Africa-Press – Ethiopia. July 1, 2025 12 minutes read Addis Abeba – The federal government has recently tabled its budget proposal for the 2025/26 fiscal year to the House of Peoples’ Representatives for approval. Totaling a record 1.93 trillion birr in expenditures, the budget proposal—presented by Finance Minister Ahmed Shide—prioritizes recurrent spending while substantially reducing the allocations for capital expenditures and regional subsidies.
A broad review of the proposed federal budget shows a notable nominal increase compared to the 2024/25 allocation of 1.25 trillion birr. However, a more in-depth analysis reveals a different picture when accounting for currency fluctuations. In the 2023/24 fiscal year, with the official exchange rate averaging approximately 57 birr to the US dollar, the federal budget was equivalent to roughly $22 billion. However, the landscape shifted dramatically following the adoption of a floating exchange rate regime in late June 2024, as the birr depreciated to an approximate rate of 135 birr per dollar currently; the new 1.93 trillion birr budget now translates to $14 billion. This indicates a substantial decline of nearly 36% in dollar terms, despite the 60% increase in the nominal local currency amount.
The proposed budget for the upcoming fiscal year allocates 1.2 trillion birr to recurrent spending, 415 billion birr to capital expenditure, 315 billion birr as subsidies for regional states, and an additional 14 billion birr for Sustainable Development Goals (SDGs). This means that the majority of the budget—61.4%—is earmarked for ongoing, day-to-day government operations. Meanwhile, 21.6% out of the total budget is designated for capital investments that aim to build long-term assets and enhance the country’s productive capacity. In addition, regional subsidies account for 16.3% of the total budget, while the allocation for SDG-related programs represents the smallest share at 0.7%.
This allocation marks a significant shift from the fiscal framework of seven years ago, when capital expenditure and regional subsidies constituted the largest shares of the national budget, and recurrent spending received the smallest allocation. For instance, out of the 346.9 billion birr budget approved for the 2018/19 fiscal year—excluding any supplementary mid-year allocations—the largest portions were directed toward regional subsidies (39.4%) and capital expenditure (32.7%), while recurrent spending accounted for only 26.2% of the total. The budget for SDGs at that time stood at 1.7%.
Through an analysis of Ethiopia’s budget allocation trends over the past seven fiscal years, this commentary argues that the discernible increase in recurrent spending reflects a growing prioritization of administrative and operational expenditures at the direct expense of development-oriented investments. Concurrently, it contends that the steady decline in capital expenditure and regional subsidies reflects a waning commitment to infrastructure and long-term development priorities.
To demonstrate the shifting fiscal priorities embedded within Ethiopia’s budgetary framework, the article undertakes a comprehensive analysis of the evolution and allocation of budget trends over the past seven fiscal years. Furthermore, it highlights the key factors driving this fiscal realignment, explores the potential implications for the country’s long-term development trajectory, and proposes a range of policy options to attain a more sustainable and equitable fiscal future.
Shifting Fiscal Priorities: Deep dive into budgetary realignment
To ensure a fair and accurate comparison of budget allocations from the 2018/19 fiscal year through the upcoming 2025/26 period, only those budgets formally approved by Parliament prior to the start of each fiscal year have been taken into account. This method intentionally excludes supplementary budgets, which are typically approved midway through the fiscal year. Given that the amount of next year’s supplementary budget remains unknown, its exclusion is a logical step to maintain consistency across the years and to avoid potential distortions that could arise from incorporating consolidated figures.
A comparative analysis of Ethiopia’s budget allocation trends over the past seven fiscal years reveals a consistent increase in the share of the recurrent budget relative to the total national budget—from 26.2% in 2018/19 to 61.4% in 2025/26. A closer examination of the data shows that the share of recurrent spending rose gradually between 2018/19 and 2021/22, climbing modestly from 26.2% to 29%. A significant shift occurred in 2022/23, when the share jumped to 43%, marking a 14-percentage point increase from the previous year. It then rose slightly to 46% in both 2023/24 and 2024/25. The most dramatic increase came in 2025/26, when the recurrent budget’s share surged to 61.4%, the highest level recorded in the seven-year period.
