Fiscal Decentralization Practices in Ethiopia: Oromia Regional State in Focus

Abstract

As one of the four dimensions of decentralization, fiscal decentralization has been practiced across the globe as a solution for the unaccountable and non-responsive problems of centralized governance system since the 1980s and since 1991 in Ethiopia. Since then, Ethiopia has been implementing decentralization; yet, little has been achieved so far if decentralization is understood as empowering lower level governments and addressing the needs and preferences of local people. The general purpose of this study was to assess the practices of fiscal decentralization in Ethiopia particularly in Oromia National Regional State. The study mainly employed quantitative approach based on a panel data on revenue and expenditure assignments between the federal government of Ethiopia and the national regional government of Oromia. It applied the two standard measures of fiscal decentralization: Expenditure Ratio(ER) and Revenue Ratio (RR). The major findings of the study show that fiscal decentralization trend in Ethiopia is so erratic that goes ups and downs with no smooth improvement. Though there has been an increase in the size of sub national governments, their expenditure share is better only in recurrent expenditure whereas the major share of capital expenditure has been under the control of the federal government. Regardless of bulk assignments of recurrent expenditure responsibilities and relatively little assignment of capital expenditure given to sub national governments, there has been huge vertical imbalance brought by the centralization of most productive tax sources by the federal government. The study found that, while the average share of sub national governments' expenditure was 39.4% (with an increasing trend), the average revenue share of sub national governments' remained stable around 28.3% in the fiscal years 2010/11 to 2015/16. This resulted in low fiscal autonomy of sub national governments making them heavily dependent upon federal transfer. Particularly in Oromia regional state, the average regional expenditure share of the country's total was found to be 11% while its average own revenue share of the country was 4.2%. From this, the region averagely covered only 24.4% of its total expenditure by its own revenue sources leaving the remaining 75.6% to be covered by federal transfer. Further, fiscal decentralization to Woreda level administration in Oromia region was found to be discouraging. The average Woredas' share of the regional expenditure was 50% and this figure is the least among the other regional states of the country. With regard to fiscal decentralization in revenue assignments, averagely, Woredas covered only 26.9% of their expenditure by their own revenue sources leaving the remaining 75.1% to be covered by subsidy from the regional government. The study concluded that although fiscal decentralization is promising in Ethiopia, therefore, in order to benefit from fiscal decentralization substantially, subnational governments should be empowered by assigning more capital expenditure responsibilities and adequate revenue sources that can help them to plan and work on developmental efforts to address the needs and preferences of local citizens.