Ethiopia plans a spending increase

• Ethiopian Finance Minister Ahmed Shide introduced on 10 June the government's budget for fiscal year (FY) 2019/20, starting on 8 July, which included spending of USD13.48 billion, a 1.6% increase on the previous year.
• He also highlighted the country's vulnerability to current foreign-exchange shortages in his speech as well as importance of value addition and further private-sector participation in the economy.
• The Ethiopian finance minister highlighted that it was impossible to achieve the 11% growth envisaged in the government's growth and transformation plan during FY 2018/19 given the country's disappointing export data. Growth is expected to have reached 9.8% instead.
• The need to reduce non-performing loans and attract further foreign investment and aid to Ethiopia are necessary to generate the sufficient funds for the USD13.48-billion budget.
• An aim is also to reduce the share of the agricultural sector in GDP, while maintaining sufficient food supply to the country. Overall, 63.3% of the capital budget is allocated to the agriculture sector, education sector, roads, water sector, healthcare, and urban development.
• The government intends to allocate 33.9% of the total budget to capital expenditure, focusing on the completion of existing energy and infrastructure projects.

Ethiopia's administration managed to reduce government spending by 34.1% during the last fiscal year. Efforts to increase tax revenue will be high on the agenda during FY 2019/20 as last year's tax revenue performance was below target due to structural problems. Furthermore, around 74% of revenue collection is targeted to come from tax revenue in FY 2019/20. Additionally, the aim is to restrict the spread of business loans with regards to the country's foreign-currency debt consolidation; instead, there is a great deal of interest in using non-performing loans.

The country's exports continue to underperform. Weaker growth primarily in coffee exports and other agricultural goods was the main driver of the dip in exports during the course of the last FY. Ethiopia's export base remains largely exposed to externalities due to its still strong dependence on agricultural commodity exports, contributing to the economy's foreign-exchange shortages. Consequently, it is essential for the country to continue to diversify the export base. Long-term export growth is expected to benefit from increased production levels in the manufacturing sector, including particularly the textile and automotive industries, which last year witnessed significant foreign investment growth.

Improving value addition in the manufacturing sector is expected to remain challenging amid the foreign-exchange reserves limitations. Manufacturers continue to report difficulties in accessing foreign exchange as part of buying production inputs, which ultimately pushes prices up. Retail trade is currently driving the service sector and the urgency to diversify the economy remains challenging in the near term, causing vulnerability and weakness in the country's export performance.

IHS Markit expects softer growth of the economy for this year. Figures for the first quarter of 2019 suggest that domestic investment as well as export growth slowed. Additionally, government spending slowed during the last fiscal year to 34.1% annual growth. The slowdown in investment growth will impact on Ethiopia's growth trajectory, as it has been the key driver of growth over the last few years. We expect fiscal and monetary policy to remain prudent. The finance ministry anticipates a 6% depreciation of the Ethiopian birr in FY 2019/20. The likelihood of a further devaluation of the birr to raise export growth to compensate for a slowdown in public investment's contribution to GDP growth will depend on the success in attracting further foreign investment to the economy.

Posted 15 July 2019 by Alisa Strobel, Senior Economist