In contrast, the share of the capital budget declined steadily from 32.7% in 2018/19 to 21.6% in 2025/26, albeit with some minor fluctuations. From 2018/19 through 2021/22, capital spending remained relatively stable at around 33%–34%. However, starting in 2022/23, the share dropped notably to 27.8%, followed by further declines to 25.4% in 2023/24. Although there was a modest recovery to 29.2% in 2024/25, this remained well below historical levels. By 2025/26, the share fell again to 21.6%, marking the lowest point in the observed period.
Similarly, the share of regional subsidies declined significantly—from 39.4% in 2018/19 to 16.3% in 2025/26—indicating a substantial reduction in intergovernmental transfers. Beginning at a high of 39.4% in 2018/19, which reflected strong support for regional governments, the share began a steady descent from 2019/20 onward. By 2022/23, it had dropped to 26.6% and continued to fall sharply in subsequent years, reaching 22.9% in 2024/25 and 16.3% in 2025/26. Unlike the recurrent and capital budget trends, this decline was consistent, without abrupt fluctuations reflecting a potential shift toward greater fiscal self-reliance among regional states.
This policy direction is evident in recent legislative and administrative measures aimed at decentralizing revenue collection and expenditure responsibilities. The Property Tax Proclamation, approved by Parliament in January 2025, serves as a key initiative in this regard. This new law imposes a levy on urban land, as well as on land improvements and buildings, empowering municipalities to collect revenue through property taxes.
Another related initiative is the amended proclamation governing the expropriation of land for public purposes, including the procedures for compensation and resettlement. Under the amended proclamation, the responsibility for assessing and disbursing compensation and carrying out expropriation has been transferred from the federal government to regional and municipal authorities.
In addition, the federal government is urging regional states to take on greater responsibility for addressing humanitarian needs, expecting them to cover up to 70% of total requirements—a clear indication of the broader push toward decentralization of fiscal responsibilities.
In its report titled “Budget Allocations in the Face of Multiple Crises,” the United Nations Children’s Fund (UNICEF), however, highlighted a significant challenge concerning regional budgets. The agency pointed out that the predominant portion of funds allocated to regions is currently consumed by recurrent expenses, primarily salaries. This allocation pattern leaves inadequate provisions for capital investments, which are crucial for enhancing service delivery at local government levels. The report further emphasizes the need for a more balanced budget composition, stating, “The composition of the budget for regions should improve to provide sufficient resources for regions to allocate for capital spending.”
UNICEF’s findings point to a broader concern about the sustainability and effectiveness of service provision in the face of multiple, compounding crises. Without targeted reforms to enhance capital spending, regions may struggle to build and maintain the infrastructure necessary to support health, education, and other essential services.
Key drivers of fiscal shift
Beyond the discernible shifts in subsidies directed to regional states, a more critical fiscal trend demands rigorous scrutiny: the persistent decline in capital budget allocation, starkly contrasting with the escalating share of recurrent expenditures. A comprehensive analysis of this inverse relationship is imperative to ascertain its root causes and to fully comprehend its profound implications for Ethiopia’s economic growth and development, both in the short and long term.
A review of time-series data vividly illustrates this divergence. The proportion of recurrent expenditure within the total national budget has demonstrated a consistent upward trajectory, escalating from 26.2% in 2018/19 to a projected 61.4% in 2025/26. Concurrently, the share allocated to the capital budget has receded from 32.7% in 2018/19 to an anticipated 21.6% in 2025/26, exhibiting a gradual decline punctuated by minor fluctuations. This sustained shift suggests a fundamental reorientation of fiscal priorities.
The time-series data further reveals that the expansion of the recurrent budget’s share has been particularly pronounced during two specific fiscal years, which emerge as critical turning points. The 2022/23 budget marked the initial significant pivot, wherein the recurrent budget’s share surged by 14 percentage points, coinciding with a sharp 5.2 percentage point decline in the capital budget’s share. Similarly, the proposed 2025/26 budget signals an acceleration of this trend, representing another pivotal year with the recurrent budget’s share projected to climb by an even larger 15.4 percentage points in 2025/26. Correspondingly, the capital budget share is expected to contract further by 7.6 percentage points. This consistent pattern underscores a deliberate, albeit perhaps necessitated, shift in government spending.
