Intergovernmental Fiscal Transfers in Ethiopia: Challenges and Some Options (A Comparative Study)

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Addis Ababa University


It is a boldly held view that the revenue assignment problem in a federal set up is less challenging than problems witnessed in intergovernmental fiscal transfers from the federal to state governments. The issue of challenges to intergovernmental transfer system and possible alternatives of avoiding them did not, however, attract much attention in Ethiopia as they deserve. This paper is then especially targeted to fill the gap in that regard. Intergovernmental fiscal transfer (in Ethiopia) involves two transfers. First, we have grants (unconditional and conditional) that the federal government devolves to the states. Second, there is revenue sharing where the federal government shares the revenues it has collected from the concurrent jurisdictions envisaged under article 98 of the constitution. Intergovernmental fiscal transfers is especially challenging in those countries where sub national entities are substantially dependent on the federal government to cover the lion’s share of their expenditures. Ethiopia is among such countries where one can observe huge fiscal imbalance between the two tiers of government that left the states to expect federal transfers for they could not cover more than 20% of their expenditure through their own sources. After reviewing the existing literatures on fiscal transfers, exploring the experience of three federal countries on the issue, and analyzing the tax assignment and fiscal transfer provisions of the FDRE Constitution with the current practice, the paper would make it clear that the 2007 and 2009 grant formulas, though appreciating in their attempt to rectify the gap between revenue capacity and fiscal need of the states (as data allow), is problematic for they do not employ variables comparable across units of governments and the role of the HOF only commences after the federal government ruled on the share dispersed as a regional subsidy, the organ currently entrusted by the HOF to prepare grant and revenue sharing formula and modify the share of the state as circumstances change is not effective. The paper argues that the prevalent vertical fiscal imbalance of the states in Ethiopia could not only be rectified through fiscal transfers and we should sought some other options to empower the fiscal capacity of the states such as bridging the gap between revenue potential and actual revenue of the states, revisiting the FDRE constitution (including the concurrent jurisdiction) to win more tax jurisdictions to the states, and enhancing their role at least in revenue sources exclusively assigned to them.