The fiscal policy framework in Ethiopia has changed dramatically over the last decade. The country has changed from a planned economy to a market economy and government control over the sector has been gradually reduced. In addition, the system of government has changed from a strong central government to a federal system of government, giving the regional states much more control over their natural resources.

A number of previous studies have examined forest charges in Ethiopia. These studies have followed two approaches to estimating forest charges: the residual stumpage value approach and the replacement cost approach. The former approach looks at the market prices for forest products and subtracts from these the costs of processing and harvesting to arrive at a standing value of trees. The second approach examines all of the costs of forest management and adds these together to calculate a total cost of production. It has been difficult to use either of these approaches because of difficulties in obtaining data for these calculations. However, the replacement cost approach has been slightly more successful in the past.

In general, despite these efforts, the levels of forest charges are believed to be far too low. However, some states are starting to use more competitive ways of selling harvesting rights, such as auctions. These auctions are resulting in prices that are far higher than the prices set by government.

In addition to the revenue collected from charges on roundwood production, charges on NWFP production and forest recreation are also important sources of forest revenue in Ethiopia. Other forest charges include fines and penalties, sales of confiscated or seized products and seedling sales from government nurseries. There are no specific forestry charges on the forest processing industry or forest products trade. In addition, there is a quite significant area of private forests in Ethiopia and the government does not collect charges on production from these areas.

The total amount of forest charges that should be paid by permit holders is assessed by field technicians from the forestry administration in each state. This money should be paid in advance and is deposited into the general government accounts (Consolidated Fund) in each state. By comparing the level of production with total revenue collection, it is suspected that a lot of producers evade payment of forest charges.

Forest revenue is used by state governments to supplement the grants that they receive from the Federal Government. The forestry administration is not allowed to retain any of this money for reinvestment in the sector unless this is approved by the government. Only Oromiya Regional State allows this and, in Oromiya, about 80% of the forest revenue collected is retained by the forestry administration. There is a general perception that the amount of money collected by the states is far more than the amount that they spend on forestry.

The annual budget allocation to the Federal Ministry of Agriculture is very small (less than one percent of total government spending or between 25 million and 47 million Birr in recent years). Annual expenditure on the forestry sector accounts for less than 1 million Birr (or only about 2 - 3 percent of this), although the budget for wildlife conservation is another 4 million to 5 million Birr.

However, in addition to spending at the federal level, the Federal Government also provides substantial grants to the state administrations for forestry and wildlife to cover most of their recurrent and capital expenditure. In recent years, these grants have amounted to between 10 million and 35 million Birr in capital expenditure and 120 million to 150 million Birr in recurrent expenditure. Thus, the amount spent on forestry and wildlife at the state level is about thirty times the amount spent at the central level.

The states also collect their own revenue from a variety of sources but, with the exception of Oromiya, it is not known how much of this they spend on forestry (i.e. in addition to the grants from the Federal Government). In Oromiya, the state spends about 4 million to 5 million Birr per year of their own revenue on the forestry sector, which is about the same amount that the forestry administration is allowed to retain from forest revenue collection.

It is recommended that the forestry administrations in each state should re-examine their forest charges as they are currently far too low. It is suggested that this should be done using the replacement cost method using updated cost and price information and that the states should do this on a regular basis. It is also suggested that they should try to implement more innovative methods of selling forest goods and services.

In broader terms, it is suggested that the forestry sector suffers from a lack of clear direction and that the absence of clear policies for the forestry sector and land-use are major impediments to the implementation of sustainable forest management. In particular, the clearance of forest land for agricultural production is highlighted as a major problem for sustainable development in the country. There is a gradual realisation that sustainable forest management is an important issue that needs to be addressed, but there is a lack of political will to deal with this. It is suggested that greater efforts must be made to demonstrate the importance of the sector for sustainable development, so that policymakers might give more support for policy reform.