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2. Aggregate Spending Trends and PrioritiesFigure 5: Total government expenditure (per cent ofGDP), 2016Aggregate national spending has increased more thantwo-fold, from ETB 163 billion in 2012/13 to about ETB334 billion in 2016/17, showing an annual averagegrowth rate of 17 per cent and 6.7 per cent in nominaland real terms, respectively (Figure 4). In per capitaterms, nominal spending has increased from ETB3130 in 2015/16 to ETB 3540 in 2016/17. The majorityof the budget has been going to public investments,primarily intended to ensure inclusive and equitabledevelopment. This demonstrates the government’sfirm determination to enhance and improve Ethiopia’ssocial and economic infrastructure and build thenation’s productive ure 4: Nominal and real spending (in billion ETB)400350334286300200Source: Data from the International Monetary Fund (IMF).231250193188163150231216170Pro-Poor National Spending10050It is evident that investments in social sectors are vitalin the fight against poverty and even more essentialfor children’s wellbeing. In essence, publicexpenditure has been aligned to poverty reductionpriorities in Ethiopia. Sub-national expenditures arealso consistent with poverty reduction goals. In thisregard, the GoE has leveraged huge resources toboost spending in what it refers to as the ‘main propoor sectors’, namely health, education, water andenergy (which includes all energy projects, such asthe construction of mega dams and power plants),roads, as well as agriculture and food security (withapproximately half of the agriculture budget allocatedto the PSNP).8 National expenditure on thesesectors averaged 64 per cent of total nationalexpenditure over the past five years (Figure 6).02012/132013/142014/15Nominal expenditure2015/162016/17Real expenditureSource: Data from Ministry of Finance (MoF). Real values arecalculated by the authors, with 2012/13 as the base year.In terms of allocation of expenditure across the broadcategories, on average, the largest share of thenational expenditure between 2012/13 and 2016/17was allocated to finance economic development,followed by social services, and finally administrativeand general services. Ethiopia’s general governmenttotal expenditure was 18.5 per cent of GDP in2016/17. Compared to selected sub-SaharanAfrican (SSA) countries, Ethiopia’s position is low,as depicted in Figure 5 below.8The World Bank. 2014. Ethiopia Poverty Assessment. Report No.AUS6744, p.v.4

Figure 6: Distribution of pro-poor expenditure (per centof total expenditure)expenditure to run and maintaininvestments that had been gure 7: Capital and recurrent expenditure (per cent oftotal 45410Water, energy and electricity expenditureHealth and nutrition expenditureAgriculture and food security expenditureRoad construction expenditureEducation expenditurePro-poor expenditure202012/132013/142014/15Recurrent Expenditure2015/162016/17Capital ExpenditureSource: Data from MoF.Source: Data from MoF.As shown in Figure 6 above, the strong commitmentto educational development is reflected in expenditureallocated to the sector, which has increased steadilysince 2012/13 to reach 27 per cent of total governmentexpenditure in 2016/17. Road construction as well asagriculture and food security each received 10 percent of national expenditure in 2016/17, while healthand nutrition, and water, energy and electricityreceived 8 per cent and 7 per cent of nationalspending respectively in the same period. Thedisproportionateallocationofbudgetaryresources to the water sector and specifically toinstitutional water and sanitation, mightnegatively affect educational outcomes and childand maternal health.Recurrent expenditure as a share of totalexpenditure increased consistently from 41 percent in 2013/14 to 55 per cent in 2016/17 (Figure 7).The higher share of recurrent expenditure in 2015/16and 2016/17 was in part due to the implementation ofsalary adjustments for public servants and anadditional supplementary budget for drought-affectedareas. During this period, half of the national recurrentexpenditure was channelled towards financingeducation, health and nutrition, water and energy,roads, as well as agriculture and food onalIn view of devolving fiscal decision-making tolower tiers of government, the GoE designed afiscal decentralization strategy with the specificobjective of promoting basic services to citizens.Accordingly, most of the budgetary resources (closeto 51.1 per cent) were being managed by the regionalgovernments in 2016/17 (Figure 8). Regionalgovernments are entitled to general and specificsector responsibilities, including basic social servicedelivery, such as the construction of primary andsecondary schools, health posts and health centres,water and sanitation, rural roads, agriculturedevelopment and natural resources protection. Thefederal government, on the other hand, is responsiblefor investing in highways, universities, powergeneration and dissemination, natural resourcesdevelopment and food security, which areimplemented throughout the country.Recurrent versus Capital ExpenditureBefore 2014/15, the national expenditure patternmainly focused on allocating more resource forbuilding economic and social infrastructure toprovide basic services. To this end, the lion’s shareof the annual budget was devoted to capitalexpenditure, which is critical to bringing future benefitsthrough building physical assets and infrastructures,as well as promoting human resources development.Recently, however, capital expenditure as a share oftotal expenditure declined consistently from 59 percent in 2013/14 to 45 per cent in 2016/17 (Figure 7).Although both capital and recurrent expenditure areincreasing in absolute terms, the share of capital intotal expenditure is declining. Past capital spendingwill also require increased current and future recurrent5

