Welcome to this week’s edition of ፍራንክ Digest!

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

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Lottery and Betting: Ticket to Easy Money?

Budget

Lottery has long been a source of fascination for governments, who see them as a means to patch budget deficits and in best case scenarios to fatten the coffers without too much effort.

While some may view these activities as little more than a "painless gamified tax" on the public, the reality is more nuanced.

Where does lottery revenue go?

The National Lottery of Ethiopia was founded in 1961 to sell lottery tickets and assist budgetary funding needs for infrastructure, healthcare and education programs.

Most lotteries in Ethiopia have a fixed payout prize with tiered winners (1st, 2nd, and so on) despite the ticket sales revenue. This means in rare cases the National Lottery could just break-even but most times it makes lots of profit.

On the other hand, bingo lottery has a growing prize depending on ticket sales revenue and in Ethiopia 50% of the revenue goes to the prize pool. Whereas, estimates from the lotteries association in the US indicate:

According to a research paper by Cepheus Capital, in 2022/23 budget year national lottery surplus contributed ETB 20.8 bln towards the Ethiopian government’s total annual revenue of ETB 479.5 bln (4.33%).

To put this into context, this is the biggest non-tax income surplus by a far margin, and is comparable to the total excise tax for domestic goods at ETB 21.5 bln, which is levied on fuel, alcohol, tobacco, soft drinks and sugar.

The allure of lottery is certainly understandable - after all, who wouldn't want to be the next big winner, sipping cocktails on a private jet, hopping from one ገበታ ለሃገር resort to another. Unfortunately, lottery is often a regressive tax that disproportionately affects low-income people and those that don’t realize the odds of winning. 

Global trends evidence growing legalization on various forms of betting, including sports betting. The betting platforms are usually run by private entities but governments tax each bet and winnings.

In Ethiopia, sports betting was legalized in 2018 and immediately betting shops sprang up across major cities but since then some ታሽግዋል measures have been taken for outlets near schools and generally restricted advertisement.

The government seems to be locked in a game of haves and have nots, trying to balance the allure of easy money with the social costs of gambling and speculative games.

And despite the lottery being a funding arm for the government, its direct economic impact is questionable but who’s really betting on that?

Feeling The Squeeze: Ethiopia’s Credit Crunch Conundrum

Borrowing

“ገንዘብ የለም!”

A phrase we’re getting way too familiar with while talking to our bank buddies these days.

Indeed, bank liquidity has dried up and the sector in itself has had a huge problem for quite some time now.

In Ethiopia, government-owned enterprises (GOEs) have long played a significant role in driving economic development and providing essential services to the population. 

However, recent concerns have emerged about the impact of GOEs on the country's credit landscape, with some arguing that their borrowing practices are exacerbating a credit squeeze in the economy.

Let's dive into the numbers: 

One example of GOEs contributing to the credit squeeze is the EEP which has accumulated significant debt over the years to finance large-scale infrastructure projects.

You might also like: EEP and Its 300 Billion Birr Debt! 🤯

While these projects are essential for expanding Ethiopia's energy infrastructure, they have also strained the country's banking sector and limited lending to other sectors of the economy.

But not all GOEs are causing this systemic breakdown: Ethiopian Airlines is 100% state owned but counts foreign lessors and overseas banks as partners to grow its aircraft fleet and expand its global footprint. And while its local borrowing is slightly significant, it’s ranked significantly lower to the other GOEs.

Be that as it may, the credit squeeze caused by GOEs has implications for Ethiopia's economic growth and competitiveness. Limited access to credit hampers private sector investment and entrepreneurship, stifling innovation and job creation.

Moreover, GOEs' debt burdens could pose risks to financial stability if not managed effectively.

Addressing the credit squeeze requires a multi-faceted approach:

So next time your hear the words ገንዘብ የለም at a party, pull out your newsletter notes and show them these steps.

That should earn you a few ‘cool’ points 😉

Next week —> VAT is getting a makeover! We touch on Taxes, Policies, Budgets and how the government earns and spends money.

NOTE: Last week’s publication erroneously states that the Ethiopian Diaspora Trust Fund (EDTF) had deployed USD 40 mln. Correct currency is ETB 40 mln instead of USD.