Quasi-public firms; a blind spot on government balance sheet: Case of parallel government?

16 Jun

By Asrat Seyoum

With the second year of the grand Growth and Transformation Plan (GTP) coming to a close, evaluation of the performance thus far and planning for the subsequent years appears to be in order. And finance minister Sufian Ahmed’s advent in the House this week was precisely for this reason.

The Cabinet’s budget proposal for the next fiscal year, an amount in excess of 137 billion birr, was presented to parliamentarians.

Finance & Economic Development Minister Sufian Ahmed (Photo credit: The Reporter)

The proposal which was computed using program budgeting model assured the House to advance greater fiscal discipline in executing the plans. However, some still inquire about the off-budget spending plans of the GTP which are almost equivalent to the official budget, writes Asrat Seyoum.

The fiscal year 2012/13 appears to be a good one to most of the regional states in Ethiopia since the federal budget allotment for the year favors regional infrastructure and Millennium Development Goals (MDGs) projects. From the overall 137 billion, subsidy for the regional government claimed 36.6 billion birr (26.52 percent of the total) while an additional 20 billion (14.5 percent) was also set aside for disbursement to regions as reinforcement to attain the MDGs. The figure hangs over the federal recurrent and capital expenditures which are 26.8 billion and 54.5 billion birr in their order. According to the budget subsidy formula that is prepared by the House of Federations three regions grossed lofty sums from the general allocation. Oromia secured 11.8 billion in the form subsidy in addition to the 6.5 billion from the MDG reinforcement (a total of 18.3 billion birr). While the Amhara and the South Nations and Nationalities and people (SNNP) claimed the second and third biggest shares which are 13 and 11.3 billon birr respectively. Overall, regional flow of the financial resource saw some 10 billion birr increase in the next year’s budget.

In terms of the big picture next year’s budget has shown an increase of 17 percent over last year’s; and both are to be financed without any direct withdrawal from the central bank’s vault. According to the finance minister, a deficit of 26 billion will be covered by less inflationary sources comprised of project and program loan and domestic borrowing through an open market operation.

Over all, the spending gap in the prospect budget appears to be above 4 percent of the GDP (taking Access capital’s forecast of the GDP for 2012/13— 616 billion birr), while the fraction that is supposed to be financed by local borrowing is half of the total deficit. With respect to the composition, around 71 percent of the federal budget is still on poverty related sectors such as infrastructure, education and health. Meanwhile, some 6.5 billion birr which is around 8 percent of the federal budget was allocated to defense spending. Defense spending which is fourth largest item in the federal budget table is measured to be 1.05 percent of the GDP. Given the hostile region of the Horn of Africa and the level of the economy, the amount of allocated to defense is warranted, according to commentators. The state as well justifies the allotment referring to the international defense expenditure threshold that is 2 percent of the GDP.

In the past, one of the criticisms leveled against the budgeting process was lack of clear accountability and resource allocation to agencies. And the issue seems to have gained the attention of the government as a new form of budgeting model—program budget—which is largely performance specific which has entered into practice since last year. And the recent budget synopsis that was presented to the House also contains detail programs and projects which will be run by the government bodies. The allotment, hence, was made based on the specific targets in these programs instead of the prior approach that allocates gross sums to these institutions. However, as much as there are pundits that praise the new budgeting process, there are also those troubled with the unaccounted for, off-balance sheet spending by public enterprises.

A job well planned is as good as a job well done

Among the list of reservation that the Joint Staff Advisory Note (JSAN) on the GTP that was authored by the IMF and the World Bank was the capacity of the public sector to carry an investment of such a huge magnitude. Furthermore, the assessment also noted series of black holes in the plan saying that it lacked appropriate monitoring and evaluating strategies, not to mention the finance sources. The critic carried more weight at the time as it was more focused on the grand scheme of the plan than the details.

In retrospect, the program budget model could have partly addressed these concerns since direct accountability and transparency are its main foundations. According to the pundits, program budgeting is a more evolved variant of performance-based budgeting. Efficient allocation of resources is it main attribute since result oriented provisions are better positioned to evaluate individual outcomes, pundits assert.

