Addis Abeba — In recent years, the Ethiopian government has implemented fiscal measures to enhance revenue collection from both tax and non-tax sources, aiming to finance its rapidly expanding annual budget. This initiative gained significant momentum in 2023 when the Addis Abeba City Administration revised tax rates on house roofs and walls, a decision that generated widespread concern among homeowners regarding its potential financial implications.
The scope of fiscal reform subsequently broadened following the launch of macroeconomic reforms in late July 2024. Key changes included revisions to the Value-Added Tax (VAT) and excise tax regulations, alongside the introduction of new levies. Amendments to the VAT proclamation now impose a 15% VAT on utilities--including electricity and water consumption--as well as on animal feed.
During the last fiscal year, enforcement of a new excise tax law extended excise tax collection to encompass novel goods and services, including telecommunications and cross-border digital services. Additionally, a new social development tax has been introduced and implemented specifically on luxury goods. Further expanding revenue channels, the national parliament approved legislation in January 2025 authorizing municipalities to collect property taxes.
Alongside these tax-based efforts, the government has enacted policies to bolster non-tax revenue. These include increases in public service fees. Notably, the Ethiopian Electric Utility (EEU) implemented a substantial tariff reform effective September 2024, resulting in a 122% increase in electricity rates.
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Recent reports indicate that revenue-raising measures--such as increases in VAT, adjustments in tariffs, hikes in service fees, and the introduction of new property taxes--are already affecting a significant portion of the population. These policies have disproportionately impacted households with fixed and low incomes, for whom even minor price increases translate into severe financial strain. The burden is particularly acute among civil servants, low-income urban residents, and informal sector workers, many of whom are now forced to make distressing trade-offs to make ends meet. There are growing accounts of families skipping meals, moving to smaller or more remote dwellings, and abandoning essential transportation in order to survive.
Furthermore, the transition to a market-based exchange rate regime in late July 2024 triggered a significant depreciation of the birr, which fell from around 56 per dollar in the official market to over 135 birr currently. This shift has led to steep increases in the prices of essential goods, including food, fuel, and medicine. In addition, the subsequent increase in fuel prices has intensified economic difficulties, leading to a more than twofold rise in public transportation fares.
The recent revenue-enhancing measures, which impose additional strains on low- and fixed-income earners, are part of the government's efforts to secure urgently needed foreign currency-denominated loans from Bretton Woods institutions, including the International Monetary Fund (IMF) and the World Bank. Although these tax measures remain unpopular among the local population, these institutions have praised the Ethiopian government for the effective implementation of its tax initiatives, emphasizing the importance of continuing the initiative moving forward. During her visit to Ethiopia in February 2025, IMF Managing Director Kristalina Georgieva acknowledged the difficulties associated with the country's ongoing macroeconomic reforms, describing them as "tough" and noting that they "take time." She urged the public to "maintain unity" in supporting the implementation of these policies, stressing that they would ultimately lead to "tremendous outcomes."
These policies have disproportionately impacted households with fixed and low incomes, for whom even minor price increases translate into severe financial strain."
Ethiopian officials also appear determined to advance these tax measures further going forward. While defending the government's 2025/26 budget proposal during parliamentary debates in July 2025, Finance Minister Ahmed Shide emphasized that efforts to increase public revenue--primarily through expanded taxation--will be further intensified in the coming fiscal years. This shift, he argued, is not a matter of policy preference but of necessity. With the government having ceased borrowing from the central bank and restricted its access to low-interest domestic loans, raising revenue significantly through taxation has become, in Minister Ahmed's words, "a matter of life and death."
Among the measures scheduled for implementation in the 2025/26 fiscal year is the introduction of the Minimum Alternative Tax (MAT). This policy aims to address what authorities describe as "excessive" tax exemptions extended to companies, ensuring that all businesses--regardless of whether they break even or declare bankruptcy--pay at least a minimum level of corporate tax to the government.
