Ethiopia has suffered the sharpest and sustained crumble in tax-to-GDP ratio recorded anywhere in the world over the past decade, a new government-backed study reveals.

The joint report by the Ministry of Finance and the Institute for Fiscal Studies (IFS) revealed on August 15, 2025 shows that the country’s tax-to-GDP ratio has plunged from 12.4 percent in 2014 to just 7.5 percent a decade later.

“No other country in the world has experienced such a large relative decline in its tax-to-GDP ratio over this period,” reads the report.

It noted that due to data availability, the study focused on the period between 2015 and 23.

Over this period, the largest contributors to the fall in the tax-to-GDP ratio were VAT, which fell by two percent; followed by customs duty and surtax, which sank by 1.1 percent, and corporate income tax and employment income tax.

The fall has defied expectations.

Despite continued official GDP growth, the ratio has “consistently underperformed IMF forecasts, as well as Ethiopia’s own targets”. If the trajectory envisioned in the Growth and Transformation Plan II had been met, the ratio “would be more than double what it is today,” reads the report.

It also cites a 2023 United Nations University World Institute for Development Economics Research (UNU-WIDER) publication which contends that the fall in the tax-to-GDP ratio is highly unusual by international standards: “no other country experienced such a large fall in its tax-to-GDP ratio during this period”.

The joint study has identified four main tax instruments behind the collapse including value-added tax, customs duty and surtax, corporate income tax, and employment income tax.

It also noted that the underlying causes are a mix of structural change and deteriorating compliance.

The report traced back more than half of the fall , around 2.2 percent, to economic shifts since 2015/16, most notably the dramatic end to the vastly practiced state-led investment boom.

Laying out the factors explaining changes in Ethiopia’s tax-to-GDP ratio over time and its link with the state-led investment boom, the report indicated that within a decade the public investment fell into seven percent of GDP, half its shares recorded in 2014.

Imports dropped from 24 to 10 percent, and manufacturing’s share of GDP shrank from 4.5 percent, while agriculture grew to 36 percent, a mere one percent increase.

A further 1.8 points are linked to worsening compliance, including what the report calls “an estimated increase in non-compliance in the wholesale/retail sector” while the VAT compliance gap alone grew by 1.4 points, and corporate tax shortfalls especially in wholesale, retail and construction also added into the problem.

According to the report, policy changes had little effect.

It  finds that “very few revenue-losing reforms since 2015”, with only minor VAT exemptions in 2020 costing less than 0.1 percentage points.

With 60 percent of federal revenue still tied to imports and taxes on the public sector, the country remains “vulnerable to the fall in imports and public sector activity.”

To reverse the decline, the report urges rapid expansion of VAT withholding agents to large private firms to increase VAT compliance, and a possible VAT rate rise from 15 percent to the Sub-Saharan median of 17.5 percent, randomized taxpayer audits to monitor compliance, and stronger data-sharing process between the Ministry of Finance and the Ministry of Revenue.

Without urgent action, the authors warn, Ethiopia will fail to meet its national Medium-Term Revenue Strategy goal of raising the tax-to-GDP ratio by seven percentage points by 2028 and could cement its position as the world’s most dramatic case of tax capacity erosion.