Ethiopia is charting a new fiscal path as it looks to regional neighbors, particularly Kenya, to inspire its sweeping tax reforms aimed at reversing a worrying revenue decline.
The country’s tax-to-GDP ratio has plummeted from 12.1 percent in 2015/16 to just 7.5 percent in 2022/23, one of the lowest in Africa. This steep fall has left Addis Ababa grappling with budget shortfalls and increased dependence on external borrowing.
In a recently published report, Ethiopian policymakers acknowledged Kenya’s relative success in widening its tax base and improving compliance, citing it as a model worth emulating. Kenya’s tax-to-GDP ratio stands at 14 percent, nearly double Ethiopia’s, a gap Ethiopian authorities hope to narrow by adopting proven regional practices.
Among the proposed changes is taxation on mobile money transactions, financial services, and airtime—areas where Kenya has already developed robust systems. Kenya’s excise duty on mobile transfers, for instance, has consistently generated revenue, and Ethiopia sees a similar opportunity given its growing digital financial landscape.
Ethiopia is also exploring the designation of large corporations as VAT withholding agents, a move that has helped Kenya improve compliance by requiring big firms to deduct and remit VAT on behalf of smaller suppliers. Additionally, the government is considering raising the VAT rate from 15 percent to 17.5 percent, aligning more closely with regional peers such as Uganda (18 percent) and Kenya (16 percent).
Another critical reform involves rethinking excise duty on fuel. Ethiopia’s fixed-rate levy, introduced in 2010, has stunted growth in collections and exposed revenue to inflationary erosion. In contrast, Kenya’s ad valorem system automatically adjusts with fuel prices, providing a steadier revenue stream.
Beyond policy, Ethiopia’s challenges also lie in weak administration. Kenya’s Kenya Revenue Authority (KRA) and its digital iTax platform are being studied as benchmarks for improving compliance and streamlining processes.
While reforms are ambitious, Ethiopia’s leaders admit that vested interests and political resistance may slow implementation. Still, the government is framing this transformation as urgent, positioning it as key to fiscal stability and economic independence.
If Ethiopia succeeds, it could mark a turning point in how African economies learn from one another, adapting regional best practices not just in policy design but in navigating the politics of reform.