Additionally, a revision to the withholding income tax rate is also expected during the same period, while plans are also in place to fully enforce the 15% excise tax on fuel, alongside the complete implementation of the 15% VAT on petroleum products. Moreover, a new motor vehicle circulation tax--a levy on fuel-powered vehicles--is expected to be introduced through legislation during the 2025/26 fiscal year.
The recent introduction of new taxes and amendments to existing tax laws comes at a time when government revenue is growing in double-digit year-on-year. Official statistics reveal that Ethiopia's national tax revenue experienced substantial growth between the 2018/19 and 2023/24 fiscal years, more than tripling from 235.2 billion birr to 723.8 billion birr. Over this period, tax revenue grew at an average annual rate of 19.5%. Furthermore, tax revenue climbed to nearly 900 billion birr in the 2024/25 fiscal year, registering a 24% increment compared with the previous year. Looking ahead, the government plans to finance 57% of its 1.93 trillion birr budget for 2025/26 by generating 1.1 trillion birr in tax revenue. It also plans to raise an additional 270 billion birr from non-tax sources.
Inflation distorting tax reality
In support of their argument for boosting tax revenue further, officials frequently cite Ethiopia's tax-to-gross domestic product (GDP) ratio, which currently stands at 6.8%, a figure significantly below the 15% minimum recommended by the IMF. This gap is often presented as evidence of underperformance in domestic revenue mobilization and a key constraint on public investment and fiscal sustainability.
Indeed, the tax-to-GDP ratio is a widely used benchmark in economic policy, offering a snapshot of how much of a nation's economic output is being captured through taxation. When used appropriately, it allows for meaningful comparisons across countries and over time, helping to identify potential areas for revenue enhancement. However, in an economy characterized by volatility and structural challenges--such as Ethiopia's--relying solely on this indicator can be misleading.
Research indicates that a range of factors, most notably high inflation, can distort both nominal tax revenues and GDP estimates, undermining the ratio's accuracy as a measure of true tax potential. This phenomenon is explained by the theory of bracket creep (fiscal drag), which states that in countries like Ethiopia that operate under a progressive tax system, inflation pushes taxpayers into higher income brackets based on nominal earnings, even when their real incomes have not increased. This results in higher tax liabilities without any actual improvement in living standards, artificially inflating tax revenue relative to nominal GDP. The outcome is a misleading impression of increased tax potential when, in reality, the change is merely a byproduct of inflation.
Even if the inflation rate is decreasing, it does not mean the prices of goods and services are falling."
In recent months, officials have appeared on state-owned media outlets stating that inflation is steadily coming under control, pointing to a decline in the 12-month moving average rate from 34.5% in August 2022 to 16% in June 2025. While this achievement is indeed commendable and signals a move toward greater economic stability, it's crucial to understand a key distinction: even if the inflation rate is decreasing, it does not mean the prices of goods and services are falling. This is because inflation fundamentally represents the rate of increase in prices, not the absolute price level itself. Therefore, a decreasing inflation rate simply indicates that prices are continuing to rise, but at a slower pace than in previous periods.
Revenue drive clouded by questionable GDP figures
Finance Minister Ahmed also underscored the urgent need to reverse Ethiopia's steadily declining tax-to-GDP ratio. He framed the issue not merely as a matter of fiscal performance but as a critical challenge to the nation's capacity to finance essential public services, invest in infrastructure, and sustain economic stability.
Since its peak at 12.4% in 2014/15, Ethiopia's tax-to-GDP has been on a steady decline, currently standing at 6.8%. A new study conducted by the Ministry of Finance, in collaboration with the Institute for Fiscal Studies, offers fresh insight into this downward trajectory. One particularly striking possibility raised in the research is the potential overstatement of GDP growth in recent years. As the report notes, "A final possible reason for a falling tax-to-GDP ratio is that GDP growth in recent years may have been overstated." The study illustrates this point with a compelling scenario: "If GDP was in fact 10% lower than officially measured, the true tax-to-GDP ratio in 2022/23 would be 8.3% rather than the official 7.5%. It further explains, "If GDP had become increasingly overstated in recent years--in other words, if GDP growth had been overstated--this could also explain (part of) the decline in the tax-to-GDP ratio."
