Budget Preparation – Ethiopian Context

7.1 Introduction

The working definition made by the World Bank, Governance refers to the process whereby elements in society wield power and authority, and influence and enact policies and decisions concerning public life, economic and social development (World Bank, 1999). For being effective, fiscal policy implementation requires coordination of political, functional and financial factors. Politically, the institution requires coordination of political, functional and financial factors. Politically, the institutional incentive structure should promote accountability and incentives. Functionally, policies should clearly delineate the responsibilities of each type of government and the private sector in the implementation process. Financially, policies should be based on a sustainable strategy that relies on long-lasing sources of revenues. If these three factors coordinated, one can say there is good governance in that particular country. Decisions about raising fiscal revenues, and planning and implementing public expenditures take place in the context of a political and incentive framework influenced by several actors intervening through the process: Ministers, government institutions and staff, donors providing budgetary support, and civil society, to the extent that they participate or are given the opportunity to participate in the decision making forum. Fiscal performance and budget management effectiveness are determined by how this framework is established. For that reason, before going to evaluate the IPRSP done by our country, first it is better to look the non-execution factors that led for the transformation of government budgets. With the ending of the internal arm conflict in the country, public expenditure was re-oriented towards social and economic development. Importantly, the share of government recurrent expenditure on education was raised from 11.9 percent in 1998/90 to 17.9 percent in 1996/97, and that of health from 3.5 percent to 5.8 percent. Moreover, emphasis was placed on primary education and health care, to help tackle poverty at its root.

 

The 1974 revolution brought major changes to the banking system. Prior to the emergence of the Marxist government, Ethiopia had several state-owned banking institutions and private financial institutions. The National Bank of Ethiopia (the country's central bank and financial adviser), the Commercial Bank of Ethiopia (which handled commercial operations), the Agricultural and Industrial Development Bank (established largely to finance state-owned enterprises), the Savings and Mortgage Corporation of Ethiopia, and the Imperial Savings and Home Ownership Public Association (which provided savings and loan services) were the major state-owned banks. Major private commercial institutions, many of which were foreign owned, included the Addis Ababa Bank, the Banco di Napoli, and the Banco di Roma. In addition, there were several insurance companies.

In January and February 1975, the government nationalized and subsequently reorganized private banks and insurance companies. By the early 1980s, the country's banking system included the National Bank of Ethiopia; the Addis Ababa Bank, which was formed by merging the three commercial banks that existed prior to the revolution; the Ethiopian Insurance Corporation, which incorporated all of the nationalized insurance companies; and the new Housing and Savings Bank, which was responsible for making loans for new housing and home improvement. The government placed all banks and financial institutions under the National Bank of Ethiopia's control and supervision. The National Bank of Ethiopia regulated currency, controlled credit and monetary policy, and administrated foreign-currency transactions and the official foreign-exchange reserves. A majority of the banking services sere concentrated in major urban areas, although there were efforts to establish more rural bank branches throughout the country. However, the lending strategies of the banks showed that the productive sectors were not given priority. In 1988, for example, about 55 percent of all commercial bank credit financed imports and domestic trade and services. Agriculture and industry received only 6 and 13 percent of the commercial credit, respectively.

To combat inflation and reduce the deficit, the government adopted a conservative fiscal management policy in the 1980s. The government limited the budget deficit to an average of about 14 percent of GDP in the five years ending in EFY 1988/89 by borrowing from local sources. For instance, in EFY 1987/88 domestic borrowing financed about 38 percent of the deficit. Addis Ababa also imposed measures to cut back capital expenditures and to lower inflation. However, price controls, official overvaluing of the birr, and a freeze on the wages of senior government staff have failed to control inflation. By 1988 inflation was averaging 7.1 percent annually, but it turned sharply upward during 1990 as war expenditures increased and was estimated at 45 percent by mid 1991.

The Government of Ethiopia under the civil service reform plan has prepared a manual to describe, analyze and make recommendations for the preparation of recurrent and capital budgets at the federal and regional level. The manual is intended to be a living document and it is expected that future various will add to and amend earlier versions. The manual is intended to serve several purposes as described below.

