26/11/2025
Falling imports and the overvaluation of the Birr
Another major economic shift is the decline in the ratio of imports to GDP, which led to an almost one-for-one decline in the ratio of import tax revenues to GDP. The decline in imports is partly linked to lower public sector investment: a large share of Ethiopia’s imports during the investment boom were capital goods used in infrastructure projects.
The overvaluation of the Birr also contributed to the decline in the ratio of import tax revenues to GDP, especially from 2021 onwards. It did this by depressing the value of imports and hence import taxes in Birr, relative to the value of domestically produced goods and services that make up GDP. Defending the overvalued Birr also required rationing the use of foreign currencies and hence imports, further reducing import tax revenues. Ethiopia’s 2024 currency devaluation (announced after our report was substantively complete) has started to reverse the decline in import tax revenues: real-terms customs duty revenues in the nine months from July 2024 were double those recorded in the nine months from July 2023.
Other potential factors
The report also considers the role of several other factors in explaining the fall in Ethiopia’s tax-to-GDP ratio.
Recent changes in tax policy do not appear to have contributed significantly to the fall in tax revenues. There were no major revenue-reducing policy reforms during this period. High profile VAT exemptions on selected food items brought in to address cost-of-living pressures are estimated to have cost less than 0.1% of GDP. Some long-standing choices, such as not collecting VAT and excises on fuel, help explain why Ethiopia’s tax-to-GDP ratio is lower than in many other comparable countries, but not the recent decline.
