Ethiopia is navigating a moment of profound change, driven by the urgent need to address the challenges that have slowed down its growth for years. One of the boldest steps in this journey is a sweeping economic reform aimed at revitalizing the country's financial system. These efforts, launched after the political shift in 2018, are intended to bring stability and lay the groundwork for a more prosperous future.
"A defining moment came on July 29, 2024," said Ermias Amelga, an economist and businessman, when Ethiopia made the daring choice to float its currency, the birr, letting the market determine its value. It was a necessary step to align with global financial norms, but it wasn't without pain. Within a day, the birr's value against the U.S. dollar plummeted by 30%, dropping from 57.48 to 74.73 per dollar. For many Ethiopians, this abrupt shift felt like stepping into unknown territory, uncertain and daunting, but it also reflected the country's determination to chart a new economic course.
The impact was immediate. As an import-dependent nation, Ethiopia saw the cost of living surge almost overnight. Prices for imported goods like food, fuel, and medicine skyrocketed, straining household budgets and putting businesses under pressure. Families struggled to stretch their incomes, and the reality of economic reform hit home in a very personal way.
In response, the government took action. On July 8, the House of Peoples' Representatives approved a historic budget of 971.2 billion birr for the 2024/2025 fiscal year. But as the effects of the reform rippled through the economy, the Ministry of Finance had to ask for an additional 582 billion birr, pushing the budget to 1.5 trillion birr. This extra funding is aimed at stabilizing the economy and offering much-needed support to low-paid government workers and vulnerable families relying on social safety nets.
As to the Minister of Finance Ahmed Shide, to meet the demands of this record-breaking budget, the government is preparing to broaden its tax base. The approved budget includes ambitious revenue targets, with 281 billion birr expected to come from taxes. The country seeks to collect 1.5 trillion birr ($12.5 billion) in the fiscal year to July 7. That compares to 613 billion birr the finance ministry set in its 2024-25 budget presented in June. However, for many Ethiopians, this will likely mean changes in tax policy and enforcement, another layer of adjustment in a period already marked by significant economic transformation.
With ambition to expand its tax base and enhance revenue collection, Ethiopia's Proclamation No. 1341/2024, approved in July 2024 after 20 years, introduces a clearer and more equitable VAT framework. The law applies VAT to goods and services while exempting capital goods used in production to encourage investment in machinery and equipment. Additionally, it includes provisions for tax fairness and digital integration, aiming to boost economic growth and support the private sector.
Ethiopia has faced persistent macroeconomic challenges and a budget deficit, primarily funded through loans and subsidies. "The budget falls short of the country's needs, as indicated by key macroeconomic indicators," said Natae Eba, Seasoned Tax Lawyer. To address these issues, the government has introduced tax reforms, including a three percent social welfare levy on imports, with some exceptions. Previously exempt services such as electricity, water, transportation, and e-commerce are now taxed. This move, aims to increase tax revenue to meet societal demands.
However, he acknowledged there are limitations, expressing concern that the creation of new businesses and registration of new TIN numbers must be prioritized to avoid overburdening already strained businesses. He also noted that higher tax rates on even small services are discouraging businesses, including foreign direct investment (FDI), and affecting business predictability. "As costs rise, uncertainty grows, potentially deterring investors, particularly from China, who had once seen Ethiopia as a promising destination," he added.
While tax enforcement has improved, businesses that were once overlooked due to weak enforcement are now required to comply with the law. However, Natae pointed out that challenges persist in the tax collection system. He emphasized that a one-size-fits-all approach to audits doesn't work, as businesses in sectors like manufacturing and retail operate differently. Tax authorities need to recognize these differences and avoid imposing their own limitations on businesses. Additionally, customs regulations should allow importers to declare goods at market prices, without applying international pricing standards, which has led to unnecessary disputes.
Experts also indicate that the government should encourage small businesses to flourish as they have the potential to work in large numbers at grass roots levels and generate a considerable amount of tax revenue.
The government's tax revenue is on the rise, with ETB 312 billion collected this quarter, a figure that once represented an entire year's target. However, experts argue that true revenue growth will depend on the creation of new businesses and the registration of new TIN numbers. They stress that when setting revenue targets, it's crucial to consider the potential number of transactions and provide clear projections for revenue growth. This approach will help prevent overburdening existing businesses.
As it is understood to meet the nation's development endeavor, the government must allocate budgets, attracting local and foreign investors by introducing new laws and improving the previous one, which was regarded as an obstacle to rapid development, and incentivizing investors through providing tax holidays and loan services with fair interest rates. Along with these, it strived to broaden its tax base, which is a source of domestic revenue that is allocated for development endeavors.
According to experts the tax GDP ratio as compared to the other Sub Saharan African countries is minimal because still a number of medium and small enterprises operate in the informal channel with no registration as legal tax payers. Therefore, it is necessary to bring them to the formal channel and enlist them as tax payers.
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The other thing that should be considered is that because of rampant corruption particularly in public service giving institutions many businessmen with more than millions of turn over annually evade tax as the result of which the nation loses huge amount of revenue. Therefore tracing them and putting them to legal accountability is essential.
The other clandestine activity which hampers the nation's tax collecting capacity is illegal trade. According to the Ministry of Agriculture recent report various types of agricultural products including livestock, oil seeds, cheek peas, grains, khat, fruits and vegetable find their way to the neighboring countries market illegally. Had they been exported in the formal and legal channel the nation would have obtained the necessary income through taxation. The government must take various measures persistently to mitigate the problem needs steady effort and action.
The other sector which is affected by the illegal trade is mining. According to the recent report by Auditor General submitted to the parliament, Precious metals, such as gold, copper, cobalt and tantalum are smuggled in a large volume in which the nation lost millions of hard currency which would have been allotted to the nation development effort.
