Ethiopia is facing an unprecedented slide in one of its most critical economic indicators: the tax-to-GDP ratio.
A joint study by the Ministry of Finance’s Tax Policy Department and the UK-based Institute for Fiscal Studies (IFS), through their TaxDev initiative, has revealed that the country’s tax-to-GDP ratio dropped to 7.5% in 2022/23, its lowest point in over a decade. That’s down from a peak of 12.4% in 2014/15, a staggering fall of 4.9 percentage points.
“This decline is unparalleled globally over the period,” the report states, noting no other country has seen such a steep drop in relative terms.
The findings arrive as Ethiopia finalizes its National Medium-Term Revenue Strategy (NMTRS), an ambitious plan to raise the tax-to-GDP ratio by 7 percentage points over the next five years.
A Gap That Speaks Volumes
At 7.5%, Ethiopia’s tax intake is far below its neighbors: Uganda (13.1%), Kenya (15.2%), and Rwanda (15.7%). The Sub-Saharan African median sits at 13.2%.
Breaking down the gap, the study points to three main culprits:
- Structural constraints (≈ 2.2 pp): Low GDP per capita, a high share of agriculture (a hard-to-tax sector), limited manufacturing, and low urbanization.
- Policy shortfalls (≈ 2.1 pp):
- Historically negligible fuel excises and VAT — Ethiopia collected less than 0.1% of GDP from these in 2021/22 versus Rwanda’s 0.6% and Kenya’s 1.6%.
- No taxes on airtime/data or financial transactions, unlike peers.
- A VAT rate of 15%, below the SSA median of 17.5%.
- Compliance gaps (≈ 1.2 pp): Weaker tax administration, particularly in direct taxes and VAT.
Why the Numbers Collapsed
Between 2015/16 and 2022/23, Ethiopia’s ratio fell 4.6 percentage points.
- VAT revenues plunged by 2.0 pp.
- Customs duty and surtax fell 1.1 pp, hit by a collapse in imports (from 24% to 10% of GDP) as investment cooled and the birr remained overvalued.
- Corporate income tax dipped 0.74 pp, reflecting lower profitability, especially at the Commercial Bank of Ethiopia.
- Employment income tax shrank 0.36 pp, tied to stagnant wages in the formal sector.
The sharpest pain point? Compliance. VAT non-compliance alone accounted for 1.4 pp of the drop, with retail and wholesale sectors flagged for underreporting.
Beyond the Numbers: Conflict & Data Doubts
The Tigray conflict shaved an estimated 0.25 pp directly from the tax ratio by disrupting collections in the region. The broader economic damage — to GDP, imports, and governance — remains unquantified.
Questions over Ethiopia’s GDP measurement linger. Alternative indicators like satellite-based night-time light data suggest growth may be overstated, which could make the tax ratio appear lower than it is. The study, however, sticks with official GDP data for its analysis.
The Fix: Widen, Deepen, Digitize
The report urges Ethiopia to reduce its overreliance on import taxes and public sector contributions — which currently make up about 60% of federal revenues — and tap the private sector more effectively.
Key policy suggestions include:
- Designating large private firms as VAT withholding agents, mirroring past public sector practices that improved compliance.
- Raising VAT to 17.5%, the SSA median though with careful calibration to avoid boosting evasion.
On the administration side:
- Tighten monitoring to ensure tax laws are applied as written.
- Track the tax-to-GDP ratio in real time to spot problems early.
- Conduct randomized taxpayer audits to map compliance gaps.
- Improve and integrate administrative tax data across ministries.
Why It Matters
The tax-to-GDP ratio isn’t just a fiscal statistic, it’s the oxygen supply for Ethiopia’s development ambitions. A falling ratio means fewer resources for infrastructure, health, and education, and a heavier reliance on debt and aid.
If the NMTRS succeeds, Ethiopia could restore its tax ratio to near regional norms by 2028. But as the study makes clear, that will require not just new tax rules, but a cultural shift in compliance, enforcement, and policy execution.