1. Provide a context and detailed assessment of the budget process for making procedural recommendations for implementation under the civil service reform.
2. Serve as an operational guide to budgeting.
3. Serve as a training resources, and
4. Provide a detailed information source for the partial development of the requirements documents for the automated financial information system to be implemented under civil service reform.

 

The central context of budget reform is Ethiopian's ambitious decentralization. Administrative responsibility has been devoted to regions and within regions administrative responsibility is being devolved to zones and woredas.

To understand financial administration in Ethiopia one must understand three frame works:

1. decentralization as devolution
2. the functions of public finance especially the allocation role and fiscal federalism, and
3. the assignment of expenditure functions under fiscal federalism.

 

   7.3.1 Decentralization

There are three types of decentralization; deconcentration, devolution and privatization. Deconcentration is the distribution of administrative functions within a single administrative hierarchy. For example, a Ministry of Agriculture with region level branch offices reporting to the ministry headquarters is an example of deconcentration. Devolution is the assignment of administrative functions to autonomous or semi autonomous administrative hierarchies. Ethiopia's regional states are an example of devolution. Finally, privatization is the assignment of public tasks to private or quasi-private agencies. Privatizing the provision of health or education would be an example of this decentralization.

While the pattern of decentralization in Ethiopia context is complex, varied and uneven devolution is the dominant type. Devolved decentralization has the following attributes.

• The fundamental characteristic of devolved administrative systems is an evolving partnership between administrative levels; federal to regions, region to sub regions.
• Partnership is build both by the reform processes and products, which promote discretion by local authorities.
• Effective discretion requires capacity and accountability.
• The goal of devolution is increased discretion, which requires the capacity to exercise discretion and political and administrative accountability.
• Implementation dilemma: how to make progress in building the partnership in a reasonable time frame while paying attention to both process and product etc.

 

   7.3.2 Fiscal Federalism

Placing the decentralization framework into a financial framework raises the three functions of public finance: stabilization, distribution and allocation. Public finance holds that the stabilization function (managing monetary aggregates) should be centralized. The distribution function which is to promote equity in resources has traditionally been viewed as a centralized financial function though in recent years strong arguments have been raised that this function can be decentralized. The use of formulas to assign subsidies between sub regional levels in Ethiopia supports the argument that the distribution function can be decentralized. The allocation function of public finance is the distribution of goods and services and it is broadly. The body of financial theory explaining the decentralized allocation function is called Fiscal Federalism. Fiscal federalism is the financial framework of decentralization. 

Fiscal Federalism has five principles.

1. Local management of resources responds better to local preferences.
2. It may be more efficient to assign expenditures to the lowest level of government consistent with efficient performance.
3. Administrative levels are accountable to local tax payers and accountable to the administrative levels above which transferred the funds.
4. Fiscal equalization
5. Increases the stake in the process by local institutions and individuals.

The essence of fiscal federalism is improved management of resources through decentralizing discretion to the lowest level where it can reflect preferences and be held accountable. The central design issue of fiscal federalism is where to assign expenditure authority.

 

7.3.3 Expenditure Assignment

The central task of fiscal federalism is the assignment of discretion over expenditure. A framework for assigning expenditure functions is therefore needed. In budgets there are two areas of discretion: how allocations are made and how costs are determined.

   1. Allocations: there are types of allocations. Allocating a budget ceiling and allocating from a budge ceiling. A ceiling is an overall sum from which allocations are made. In some cases one level allocates a ceiling to another level and in other cases one level specifies detailed expenditure items to another level.

      Both these types of allocation decision may be:

1. arbitrary and subject to negotiation
2. governed by norms, standards, or formulate and therefore not arbitrary
3. based on last year's allocation.

The allocation criteria need to be specified and analyzed to determine whether they are reflected in the budget and later in expenditures.

