Addis Abeba — For Lombebo Mulatu, a federal government worker in Addis Abeba, life has become an unrelenting battle against rising costs. Each month begins with a heart-wrenching decision: pay the rent or buy food.
"My salary barely covers the basics," he said, the weight of his financial worries evident in his voice. "Rent alone consumes over 65% of my income. It's a constant struggle to put food on the table."
In an interview with Addis Standard, Lombebo vividly described the daily anxieties he faces.
"Prices fluctuate wildly," he explained. "Something you bought yesterday could cost 30, 40% more today."
His adaptation strategy is sobering: reducing meals to twice a day and walking long distances to avoid unaffordable transportation costs.
Lombebo's struggle isn't unique. Ethiopia's economy, battered by the ripple effects of the COVID-19 pandemic and consecutive internal conflicts, has left public servants like him reeling under the weight of inflation.
Lombebo's experience is not isolated.
Milkessa Mohammed, a government employee and teacher residing in the West Arsi Zone of the Oromia region, grapples with a similar challenge. His daily life has become a precarious balancing act between the demands of survival and the sacrifices necessary to fulfill his responsibilities.
With his modest salary of 8,000 birr after tax, more than 60% goes to house rent, leaving little for food, school fees, and other essentials. The rest, he says, is a struggle to stretch across a growing list of needs.
"We are praying just to feed our families and raise our children," Milkessa said. "Saving is unthinkable."
To make ends meet, Milkessa spends his vacation days painting houses, a skill he picked up from a former colleague. "It's the only way I can cope," he stated. "However, the extra work offers only temporary relief."
Inflation, Taxes, and the Daily Sacrifices
In recent months, the government has implemented various policies aimed at increasing revenue from both tax and non-tax sources. These measures have included an increase in public service fees.
Notably, the Ethiopian Electric Utility (EEU) implemented a significant tariff reform on 11 September, 2024, resulting in a substantial 122% increase in electricity rates.
Furthermore, the Addis Ababa Driver and Vehicle Licensing and Control Authority has increased service change fees from 17,100 birr to 30,000 birr. Additionally, the Ethiopian Immigration and Citizenship Service (ICS) has raised passport fees. The cost of a new passport is now set at 5,000 birr, while expedited services can cost up to 25,000 birr.
Alongside these fee increases, the government is revising tax laws to boost tax revenue. The changes include adjustments to property tax rates, revisions to value-added tax (VAT) and excise tax regulations, and the introduction of new taxes, such as property and environmental levies.
Just last week, the Ethiopian Electric Utility announced the implementation of a value-added tax (VAT) on consumption bills for the use of more than 200 kilowatt-hours of electricity per month.
The recent fuel price hike of up to eight birr per liter has further exacerbated economic challenges, driving public transportation fees to more than double.
We are praying just to feed our families and raise our children." Milkessa Mohammed, a government employee and teacher
In August 2024, Ahmed Shide, Minister of Finance, emphasized that a primary goal of the tax reform policy is to substantially increase the tax-to-gross domestic product (GDP) ratio. Currently, this ratio stands at 6.8%, significantly below the International Monetary Fund's (IMF) recommended minimum of 15%.
The importance of the minister's remarks became evident during the swearing-in of Ambassador Taye Atske-Selassie as Ethiopia's new president at a joint session of the House of People's Representatives and the House of Federation in early October 2024.
In his inaugural address to the joint session, President Taye outlined the government's primary objectives for the current fiscal year, stating, "The government's key objectives for the current fiscal year is to raise government revenue to 1.5 trillion birr."
According to the National Medium-Term Revenue Strategy, published by the Ministry of Finance in August 2024, the Ethiopian government aims to increase the tax-to-GDP ratio to 30% by the end of 2028 through the adoption of various policy reforms.
"The tax reform program is expected to play a crucial role in significantly reducing the country's debt burden while maintaining its growth trajectory," Ahmed noted.
Henok Fasil (PhD), a consultant at the United Nations Economic Commission for Africa, agrees that enhancing these revenues can indeed support economic growth by funding essential public services and infrastructure. However, he emphasizes that the success of such measures hinges on their careful design and effective implementation.
"If revenue-boosting strategies disproportionately burden low-income households, as the recent measures reveal, they may hinder economic growth by reducing disposable income and consumption," Henok stated. "Therefore, while increasing revenues is important, it must be balanced with equitable policies to avoid adverse effects on the economy."
Merid Tullu, a macroeconomist currently employed in the private sector, explained that revised tax laws, which increase income tax, sales tax, or VAT, place a disproportionate financial burden on lower-income households.
