Ethnic Federalism in a Dominant Party State: The Ethiopian Experience 1991-2000 Lovise Aalen r 2002: 2

Fiscal relations
Decentralisation of fiscal relations between central and regional level is one of
the important preconditions for a federal system to work. The political
empowerment of federal units through representation in the central decision
making process and self-government within own borders do not have much
value if the regional governments are deprived of own funds. The more
resources a region controls, the larger is the potential for genuine regional
autonomy. In most federal systems, however, there is a gap between the
regional governments’ responsibilities (expenditures) and their income (revenue
sources). Hence, the federal units become dependent on transfers from the
central government to be able to carry out their tasks. This is also the case in
Ethiopia. A common critique of the Ethiopian model is that the “lion’s share”
of the revenues in the country is assigned to the federal government, and the
regional states are totally reliant on federal grants to perform their duties
(Befekadu Degefe 1994; Eshetu Chole 1994).
The constitution allows the regional governments to design and implement
economic policies and plans and to prepare and implement their own budgets.
They have also the power to levy and administer taxes and dues under their
jurisdiction and borrow money from domestic sources (Art. 95). But the taxes
under regional jurisdiction do not give much income, and the process of
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The people in Gambella and Benishangul-Gumuz live relatively scattered and might not
have easy access to doctors even if the doctor/population ratio is high.

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domestic borrowing is cumbersome and of little practical use. The result of this
is that the regions rely heavily on subsidies from the central government, and
this gives a clear vertical imbalance. In addition to this, the various regions
have very different capacities to collect revenues and perform the financial
tasks assigned to them in the constitution. This contributes to horizontal or
regional imbalances in the federal system.
Vertical imbalance – the regional states’ dependence on the centre
The major reason for the vertical imbalance in the Ethiopian federation is that
the tax bases assigned to the regional governments are weak, while the most
lucrative sources are given to the central government. As illustrated in table 6.4
on the following page, the central government has exclusively been given the
largest revenue source, the foreign trade taxes. The regions’ major sources are
the direct and income/profit taxes, but from 1993 to 1998, the federal
government has gradually taken a larger share of these taxes too.
Table 6.5 below shows that while the revenue sources of the regions are
meagre, their expenditure responsibilities are large. In sectors like social
services, health and education, the regional governments have covered between
70 and 90 per cent of the expenditures from 1993 to 1998. Generally, the
regions have increasing shares of the public expenditure, while their revenue
collection has been on the same level.
In addition to own revenue sources, the regions have access to some joint
revenues, which are supposed to be shared between the regional and federal
levels of government. These are taxes from inter alia jointly owned enterprises
and large-scale mining enterprises (Art.98 of the constitution). The constitution
gives the House of the Federation the power to determine the sharing of joint
resources, but it has still not been able to perform this and the procedures for
distributing joint revenues are not yet settled (World Bank 2000: vi). So far,
the joint revenues have been collected and administered by the federal
government. The four lowland regions, Afar, Somali, Benishangul-Gumuz and
Gambella, have not received any shares of the joint revenues. Addis Ababa and
Diredawa were the only regions which received substantial revenues from this
source, due to the fact that these states have a large part of the jointly owned
enterprises in the country within their borders. For the other regional states, the
amounts from the shared revenue sources were minor (Fenta Mandefro 1998:
38).
The regions generally lack the capacity to collect taxes, both in logistics and
skilled manpower. What might increase the regional tax base is privatisation of
federal enterprises, rising agricultural incomes, and improvement of the
administrative capacity of the regional governments. Despite the constitutional
right to levy taxes, the regions do not have the right to change their tax bases
as a means to increase their revenues. The tax level is standardised and
harmonised all over the federation and is set by the Ministry of Finance.
Generally, the Ministry of Finance has an important supervisory and
controlling role in the regions, and provides essential assistance in regional
finance bureaus.

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Table 6.4 Share of federal and regional governments in revenue in Ethiopia 1993/93 to 1997/98 (in per cent)
1993/94
1994/95
1995/96
1996/97
1997/98
Category