   2. Costs: although allocation decision may be made at a given levels, these may be constrained. They may be constrained by legislation, regulations and by other types of policy. They are also constrained by the degree to which at any given level there exists choice about costs. The "top" may set in place direct constrains (laws, regulations etc) and indirect constraints (the fixing of cots, e.g., national salary scale). Thus, although there may be some discretion over allocation, there may be less discretion over costs.

   3. Policy: A budget is a financial expression of a policy. An annual budget reflects the planning of expenditures for that year. Allocations therefore are /should be based on the achievement of a given policies (e.g., increased enrollment, improved quality).

 

Proclamation No. 358/2003

Federal Government Budget Proclamation

WHEREAS, it has become necessary to approve and disburse on time the budgetary appropriation for undertakings by the Federal Government during the 1996 (E.C) Fiscal Year.

WHEREAS, the subsidy budget that may be appropriated to the Regions has to be decided on the basis of the formula developed by the House of Federation;

NOW, THEREFORE, in accordance with Article 55(1) and (10) of the Constitution of the Federal Democratic Republic of Ethiopia, it is hereby proclaimed as follows:

 

PART I

General

Article 1: This Proclamation may be cited as the "1996 Fiscal Year Budget Proclamation No. 358/2003."

Article 2:  The Federal Budget is hereby appropriated for the fiscal year commencing on Hamle 1,1995 E.C and ending on Sene 30, 1996 E.C. from Federal Government revenues and other funds for the undertakings set forth in the Schedule hereto:

1. For Recurrent Expenditure                     Birr 7,885,500,000
2. For Capital Expenditure                         Birr 5,404,911,028
3. For Subsidy Appropriation to regions      Birr 5,969,800,000

Grand Total                                                   Birr 19,260,211,028

(Ninetteen Billion Two Hundred Sixty Million Two Hundred Eleven Thousand Twenty Eight Birr).

Article 3: The Ministry of Finance and Economic Development is hereby authorized to grant advance of salary to permanent Federal Civil Servants for necessary cases in accordance with directives issued thereon, and to fix the period of repayment thereof, and to collect interest thereon, at the rate fixed by the directives to be issued by the Minister of Finance.

 

PART II

BUDGET ADMINISTRATION

Article 4: Powers of the Federal Government Organs

1. The Minister of Finance and Economic Development is hereby authorized and directed, upon the request of the heads of the concerned Federal Government organs, to disburse out of the Federal Government revenues and other funds the amounts appropriated herein for undertakings of their respective organs.
2. The Minister of Finance and Economic Development is hereby authorized to allow Federal Government Hospitals, to retain and expend within their total budgetary appropriations, receipts from the current fiscal year up to an amount not exceeding 50% (Fifty percent) of their receipt for the previous fiscal year.
3. Public bodies are hereby authorized to record on their appropriate budgetary head, subhead, project, or program, as the case may be, and undertake all acts necessary for the utilization of any additional loan or aid in kind and/or cash obtained from foreign or local sources for carrying out capital project or recurrent programs, and report to the Minister of Finance and Economic Development within one month from the end of the budget year.
4. The Ethiopian Customs Authority shall assess and record duties and taxes payable on goods imported by public bodies, purchased with the proceeds of loans, or grants and appropriated from the treasury or acquired in kind, and allow such goods to enter into the country. The Authority shall notify the assessment, thus recorded to the public body concerned.
5. If the agreement signed between the consultant and the project executing public body stipulates that the income tax and the service sales tax payable by the public body, the same shall inform the Federal Inland Revenue Authority. The federal Inland Revenue authority shall on the basis of information it obtained from the public body keeps record of such taxes. The authority shall also notify the public body of such record.
6. The Public Body, which received the notification, mentioned under sub-Article 4 and 5 above shall record the amount of taxes and duties under its heading; sub-heading, program, project and shall, within one month from the end of the budget year, communicate to the Ministry of Finance and Economic Development the Taxes and duties payable on goods for which budget from the payment of the tax not already been appropriated.
7. The Ministry of Finance and Economic Development is further authorized and directed to record as supplementary appropriation the additional loan or aid in kind and/or in cash recorded pursuant to Sub-Article (3) and (6) of this Article.
8. The Minister of Finance and Economic Development is hereby authorized to set-up special fund to be financed out of the proceeds of foreign loans and assistance obtained for the reconstruction of infrastructures and other properties destroyed in the course of Ethio- Eritrean conflict and to demobilize a portion of the defence force in order to reduce its size to peace time requirements and to rehabilitate the demobilized members of the force in a special program.
9. The Minister of Finance and Economic Development shall issue directive outlining conditions under which the fund setup in accordance with Sub-Article 8 shall be administered.

