Ethiopia streamlines tax exemptions, eyes new levies, and gains IMF backing in bid to boost revenue and stabilize its economy.
By Charles Wachira
Ethiopia Accelerates Tax Reforms Amid Economic Strains
The Ethiopian government is rolling out wide-ranging tax reforms to boost revenue, modernize fiscal policy, and attract investment—critical steps as the country grapples with high inflation, regional instability, and a persistent foreign exchange crunch.
According to a recent International Monetary Fund (IMF) report released on January 29, 2025, Ethiopia is working to eliminate tax exemptions, broaden its tax base, and introduce new levies—all in a bid to stabilize the economy and enhance public finances.
Ending Loopholes and Revising Incentives
Central to the reforms is a directive to end tax exemptions on imported intermediate goods—concessions previously extended to attract local and foreign investors. In Kenya, attempts by the Government to raise taxes on essential goods led to national protests that shook investors’ confidence.
“The Ethiopian government is finalising a directive to streamline and eliminate tax exemptions for imported intermediate inputs,” the IMF stated in its latest country report.
The government also plans to close corporate tax loopholes and restructure the presumptive tax regime for informal businesses—a sector that constitutes a large portion of Ethiopia’s economy.
New Taxes: Vehicles and Property in the Spotlight
In the 2025/26 fiscal year, new motor vehicle ownership taxes will be implemented, targeting middle- and high-income earners. The government is also reassessing personal income tax thresholds to improve fairness and revenue efficiency.
But the most contentious plan remains the proposed property tax. The measure, currently under parliamentary debate, has drawn concern over its impact on low-income households and small-scale landowners.
“Are we improving the tax system by overburdening these segments of society?” asked Ewnetu Alene, Chair of the Standing Committee on Democratic Affairs.
IMF Lifeline: Credit Facility Supports Reform Agenda
These tax reforms are part of Ethiopia’s four-year Extended Credit Facility (ECF) agreement with the IMF. In January 2025, the second review unlocked $248 million, bringing total disbursements under the $3.4 billion package to $1.611 billion.
The IMF says the reforms are necessary to:
- Create fiscal space
- Tame inflation, expected to return to single digits by 2028
- Ease forex constraints
“These measures, while difficult, are expected to support higher growth,” the IMF noted in its report.
Persistent Challenges: Inflation, Displacement & Conflict
Despite the reform momentum, Ethiopia remains mired in structural challenges. Inflation is projected to peak at 25% in late 2025. Combined with internal displacement and ethnic conflicts in Amhara, Oromia, and Tigray, the pressure on public spending and aid dependency is increasing.
The IMF warns that “elevated downside risks” could derail the reform agenda. However, support from the World Bank, African Development Bank, and European Union is helping to cushion Ethiopia’s path to recovery.
Revenue Trends and Government Targets
Despite hurdles, revenue collection is trending upward. Ethiopia reported 451 billion birr in the first half of the 2024/25 fiscal year—putting it on track toward a 1.5 trillion birr annual target.
Finance Minister Ahmed Shide stressed that expanding the tax base and improving compliance are crucial:
“We’re committed to engaging the public in understanding why these reforms matter.”
With its revenue-to-GDP ratio lagging behind the Sub-Saharan Africa average, Ethiopia aims to close the gap through tighter policies and smarter collection mechanisms.
The Bigger Picture: Ethiopia’s Fiscal Reboot
Ethiopia is shifting from its previous infrastructure-led growth model to one anchored in sustainable, revenue-driven development. With over 120 million people, the country’s future hinges on generating domestic resources to fund services, reduce poverty, and attract foreign investment.
The current reform program—if sustained—could be the most impactful fiscal shift Ethiopia has undertaken in decades.
“While opposition to some tax measures is expected, the broader vision is a stable and self-reliant economy,” said economist Getachew T. Alemu.