The practice of fiscal decentralization at local level in Ethiopia: Evidence from Oromia and Afar Regional States

Abstract

In the past half century, fiscal decentralization has emerged as a critical policy issue among public finance scholars and policymakers around the world. Since 2001, Ethiopia has practiced fiscal decentralization at the district level by devolving certain functions and financial resources for the District Administration. The primary goal of this paper was to assess fiscal decentralization practices at the district level, as well as the challenges that local level authorities faced while implementing it. The paper focused on the intergovernmental fiscal relationship between the Regional and Local Governments (LG) of Oromia (representing the relatively “developed regions”) and Afar (representing the “emerging regions”) Regional States. We selected these regional states, not randomly, but purposively using various criteria such as fiscal capacity, population size and geographical area/distance, and infrastructure and human development. We used both primary (in-depth interviews and field observations) and secondary (published and unpublished sources) data. The key informants for in-depth interview and discussions were selected purposively from regional and Woreda institutions on the basis of their levels of knowledge on the subject under investigation while, the secondary data were analyzed and interpreted through a descriptive technique and presented in form of tables and figures in light of the study’s objective. The major findings show that the regional governments’ devolution of expenditure responsibility to the LGs is not accompanied by adequate financial resources, resulting in high vertical and horizontal fiscal imbalances in Ethiopia. As a result, LGs rely heavily on regional blocked grants to cover the costs of the functions devolved to them by regional governments. This, in turn, limits local governments’ fiscal autonomy and leads to less efficiency in public service delivery and accountability at the local level. This necessitates increasing LGs’ fiscal autonomy by devolving taxation authority in order to reap the potential benefits of effective fiscal decentralization system at the sub-national and national levels.