Ethiopia has reported the lowest tax-to-GDP ratio in sub-Saharan Africa, falling by 4.9 percentages since 2014/2015 Ethiopian fiscal year, according to a new research released by the Institute for Fiscal Studies (IFS) over the weekend.
Since then, the tax-to-GDP ratio has fallen by 4.9 percentage points. No other country in the world has experienced such a large relative decline in its tax-to-GDP ratio over this period.
The research conducted in partnership with the Ethiopia’s Ministry of Finance’s Tax Policy Directorate revealed that the tax-to-GDP ratio of the east African country has dropped from 12.4 percent of GDP in 2014/15.
“Due to data availability, this study focuses on the period between 2015/16 and 2022/23. Over this period, the largest contributors to the fall in the tax-to-GDP ratio were VAT, which fell by 2.0 percentage points; followed by customs duty and surtax, which fell by 1.1 percentage points; corporate income tax, which fell by 0.74 percentage points; and employment income tax, which fell by 0.36 percentage points,” the research revealed.
The research showed that Ethiopia’s tax-to-GDP ratio stood at 7.5 percent in 2022/23, meaning just 7.5 Birr out of every 100 Birr generated in the economy were collected in taxes. By contrast, Uganda collected 13.1 percent, Kenya 15.2 percent and Rwanda 15.7 percent, while the sub-Saharan Africa median was 13.2 percent in 2021.
“Ethiopia collects substantially less revenue than its peers in direct taxes, VAT and excise duties. This represents a major challenge for fiscal sustainability,” said the TaxDev research team.
According to the report, “around 2.2 percentage points can be attributed to structural factors such as low GDP per capita, the dominance of agriculture, limited manufacturing and low urbanisation.”
Policy choices, including delayed collection of VAT and excises on fuel, the absence of certain excises until recently, and a relatively low VAT rate of 15 percent compared with a regional median of 17.5 percent, explain a further 2.1 points. Weak compliance and tax administration performance account for the remaining 1.2 points.
The Ministry of Finance’s Tax Policy Directorate acknowledged the findings but emphasized ongoing reforms. “We recognize the urgency of reversing this trend,” the Directorate said. “Our focus is on strengthening compliance, modernizing administration, and ensuring that the tax system can support Ethiopia’s development priorities.”
Ethiopia has experienced a major change in the structure of its economy in the last ten years. It is widely acknowledged that Ethiopia’s high rate of economic growth in the mid-2010s was driven by investment.
Especially important were state-backed investment in projects such as the Grand Ethiopian Renaissance Dam and the Addis–Djibouti railway, as well as a number of smaller road, energy, irrigation and housing development projects.
MG/as/APA