Article 5: Budget Transfer

Without prejudice to the provisions of Article 17-20 of the Federal Government of Ethiopia Financial Administration Proclamation No. 57/1996 budget transfer shall be executed as follows:

1. Where a budget is required to finance pending obligations of a project approved in previous years, such budget shall be allocated in the following manner:
   
   1. If the budget can be covered by transfer from the capital budget of the public body, such transfer may be authorized by the Ministry of Economic Development and Co-operation.
   2. If the budget can be covered within the overall capital budget ceiling by transfer of capital budget of one public body to the other, such transfer may be authorized by the Council of Ministers on the basis of the recommendations submitted by the Ministry of Economic Development and Co-operation.
2. Transfer of recurrent budget from one public body to the other can be made upon authorization of the Council of Ministers.

7.5 Budget Preparation Process

   7.5.1 Budgeting at the Federal Level

The recurrent budget is not defined in the financial law or the financial regulations. The financial law does provide a definition of the capital budget thereby residually defining the recurrent budget. There is considerable uncertainty amongst budget staff as to what expenditures should be placed in the recurrent or capital budget. The financial law defines the items of expenditure for the capital budget as fixed assets or consultancy services.

Analysis of recurrent budgets though show that fixed assets which are not associated with an external assistance project are frequently budgeted in the recurrent budget. It is also not clear how to budget those externally financed projects which build capacity (training, technical assistance) as opposed to those that install or build fixed assets.

There are a variety of criteria that can be used in defining recurrent and thus capital budgets. The three most common are source of finance (domestic, external), status of expenditure (project versus program), and object of expenditure (fixed asset, consultancy service, etc). The financial law has defined the budget through the object of expenditure making the recurrent budget residual to the definition of the capital budget.

The recurrent budget at the federal level, which consolidates and coordinates the recurrent budgets of all Federal Public spending bodies, is prepared by the budget department of the ministry of finance.

The Ministry of Finance are authorized by the Federal Government during the 1996 (G.C) fiscal year under the proclamation No 358/2003. Some of the authority issued to MOF are quite illuminating and worth discussing.

Article 3 of proclamation no 358/2003 states that: The Ministry of Finance and Economic and development is here by authorized to grant advance of salary to permanent federal civil servants for necessary cases in accordance with directives issued thereon, and to fix the period of repayment thereof, and to collect interest thereon, at the rate fixed by the directives to be issued by the Ministry of Finance.
 

     7.5.1.1 Recurrent Budget

The budget preparation process is as enumerated below:

Preparation of Recurrent Budget in the MOF

 

1. Preparation of the Macro Framework 
   This is an assessment of the economic situation and establishment of fiscal balance (GDP, growth rate, etc). This stage includes two steps:
   a) collecting and analyzing information regarding the performance of the economy in the previous fiscal years,
   b) 

   economic protection such as growth, revenue estimating for the next year which is done by the coordinating ministries (ministry of economic development and cooperation and ministry of finance) with consultation with the National Bank of Ethiopia, the central statistics authority and other relevant institutions. The macro framework is reviewed and approved by the prime minister's office.

2. Allocating Public Expenditures Between the Federal and Regional Government 
   This step determines the amount of subsidy to regional governments. After preparing the revenue estimation of total government expenditure (fiscal plan) a decision usually is made by prime minister's office for allocating the shares to the federal and regional governments. The distribution among regions is done by the Federation council with consultation of the Prime Minister's office, Ministry of Economic Development and Cooperation, and Ministry of Finance. Allocation between regions is based principally upon a formula, such as population, level of development, revenue generation capacity. The price minister's office reviews the split and then presents to the federation council.

