Ethiopia

Abstract

Abstract Fiscal federalism in Ethiopia has been implemented within a unique political context. The adoption of a multiethnic federal system has reshaped the fiscal and economic landscape of the country since 1991. Following the political restructuring towards federalization, the culture of centralization of fiscal powers and responsibilities, which had been witnessed for more than half a century, has significantly been altered. Yet, Ethiopia is a highly centralized federation, both in design and practice. The division of powers favors the Federal government in legislation and policymaking. The provision of most public services is, however, significantly decentralized. The lucrative sources of revenue are assigned to be either exclusive federal powers or concurrent. As a result, Ethiopia’s fiscal federalism has been characterized by a high degree of fiscal imbalances, the Federal General-Purpose Grant (FGPG), an equalization transfer, being the dominant mechanism to bridge the imbalances. Revenue sharing and specific purpose transfers constitute only a very small proportion of Subnational finance. States’ borrowing rights are limited to internal sources and are subject to stringent preconditions set by the federal government.