For much of the past two decades, Ethiopia’s economic model has been defined by an overriding principle of public investment as the engine of growth.
The previous EPRDF administration channeled vast fiscal resources into highways, industrial parks, power generation projects and other large-scale infrastructure schemes designed to accelerate structural transformation. Public capital formation was regarded not merely as a policy instrument but as the foundation of the nation’s development strategy.
On the other hand, the federal government’s proposed budget for the 2026/27 fiscal year (2019 Ethiopian) clearly signals the country may now be entering a markedly different phase.
RELATED POSTS
While the headline figures portray an expanding fiscal framework, a closer examination of the expenditure composition reveals a government increasingly preoccupied with managing existing obligations rather than financing fresh transformative investment projects.
The proposed expenditure document stands at 2.34 trillion Birr, representing a 21.3 percent year-on-year expansion over the current year’s approved budget of 1.93 trillion Birr. Yet beneath the growth in aggregate spending lies a significant reconfiguration of priorities.
Over half of total federal expenditure (1.2 trillion Birr) has been earmarked for recurrent expenditures, while less than a quarter has been apportioned to capital investment.
Recurrent expenditures encompass salaries, administration, operations, subsidies for fertilizer and petroleum, debt servicing, and security.
Capital expenditure in the proposed budget document is focused more on completing ongoing projects like roads and education facilities than bold new expansions. Meanwhile, regional subsidies or transfers amounting to 520.6 billion Birr account for 22.3 percent of the budget.
The shift points to an economy transitioning from an era of infrastructure-led expansion towards one centered on fiscal consolidation, debt sustainability, and macroeconomic stabilization.
Teshome Abebe (Prof.), an esteemed economist at Eastern Illinois University, argues the budget reflects a partial or pragmatic shift due to economic pressures toward managing and sustaining existing institutions and operations, rather than aggressively expanding new large-scale infrastructure.
He observes Ethiopia’s previous growth model, especially under earlier Growth and Transformation Plans (GTPs), heavily emphasized public capital investment in infrastructure like roads and energy to drive industrialization, connectivity, and long-term capacity. Capital spending historically took a larger share, often near or above 40 to 50 percent in consolidated terms in past decades.
Teshome further explained that the budget shift continues a multi-year trend of rising recurrent shares, driven now by devaluation of the Birr, debt service, security needs, salary adjustments, humanitarian/recovery spending, and subsidies, with capital’s relative share declining.
“Recurrent expenditure now exceeds capital by more than 2:1 at the federal level,” he said. “This indicates a pivot toward maintenance, stabilization, and institutional functionality amid fiscal pressures, rather than pure infrastructure-led expansion. Capital remains significant in absolute terms and prioritizes completion of existing projects.”
Although the capital budget registers a substantial 36.8 percent increase compared with the current fiscal year, recurrent expenditure remains more than twice as large.
The expenditure architecture of the 2019 Ethiopian fiscal year may appear defensive, but the government’s narrative is anything but cautious.
While he presented the budget spending bill to the parliament, Ahmed Shide, minister of Finance, explained the “economic successes” registered.
“The evidence clearly demonstrates that the economic reforms implemented over the past several years—and the tangible results they have generated—have played a significant role in strengthening Ethiopia’s position as an increasingly attractive destination for global economic engagement,” he said.
“In particular, the country’s strong and resilient economic performance has enhanced its appeal to international investors,” said the Minister. “The sustained inflow of foreign direct investment [FDI], even during a period marked by considerable disruptions and uncertainties in the global economy, stands as compelling evidence of investor confidence in Ethiopia’s economic prospects and reform trajectory.”
Ahmed further stressed that managing inflation, boosting domestic production, enhancing domestic revenue collection and judicious external debt management will be crucial in steering a cautiously realistic budget.
The latest budget proposal presented to Parliament resonates with audacious aspirations and hopeful growth prospects, promising economic resilience and a bounce back from past self-inflicted economic faltering.
“While commodity price inflation recorded a sustained downward trajectory during the 2018 fiscal year—declining to single-digit levels for the first time in many years—it experienced a slight reversal following the outbreak of the conflict in the Middle East, rising to 11.7 percent in April,” Ahmed conceded.
Meanwhile, recent data from the Ethiopian Statistical Service (ESS) shows the annual inflation rate at 13.4 percent in May, down from 14.4 percent during the same period last year.
“In response to these emerging external pressures, the government has continued to shoulder a substantial fiscal burden by heavily subsidizing fuel imports purchased at elevated international market prices, thereby shielding households and businesses from the full impact of global price increases,” Ahmed explained.
“Going forward, additional policy measures will be deployed to complement these interventions, with the objective of containing inflation, safeguarding purchasing power, and maintaining macroeconomic stability.”
Despite the Minister’s claims, retail prices for benzene and diesel have both surged in recent months to 167.50 Birr and 180.46 Birr a liter, respectively.
Debt, Development, and the Budget Dilemma
“Debt service of hundreds of billions Birr alone is a major recurrent driver, alongside security and subsidy costs, which have been exacerbated by external factors like Middle East tensions affecting fuel prices,” Teshome said, noting “This leaves less fiscal room for fresh capital projects, even as the overall budget grows from 17 to 21 percent nominally from the prior year. Implementation bottlenecks on capital spending include procurement and capacity has historically compounded this.”