These figures are not merely statistical aberrations; rather, they signify a fundamental structural transformation in national expenditure priorities. They represent a clear reallocation of resources away from long-term capital investments—the very foundation of future economic productivity and essential infrastructure development—and toward immediate recurrent expenditures. This strategic shift warrants careful examination—both to identify its underlying causes and to assess its long-term implications for the nation’s development trajectory.
Several interrelated factors appear to be driving this shift. Chief among them are the financial burdens associated with the two-year war in Tigray and subsequent post-war recovery efforts; rising public debt and associated service obligations; and inflationary pressures, particularly those impacting public sector wages and salaries.
Data obtained from the recently presented budget proposal document in Parliament strongly supports these arguments. It reveals that defense spending surged from 16.9 billion birr in 2019/20 to 102.6 billion birr in 2021/22, demonstrating a staggering 507% growth during this period. This substantial increase highlights the immediate and pressing demands placed on the national budget by the war.
Reports further indicated the substantial capital required for post-conflict recovery, which placed significant strain on the national budget. Officials estimated that economic losses and damages to infrastructure—primarily caused by the two-year war in Tigray, which also had severe repercussions on the Afar and Amhara regions—amounted to approximately US$28.7 billion. Additionally, the cost of post-war reconstruction was projected to reach as high as US$20 billion.
Recently, high-level regional officials from Ethiopia’s conflict-affected Amhara region also stated that they are seeking $10 billion in recovery funding, as the area continues to contend with the destructive consequences of the ongoing conflict between government forces and various factions of the Fano armed groups, compounded by drought and disease outbreaks.
The budget proposal document further indicates that between 2019 and 2024, the most significant growth—exceeding a fivefold increase—was observed in public debt servicing, particularly in interest and principal payments. In 2019/20, the government expended 13.5 billion birr on interest payments, a figure that escalated to 68.9 billion birr by 2023/24. This exponential rise in debt service obligations underscores a significant drain on available resources, inevitably impacting discretionary spending, including capital investments.
Furthermore, according to the upcoming year’s budget proposal, 158.9 billion birr has been earmarked for salaries, allowances, and operating expenses, representing a 48.6% increase compared with 2024/25. This substantial allocation for personnel and operational costs further reinforces the expanding footprint of recurrent expenditures within the national budget.
Without targeted reforms to enhance capital spending, regions may struggle to build and maintain the infrastructure necessary to support health, education, and other essential services.”
While these expenditures may be deemed necessary to address urgent short-term pressures and maintain national stability, they come at the significant cost of deferring critical investments in infrastructure, technology, and other capital projects essential for driving sustainable, long-term economic expansion. The postponement of such investments could potentially hinder future productivity gains and impede the nation’s capacity for sustained development.
The notable disparity between recurrent and capital expenditures drew significant concern from lawmakers during the recent parliamentary session, with some of the most critical voices even emerging from within the ruling Prosperity Party (PP) itself. These legislators criticized the allocation to capital expenditure as inadequate, emphasizing its crucial role in fostering infrastructure development.
In his recent address to Parliament, Finance Minister Ahmed shed light on the government’s priority, stating that “in 2025/26, government priorities will be shifted toward completing existing projects that were already underway,” adding that “in the upcoming fiscal year, budget allocations will be limited only to essential legacy projects…,” signaling the government’s focus on consolidating past commitments rather than initiating new development ventures.
In fact, this has been the official stance of the government since 2023. During his presentation of the budget proposal to parliament in June 2023, Minister Ahmed explicitly stated that the proposed budget for the 2023/24 fiscal year did not include provisions for initiating new projects to be financed by the federal government.
Long-term development implications, policy options to fix fiscal imbalance
A predominant recurrent budget typically signifies reduced availability of funds for critical capital investments. This can impede the development of essential infrastructure, limit advancements in technology, and restrict the expansion of key sectors such as education and health. These sectors are undeniably vital for fostering sustained economic growth and robust human capital development over the long term.
