PARLIAMENT PASSES 2008/09 FEDERAL BUDGET

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001948

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: PARLIAMENT PASSES 2008/09 FEDERAL BUDGET


1. (SBU) SUMMARY. The Ethiopian Parliament passed a federal budget
of US$5.6 billion for 2008/09 fiscal year that runs from July 8,
2008 to July 7, 2009. The budget is 16 percent higher than the
US$4.9 billion budget endorsed last year. Given that annual general
inflation in June 2008 was 55.3 percent the 16 percent nominal
increase in the budget reflects a fiscal tightening in real terms.
The recurrent budget, constituting 57 percent of the total budget,
grew by 15.6 percent vis-a-vis its level last year. Federal
subsidies to regional states -- accounting for over 56 percent of
the recurrent budget or 32.1 percent of the total budget --
increased by 14.8 percent. The national defense budget,
constituting close to 13 percent of recurrent budget, increased by
$50 million or 7.3 percent to $416 million. Meanwhile, the capital
expenditure budget items showed a 16.6 percent annual growth,
largely allotted to economic and social developments. More than 93
percent of the capital budget or over 40 percent of the total budget
constituted pro-poor spending such as agriculture, irrigation and
natural resources development, education and training, road
construction, rural electrification and expansion of health
services. The government plans to finance 60 percent of the budget
from domestic revenue, 25 percent from external assistance --
including $700 million or 12.4 percent from the World Bank-supported
Protecting Basic Services program -- and the balance from foreign
and domestic borrowing. The government explained that the principal
objectives of the budget are to reduce the impacts of inflation,
ensure food security, and enhance development efforts. Members of
opposition political parties voiced their concerns on the budget but
the latter passed by a majority vote. End Summary.

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THE BUDGET IN BRIEF
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2. Ethiopia's 2008/09 federal budget totals US$5.6 billion,
indicating 16 percent higher than that of 2007/08 and 24 percent
vis-a-vis that of 2006/07 in nominal terms. Given that general
annual inflation reached 55.3 percent in June 2008, the real growth
in the budget is negative. The budget does not include regional
government budgets from their own revenues, state enterprise
budgets, or off-budget donor contributions. The budget includes
capital expenditure of US$2.4 billion and a recurrent budget of
US$3.2 billion, including subsidies to the regional states of US$1.8
billion. Major capital budget items include construction sector
$796 million ($758 million for road construction),food security,
agriculture and rural development related $516 million, education
and training $506 million, health services $188 million and water
resource development $178 million. Major sources of funding for the
capital budget are the government's central treasury (60 percent),
foreign assistance (25 percent),loans (14 percent) and the balance
from retained revenue.


3. The recurrent budget is US$3.2 billion, up by 15.6 percent
compared to its level last year. Major spending items include
subsides to regional states at $1,813 million (a 14.8 percent
increase),administration and general services at US$585 million (a
11.2 percent increase) of which national defense at $416 million (a
$50 million or 7.3 percent increase),education and training at $200
million (up from $157 million last year),and debt servicing at $344
million (in contrast to $257 million last year). Debt servicing is
broken up into 73 percent servicing domestic debt and 27 percent to
repay foreign debt. 96 percent of the recurrent budget is planned
to be financed from the central treasury account while the balance
from retained revenue.


4. Total domestic revenue is projected at US$3.3 billion, an
increase of 19.4 percent from last year. Tax revenue accounts for
$2.6 billion while non-tax revenue is planned to reach $673 million.
Non-tax revenue includes licensing fees, service charges, residual
surplus payables from government investments, interest income,
capital gains and others. Planned foreign budget assistance
includes US$479 million from multilateral organizations, US$209
million from bilateral sources, US$700 million from the World
Bank-supported Protecting Basic Services project, and US$17 million
from HIPC (Highly Indebted Poor Countries) debt relief. (Note:
After the contentious 2005 national election, many budget support
donors shifted from direct budget support to block grants to
regional governments under the World Bank-championed Protecting
Basic Services program. End Note). The deficit is planned to be
financed by foreign and domestic borrowings. Foreign loans
constitute $349 million from multilateral donors and $20 million
from bilateral deals. Net domestic borrowing of the government is
expected to be equivalent to US$533 million.

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ISSUES RAISED BY OPPOSITION
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ADDIS ABAB 00001948 002 OF 002



5. Finance Minister Sufian Ahmed presented the proposed budget to
the House of Peoples Representatives on July 4 and 5, 2008. Sufian
argued that the principal objectives of the budget are combating
inflation and its impact, improving peoples' health, education and
enhancing further development efforts. Opposition MP Temesgen Zewde
proposed re-allocating $10 million from intelligence and security
budget to augment efforts geared towards abating inflation. Bulcha
Demeksa from OFDM questioned the need to increase the defense budget
by $50 million, arguing that the proposed increase be re-allocated
to rehabilitate drought affected citizens. Lidetu Ayalew from
UEDP-Medhin disputed the government's 26 percent food inflation
figure as unrealistically low, proposing a squeeze in the capital
budget to tighten money supply to combat inflation.


6. Sufian argued the increase in the defense budget is required to
increase salaries and accommodate inflation within the military
budget. He also noted that the increase in federal police budget is
due to the planned recruitment of 3,000 policemen. Prime Minster
Meles said "the primary agenda of the government is to control and
reduce the impact of inflation on the economy and further enhancing
development efforts." He further noted "the increase in budget on
the various sectors would reduce the impact of inflation and curb
the rising cost of living of the people." Meles argued that
combating inflation is the only area where his government has failed
to accomplish its objective. Despite the motions voiced by the
opposition, the budget passed as proposed by majority votes.

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THE BUDGET AT A GLANCE
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2008/09 Increase
Budget from 2007/08
(USD millions) (percent)
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Total Budget: 5,643.5 16.0
Recurrent Budget: 3,206.7 15.6
o/w Subsidies to Regions: 1,813.1 14.8
Administration: 169.4 (12.0)
Defense: 415.9 7.3
Debt Servicing: 344.1 33.9
Capital Expenses: 2,439.6 16.6
o/w Construction: 796.0 21.9
Food Security,
Agriculture, and
Rural Development: 516.0 5.5
Education: 506.6 45.6
Health: 188.0 0.0
Water Resources: 178.0 19.5

Total Planned Revenues: 3,336.9 19.4
Taxes: 2,642.4 17.5
Non-Tax Income: 672.9 48.6
Multi-lateral
Budget Support: 478.8 24.3
o/w from PBS: 699.9 31.9
Bilateral
Budget Support: 209.0 9.7
Domestic Borrowing: 533.1 (0.4)
Foreign Borrowing: 368.7 15.2
HIPC: 17.1 (47.1)

YAMAMOTO