Fiscal Federalism in Ethiopia the Quest for Equitable Development
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Date
2021
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Addis Ababa, Ethiopia
Abstract
One of the reform agenda of the EPRDF, following its control of state power in 1991, was the introduction of fiscal federalism. The goal of the agenda was to bring about equitable development and durable peace to Ethiopia, a home to diverse nations and nationalities. After two and half decades, though there are developmental progresses beyond controversies, there are widely held concerns about the equity of the development across regions. This thesis investigates the impact of fiscal federalism—devolution of assignment of responsibilities, taxation powers, and the intergovernmental transfer system—on equitable development in Ethiopia by taking four pro-poor sectors including eduation, health, water and road. To this end, both qualitative and statistical/ econometrics techniques were employed and both primary and secondary data were used.
The finding indicates that there is a connection between fiscal arrangement and equitable development in Ethiopia. This can be explained by the analysis made on the selected sectors. Despite a growing trend in all aspects of socioeconomic development as exemplified in the four selected sectoral development (education, health, water and road) for the last ten years, it is important to realize that the progresses in each of the four sectoral developments are not equitable and regions show significant variation in their emphasis on their achievements and their development outcomes. For instance, despite the achievements observed at the primary level, the analysis shows that the ESDP has been less successful at improving equity and filling the gap of the access at secondary level. Moreover, despite substantial increases in the enrolment of children in secondary schools, absolute enrolment levels are still very low and wealth, geographic and gender disparities remain considerable. The expenditure in the health, water and road sector increased in terms of both absolute amount and per capita basis. Consequently, output and outcome of their services have also increased substantially. However, equity and inclusiveness among regions are still not addressed and needs concerted action to reduce the inter-regional health, water and road access gap without compromising efficiency to fulfill each individual’s right of equal access to government provided services stipulated in the Ethiopian Constitution.
Furthermore, regarding tax policy in Ethiopia, it was supposed to ensure balanced regional development. The Federal Constitution aims at creating strong states vested with extensive decision-making powers. Notably, the finding shows that there has been a steady increase in both direct and indirect tax collection. However, the finding shows that the federal government still centralizes the fiscal means of executing fiscal responsibilities which indicates that there is a de facto centralization of fiscal decision-making. This is reflected by excessive dependence of regional governments on federal grants to finance even recurrent expenditures within their jurisdictions. The fiscal system is characterized by both vertical and horizontal imbalances that require further decentralization of revenue sources that commensurate the expenditure responsibilities of the regional governments. The vertical fiscal imbalance in Ethiopia is thus explained more by monopolization of the Central Government over the most lucrative tax bases and partly by high expenditure requirement of regional governments. The study also found that the true practice of fiscal federalism in Ethiopia has been inhibited by several factors which include, the dominance of the federal government in the sharing of national financial resources, the imposition of the party structure of the EPRDF on fiscal federalism, the pattern of assignment of responsibilities by the constitution among federating units, and over-reliance of regional governments on the revenue from the Federal government grant. The analysis further shows that the federal grant that is expected to be as a glue to hold federal and regional states together is not able to narrow the vertical and horizontal fiscal imbalance of the country and that
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suggests, fiscal federalism in Ethiopia failed to keep its constitutional promises. Therefore, based on the above findings this study concludes that fiscal federalism in Ethiopia is not promoting equitable development even if it has made contribution to the overall development.
Finally, central to the success of fiscal decentralization, is clarity in the assignments of revenue and expenditure responsibilities. The urgent reform that is required is the need for government to redress the prevailing vertical and horizontal fiscal mismatches through appropriate policies of increasing tax revenues to regional states as well as reforms of expenditure responsibilities to enhance their efficiency and capacity in the provision of public services.