Numerous studies corroborate this perspective. For instance, a study analyzing Ethiopian government expenditures found that while capital spending had a strong and statistically significant impact on economic growth, recurrent expenditure showed no meaningful correlation. This suggests that prioritizing operational spending over investment could place serious constraints on Ethiopia’s future economic potential.
Another research, “The Impact of Government Expenditure Budget on Economic Growth in the Case of Ethiopia,” also reveals a positive correlation between economic growth and government spending in crucial areas, particularly capital investments. The findings from this research strongly suggest that increased allocations to capital expenditure contribute significantly to the country’s overall economic expansion.
A second important implication of the largely recurrent nature of the budget, coupled with diminished availability of resources for essential capital investments, is the risk of crowding out private investment. When a government allocates a large share of its budget to recurrent spending—particularly when it relies on domestic borrowing to finance these expenditures—it can reduce the pool of credit available to the private sector. This scenario often results in higher interest rates, which discourages private investment, stifles entrepreneurship, and limits job creation.
The growing dominance of recurrent expenditure—driven by conflict-related fiscal pressures, mounting debt service obligations, and an expanding wage bill—poses a significant threat to Ethiopia’s long-term development prospects.”
Supporting this concern, a study on financial repression in Ethiopia between 1980 and 2020 found that public policies that prioritize recurrent expenditures—especially through directed credit policies and elevated reserve requirements—adversely affect private sector access to credit. As financial institutions are increasingly obligated to meet government borrowing needs, the availability of credit for private enterprise shrinks, thereby undermining the private sector’s ability to contribute meaningfully to economic development.
A high level of recurrent spending also limits the government’s fiscal flexibility. When a substantial portion of the budget is locked into fixed expenditures—such as wages, subsidies, and debt servicing—it reduces the state’s ability to respond to economic shocks, fund new policy initiatives, or implement structural reforms. This rigidity makes the economy more vulnerable to external disruptions and constrains the fiscal space needed to support long-term development goals.
Ethiopia’s national ambitions—ranging from industrialization and agricultural transformation to investments in education, health, and poverty alleviation—require sustained capital investment. Yet, the growing dominance of recurrent expenditure, especially the ballooning public sector wage bill, restricts the country’s capacity to fund these transformative sectors adequately.
Historically, Ethiopia’s impressive growth rates prior to 2020 were largely driven by large-scale public investments in infrastructure and development. However, recent research published in the Ethiopian Journal of Economics points to growing concerns about the sustainability of this model, particularly as recurrent expenditures—fueled by conflict-related costs, rising debt service obligations, and social spending pressures—continue to rise. These developments threaten to reverse gains and complicate efforts to reignite growth in a post-conflict era.
Today, the country faces a pivotal challenge. The growing dominance of recurrent expenditure—driven by conflict-related fiscal pressures, mounting debt service obligations, and an expanding wage bill—poses a significant threat to Ethiopia’s long-term development prospects. It not only undermines investments in infrastructure, human capital, and key productive sectors but also constrains fiscal maneuverability and raises concerns over debt sustainability. Most critically, it jeopardizes the country’s ability to achieve inclusive growth, reduce poverty, and meet its broader development goals.
Addressing this structural imbalance necessitates bold policy choices. These include resolving conflicts peacefully to minimize defense and post-conflict recovery expenditures, efficiently managing the public sector wage bill, allocating sufficient funds toward new infrastructure projects, and undertaking reforms that ease constraints on private sector access to credit.
Nevertheless, it is important to acknowledge that the relationship between recurrent and capital expenditure is inherently complex and not always straightforward. Some studies suggest that certain recurrent expenditures, particularly those directly related to human capital development, such as investments in quality education and healthcare, can have a positive long-term impact on economic growth, albeit often indirectly. For instance, improvements in education and healthcare can enhance labor productivity, which serves as a long-term driver of economic expansion. However, the consensus among economists and international development organizations remains that for a country to achieve strong, sustainable development, a balanced approach is essential—one that ensures sufficient allocation to both current operations and productive capital investments. AS
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