In your edition of June 22, 2008, Volume. 9, No. 425, commentary section, Haftamu honestly tried to address the threat of high dependency on foreign grants and loans. This is not a response to this article; rather, it is another way of seeing the situation, which Haftamu Tafare tries to analyse. Mikias Merhatsidk.

In "on Government Self Reliance: Walking the Talk," he attempts to tell us why opposition MPs are wrong for raising the fear of furthering inflation as the result of increased public expenditure, following the budget proposal by Sufian Ahmed, Minister of Finance and Economic Development (MoFED). Citing Josef Stigliz (PhD), 'Inflation targeting is a futile exercise,' a belief which he also shares, Haftamu tried to show why cutting public expenditure is ill-advised. He  believes the argument should rather focus on how national dependency on foreign assistance would affect the long term development efforts of the country.
 

In this light, he suggests taxation as a remedy, even though he does not elaborate how. He also tries to assess the nation's tax collection performance, and calls for its increment, because foreign assistance, which still is major part of the budget, is unstable and hard to depend on, taking the last decade as a lesson. To make things worse, in their bid to respond to many humanitarian appeals through the world: drought, flood and earthquakes, add to these the soaring food prices around the globe which left millions of people in developing countries at the mercy of international aid, national and multinational donors are hard pressed for more aid, leaving no room for development assistance, he argues.

Finally, he says, "This is where Minister Sufian's budget proposal to parliament should seriously consider another stream of revenue; broadening the tax base is an ideal one. For a government that advocates civil society to generate 90% of its revenue from local sources, it too should simply walk the talk." Here, the question is what other streams of revenue are really at the disposal of the government. We will address this issue later, but first, let me say something about the budget, public expenditure and inflation.

The staggering figure proposed for the budget of the next fiscal year is the continuation from the series of the five-year plan that was put in motion in 2006, just adjusted to take into account the present inflation. With this ambitious plan, there seems to be no room for flexibility that involves the issue of short-term pain for long-term gain. One can argue that this seemingly huge sum is not enough public expenditure for a country that wants to see itself among the middle-income countries in twenty or thirty years, but with a minimal infrastructure.

And the case may even go further for a government that claims to be a developmental state. But one has to live the moment to reach the future, and as the Prime Minister put it, inflation is our main problem at this time, with no end or slowing down of the galloping prices in sight.

Every economic decision is all about choices and balancing. In this globally complicated economical sphere, there may not be a perfect economic exercise, at least in practice. So the bottom line will be giving priority to the urgent questions of the system, and what it is made of budget, public expenditure and inflation.

Although trying to associate with Joseph Stigliz (PhD) and other contemporary economists, Haftamu was totally off course. Yes, cutting public expenditure may result in recession and unemployment, but neither Stigliz nor I believe this will be the case for Ethiopia, where more than 85% of the population live economically oblivious to government's spending and investments. Rather, the price hikes, mostly in food items, will rip-off the benefits that the low and middle-income community in the urban enjoy, from this minimal economic growth.

Still, the question is how the government funds its budget. Generally, the government has two main options (sources) to finance the budget. The first one is outside sources, which mainly consists of loans and grants from national and multinational donors. This source covers more than 30% of the budget proposal for the year 2008/09 and has proved to be unstable and unreliable as its variable are mostly out of the government's control.

There are many factors inherent to this particular source that can make it out right disappointing, especially in the year when donor funds are stretched to the limits, as Haftamu rightfully fears. The focus on humanitarian appeals by the international donors may be disappointing, more than 4.6 million of us, the catastrophic hungry. And I do believe another "We Are the World' concert and a mass exodus of philanthropists to ring the bell of Faminus Ethiopicus in every body's mind is the last thing we want. After all, this image building Millennium publicity.

But my fear lies in what the government will do when loan and grants are no longer adequate. It tried to get money from the central bank of Ethiopia compromising NBE's independence, with a new bill proposed by NBE (to many critics dismay), that will allow the government to get the loan advances after only consultation.

Even with the amount that the government plans to support the proposed budget from public borrowing,  fears are that this will further aggravate the present inflation, overwhelming all the monetary policies that were put in motion (increment of both the interest rates and reserve requirements, which was proved ineffective in this infant financial market), to curb the inflation.

The latest report by the Federal auditor states that the government has borrowed an extra 3:3 billion Br from the central bank, surpassing the limit in the 2006/07 fiscal year alone. This is contrary to the Finance and Banking Law of the country, and the 2006/07 Budget Law the parliament endorsed at the end of the 2005/06 budget year. And this inflated borrowing is associated with the cancellations of budgetary support by donors following the 2005 elections.

If this is the case, assuming the expected external source did not materialise and with the new draft bill is in the pipeline, NBE is doomed to become the back pocket of the government, and its effect further increases the money supply in the market. In the first three quarters of the current budget year, the money supply has grown to 65.7 billion Br, despite measures taken to curb its growth. According to a research made by NBE, a one-percentage point increase in money supply will result in a 0.6% rise in inflation. This means the government is actively, and with all its might, working hard towards the escalation of inflation.

The second source is the domestic one, which is always below what it is expected to be, and this mainly consists of tax and other revenues that the government collects, including public borrowing. As many may agree, the government should work on improving and creating more tax revenue: the source that can be more reliable, but that is still halfway below the sub-Saharan average.

Many suggest the introduction of property taxes, which, in my opinion, is the ideal solution for a country like Ethiopia that is wrecked by implementation of inefficiencies of every sort. These property taxes could be formulated in a way to use the upper class as a tax base. This class is easy to levy, as specific as it can get, and have no major loopholes that will leave the door open to evasion. The other tax cash machine could be trade tax on anomalous goods like alcohol drinks (the Russian case can be a lesson here) and the infamous narcotic chat. These taxes could have many positive externalities, besides revenue, for the government, such as encouraging savings, and keeping the working force clean, to say the least.
 

All in all the budget seems exorbitant and can further the on going inflation and to make thing worse the places where the government is getting the fund to full fill its ambitious plan are not best of places with  regard to inflation. So I say the government should leave some space for flexibility and consider a short term pain, if there be any, for a long term gain.