By Tsion Zerihun
Ethiopia’s tax reform is becoming one of the most visible and controversial parts of the country’s economic transition. For citizens, the reform can feel simple: higher prices, stricter tax collection and more pressure on businesses and households. But behind the tax changes is a much larger economic problem: Ethiopia needs more domestic revenue to finance development, reduce dependence on borrowing and rebuild fiscal space. The IMF’s 2025 assessment found that Ethiopia had one of the lowest tax-to-GDP ratios in Sub-Saharan Africa, despite years of strong economic growth.
Why the IMF matters?
Ethiopia’s tax reforms are taking place alongside its four-year, $3.4 billion IMF-supported program, approved in 2024 to support the country’s economic reform agenda. The program is intended to help restore macroeconomic stability, strengthen growth and support private investment. But IMF financing does not come without policy expectations.
The program places emphasis on domestic revenue mobilization, fiscal discipline, tax and customs administration, reducing inefficient subsidies and improving debt sustainability. In January 2026, the IMF said stronger tax administration was necessary to broaden the tax base and create a more stable environment for private investment. This is where Ethiopia’s borrowing history becomes important.
Large-scale public investment helped accelerate development, but borrowing also increased the government’s financial burden. Debt pressures eventually contributed to Ethiopia seeking debt restructuring and international financial assistance. The consequence is that the government now has less room to finance development simply through borrowing. Tax revenue is therefore becoming a replacement for some of the fiscal space that debt once provided. But citizens are asking: “Who is paying?
For many households and businesses, the reform is being experienced before its benefits become visible. Higher consumption taxes can feed into prices. Stricter enforcement can expose businesses that previously operated informally. And when taxation is introduced while households are already dealing with higher living costs, public frustration can grow. That criticism should not simply be dismissed. A tax system cannot be sustainable if citizens believe they are paying more without seeing better public services, infrastructure, jobs or accountability in return.
The unseen side of taxation
Yet there is another side that is less visible. A stronger domestic revenue system can give Ethiopia greater ability to finance roads, schools, hospitals, energy, social protection and other public services without constantly depending on external borrowing. It can also make the state more financially independent. The IMF’s 2025 tax study argues that strengthening domestic revenue is essential for Ethiopia’s macroeconomic stability and long-term development, particularly because weak revenue collection has limited the government’s ability to finance infrastructure and social programs.
And the early numbers show that the tax base is beginning to respond. The IMF reported that federal tax revenues increased strongly in FY 2024/25, with VAT and excise reforms contributing significantly to the rise. This is the unseen growth of tax reform: it does not necessarily appear as a new factory or a new road immediately. It appears as greater fiscal capacity the ability of the country to finance its own priorities.