These findings suggest that at least some portion of the decline in the tax-to-GDP ratio may not be a genuine fall in fiscal capacity but rather a result of distortions in how economic output is measured. If actual economic activity is smaller than official figures indicate, tax revenues may not be underperforming as sharply as headline numbers suggest.
The implications are significant, as the findings of the study compel us to ask important questions about the accuracy of Ethiopia's economic statistics and the broader implications for fiscal policy. Persistent overestimation of GDP does more than inflate perceptions of growth--it risks undermining the foundation of sound fiscal policy. Revenue shortfalls may be misdiagnosed, budget planning may be based on inflated baselines, and structural challenges in tax administration could be overlooked. Furthermore, the findings send a clear message to policymakers: the challenge lies not only in raising tax revenues but also in ensuring that the metrics guiding fiscal strategy are credible and transparent.
Chasing Kenya's tax-to-GDP ratio in inflation-ravaged Ethiopia
In a recent address to parliament, Prime Minister Abiy Ahmed pointed to Kenya as a relevant regional benchmark, emphasizing its more advanced domestic revenue mobilization. He noted that the East African nation collects approximately 14% of its GDP in taxes--nearly double Ethiopia's current tax-to-GDP ratio of 6.8%. "If we manage to increase our tax-to-GDP ratio to Kenya's level, we could collect over 1.8 trillion birr," he stated, highlighting the substantial fiscal potential such an improvement could unlock under existing economic conditions.
Before drawing direct comparisons between Ethiopia and Kenya in terms of tax performance, it is essential to consider the broader macroeconomic context in which these tax systems operate. This is because key factors such as inflation levels, the cost of living, household purchasing power, and overall standards of living differ significantly between the two countries and must be taken into account to ensure a meaningful and fair assessment.
According to official data, the highest annual inflation rate Kenya experienced since 2020 was 7.7%, recorded in 2023, followed by a decline to 4.5% in 2024. This reflects a relatively stable macroeconomic environment, supported by consistent monetary policy and manageable fiscal pressures. In contrast, Ethiopia has faced persistently high inflation over the past five years, driven by a combination of factors including loose monetary policy, prolonged currency depreciation, supply chain disruptions, conflict, and rising global commodity prices--particularly fuel and fertilizers.
Data from the Ethiopian Statistical Service (ESS) illustrates this volatility: the annual average inflation rate stood at 20.1% in 2020/21, surged to 33.7% in 2021/22, moderated marginally to 32.6% in 2022/23, declined further to 26.6% in 2023/24, and reached 16% in 2024/25. While the downward trend in recent years is a positive signal of stabilization, inflation has remained stubbornly high for an extended period, eroding the purchasing power of consumers and undermining economic confidence.
When compounded over time, the cumulative impact of this inflation is staggering. A calculation of the total price increase from 2020/21 to 2024/25--factoring in the compounding effect year after year--reveals an approximate rise of 212.65%. In practical terms, this means that an item costing 100 birr at the beginning of the period would cost about 312.65 birr by the end of 2024/25, assuming uniform inflation across all goods and services. While actual inflation varies by category--especially with food inflation often exceeding the overall average--this figure illustrates the dramatic loss of purchasing power of consumers over a relatively short period.
This rapid erosion of purchasing power has profound implications. Absent commensurate income growth, this means households now afford only one-third of the goods and services they could purchase five years ago. The result is a significantly higher cost of living, diminished real incomes, and widespread economic hardship--disproportionately affecting low- and middle-income families. Essential expenditures--food, housing, transportation, and healthcare--have become markedly more burdensome. Given the persistently high inflation in basic necessities like food (which constitutes a large share of household budgets in Ethiopia), these groups face acute financial strain as a greater proportion of their stagnant incomes is consumed by non-discretionary spending.