3. Allocating Between Recurrent and Capital Budget at Federal Level
   Depending on various factors, the PMO with consulation of ministry of economic development and cooperation and the ministry of finance determines how much is to be allocated to recurrent and capital expenditure. The decision is based on the following factors:

      a) government prioritized sectors
      b) 

   non-discretionary expenditures
      c) 

   on going projects, and
      d) 

   institutional capacity

4. Budget Call and Ceiling Notification by the Ministry of Finance 
   The ministry of finance provided each spending public body a recurrent ceiling in the budget call.

     a) The ministry of finance prepares a proposal for the total recurrent budget and allocations to spending public bodies.
     b) 

   The prime minister's office reviews the ministry of finance's proposal and makes adjustment.
     c) 

   The ministry of finance releases the budget ceiling to the line ministries in a budget call.
     d)

   The budget call provides each ministry the following information: the macro economic environment, an aggregate recurrent budget ceiling, and priorities to budget.  

5. Submission of the Budget Proposal to the Ministry of Finance 
   Prior to a formal budget hearing, spending public bodies submit their budget proposals to the ministry of finance. The budget submission is given to the budget department of the ministry of finance for study. The ministry of finance prepares an issue paper on the major issues at each head level in the proposed budget. Spending public bodies can submit above the ceiling but have to have a compelling justification for a higher ceiling such as new priority activity.

6. Budget hearing with the Ministry of Finance 
   Spending public bodies defend their budget submission in a formal hearing with the ministry of finance. The budget hearing includes ministers and/or vice ministers, heads of public bodies and relevant department heads and budget experts from the spending public bodies and their ministry of finance.
   Spending public bodies can challenge the ceiling at the budget hearing. The heading focuses on policies, programs, and cost issues.
    

7. Review and Recommendation by the Ministry of Finance 
   The budget committee of the ministry of finance reviews the discussion and make a recommendation. If there is an increase in the spending public body's ceiling this has to go to the prime minister's office for approval. Usually the ministry of finance recommends the budget to the council of ministers.

8. Submission to the Council of Ministers
   The recommended budget is submitted to the Deputy prime ministers in economic affairs summon individuals from each ministry as required. Once reviewed, the budget is then presented to the prime minister along with a brief. The prime minister may or may not make amendments and then the budget is sent to the council of ministers for discussion.

9. Submission to the Council of Peoples' Representatives
   Once approved by the council of ministers, the prime minister presents both the capital and recurrent budgets to the council of peoples' representatives. The budget committee of the council reviews and makes recommendations to the council.

10. Notification and Publication

    Allotment 
    The budget is appropriated by the council of peoples' representatives and is published in the Negaret Gazeta. Spending public bodies are formally notified of their budget for the next financial year by the release of Form 3/1 from the ministry of finance. Until Form 3/1 is received, spending public bodies are authorized to spend one-twelfth of the previous years budget with no provision for new expenditures (e.g., new staff posts). Form 3/1 is sent to the Treasury Department of the ministry of finance which disburses funds to spending public bodies.

11. Allotment
    The public bodies are required to prepare salary allotment, work plan and cash flow and submit to the ministry of finance. The allotment is verified by the ministry of finance and then sent to the treasury department along with Form 6 which authorizes the disbursement.

     
     7.5.1.2 Capital Budget

Ethiopia has a dual budget system with capital and recurrent budgets prepared separately by planning and finance institutions respectively. The budget preparation process calendars of recurrent and capital budgets are different. The process of budgeting begins with the federal coordinating ministries (ministry of finance and ministry of economic development and cooperation), which determines the budget ceiling for federal spending public bodies and the grants to the regions. The ministry of economic development and cooperation prepares the grant formula, which the prime minister's office uses to issue the regional grants. The ministry of economic development and cooperation also issue the capital budget ceiling for the federal spending public bodies. The ministry of finance issues the recurrent budget ceiling to the federal spending public bodies.