"Since these households allocate a significant portion of their income to necessities, any rise in consumption taxes substantially increases their cost of living," he noted. "This, in turn, can result in public discontent and, in extreme cases, political instability."
Merid's assertion is substantiated by the violent clashes that erupted between police and protesters in Nairobi, Kenya, in June 2024. These confrontations were sparked by widespread opposition to proposed tax increases in a country already grappling with rising living costs.
The proposed legislation, which included a $2.6 billion tax hike, was designed to bolster government revenue as part of the conditions tied to a $2.34 billion loan extended by the IMF in April 2021 under a 38-month agreement.
The tax measures outlined in the bill would have significantly raised the prices of essential goods, such as bread, sugar, and petroleum, disproportionately burdening low-income and working-class communities.
However, in the face of these violent protests, which tragically resulted in the deaths of at least 39 individuals and left hundreds injured, President William Ruto ultimately withdrew the Finance Bill 2024.
However, Ethiopian officials maintain that there is potential to increase tax revenue without imposing an excessive burden on the population. To substantiate this claim, authorities point to neighboring countries such as Kenya, Uganda, and Rwanda, which exhibit higher tax-to-GDP ratios compared to Ethiopia.
With a GDP of $116.3 billion, Kenya's current tax-to-GDP ratio stands at 14%, according to the IMF. In contrast, Ethiopia, with a GDP of $145 billion, has only managed to collect tax revenue amounting to less than 10% of its GDP.
While the government asserts that these measures are vital for sustaining economic growth, experts stressed that they have contributed to a rising cost of living, placing substantial strain on low-income households and fixed-wage earners.
According to Henok, increasing taxes and public service fees can raise the cost of living, disproportionately impacting lower-income households. He noted that these households allocate a larger portion of their income to essential goods and services, making them particularly vulnerable to price increases.
Henok further emphasized that increased taxes and fees can force low-income families to make difficult choices between essential needs such as food, housing, and healthcare.
"This financial strain can lead to reduced access to necessary services, negatively impacting their quality of life and perpetuating cycles of poverty," he argued.
According to Lombebo, the government's attempts to increase revenue have only worsened the situation, squeezing the life out of ordinary citizens.
Milkessa also believes the government is out of touch with the realities faced by ordinary citizens.
"Government officials don't understand the daily struggles we endure," he emphasized. "How can they expect us to thrive when we can barely survive?"
IMF's 'Friendly' or 'Harmful' Policy?
The revenue-boosting initiatives, which place additional strain on low- and fixed-income earners like Lombebo and Milkessa, are part of the government's efforts to secure urgently needed foreign currency-denominated loans from Bretton Woods institutions such as the IMF and the World Bank.
Despite Ethiopia's active pursuit of financial assistance from the IMF since 2021, no tangible progress was achieved until the government made a pivotal decision in late July 2024: to transition to a market-based foreign currency regime, abandoning the previous crawling peg exchange rate system.
Any rise in consumption taxes can result in public discontent and, in extreme cases, political instability." Merid Tullu, a macroeconomist
Following this crucial decision, the IMF announced its approval of a $3.4 billion loan to Ethiopia over a four-year period, contingent upon the successful implementation of an economic reform program.
Similarly, the World Bank's Board of Executive Directors approved a $1 billion grant and a $500 million concessional credit from the International Development Association (IDA) to support the second phase of the Homegrown Economic Reforms, initiated by the government in July 2023.
These funds are part of the approximately $10.7 billion that Ethiopia expects to secure through a combination of loans, grants, and debt re-profiling arrangements.
Merid generally views Ethiopia's relationship with the IMF as mutually advantageous. However, he emphasizes the importance of policymakers striking a balance between external demands and domestic priorities.
"It is imperative that the welfare of Ethiopian citizens remains paramount in economic decision-making to avoid jeopardizing national development goals," he noted.
Henok also contends that implementing policies that align with international institutions like the IMF can offer several benefits, such as access to financial support and enhanced credibility in global markets. However, he strongly emphasizes the crucial need to tailor these policies to Ethiopia's unique economic context and development goals.
"Blindly adopting external recommendations without considering domestic realities may lead to unintended negative consequences," Henok argued. "While collaboration with external actors is beneficial, policies should be adapted to serve Ethiopia's best interests."
Following the government's implementation of macroeconomic reforms, the nation, particularly the capital city of Addis Abeba, has experienced a notable increase in prices for a diverse range of consumer goods. This has prompted a government crackdown on businesses accused of engaging in price gouging and hoarding activities.
A survey conducted by Addis Standard across various markets within Addis Abeba revealed a significant surge in prices for certain products, particularly imported goods and essential domestic commodities such as oil, sugar, and onions.
