Fiscal Decentralization in Ethiopia: Achievements and Challenges

Abstract

As one of the major dimensions of decentralization reform program, fiscal decentralization has been a worldwide phenomenon since the 1980s and since 1991 in Ethiopia. The major purpose of this study was to assess the achievements and challenges of fiscal decentralization in Ethiopia. The study mainly employed quantitative approach based on a panel data on revenue and expenditure assignments between the federal government of Ethiopia and regional state of governments. It applied two standard measures of fiscal decentralization: Expenditure Ratio (ER) and Revenue Ratio (RR). The finding shows that there is mismatch between expenditure and financial autonomy of sub-national governments in the devolution process, which in turn creates vertical imbalances. Another major finding of this study is that intergovernmental fiscal transfers are a major source of revenue for regional states of governments which shows heavy dependence on federal government subsidy. The author concludes that fiscal decentralization is promising in Ethiopia since it encourages sub-national governments to assume additional responsibilities. However, special attention must be given to enhance the fiscal autonomy of sub-national governments so as to realize the benefits of effective fiscal decentralization.

Keywords: Decentralization, Fiscal Decentralization, Revenue assignment, Expenditure assignment, fiscal inequity.