A capital budget is broadly describes as an outlay on projects that results in the acquisition of fixed assets and the provision of development services. The financial law defines capital expenditure as the "outlay of the acquisition of or improvements to fixed assets, and includes expenditures made for consultancy services." Such outlays include: expenditure on physical and social infrastructure, machinery and equipment, research studies and design, management, supervision and direct labor costs, transfer payments like taxes related to projects. The concept of a capital budget has therefore a wider coverage than simple outlays in fixed investments, since it includes expenditure on development services like agricultural research and transfer payments related to a project.

The capital budget is presented in two ways: by economic category and by appropriating agency by code of expenditure. Individual projects are detailed under such sectors as "agriculture development", "road construction" and the like. Project activities are further codified by items of expenditure.

Currently the composition of capital expenditure in Ethiopia tends to increasingly shift towards expenditure on physical infrastructure, which is an element of the economic development category and the social infrastructure, which is included in the social development category. This allocation is mainly due to the low level of the existing infrastructure development which cannot be left to the private sector.

Preparation of the capital budget involves seven distinct stages with some reiteration whenever there is a need.

 

1. Preparation of the Macro Framework

This is an assessment of the economic situation and establishment of fiscal balance (GDP, growth rate, etc). This stage includes two steps: collecting and analyzing information regarding the performance of the economy in the previous fiscal years, economic protection such as growth, revenue estimating for the next year which is done by the coordinating ministries (ministry of economic development and cooperation and ministry of finance) with consultation with the National Bank of Ethiopia, the central statistics authority and other relevant institutions. The macro framework is reviewed and approved by the prime minister's office.

 

2. Allocating Public Expenditures Between the Federal and Regional Government

This step determines the amount of subsidy to regional governments. After preparing the revenue estimation of total government expenditure (fiscal plan) a decision usually is made by prime minister's office for allocating the shares to the federal and regional governments. The distribution among regions is done by the Federation council with consultation of the prime minister's office, ministry of economic development and cooperation, and ministry of finance. Allocation between regions is based principally upon a formula, such as population, level of development, revenue generation capacity. The price minister's office reviews the split and then presents to the federation council.

 

3. Allocating Between Recurrent and Capital Budget at Federal Level

Depending on various factors, the PMO with consultation of ministry of economic development and cooperation and the ministry of finance determines how much is to be allocated to recurrent and capital expenditure. The decision is based on the following factors:

• government prioritized sectors

• non-discretionary expenditures

• on going projects, and

• institutional capacity

4. Capital Budget Call

Each year the ministry of economic development and cooperation issues detailed capital budget preparation guidelines to the federal government spending public bodies along with the ceiling provided to each line institution. The overall national ceiling is decided by the prime minister's office (with a background proposal from ministry of economic development and cooperation).

Sectoral ceiling are usually issued immediately following the decision on national ceiling. The objective of the budget call is to receive a capital budget proposal at a fixed date from spending public bodies. Federal spending public bodies submit a budget proposal by code of expenditure and source of finance each year.

5. Capital Budget Review

The sector departments of the ministry of economic development and cooperation review the capital budget requests from different public bodies. At this stage projects are screened. If there exists a discrepancy between the respective sector department and the public body, a series of discussions are held to reach agreement. The various departments of the ministry submit their first round recommendation to the development finance and budget department of the ministry. The information capital budget steering committee (members drawn from prime minister's office and the ministry of economic development) receives the consolidated federal capital budget through development finance and budget.

6. Capital Budget Hearing and Defense

Federal spending bodies are called to defend their projects to a budget hearing convened by the prime minister's office which is chaired by the prime minister or the deputy prime minister or their economic advisor. The hearing customarily include a review of the following:

• status of projects

• implementation capacity of the institution involved

• compatibility with the country's development strategy and policy

• cost structure

• regional distribution

A project description is presented at the hearing, which includes the following: objectives of the project; main activities of the project; status of the project, total costs, past performance of the project, structure of finance, whether the project is accepted or rejected by the sector.

The budget hearing focuses on whether to accept or reject a project during the up coming fiscal year.