Initiated by Prime Minister Meles Zenawi a few years ago, program budgeting entered into force starting the last budget year. And this year’s budget preparation was also conducted in line with the principle which was evident in the mention of few specific projects and program in the document. According to the ministry, the model elaborates on medium term (three years) spending plans of the government that is crafted in harmony with the five-year strategy. Indeed, most of the items that the next year’s budget carries are designed to facilitate the continuation of programs and budgets already under way. In this regard, the budget explicitly outlines some water irrigation projects, road infrastructure projects, higher learning and technical training expansion programs and projects and others can be seen in the document.

Meanwhile, continued programs and project financing does not necessarily means showering funds, but it also includes evaluating, revising and at times redirecting resources to priority and better paying ones, the pundits clarify. To this effect, a common practice in the public institutions for years comes to mind. It is usually said that the ideal time to ask for a sponsorship in the government institutions is when the end of the budget year draws nearer since most do not know if they have the resources until that time. And in most institutions a lamp sum of the budget will be returned in the end unutilized.

Learning from experience

On other hand, there are factors which led the policymakers to think of the other way of formulating the national budget, commentators say. It is the immediate shift of the international community away from direct budget support to Ethiopian government, according to them. The fact of the matter is that the greater part of the multinational and bilateral donors at the time chose to shift to project based assistance. The extent of the impact of this shift is not exactly known and this group argues that the new budget formulation is ‘learning form experience’.

For a country, a minor snooze in the finances in the middle of the fiscal year which was seen in 2005 would definitely cause an economic shock, the above commentator says. Hence, program budgeting could buffer against possible default on assistance commitments made by donors on such occasions. In addition, program budget is a prudent instrument to attract more assistance and loan as it assures the donors that their money has been put to right use.

The black hole in budget

When the fiscal year comes to an end one issue seems to hang over the budget planner; the issues of inflation and spending discipline. Given a large share of the public sector in the aggregate economic activity, the spending plan appears to be a controversial matter. Let alone the size of the budget deficit, the overall budget and associated investment is scrutinized in fear of fueling up the already high inflation. The 17 percent increase of the overall budget over the last year’s appears to be accepted as reasonable rise for the pundit; but issue remains a bit controversial—the spending of the quasi-public enterprises.

The giant state monopolies like the Ethio Telecom, Ethiopian Electric Power Corporations (EEPCo), the former Ethiopian Shipping Lines, the Ethiopian Railway Corporation and like are the source of discomfort for some of the pundits and international organizations over the years. Why? Because nowhere in the spending plan are these institutions represented; and they are quite significant in terms of their investment outlay.

According to Access Capital, out of the combined spending that is planned for the GTP period almost half belongs to such kinds of off-budget expenditures. The report shows that 569 billion birr of 1.2 trillion spending for GTP period is made by the off-budget items. And they question if the federal agencies’ spending alone is a good measure of the public sector in Ethiopia? In this regard, among the major poverty oriented investment of the GTP hydropower projects like the Renaissance Dam with its massive 80 billion birr outlay is classified under the off-budget expenditure. Hence, the pundits also argue that the government’s commitment to curb inflation that was displayed by cutting direct central bank borrowing would not be complete without full disclosure about the spending off-budget items.

Still some argue that the government’s balance sheet presentation is not wrong in its form. Legally, the budget table presented to the house should be of those federal agencies; not the quasi-corporate public enterprises. But some of these institutions also reported to have remitted certain part of their profit, while the official debt documents prepared by the finance minister do carry foreign and local borrowings of enterprises as some of this borrowing are guaranteed by the governments. So, where in the balance sheet would the effect of this overlap between the federal government and public enterprises be reflected? How could the public sector planning be complete without the consideration of these mammoth investors? How could the equally significant investment and it effect on inflation be understood? Are some of the points that beg for clarification, they conclude.

(Source: The Reporter)

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