Ethiopia’s Tax Revenues Sink to 7.5% of GDP, Leaving Billions on the Table











Addis Ababa — Ethiopia’s tax haul has collapsed to just 7.5% of GDP, the lowest in more than a decade and among the weakest in Sub-Saharan Africa, raising urgent questions over how the government will fund its post-war reconstruction and ambitious growth plans.

The figure for the 2022/23 fiscal year puts Ethiopia far behind regional peers like Uganda (13.1%), Kenya (15.2%), and Rwanda (15.7%), and well short of the SSA median of 13.2%, according to a new World Bank–backed analysis.

From Peak to Plunge

Tax revenues once peaked at 12.4% of GDP in 2014/15, but have since slid almost five percentage points. Four sources account for nearly all of the decline:

Value-added tax (VAT): −2.0 points

Customs duties and surtax: −1.1 points

Corporate income tax: −0.74 points

Employment income tax: −0.36 points

“These are the workhorses of the tax system,” the report notes. “When they falter, the whole system feels it.”

A Fragile Tax Base

Ethiopia’s revenue structure is unusually exposed to imports and public-sector spending, which together generate about 60% of federal tax income. As imports slumped and public investment was slashed in recent years, tax receipts fell almost mechanically.

That dependence is risky: customs rates are already high by regional standards, and the public sector’s role as the sole VAT withholding agent means that when state spending dips, so do collections.

Why Ethiopia Lags Peers

The analysis breaks the country’s 5.5-point gap with the SSA median into three drivers:

Structural constraints (≈2.2 points): Low income per capita, a large agricultural base, low urbanization, and a small manufacturing sector all depress taxable capacity.

Policy gaps (≈2.1 points): Lower-than-average VAT rate (15% vs. 17.5% median), historically no VAT/excise on fuel or airtime (recently changed), and no taxes on financial transactions.

Compliance weaknesses (≈1.2 points): Administrative gaps and leakages beyond what economic structure can explain.

Compliance Is the Real Story

Since 2015/16, about 1.8 percentage points of the tax ratio drop stems from widening compliance gaps, especially in VAT and corporate tax. Wholesale and retail trade — along with construction — have seen the steepest under-collection.

Imports collapsing, public investment drying up, and formal wage growth lagging GDP have added further pressure.

Reform Plans — and Risks

Ethiopia’s National Medium-Term Revenue Strategy (NMTRS) aims to lift the tax ratio by a dramatic seven points by 2027/28, through both policy tweaks and administrative reforms.

Two potentially game-changing — but risky — proposals from the report:

Appoint large private firms as VAT withholding agents to replicate the compliance effect of public-sector procurement.

Raise the VAT rate toward the SSA median — but only if compliance is shored up first to avoid widening the gap between compliant and non-compliant businesses.

What It Means for Business

For Ethiopia’s private sector, the tax landscape is shifting:

VAT and corporate tax enforcement will tighten, with high-risk sectors facing closer audits.

Large corporates may be pulled into VAT withholding, adding reporting burdens but also potential leverage in supply chains.

Border taxes have peaked, signaling a pivot toward onshore compliance rather than import tariffs.

The Road Ahead

Reversing the revenue slide will require Ethiopia to re-engineer its tax base toward the private economy, while cleaning up compliance. Raising rates without first fixing enforcement risks driving more firms into informality.

The choice, in short: stay import- and state-dependent — or build a broader, more resilient private-sector tax net. The next two years will show if policymakers have the political will to make that shift.