The federal government posted a budget deficit of 93.6 billion Birr in the first half of the 2025/26 fiscal year (EFY 2018), as a sharp rise in public spending outpaced strong revenue growth, according to the latest mid-year budget implementation review released by the Ministry of Finance.
The report shows that while total revenues and grants have climbed by 55 percent year-on-year to nearly 705 billion Birr, expenditures grew even faster to over 798 billion Birr over the six-month period. The figure is close to 80 percent higher than expenditures recorded during the first half of the last fiscal year.
Tax revenue remains the primary source of government revenue, accounting for 580 billion Birr or 82 percent of total collections. Direct taxes alone contributed nearly one-third of total tax revenue. The Ministry report highlights strong gains in corporate income tax, which surged by more than 92 percent from last year.
Officials attribute the growth to ongoing tax reforms, including the introduction of quarterly advance payments for corporate taxpayers and the implementation of the National Medium-Term Revenue Strategy.
Despite these gains, government expenditure has ballooned, owing largely to recurrent spending, which has doubled. Key drivers cited in the report include civil service salary adjustments, expanded social protection programs, and inflation-related outlays.
Significant resources were also directed toward subsidy programs, particularly for fuel, fertilizer, and the Productive Safety Net Program (PSNP), aimed at cushioning vulnerable households amid ongoing economic reforms, reads the report.
At the same time, debt servicing costs placed increasing pressure on public finances, with interest payments on domestic debt alone rising by over 250 percent.
To finance the widening deficit, the government relied heavily on domestic borrowing, which reached 139.7 billion birr during the review period, according to the Ministry. External financing played a more limited role, reflecting tighter global financial conditions, Ethiopia’s default credit rating, and ongoing debt management efforts.
Nonetheless, the report forecasts 10.2 percent GDP growth in 2025/6 and lauds an improved export performance. Export revenue over the first six months of the fiscal year pushed past the five billion dollar mark, driven largely by gold.
However, import value also grew by 23.3 percent, leading to a widening of the trade deficit. The deficit expanded from USD 5.9 billion in the first half of 2024/5 to USD 6.3 billion this year.
The Ministry of Finance also noted that while tax collection is on a “robust upward trajectory,” performance in domestic indirect taxes remains below target. Officials have signaled a need for enhanced tax audits with targeted efforts to identify causes of weak performance in indirect tax collection.
