Debt Repayments Outpace Capital Spending in Ethiopia’s 1.93 Trillion Birr Budget

Ethiopia is poised to ratify a record 1.93 trillion Birr budget for the upcoming fiscal year, representing a 34.4% increase over the current year’s allocation. But as the government looks to bolster public spending, debt servicing continues to cast a long shadow, accounting for nearly 39 percent of recurrent expenditures, roughly 463 billion Birr.

A draft of the budget, presented to the House of People’s Representatives on Tuesday morning, allocates 48 billion Birr more to debt repayments than to total capital expenditures. The burden underscores the urgency of ongoing talks with official creditors. A memorandum of understanding is expected in the coming weeks, potentially paving the way for a multi-year debt restructuring package worth approximately $3.5 billion in relief.

Finance Minister Ahmed Shide told lawmakers that the government would maintain its conservative fiscal approach, prioritizing the completion of ongoing projects over the initiation of new ones, a strategy that has guided fiscal policy in recent years

A staggering 1.1 trillion Birr, or around 73% of the forecasted public revenue, is expected to be collected from taxes in the coming fiscal year. The imposition of a value-added tax of 15%, an excise tax, and the introduction of a motor vehicle circulation tax particularly stirred MPs, who argued that it was in contradiction with the ongoing phase-out of fuel subsidies.

Desalegn Chane (PhD), an opposition MP of the National Movement of Amhara (NAMA), called attention to what he described as a contradiction: that taxes on fuel, he noted with irony, are intended in part to fund subsidies that are simultaneously being phased out. He also voiced concern over the widening strain on civil servants, who are grappling with rising prices, new taxes, and a depreciating Birr, while salaries have barely budged

“The group of new taxes over the past year has already contributed to the rise in the cost of living,” he said.

Minister Ahmed defended the tax increases as essential to Ethiopia’s broader macroeconomic overhaul, a reform agenda backed by a four-year International Monetary Fund program. This has included the floating of the Birr, gradual removal of energy subsidies, and a transition towards an interest-based monetary policy framework.

The minister pointed to export revenues, which have reached $7.2 billion, a narrowing gap between official and parallel exchange rates, and a deceleration in inflation as signs of progress.

“We are convinced that motor vehicle circulation tax is critical to our revenue targets,” Ahmed said, adding that the government plans to raise the tax-to-GDP ratio by four percentage points over the next four years.

He also highlighted the end of direct lending from the National Bank of Ethiopia as a milestone in fiscal reform. The freeze, he said, has helped tamp down inflation, rein in aggregate demand, and strengthen the government’s budget discipline.

Still, the proposed budget includes a deficit of 417 billion Birr. The government plans to cover it through a mix of 139 billion Birr in external borrowing and 278 billion Birr from domestic sources.

Parliament’s Plan, Budget, and Finance Affairs Standing Committee will review the budget proposal alongside several stakeholders before it is ratified by the House.