Following consultations with Ethiopia under Article IV of the IMF’s articles of agreement the IMF released a staff report and other documents on 30 October 2015.

Ethiopia’s recent economic performance has been strong, with economic growth of around 8.7% in 2014/15, including growing manufacturing and construction sectors. Growth in the medium term is estimated to be 7.5% to 8%. However there are challenges to competitiveness from credit and foreign exchange constraints.

The IMF staff recommends strengthening the tax administration to increase revenue. The report also suggests that a more effective tax system could raise more resources. The tax to GDP ratio in Ethiopia was 12.9% in 2014/15 which means that Ethiopia is collecting well below the tax that could potentially be raised. Measures to increase the tax base, such as promoting private sector growth and increasing the coverage of commercial agriculture, could support the initiative to increase revenue.

The IMF recommends that the Ethiopia Revenue and Customs Authority should accelerate its current reform program and focus on improving taxpayer registration, strengthening customs administration, upgrading IT systems and implementing a strategy for compliance management and enforcement.

Tax incentives and tax expenditures should only be used when necessary so that revenue foregone is minimized and economic distortions are prevented. Any measures that do not result in significant economic or social outcomes should be phased out. Caution should be exercised in relation to offering tax incentives to investors in industrial zones. The IMF staff consider that the government could use the same resources to build infrastructure in the zones rather than providing tax incentives as this would benefit the economy in the long term.

The Ethiopian authorities note that the second Growth and Transformation Plan (GTP II) is to target a tax revenue increase to 17% of GDP with an emphasis on reducing leakages. This goal is considered by the IMF staff to be achievable but additional tax policy measures are also needed. The Ethiopian authorities consider that offering tax incentives is important in attracting foreign direct investment (FDI) because many other countries are offering similar incentives.