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Proposed Federal Gov’t Budget Embraces Macroeconomic Loopholes; Risky!
Both proponents and critics of the Revolutionary Democrats concur that ambition is their defining character. They have carried it through two decades of leading this rather volatile nation. It has existed in the highs and lows of their time in power, as if it is the oxygen of their administration.
Most of their projects are made successful, since ambition has overcome limited capital and labour. Showcasing their devotion for grandiosity are projects such as the Grand Ethiopian Renaissance Dam (GERD) and a cross-country railway network. A smart combination of public relations and execution has helped them gain significant popular support, a huge political capital to be spent in the future.
Continuing their ambitious developmental expedition, the EPRDFites have proposed a federal budget of 137.8 billion Br for the 2012/13 fiscal year. Up by 20 billion Br compared to 2011/12, 63pc of the budget is to be contributed from tax revenue. A deficit of 26.6 billion Br ought to be covered from external and internal sources, whilst the grant contribution of the budget has seen a decline to 11.6pc from a historical average of 40pc.
Although not ready to admit it explicitly, the Revolutionary Democrats seem to have tacitly accepted the riskiness of an expanding fiscal regime. Taken nominally, the jump in size between the last two budgets is the smallest in the last five years.
That does not mean that their fiscal conservatism has avoided loopholes from the proposed budget. It instead has continued along the same sensitivities.
Critics prefer to think of the proposed budget in real terms. A rising fiscal wariness and intentional measures of fiscal suppression contribute to the marginal increment in the budget, they claim. If it could be adjusted for such distortions, they estimate, it could have grown to 200 billion Br.
Bar the inherent distortions, however, the implementation environment of the budget is troubled with the sharp swords of inflation and supply constraints. Though showing marginal declines in the last two months, the aggregate price still hovers within the hyper sphere.
Aggregate inflation stands at 25.5pc, as of April 2012. With a large portion of the inflationary build-up contributed by the price of food items, the burden on the poorest of the poor (bottom quintile) is colossal.
Complementing the price escalation is the seemingly unsolvable market volatility originating from inferior aggregate supply. Despite recent stability in the consumables market, the fundamentals are still fragile. So much of it depends on whether the EPRDFites can bring a sustainable solution to the problem.
It is upon such macroeconomic turbulence that the proposed budget is introduced. It certainly will bring its own sensitivities with the capacity to initiate a second-round inflationary impact. A large section of the fault line lies on the deficit financing scheme.
As it stands, the proposed deficit will see an equal contribution from local and external sources. Selling treasury bills (T-bill) is foreseen to cover the domestic side of the deficit. Whilst monetary sterilisation continues, eroding the foreign exchange reserves of the nation to lows of 1.5 months of imports, external loans are expected to contribute 13.3 billion Br.
Both sources leverage the budget with their own risk. The sale of T-bills was so dismal last year, as the liquidity of private commercial banks, the major players in the market, has been constrained by obligatory investment in government bonds, equivalent to 27pc their loan disbursements.
In fiscal year 2010/11, the performance of the T-bill market was only 62pc. The case was even worse if the maturity date of the bills is accounted for, with bills of longer maturity rates witnessing negative performances.
Such a passive T-bill market is threatening the envisioned deficit financing. The public interest in investing in treasury bills is very low, since the return on investment (RoI) is unattractive compared to the market rate of return. Spiralling inflation further suppresses the viability of such an investment.
Another risk emanates from the rising debt stock of the nation. The outstanding debt of the nation has continued to rise, since 2008. National debt as a percentage of gross domestic product (GDP) reached 26.1pc in 2011, growing by an average of four per cent annually since 2008.
Worsening the case for external financing is the convergence of off-budget financed megaprojects and in-budget capital investments. Both involve a large portion of investments in foreign exchange. Paying back the principal and interest of such a large external loan will definitely lay its shadow on the sprinting economy of the nation, if a leap in productive capacity is not realised.
As long as the linkages between the fiscal and monetary policy of the nation remain passive, these loopholes will continue to challenge the implementation of the budget. At the heart of the whole equation lies the macroeconomic stability of the nation.
Ambitious as they may be, the EPRDFites have been unable to tame the inflationary beast for a sixth year in row. They have turned a deaf ear to all critics relating the spiralling rate of inflation with their addiction to expansionary fiscal policy.
No matter how much they are concerned about the compounding public investment and its tail effects, they do not want to admit it in public. Certainly, doing so would have direct political costs that the Revolutionary Democrats are not ready to pay. They do not want the world to turn its face away from their history book of double-digit growth.
Slowly but surely, inflationary factors have forced them to tacitly admit that fiscal expansion has its own limits. Much of its existence depends on untapped revenue sources in the economy. No doubt that those sources cannot be stretched infinitely.
Therein lies the vigilance of the Revolutionary Democrats. Evidently, they have come to realise that growth sources are limited.
At stake in the highly debated fiscal conservatism of the Revolutionary Democrats is the ground impact of the budget. Budget effectiveness can only be ascertained through stabilising the macroeconomic waters of the nation.
With the intention rightly included in the proposed budget, the remaining part will translate it into reality. It is indubitable that it is all easier said than done.
Noninflationary financing of the budget deficit can be realised through reactivating the T-bill market and thoughtfully managing the debt stock. Reactivating the T-bill market requires lifting the investment obligations of private commercial banks, enhancing public awareness and indexing the return on investment (RoI) with inflation. Doing so will broaden the base of the investment and enhance its commercial viability.
Proper management of the national debt stock, on the other hand, involves creating a framework to identify the compounding impact of off-budget and in-budget capital investment. Redirecting public investment towards sectors with high economic RoI is important. This will guarantee the future ability of the economy to pay back debts through productive capacity.
For the arguably ambitious EPRDFites, creating a high impact fiscal regime is both an economic and political necessity. Addressing the necessity with the deployment of viable economic policies and equivalent political resolve is, then, the burden that they have to shoulder with ambition, at least through the next fiscal year. Doing so will not only maintain their accrual legitimacy but save their skin in front of critics, both local and international.
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