Developing countries rely on a number of sources of revenues for financing various economic activities. Similarly, Ethiopia’s economic activities depend on a variety of sources of revenue, including traditional and modern ones. Agriculture, being the backbone of the country’s economy, is a major generator of revenue. It engages a large majority of the population, which contributes to a variety of produces. The sector is a major contributor to the country’s GDP.
Revenue is generated through the export of agricultural produces. The major export items are coffee, sesame seeds, flowers, fruits and vegetables, and livestock products. In addition to agricultural products, Ethiopia has been exporting minerals and manufactured goods such as gold, leather products, and textiles. These exports have contributed to foreign exchange earnings and government revenue. The foreign exchange has, in turn, been used for the import of inputs for the productive sectors of the economy. These inputs comprised of machineries, fertilizers, improved seeds, pesticides that are used in the agricultural sector. The foreign exchange has also been used for the purchase of inputs for the service sectors.
Another source of revenue is remittance from Ethiopians residing abroad. This is registered as a major source of revenue in the form of foreign exchange. Many Ethiopians working abroad send money back to their families. In so doing, they contribute to the country’s foreign exchange reserves. The Diaspora has, therefore, been supporting household incomes in Ethiopia using foreign exchange. It is reported that this has been done formally and informally.
Most Ethiopians residing abroad have used the official channel when sending money to their relatives. It is also reported that in 2023 over USD six billion has been transferred to Ethiopia by the Diaspora. This is a major contribution to the country by Ethiopians working abroad. Another source of foreign exchange is the rich cultural heritage that attracts tourists. The culture of diverse ethnic and tribal groups residing in different parts of the country has attracted foreigners that visit the country. Also, the religious heritages, including rock hewn churches and mosques and tombs located in various parts of Ethiopia have been centers of tourist attraction.
The diverse landscapes, mountains and national parks have great attraction for tourists from around the world that contributed to revenues in foreign exchange. The revenues generated from tourism-related activities have engaged numerous tourism enterprises that employed tourist guides in different parts of the country.
Several investors have built hotel accommodations near and around the tourist sites. Others have engaged in providing transportation services to the tourists. Both public and private tour service agencies have expanded to the historical and natural attraction centers. These agencies charged entry fees to the tour sites to cover their cost of providing services to the visitors. The tourism industry has, therefore, become one of the major sources of revenue to the government. However, this has been possible only during time of peace and security which is a precondition for tourism.
Ethiopia enjoys hydropower as its major source of revenue. It has substantial hydropower potential, and the government has invested in developing hydroelectric projects to generate electricity for domestic consumption and export. Domestically, households, enterprises and government agencies and others have used electricity for productive purposes. However, electricity has not yet extended to all households in the far corners of the county.
The electric sector is divided into two and these are the Ethiopian Electric Power (EEP) responsible for generation and transmission and Ethiopian Electric Utility (EEU) responsible for distribution. Both EEP and EEU are state owned electric companies covering generation, transmission and distribution. Revenue is also generated from the sale of electricity to neighboring countries. Ethiopia is endowed with water resources basins which are constant suppliers of dams built for electric power generation. These sources of power generate revenues in foreign exchange.
Revenue is generated through domestic sales and exports of manufactured goods. Economic activities in these industries are facilitated through infrastructural services and telecoms. Roads, railroads, shipping lines and airlines have all been facilitating both the export and import of goods in the country. They generate revenues through the efficient and effective delivery of services. The telecommunications sector, for example, has been liberalized in recent years, attracting foreign investment and generating revenue. The major services are mobile phone services, internet connectivity, and related infrastructure. These services have facilitated trade at the domestic and international levels thereby generating revenues for the country.
Another crucial economic activity that generates revenues is the construction sector. Ethiopia has been experiencing rapid urbanization due to industrialization that attracts workers into the towns. These workers generate income and contribute tax revenue to the State. Most of these workers are engaged in infrastructure development projects. These projects contribute to significant revenues in the construction sector through government contracts.
Also, private investments, and foreign aid for infrastructure projects generate revenues. The business sector pays taxes to the government on the basis of tax rules and regulations. These revenues are collected through various taxes, including income tax, value-added tax (VAT), customs duties, excise taxes, and corporate taxes. Also, the government collects taxes from individuals, businesses, and imports to fund public services and development projects. In some cases, the government is forced to use some of these revenues for financing its defense and security expenses to maintain law and order in the country.
Ethiopia receives substantial foreign aid from bilateral and multilateral donors for the financing of expenditures in the social sector, such as education and health. It also receives assistance from international organizations, development agencies, and foreign governments. This aid supports various sectors, such as services, agriculture, and infrastructure. Ethiopia has to meet the severe conditions of these donor agencies in order to have access to development funds. These funds are major sources of revenue for the government to finance its projects. Projects financed by donors have to be monitored and evaluated periodically as conditions for the release of the next round of funds. Professional staffs are placed at critical stages of the implementation of projects to check and approve the flow of funds. Donors are external sources of government revenues in the form of foreign exchange. These are some of the domestic and external sources of revenue in Ethiopia.
The misuse and abuse of revenues in Ethiopia have been major issues that have engulfed the economic development and governance in Ethiopia. Many factors have contributed to this cancerous socio-economic problem. One of these factors is corruption that has become pervasive in the country, with government officials and bureaucrats playing the major role. They are often involved in embezzlement, bribery, fraud, cheating and kickback schemes. This diversion of tax payers’ money has hampered the proper allocation of resources for economic development. It has also diverted resources that may have financed public services and infrastructure development.
The absence of transparency and accountability techniques and mechanisms are often weak or nonexistent in the country. This situation allows for the mismanagement of public funds without adequate control, supervision and oversight. In the absence of transparency, it becomes much easier for government officials to misdirect and siphon off revenues for personal gain.
The misuse and misuse of revenues has been exacerbated by political instability, which Ethiopia has experienced in recent years. In other words, periods of political instability and conflict, have caused abuse of government revenues.
In times of unrest, there may be less inspection and follow up over government spending. These funds may be easily diverted to repress, quell and crush dissent rather than being allocated towards development projects. These projects require absolute peace, law and order to achieve the objectives of development, including poverty reduction, employment creation, and earning and saving of foreign exchange.
However, weak Institutions may not achieve these objectives due to low management capacity, inadequate skills, and diversion of resources. Weak institutional capacity within the government contributes to the misuse of revenues. This includes inadequate financial management systems, understaffed supervisory agencies, and limited expertise in auditing and accountability.
Another loophole in the economic development of Ethiopia is dependency on foreign aid. The country has historically relied heavily on foreign aid to finance its development programs and projects. Of course, aid may be necessary for addressing immediate obstacles of development. However, it may also create opportunities for abuse and misuse of resources if not properly managed, monitored and evaluated.
In some cases, aid may be pocketed by corrupt officials or used to fund projects that are totally irrelevant for addressing the long-term development issues of the country. Experts suggest that addressing the misuse and abuse of revenues in Ethiopia demands a comprehensive reform. This includes intensification of anti-corruption measures, strengthening transparency and accountability mechanisms.
Moreover, it requires improving governance and institutional capacity, and diversifying the economy to reduce dependency on foreign aid. Also, nurturing a culture of integrity and ethical behavior within government institutions is very critical for promoting responsible government revenue management and sustainable development. Yet, challenges such as poverty, political instability, and environmental degradation continue to impact revenue generation and economic sustainability.
BY GETACHEW MINAS
THE ETHIOPIAN HERALD FRIDAY 5 APRIL 2024