Figure 8: Federal and regional expenditure (per cent oftotal spending)Budget CredibilityWithin a context of an increasing budget, Ethiopiafaces resource constraints to adequately meet itsfinancing needs which can be exacerbated byinefficient budget utilization. In order for the budgetto be an effective instrument of implementation ofpublic policies, it is important that it is realisticand that it is implemented as it was approved.Budget credibility is measured as actual expenditureas a share of the original approved budget. In thisregard, the credibility of the federal government’sbudget indicates that the actual amounts spent werenot very different from the approved budget, except in2015/16 (Figure 10). Budget credibility would beexpected to show deviation as a result ofsupplementary budgets that are approved halfwaythrough the fiscal year. A budget increase later in thefiscal year would be harder to spend effectively. Otherreasons for deviation from the original approvedbudget could probably be limited capacity for budgetpreparation and forecasting, and unpredictability ofexternal 48.970%60%50%40%30%20%10%0%2012/13 2013/14 2014/15 2015/16 2016/17Federal expenditureRegional expenditureSource: Data from MoF.Compared to the regional governments, thefederal government is spending a larger portion ofits budgetary resource on capital expenditure inan effort to address the infrastructure gapthroughout the country. The federal government’sshare in total recurrent spending has declined from 46per cent in 2015/16 to a low of 39 per cent in 2016/17(Figure 9). Regional governments are primarilyundertaking recurrent expenditure, leaving moreresponsibility for the federal government to financelarge, countrywide, capital investment projects. As aresult, and as can be seen in Figure 9, regionalgovernments’ share of total recurrent expenditure ishigher than the federal government’s share. Thisimplies that the bulk of the national recurrentexpenditure (close to 61 per cent) was allocated tofinance regional-level recurrent spending in 2016/17.Figure 10: Federal government budget ure 9: Federal and regional capital and recurrentspending (per cent of total capital andrecurrent spending)2014/152015/162016/17Source: Data from MoF (information for sub-national levels ofgovernment has not been made available).100%80%363737463. Financing the National Budget39The overall government budget is financed fromdomestic and external sources, with the latterconsisting of borrowing and assistances in the form ofgrants from bilateral and multilateral developmentpartners. With increases over time in both domesticand external revenue sources, total revenue(including external grants and loan) increasedsignificantly from ETB 267 billion in 2015/16 to ETB294 billion in 2016/17. However, total governmentrevenue declined from 17.3 per cent of GDP in2015/16 to 16.3 per cent in 2016/17 (Figure 11),which is a level much lower than other countriesin the eastern and southern Africa region,suggesting the availability of additional fiscalspace to increase government revenue that can al capital expenditureFederal recurrent expenditure2015/162016/17Federal capital expenditureRegional recurrent expenditureSource: Data from MoF.6

channelled towards further investment in thesocial sectors. External assistance continues to be akey source of financing and its share in GDP hasincreased from 2.2 percent in 2015/16 to 2.5 percentin 2016/17. However, considering its trend since2012/13, its share in GDP has been decliningindicating relatively greater reliance on domesticfinancing.concerned, annual income below ETB 7,000 is freefrom income tax.Figure 12: Domestic revenue sources (per cent ofdomestic revenue)100.090.016.680.0Figure 11: Sources of government budget (per cent 111.829.42012/1313.72013/142014/15Direct taxesIndirect taxes (domestic)4.02015/162016/17Foreign trade taxesNon-tax revenueSource: Data from MoF.2.00.02012/132013/14Domestic revenueExternal loan2014/152015/162016/17Among the major domestic revenue sources,indirect tax such as Value Added Tax (VAT) hasbecome an important and growing source ofrevenue to the national government. The share ofdomestic VAT revenue averaged 22.8 per cent ofdomestic revenue for the past five years (Figure 12).Foreign trade taxes entirely collected from importedgoods make up the largest share of the total domesticrevenue next to direct tax, averaging 28.8 per cent forthe past five years. On the other hand, domesticrevenue collected from non-tax sources, mainlygenerated from government fees and charges,contribute less to government finance. Less relianceon non-tax sources indicates the low level of fees andcharges attached to basic government services. Theshare between tax and non-tax revenue sourcesshows a relatively constant trend over time.External grantTotal revenueSource: Data from MoF.In terms of domestic financing, Ethiopia generatesthe majority of its resources from taxes, whichamounted to 76.5 per cent of domestic revenue in2016/17, lowering from 88.2 per cent in 2013/14. Asan agrarian economy that is not fully monetized, witha large, untaxed, non-agrarian informal sector, thecontribution of direct tax sources remains relativelylimited, and its average share remained constant ataround 31 per cent of domestic revenue in the pastfive years (Figure 12). While contributing about 35.9per cent of the national GDP, agriculture provides lessthan 0.5 per cent of tax revenue in 2016/17. Most ofthe revenues from direct taxes are generated frompayroll tax and taxes on profits of enterprises andindividuals.The tax-to-GDP ratio remains low (10.5 per cent ofGDP in 2016/17) compared to the sub-Saharanaverage of 18 per cent. Thus, fostering taxpayereducation and sensitization, encouraging voluntarytax compliance and strengthening enforcement effortscan contribute to the tax revenue base. Ethiopia’smacroeconomic context of a low tax-to-GDP ratio, ahigh saving–investment gap (16.2 per cent of GDP), ahigh current acco

Development and Poverty in Ethiopia 1995/96 to 2010/11. Despite the substantial results achieved over the past decade, significant headwinds to growth and socio-economic transformation remain. According to the 2014 World Risk Report, Ethiopia is subject to increased vulnerability to climate change, and it is one