Over the past year, Ethiopia’s government has embarked on an aggressive tax reform campaign which is backed, if not dictated, by the International Monetary Fund (IMF) as part of broader economic stabilization and revenue mobilization initiatives. While these measures are a necessary component of macroeconomic management, the manner in which these taxes are being implemented —characterized by the introduction of a slew of new taxes including property taxes, revised income tax brackets, and the elimination of exemptions —risks inflicting unintended, severe consequences on both citizens and businesses. If not carefully calibrated and accompanied by protective measures, this taxation expansion threatens to undermine economic growth, deepen inequality, and erode the social fabric of the country. As such it is of the essence to seek creative that help achieve the stated objective of the tax reform without impoverishing vulnerable populations.
The roll out of the government’s macroeconomic policy reform in July 2024 has not been a resounding success as the government would have Ethiopians believe. The steep depreciation of the Ethiopian birr it has led to a considerable rise in the cost of imported essential goods, aggravating food insecurity and other inflationary challenges for households eking out a living on the pittance they earn. The credit cap the central bank has been enforcing for some two years now with to bring down inflation to a single digit has proven to be a handicap as well, making it hard to obtain the financing required to import basic necessities and other goods by limiting the supply of money. The enactment of a raft of new taxes to shore up its coffers has thus only served to make matters worse for the poor. True, there is no denying that Ethiopia’s economy has long been in a state necessitating a major overhaul. The country has been beset with such severe economic challenges as a seemingly endless cycle of conflict and violence marring several regions, a sky-high cost of living, unsustainable debt levels, low international reserves, and chronic unemployment. The tragic effects of these challenges have had detrimental socio-economic impacts, underscoring the imperative for unprecedented reforms.
Chief among these impacts is a reduction in disposable income and living standards. Higher taxes on consumption—such as VAT increases and excise duties—translate into higher prices for everyday goods and services. Households, particularly those with low and middle incomes, bear the brunt of these costs, reducing their purchasing power and raising living costs. For many Ethiopians living below or close to the poverty line, this is a step backward in achieving economic stability and social equity. Disproportionate tax burdens on ordinary consumers and small businesses increase inequality, leading to social discontent and reduced trust in government. If citizens are overtaxed and consequently unable to afford basic necessities, the ensuing frustration can fuel protests, weaken social cohesion, and undermine the legitimacy of economic reforms.
When it comes to businesses heavy tax burdens can deter both domestic and foreign investment. Investors seek predictable, fair, and competitive tax regimes; sudden hikes or complex tax structures can be perceived as risks, prompting investors to look elsewhere. The digital economy and startups, considered vital for future growth, may also be discouraged by new levies targeting online platforms and digital services. Tax hikes on sectors like manufacturing, trading, and technology also create additional financial burdens for businesses. SMEs, which are crucial for job creation and economic diversification, are especially vulnerable. Higher operational taxes are certain to give rise to reduced profit margins, layoffs, or even closures—further constricting economic activity and discouraging entrepreneurship. Meanwhile, increased taxation on formal businesses and services is apt to push economic activity into the shadows. As compliance costs rise, a significant number of entrepreneurs may resort to informal operations to evade taxes, which erodes the tax base further and hampers revenue collection in the long term.
Although revenue mobilization is critical for Ethiopia’s fiscal sustainability, the government must balance immediate needs with the welfare of the public and the long-term health of the economy. The IMF-backed tax reforms, while well-intentioned, have placed an unjust burden on Ethiopia’s most vulnerable citizens and stifled business growth. A more balanced approach—one that focuses on progressive taxation, social protections, and private sector development—is essential to ensure fiscal stability without deepening inequality. The government must heed the concerns of ordinary citizens, entrepreneurs, and economists who warn that the current path is unsustainable. Ethiopia achieve sustainable growth if and only if equity underpins its tax reforms.