Tax hikes hit hard as real incomes plummet
Ethiopia's intensified tax collection efforts, while yielding nominal fiscal gains, are occurring amidst a rapid decline in consumer purchasing power, imposing significant real costs on households. The combination of sustained inflation and the introduction or expansion of various taxes is notably eroding the already limited incomes of the poor and those on fixed wages.
Even when assessed in broader economic terms, Ethiopia's nominal GDP per capita is estimated at $1,070 in 2025, ranking among the lowest globally. By comparison, Kenya's nominal GDP per capita for the same year is forecast at $2,468--more than double Ethiopia's level.
A more targeted look at individual earnings reveals an equally stark disparity. According to 2025 estimates, the average monthly salary in Ethiopia stands at approximately 7,052 birr--equivalent to about $52 at current exchange rates. This amounts to an annual average income of 84,624 birr, or roughly $622. However, averages can be misleading in economies marked by pronounced inequality. The median monthly wage, which better represents the typical earner, was reported at 3,000 birr ($22) in the 2024 International Labour Organization (ILO) assessment, translating to an annual income of 36,000 birr ($266). These figures largely reflect earnings in the formal sector, including urban employment in services, manufacturing, and public administration.
Yet, the reality for most Ethiopians lies far below this threshold. Agriculture remains the primary source of livelihood for over 70% of the population, and the vast majority of these workers operate in the informal economy, where incomes are irregular, unprotected, and often fall well below the poverty line. Rural smallholder farmers, daily laborers, and informal traders, though essential to the economy, seldom benefit from stable wages or social protections, leaving them particularly vulnerable to economic shocks. As such, fiscal policies must be carefully designed to avoid deepening hardship among those already living on the margins.
In contrast, Kenya's annual average salary stood at approximately $4,000--six times higher than Ethiopia's average in dollar terms. This reflects not only higher productivity and a larger formal economy compared to Ethiopia but also a more stable macroeconomic environment that supports wage growth and consumer confidence.
These disparities suggest that Ethiopia's aspiration to achieve Kenya's tax-to-GDP ratio must be pursued with a clear recognition of the vastly different economic realities facing the two East African nations. Kenya's greater capacity for tax collection is supported by a more stable macroeconomic environment, significantly higher household incomes, and a larger formal economy. In contrast, Ethiopia faces a different situation, where inflation has eroded purchasing power by over 200% in just five years and the majority of the population relies on subsistence incomes. In this context, raising taxes to Kenyan levels would impose an unsustainable burden on households already struggling to meet basic needs. Any effort to expand revenue must therefore be carefully calibrated, taking into account not only fiscal potential but also the imperatives of social equity and economic resilience.
Raising tax burdens in an environment characterized by stagnant real incomes, widespread informality, and declining purchasing power carries the risk of exacerbating social and political instability rather than fostering a healthy political climate and a sustainable macroeconomic environment. This dynamic was clearly illustrated in Kenya's experience with proposed tax increases last year.
In June 2024, widespread opposition to the government's proposed tax measures sparked violent confrontations across the country. The legislation, which included a $2.6 billion tax hike, would have significantly increased the cost of essential goods, including bread, sugar, and petroleum, disproportionately affecting low-income and working-class households. In response to the unrest, which tragically resulted in at least 39 deaths and left hundreds injured, President William Ruto ultimately withdrew the Finance Bill 2024. This tragic event highlighted the delicate balance required between fiscal policy and social stability.
To fully grasp the implications of increased tax burdens on middle- and low-income consumers, it is crucial to first understand Ethiopia's regressive tax structure. Ethiopia's tax system heavily relies on indirect taxes, with VAT and excise duties accounting for more than 70% of the total tax revenue. According to a study by the Organization for Economic Co-operation and Development (OECD), this reliance on indirect taxes makes "tax increases particularly burdensome for low-income households during inflationary periods."
Tax policy cannot be divorced from broader socioeconomic conditions."