7. Submission to the Council of Ministers

The ministry of economic development and cooperation receives the capital budget requirement of each institution, which is finally recommended by sector departments.

A brief analysis of the federal capital budget is prepared by the ministry along with a consolidated federal capital budget is submitted to a meeting of the council of ministers called by the prime minister. The ministry defends the budget to the council. The council of ministers may make some adjustments and finally the draft capital budget passes the first stage of approval.

8. Submission of the Draft Capital Budget to the Council of Peoples' Representatives

The final draft federal capital budget is submitted through the council of ministers to the council of peoples' representatives for discussion and final approval.
 

9. Notification and Publication of the Capital Budget

The final stage in capital budget preparation is notifying the line budgetary institutions of their approved capital budget by items of expenditure through the ministry of economic development and cooperation. The legal status of the capital budget is established through publication in the "Negarit Gazeta".

 

7.6 Budgeting at the Region and Sub-region Levels

To reduce regional disparities among regions, government provides an incentive package scheme to investors to encourage them to invest in the backward regions. Thereby economic development will be fostered. In addition to this, government appropriately allocate budget subsidies to all regions depending upon their infrastructure need: schools, road, electricity, hospitals, etc.

The factors necessary to allocate funds to regions are worth discussions.

The Objective of Budget Subsidy

To ensure rapid economic development, authority has to be decentralized at region and sub region level in order to encourage them to determine their budget requirement. Accordingly, the federal government will provide a general purpose grant and specific purpose grant. Therefore, the main purpose of the General Grant is:

       A)To assist regions and sub regions expenditures on which case they are unable to cover.

       B) To assist regions and sub regions on laying an infrastructure in order to normalize the regional disparities.

       C) The purpose of the general grant is indicative. On one hand, it works in normalizing the horizontal fiscal imbalance and to maintain efficiency in allocation.

A. Type of Grant and Fiscal Transfer

1. When revenue is unable to cover the expenditure, it may jeopardize the activities of the regions. In such instances, grant without a question is necessary. In this case, either specific purpose grant or general purpose grant will be a mandate.

2. General Purpose Grant: will provide full authority to the user as to allocate the grants based up on their expenditures priority.

3. Specific Purpose Grant: in this grant, expenditures are predetermined. Whereby the regional government or the federal government will impose on regions to see to it that they are implemented as per plan.

B. Expenditure and Revenue Equalization

The regions in order to meet their expenditure assignment they should have a financial strength (Revenue or Financial Resource). In order to have a clear picture as to surplus and deficit, the regions must laid an equalization system in order to monitor their performances.

Indicators of Budget Size

To determine the budget requirements of the regions and sub regions, certain factors needed be considered. The following factors are quite illuminating:

1. Population
   Every economic plan should be based up on the population. The planner must center the total number of population. The planner must center the total number of population, the birth rate, economic concentration, housing etc while planning, this variable must be considered, and accordingly the budget need will be determined.
2. Expenditure Requirements
   While determining their expenditure requirements, region and sub regions must compare their regions with others in view of the economic development. That is, backward regions must assess the budget size requirement according to the activities that they are intending to take.
3. Agriculture
   Agriculture is the backbone of the regional economy. In assessing of the budget size, the agricultural development of the region is indicator while assessing the development, the following factors needed to be considered:
      - workforce(development agent)
      - number of a household in extension package program
      - number of veterinary clinics
4. Health
   Health sector development program must consider the primary health care – curative as well as preventive. While trying to foster the health economy, the planner must look on to the following variables.
   A. Number of Health Center
       - Number of health center/ thousands of population
       - Number of clinics/ thousand population etc
   B. Health Professionals
       - Number of Doctors/ thousand population
       - Number of Nurses/ thousand population
       - Number of Laboratory Technicians/ thousand population
5. Education
   The other factor to be consider while budget is the education center. The regions must compare the level of education compared to the other regions before determining the budgets. The factors to be work under this is:
      A. Number of primary schools
      B. Correlation between students and teachers
      C. Class size of the primary school etc
6. Water
   Water supply is one of the basic need that a human being requires to live. To avoid water cause diseases, regions must work in supplying pure water to their fellow citizens. Accordingly, they must work on the need assessment of water supply etc.

