In his budget speech, Ethiopia’s Minister of Finance, Ahmed Shide, outlined the government’s plans for the 2025/26 fiscal year, emphasizing a strong commitment to avoiding high-powered money as a means to cover the budget deficit. The proposed budget totals 1.93 trillion birr, with a deficit of 22%, amounting to 417 billion birr.
Ahmed told Capital that the government plans to finance the deficit exclusively through domestic sources, stating, “Tax revenue and treasury bills will be the only means to cover the budget gap.”
He highlighted a significant change from previous years, noting that the government has not sought direct advances from the National Bank of Ethiopia (NBE)—a major contributor to inflation—in the current fiscal year.
Of the total deficit, 67% (277.5 billion birr) will be financed through domestic sources, while the remaining 33% will come from direct budget support from international partners.
“We have no alternative but to rely on tax revenues and the money market, specifically treasury bills,” Ahmed stressed, clarifying that the government would only consider using an overdraft facility as a last resort.
However, borrowing costs from domestic sources have increased as part of ongoing reforms. International partners have encouraged the government to pursue market-based financing instead of direct advances from the central bank.
To attract more investors, the government has adjusted treasury bill yields to provide positive real returns in relation to inflation.
Since February, T-bill rates have surpassed the central bank’s 15% policy rate, reaching 17% in the most recent auction.
Ahmed noted that avoiding direct advances has helped to limit base money growth this fiscal year.
The NBE’s tight monetary policy has reduced reserve money growth from 24.8% in July 2024 to 17.3% in November, while broad money growth decreased from 24.8% to 19% during the same period.
He attributed this stability to measures such as open market operations and credit ceiling caps.
The International Monetary Fund (IMF) has commended Ethiopia’s commitment to a tight monetary policy and has urged its continuation.
For the upcoming fiscal year, the government aims to raise 1.5 trillion birr from domestic revenue and international grants, with 1.2 trillion birr (81%) expected from local sources and 235 billion birr from grants. Tax revenue is projected to increase by over one-third, reaching 1.1 trillion birr.
Debt servicing remains a significant expenditure, with 463 billion birr (29% of the budget) allocated for repayments, including funds owed to the Commercial Bank of Ethiopia for past public enterprise bailouts.
The budget allocates 1.2 trillion birr (61%) for recurrent expenditures, 412 billion birr (21.6%) for capital projects, and 315 billion birr for regional budget support.
Ahmed’s speech underscores Ethiopia’s shift toward fiscal discipline and market-driven financing, with the aim of curbing inflation and stabilizing the economy.
