each securing a check for $906.3 million and $843.5 million respectively. Somali Regional state is the next biggest earner $418.6 million followed by the Tigray regional state $252.9 million, Afar region $126.6 million, Benishangul $76.5 million, Addis Ababa $59.4 million, Gambella $55.9 million, Dire Dawa $37 million and Harari $31.9 million1.

Apart from the subsidy grant, the government allocated a total of $254 million to support regional states in their effort to meet the Sustainable Development Goals (SDGs). Oromia received $87.4 million from the support for SDGs fund while Amhara got $54.8 billion, south $51.2, Somali $25.3 million and so on. The combined budget dedicated to regions under the subsidy and support for SDG categories is about 38.7 percent of the overall budget while the others (recurrent and capital) accounting for 25.5 and 36.5 percent each.  

Priority projects

In keeping with the overall aims of the second Growth and Transformation Programme (GTP II), budget spending is targeted at a number of areas, including industrial development (notably textiles, chemicals, and agro‑processing), which would increase the value of exports; and education, so as to adapt the population for an increasingly industrialised economy.

In terms of its sectoral distribution, about 61.8% of the budget is assigned mainly to finance infrastructure developments such as road, education, agriculture, water, health and rural electrification projects. Large sections of the budget will be spent on manufacturing, export and urban development, with the specific intention of transforming the economy sustainably.  The education sector gets the significant amount on the top of the budget, $1.6 billion. Agriculture and defense are the institutions receiving another biggest budget in the fiscal year, $435 million each.

On the revenue side, the government aims to collect nearly $8 billion domestic revenue from taxes and non-tax sources in the fiscal year. The government also expects to secure $1.65 billion from foreign assistance, loan and/or credit. Despite the uncertainties associated with the ongoing political instability and El Nino effect, the government expects to maintain the two-digit GDP growth in the fiscal year.

References

World Bank. (2010, August) Ethiopia Public Finance Review. Retrieved from  http://documents.worldbank.org/curated/en/530241468255278847/Ethiopia-Public-finance-review-2010

Assefa, D. (2015) Fiscal Decentralization in Ethiopia: Achievements and Challenges. Retrieved from   http://www.iiste.org/Journals/index.php/PPAR/article/viewFile/24944/25547

Ethiopia. (2017) Ministry of Finance and Economic Development. Fiscal Year Budget Retrieved from http://www.mofed.gov.et/

Asrat, S. (2017, June 17) Budget Breakdown. Retrieved from https://www.thereporterethiopia.com/content/budget-breakdown

 

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