Ethiopia has recorded the lowest tax-to-GDP ratio in sub-Saharan Africa, a dramatic drop that poses a significant challenge to the country’s fiscal sustainability.
According to a study by the Institute for Fiscal Studies (IFS) in collaboration with the Fiscal Policy Directorate of the Ethiopian Ministry of Finance, Ethiopia’s tax-to-GDP ratio fell from 12.4% in 2014/2015 to just 7.5% in 2022/2023, marking the largest relative decline in the world over this period.
The research attributes the drop to multiple factors, including reductions in value-added tax, which fell by 2 percentage points, customs duties and surcharges (-1.1 points), corporate income tax (-0.74 points), and earned income tax (-0.36 points). I
n comparison, neighbouring countries collected significantly more, with Uganda at 13.1%, Kenya at 15.2%, and Rwanda at 15.7%, while the sub-Saharan African median in 2021 stood at 13.2%.
Structural characteristics account for around 2.2 points of the decline, including low GDP per capita, the predominance of agriculture, limited manufacturing, and low urbanisation, according to TaxDev. Policy decisions, such as deferring VAT and fuel excise duty collection and maintaining a VAT rate of 15%—lower than the regional median of 17.5%—explained another 2.1 points. Low tax compliance and limited tax administration performance contributed a further 1.2 points.
The Directorate of Tax Policy has acknowledged the urgency of reversing the downward trend, stressing the need to strengthen compliance, modernise tax administration, and adapt the system to Ethiopia’s development priorities.
Ethiopia has undergone major economic transformation over the past decade, driven by public investment in infrastructure projects including the Grand Ethiopian Renaissance Dam, the Addis-Djibouti railway, and extensive road, energy, and irrigation networks. While these projects have fuelled growth, the low tax-to-GDP ratio highlights the difficulty of sustaining public finances amid rapid development and structural economic challenges.
Experts warn that without swift reform, Ethiopia’s ability to fund public services and maintain long-term fiscal stability could be at risk, underscoring the need for urgent policy intervention and improved revenue mobilisation.
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