 

Regions and sub regions will have to take the various factors discussed above, while submitting their budget proposal. According to their economic development, and the budget requirement, the federal government may endorse the amount of subsidies granted to them.
 

Procedures to Prepare Budget at Region and Sub-region Level

The procedures followed to prepare the budget at region and sub-region levels follow the series of steps which are as follows.

1. Pre-ceiling Budgeting by Woredas
   The woredas prepares a budget with no indicative or final ceiling from the zone or the region. There is no ceiling yet from the zone or the region because the federal government has not yet notified them of their grant, which covers approximately 85% of ther regional expenditure. The woreda sector office prepares a budget. The woreda executive committee forms a budget committee to review the budget submission.
2. Review of Woreda Pre-ceiling Budgets by Zones
   The woreda budgets are sent to the zone through two channels. The woreda executive committee submits to the zone executive committee and the woreda sectoral offices send to the zone sectoral departments. The executive committee will set up a budget committee which reviews the woreda and one sectoral budget submissions.
3. Review Zone Pre-ceiling Budgets by Regions
   The zone budgets are sent to the region through two channels. The zone executive committee submits to the region sectoral bureaus. The sectoral bureaus then prepare a budget submission to the region plan bureau. The sectoral bureau can change the budget submission from the zone. The submission is the combined budget of the sectoral bureaus, departments and offices.
4. Determination of the Regional Expenditure Envelop
   The region is notified of the federal grant between March and May. The total regional public expenditure envelope is then determined based on the federal grant, local revenue and local borrowing.
5. Allocation of the Region Envelop Between Capital and Recurrent Expenditure
   The region allocates the expenditure envelop between capita and recurrent. The allocation begins with recurrent expenditure specifically non-discretionary expenditure expenditures (debt, legal liabilities, pension, salary). The largest share of recurrent expenditure is for salary and the region can determine this total because all staff are managed from the region level. The balance of the envelop or the upper bound residual of he expenditure envelop is reserved for capital expenditures. The trend shows that government emphasizes capital expenditure.
6. Allocation to Bureaus and Zones
   The capital envelope is allocated to the region bureaus by increment. First, the share of ongoing projects, inter-regional projects and those projects administrated by bureaus at zone and woreda level and included first.
7. Allocation to Zone sector Departments
   In this step, the lump sum zone allocation is distributed by sector to the corresponding zone and woreda departments and offices. Once the sahre of the zonal allocation is known the sectoral budget allocation is made by the following criteria: ongoing projects, new priority projects, the 5-year plan and inter-zonal projects.
8. Allocation to Woredas
   The woreda's are allocated on a sectoral basis from the zone. Allocation is done through discussion by the woreda council with the assistance of two planning officers who are assigned to the council and experts from the zone who will make allocations to sectroal offices.

 

Policies should clearly delineate the responsibilities of each type of government and the private sector in the implementation process.

The central context of budget reform is ambitious decentralization.

"Decentralization is an outcome of the adoption of a federal system of government in Ethiopia. With the devolution of power to the regional governments, implementation of economic policies and development programs have to a large measure, been shifted from the center to the regions. The application of fiscal federalism ensures a single system of taxation, allows some revenue collection by the regions and some revenue sharing with the federal government while putting the majority of the revenue under the central authority, provides budgetary subvention the regions, and grants the regions full autonomy in budgetary expenditures. 

The recurrent budget at the federal level, which consolidates and coordinates the recurrent budgets of all budgets of all federal public spending bodies, is prepared by the budget department of the ministry of finance.

A capital budget is broadly describes an outlay on projects that results in the acquisition of fixed assets and the provision of development services. The capital budget is presented in two ways: by economic category and by appropriating agency by code of expenditure. Individual projects are detailed under such sectors as "agricultural development", "road construction", and the line. Project activities are further codified by items of expenditure.