An African Development Bank (AfDB) report published this week forecasts Ethiopia’s development financing requirements over the coming six years will amount to a minimum of a quarter billion dollars.
Dubbed ‘Driving Africa’s Transformation: The Reform of the Global Financial Architecture,’ the report features economic analyses and forecasts for all 54 countries . The 56-page section dedicated to Ethiopia indicates the federal government estimates its financing requirements for development priorities by 2029/30 to be between USD 257 and USD 397 billion.
Meeting Ethiopia’s Sustainable Development Goal (SDG) targets by 2030 will require about USD 608 billion, according to the report.
“According to the Bank’s estimates for the 2024 Africa Economic Outlook, Ethiopia will need USD 25.8 billion per annum until 2030 to accelerate its structural transformation and position it at par with high-performing developing countries with comparable levels of development,” reads the report. “With declining trends in external assistance, achieving these global and regional goals is increasingly challenging.”
The Bank estimates the financing requirements for achieving structural transformation targets by 2030 at 13.2 percent of GDP.
“However, despite Ethiopia’s high economic growth record, tax revenues have not reached the 15 percent of GDP that developing countries require to adequately finance progress toward the SDGs. In fact, the tax-to-GDP ratio has been declining since the 2010s from about 12.7 percent to about seven percent in 2022/23,” reads the report.
The Bank notes there is room to achieve the targets through expanding the tax base, improving revenue collection, and modernizing tax administration.
The federal government is in the process of expanding its tax base, with officials looking to collect an additional 92.5 billion birr from taxpayers this fiscal year to finance a record federal budget of close to one trillion birr.
Among the tools the government plans to use are the introduction of a property tax in Addis Ababa, adjustments to the application of value added tax (VAT) and excise tax regimes, and plans to introduce a nationwide property tax.
However, the AfDB notes that taxes alone will not suffice to finance Ethiopia’s lofty development ambitions. The Bank indicates the need for external financing, of which the report notes Ethiopia received close to USD 65 billion between 2005 and 2018.
“[External financing] was instrumental in driving the high growth record. However, amidst ongoing conflicts within the country, there has been a noticeable decline in external support,” it reads.
The report reveals external financing declined to USD 3.3 billion in 2021/22 from a peak of USD 5.7 billion in 2019/20 as a result of armed conflict in the country and a global economic slowdown, among other factors.
“The reduction in external assistance poses a significant challenge for Ethiopia, which has traditionally relied on external support to fund its developmental endeavors. The decline has not only reduced the available resources for development projects but has also necessitated increased domestic borrowing. The situation has also contributed to shortages of foreign currency, further complicating Ethiopia’s economic challenges,” it reads.
The Bank notes additional financing requirements for reconstruction efforts in the war-torn Tigray region are estimated at close to USD 20 billion.
“The scale of resources needed to support Ethiopia’s structural transformation requires increased international financing. This calls for a reform of the global financial architecture to provide for orderly restructuring of existing debt and for the financial and technical resources at scale, at affordable terms, and in a timely manner,” reads the report.
The Bank recommends a focus on current infrastructure investments, improving education quality, fostering the development of a skilled workforce, improving public spending and tax collection, catalyzing private sector engagement, rationalizing the scale and reach of state-owned enterprises (SOEs), leveraging financing instruments, and strengthening trade through the African Continental Free Trade Area (AfCFTA) as a way to accelerate structural transformation in Ethiopia.
AfDB predicts Ethiopia’s economic growth to slow to 6.7 percent in 2023/24 and the following year due to “a slowdown in public investment, a shift in public spending towards economic recovery and humanitarian interventions, slow pace of negotiations on debt restructuring and associated impediments on access to development finance.”
The report also notes the pressure that political differences and armed conflict are placing on the economy.
“Political issues and conflict due to feelings of limited participation in the economy constrain Ethiopia’s inclusive growth and structural transformation as public expenditures and policy focus are diverted from basic services to defense,” it reads.
The report indicates that internal conflicts have driven Ethiopia’s defense budget up to 1.7 percent of GDP in 2022 from 0.5 percent in 2020.
Source: AfDB estimates Ethiopia development finance needs through 2030 at USD 397bln