Amid widespread reports of inflation and rising taxes driving even employed citizens into financial hardship, the life of Amanuel Abeje, a public servant in Bahir Dar, has become a relentless struggle of sacrifice.
Once able to manage his household expenses with careful budgeting, the rapid rise of living costs has shattered any semblance of stability. "Saving is a thing of the past," Amanuel told Addis Standard. "Everything has exponentially increased. I feel the cost of living weekly, if not daily."
To make ends meet, Amanuel has had to upend his life. His once-stable social routines and daily comforts have become distant memories. He moved to a smaller, cheaper house farther from work, walks home every day to save on transportation, and has begun skipping meals--often using fasting periods as a justification for eating less.
"It's not just about essentials anymore," he explained.
Finding a Way Forward
Officials assert that the government is undertaking various measures to address the price surges associated with the reforms, including a salary adjustment for public sector employees.
Speaking at a recent press briefing, Minister Ahmed explained that this salary adjustment became necessary in light of the macroeconomic reforms, which are "expected to place additional financial strain on fixed- and low-income earners."
"The salary adjustment aims to mitigate the rising cost of living for civil servants," he emphasized.
Despite promises of a salary adjustment, civil servants and fixed-income households feel abandoned by policies that seem disconnected from reality.
"The new salary adjustment is not enough to offset the relentless inflation," Lombebo lamented, pointing to the plunging value of the birr and skyrocketing living expenses.
Amanuel also noted that the post-tax salary increase provided minimal relief.
"While initially hopeful," he explained, "inflation has significantly eroded the salary increase. My net gain is only 700 birr."
Experts indicate that recent salary increases for civil servants can help offset some inflationary pressures. However, they assert that without broader measures, such as progressive taxation, targeted tax breaks, and improvements in tax administration, the benefits may be limited.
"Without mitigating measures, such as targeted subsidies or social safety nets, these policies may exacerbate poverty and inequality," Henok highlighted.
Scholars also contend that the rising inflation rate is a key driver of increased government expenditure, which subsequently compels the state to seek additional revenue from its citizens. They argue that this cycle creates a vicious circle, wherein inflation leads to heightened government spending, which, in turn, triggers further price increases as the government attempts to raise revenue through tax and non-tax sources.
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Life has become harder, and I fear it might get worse." Lombebo Mulatu, a civil servant
In June 2024, the House of Peoples' Representatives approved a substantial budget for the current fiscal year, amounting to 971 billion birr.
Despite allocating a budget approaching one trillion birr, legislators in November 2024 approved a significant supplementary budget proposed by the executive branch, amounting to 581.98 billion birr. This adjustment brought the total budget for the fiscal year to over 1.5 trillion birr.
However, government officials have consistently emphasized that the inflation rate is under control.
During a parliamentary session on 31 October, 2024, Prime Minister Abiy Ahmed reported a reduction in headline inflation, which had decreased from 28% the previous year to 17.2% as of September 2024.
In a subsequent parliamentary session held in early December 2024, Kassahun Goffe (PhD), Minister of Trade and Regional Integration, highlighted that enhanced supply mechanisms and the enforcement of price control measures had successfully lowered the food inflation rate from 29.2% in October 2023 to the current rate of 19%.
Despite intense scrutiny from lawmakers regarding the escalating prices of essential household and food items, Kassahun affirmed that, following the introduction of macroeconomic reforms, daily market monitoring and regulatory measures have been actively enforced. These efforts, he stated, include actions against traders responsible for contributing to the rising cost of living.
Experts suggest that businesses facing higher taxes may pass these costs on to consumers through increased prices, potentially contributing to inflation.
Henok noted that this practice disproportionately impacts low-income individuals who have less financial flexibility to absorb price hikes. To prevent such outcomes, he recommends balancing tax policies with measures that support business growth and protect consumers.
Merid proposed that implementing progressive taxation, providing targeted tax breaks, and enhancing tax administration could significantly mitigate the negative consequences of increased taxes and fees.
"By ensuring that wealthier individuals and businesses contribute a fairer share, the government can reduce the financial burden on low-income households and promote a more equitable economic system," he added.
Henok concurs, stating, "The government's approach should be balanced to avoid overburdening citizens, particularly low-income households. Effective strategies should also encompass prudent fiscal management, efficient public spending, and economic reforms that foster sustainable growth."
For now, as the rapidly rising cost of living continues to impact people across the country, Amanuel fears for the future.
"Hope is dwindling," he said. "Life has become harder, and I fear it might get worse."
Lombebo shares Amanuel's sentiment.
"It's a daily struggle, battling against rising prices and dwindling resources," he emphasized. "You just try to survive and hope for a better tomorrow."