The Ethiopian government's intensified tax collection efforts come at a time when inflation has significantly diminished the value of wages, and real incomes have remained largely stagnant. This convergence of factors creates a precarious situation for millions of households already struggling to meet basic needs. The World Bank underscored this risk in its 2023 Economic Update, warning that "increased tax pressure during periods of declining real incomes can push more households below the poverty line, particularly in low-income countries like Ethiopia, where consumption taxes form a large portion of the tax base."
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When inflation is high and incomes remain unchanged, households are already struggling to afford basic necessities such as food, housing, and healthcare. Imposing higher taxes, whether through direct means like income tax or indirect measures like VAT and excise duties, further reduces their disposable income. This, in turn, pushes more people into poverty or deepens the struggles of those already experiencing it.
Fiscal push deepens poverty
Ethiopia's poverty rate is already in an upward trajectory, with living standards deteriorating due to persistent inflation, conflict, and structural economic challenges. An assessment conducted last year by the Ministry of Finance and the Civil Service Commission highlights the severity of this issue within the civil service. It revealed that of the 2.3 million civil servants in the country, nearly half are living in extreme poverty and are disproportionately affected by the rising cost of living.Although the government implemented a salary adjustment for civil servants last year, reports indicate that the increase had little to no meaningful impact on improving living standards or lifting employees out of poverty. With inflation outpacing wage growth, the real value of salaries continues to decline, rendering such adjustments largely symbolic.
Recent findings from international organizations further illustrate a worsening poverty situation in Ethiopia. The Afrobarometer lived poverty survey (2024) reveals a high level of deprivation, with 86% of respondents reporting they had no cash income at least once in the past year. Furthermore, 54% of respondents reported moderate or high levels of lived poverty, indicating that significant portions of the population face frequent shortages of basic needs.
Similarly, the Global Multidimensional Poverty Index (MPI) report, released in October 2024, indicates that 68.7% of Ethiopia's population is classified as multidimensionally poor. This means they suffer from deprivation in at least one-third of the weighted indicators across health, education, and living standards. Furthermore, the World Bank recently issued a warning that poverty is worsening in Ethiopia, placing the country among 39 nations where extreme poverty is deepening.
Together, these findings underscore a critical point: tax policy cannot be divorced from broader socioeconomic conditions. In a context of widespread poverty and inflation-driven hardship, increasing tax burdens--especially through regressive mechanisms--risks undermining both equity and stability. Policymakers must carefully weigh the fiscal necessity of revenue generation against the human cost it may impose on the most vulnerable. Any meaningful revenue strategy must be accompanied by measures to boost real incomes, expand formal employment, and protect the most vulnerable from the compounding effects of inflation and taxation.
Ethiopia's push to raise more revenue through new and expanded taxes reflects an urgent fiscal need, but it also highlights the difficult trade-offs facing the country. While officials point to the benefits of stronger revenue collection and the demands of international lenders, the reality on the ground tells a different story. For millions of households already struggling with high inflation and stagnant wages, each new tax feels less like a policy adjustment and more like an added burden. The growing gap between policy ambition and people's daily struggles raises tough questions about the sustainability of this path. When families are forced to cut meals, move into smaller homes, or forgo basic services, it shows that the cost of fiscal reform is being carried disproportionately by those least able to afford it.
Looking ahead, policymakers face a difficult balancing act: aligning the state's fiscal needs with the pressing realities of its people. A strategy that only focuses on meeting budget targets or satisfying external lenders will not succeed if it ignores the lived realities of citizens. For fiscal reforms to be sustainable, it requires creating a fair and effective tax system, stronger protection for vulnerable groups, and policies that prioritize job creation and income growth. Otherwise, the government's revenue drive could come at the expense of social cohesion and the very development it seeks to achieve. AS
Editor's Note: Samson Hailu, the author of this commentary, holds a Master of Business Administration with a specialization in finance and a Bachelor of Arts in economics. He can be contacted at [email protected]
