Ethiopia is facing a growing revenue shortfall, with untargeted tax exemptions and incentives leaving billions of birr uncollected, according to a new International Monetary Fund (IMF) report. The warning comes as the country grapples with tighter global financing, declining aid, and volatile trade conditions that are straining public finances across Sub-Saharan Africa.

The IMF’s Tax Expenditures in Sub-Saharan Africa report highlights that incentives such as exemptions, deductions, and preferential tax rates are costing African governments between 0.1 percent and nearly 13 percent of GDP. Ethiopia ranks among the countries with the largest gap between potential and actual tax revenue, with a shortfall exceeding five percentage points of GDP. Many of these incentives persist beyond their intended purpose, often without clear evaluation or public disclosure.

External pressures exacerbate the situation. Sub-Saharan Africa is projected to lose $4.2 billion in official funding in 2025, while rising interest rate spreads, declining capital inflows, and commodity price volatility tighten financing conditions. For Ethiopia, this translates into higher debt servicing costs and increased reliance on domestic revenue, making effective tax mobilisation more urgent than ever.

The IMF urges the government to institutionalise tax expenditure reporting, assess the cost-effectiveness of incentives, and integrate the findings into the national budget process. Analysts note that curbing poorly targeted exemptions could expand the tax base, strengthen fiscal discipline, and free resources for critical public services.