Big budgets are often deemed a precursor of inflation. Teshome concurs.
“It risks fueling inflation more than easing it in the near term, depending on financing and monetary response. The proposed budget represents a substantial increase in nominal terms, driven in part by devaluation and ongoing macroeconomic reforms such as currency float and subsidy adjustments,” he argues.
He also contends that higher government spending can fuel inflationary pressures, particularly if the budget deficit is financed through domestic borrowing or monetary expansion. Recurrent-heavy spending on salaries and subsidies directly boosts consumption.
“A significant increase in liquidity could place renewed upward pressure on prices, especially for food, fuel and other essential commodities in the short-term given Ethiopia’s dependence on imports and its market-based exchange rate system,” he told The Reporter Magazine. “Most of the time, rapid money supply growth and deficit monetization have been key drivers of inflation.”
Although current reforms aim to boost revenue collection and reduce reliance on inflationary financing, these gains will take time to materialize. Therefore, the risk of renewed inflation remains significant, Teshome further explains.
On the contrary, another economist argues that inflation is inevitable but the government can control the pace.
“An increase in the overall budget can create inflationary pressures, but the impact depends largely on how the spending is introduced into the economy,” said Molla Alemayehu (PhD), a senior researcher at the Ethiopian Economics Association. “The approval of a trillion-Birr budget does not mean the entire amount enters circulation immediately.”
“Since budgetary expenditures are disbursed gradually over the course of a 12-month fiscal year, the government has the flexibility to monitor economic conditions and calibrate the pace of spending to prevent excessive inflationary pressures,” he stressed.
Similar to Teshome, Molla believes that if a large volume of liquidity is pumped into the economy too rapidly, it could exacerbate the existing inflationary pressure.
Molla pointed out that the budget focus shift to recurrent expenses is a way to tame inflation.
“Perhaps the government did this to manage inflation,” he noted. “Large capital projects inject significant demand into the economy, and at a time when aggregate demand already exceeds supply, reducing capital spending could help ease pressure on prices and support market stability.”
However, the government should be selective, he opined.
“It needs to distinguish between projects that could worsen inflation and those that can continue without adding significant demand-side pressures. Productive investments that do not fuel inflation should be allowed to proceed.”
There is also a practical consideration, according to Molla.
“Cutting recurrent expenditure can have immediate consequences because it finances the day-to-day operations of government institutions and public services. Significant reductions in recurrent spending can disrupt essential functions,” he explains. “As a result, when fiscal adjustment is required, capital expenditure often becomes the more flexible component of the budget.”
“However, from a development perspective, capital expenditure generally delivers greater long-term economic value,” he told The Reporter Magazine. “Policymakers often face a trade-off between accelerating development and containing inflation, as the two objectives can be difficult to pursue simultaneously in the short term.”
Regarding government spending to stimulate production, Teshome believes it will fuel production but notes its impact will depend on the composition of spending.
“Capital expenditure directed toward infrastructure, agriculture, energy, and other productive sectors can expand productive capacity, stimulate private-sector activity, and generate positive multiplier effects across the economy.”
He also stresses that recurrent expenditure could also support economic growth when it strengthens human capital, public service delivery, and macroeconomic stability.
“However, recurrent spending that is largely consumption-driven or inefficient tends to have weaker—and in some cases negligible—long-term effects on productivity and growth,” said Teshome.
He concurs that in Ethiopia’s case, empirical studies generally indicate that capital expenditure has a stronger and more sustained positive impact on economic growth than purely recurrent spending, underscoring the importance of maintaining adequate investment in productive sectors while pursuing fiscal stability.
The budget proposal also earmarks an eyewatering 542 billion Birr for debt service. Molla fears the focus on settling debt will leave fewer resources for other priority sectors.
“Debt should not be treated as a primary source of revenue; it should be reserved for essential, high-impact, and urgent national needs,” he said. “Our loan management capacity remains weak, and borrowed funds are often not utilized as efficiently as they should be despite their high cost. Projects financed through loans and grants frequently experience waste and poor oversight.”
To address this challenge, Molla suggests that there needs to be stronger debt management, more effective budget oversight, and better project management. Too many projects exceed their planned timelines and budgets, driving up costs and diverting resources from other critical investments.
Meanwhile, Teshome observes the budget features short- and medium-term aspects.
“It could be that recurrent spending is positively linked to growth through operations and maintenance of existing assets with favorable assumptions about capacity and implementation efficiency,” Teshome predicts.
With regard to risks for long-term growth, heavy infrastructure investment historically built productive capacity such as roads construction and electric power, which boosts productivity and attracts private investment.
“A sustained shift toward recurrent spending could slow capital stock accumulation, limit new growth drivers, and reduce potential output if maintenance lags or new projects stall,” he said. “Ethiopia still faces infrastructure gaps; under-investment here could constrain industrialization and exports.”
For him, growth depends on efficiency.
“If recurrent spending improves service quality and human capital while capital focuses on high-return completions, impacts can be mitigated,” he explained. “But persistent crowding-out and debt burden risks lower long-run growth unless the private sector and FDI fill gaps.”
