Ethiopia’s tax-to-GDP ratio has declined significantly over the past decade, despite strong economic growth

• Overall Decline

  • Tax-to-GDP ratio fell from 12.4% in 2014/15 to 7.5% in 2022/23.

  • Largest declines: VAT (-2.4 percentage points), trade taxes (-1.1 pp), corporate income tax (-0.7 pp), and employment income taxes (-0.3 pp).

• Expected vs. Actual Trends

  • Normally, tax-to-GDP rises with growth due to expanding formal sectors and improved administration.

  • Ethiopia, like Kenya, Rwanda, and Indonesia, experienced the opposite trend.

• Role of Public Sector in Tax Collection

  • Ethiopia’s economy was previously driven by large-scale, state-backed investment projects.

  • Public sector investment share of GDP fell from 37% in 2015/16 to 22% in 2022/23.

  • Government and state-owned enterprise (SOE) investment fell from 14% to 7% (2021/22).

  • Decline in public sector contracts reduced VAT withholding and compliance, especially in construction.

  • Profitability decline in Commercial Bank of Ethiopia lowered corporate tax revenues.

  • Personal income tax revenues fell due to reduced public employment share, mitigated somewhat by frozen thresholds.

• Private Sector Weaknesses

  • Private sector growth did not translate into tax revenue due to weak administrative systems.

  • Compliance problems in retail and wholesale sectors worsened the revenue gap.

• Falling Imports and Currency Overvaluation

  • Imports-to-GDP ratio declined, reducing import tax revenues.

  • Lower imports linked to reduced public investment and restrictions from an overvalued Birr.

  • Overvaluation suppressed the Birr value of imports and required restrictions on foreign currency use.

  • Import tax revenues began recovering after 2024 currency devaluation, with customs duty revenues doubling (July 2024–April 2025 vs. previous year, inflation-adjusted).

• Lessons for Other Countries

  • Reliance on narrow tax bases (public sector, imports, or specific industries) increases vulnerability.

  • Diversified tax bases and strong enforcement mechanisms are essential for sustainability.

  • Exchange rate and trade policies strongly influence tax revenues; reforms can raise revenue but may increase inflation and debt costs.

  • Revenue performance analysis must combine tax microdata, local context, and country-specific factors, not just cross-country models.

  • First step to reform is diagnosing causes; in Ethiopia, priority should be improving private sector tax administration and enforcement.