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The Ethiopian Revenue and Customs Authority’s (ERCA) annual income from inland taxes will be over half a trillion birr by the end of the second Growth and Transformation Plan (GTP II), according to ERCA. The need to increase tax revenue was noted in the first GTP plan but has received more emphasis in GTP II, with targets for growth now set at doubling tax revenues.
In the 2014/15 fiscal year, annual government revenue including grants stood at 200 billion birr; according to the new plan, this figure is expected to reach 627.6 billion birr by the end of the current GTP period. Of the new target revenue, over 600 billion birr is expected to be collected from tax and non-tax Inland Revenue sources, with taxes accounting for over 550 billion birr.
ERCA collected 116 billion birr in the past fiscal year and to make it to its 550 billion birr target over the next five years, tax collection would have to grow by close to 100 billion birr every year.
There is no doubt that Ethiopia’s revenue from taxes needs to grow, the country’s tax to GDP ratio – nearly 13 percent – is below the East African average. Also according to international financial institutions like the International Monetary Fund (IMF), more tax is needed to keep up with the country’s developmental expenditures.
However, the government’s targets may be too steep. With its half a trillion birr target, the tax to GDP ratio will reach 17 percent; despite deeming this target ‘achievable with additional tax policy measures’ the IMF has projected that the ratio would likely be 14.4 percent in 2019/20.
The government’s plan to reach its ambitious target is to expand the tax base. IMF’s latest report also points to the same recommending that forgone revenue should be minimized with tax incentives and tax revenues used prudently to avoid potential economic distortions. “Rather than providing incentives through tax policy, the government could use these resources to finance infrastructure,” according to IMF’s latest report.
The government’s expenditure is also expected to grow significantly over the GTP II, with total expenditure set to reach 726.1 billion birr. For the current fiscal year starting on July 8, the parliament has approved a 223.3 billion birr (USD 11 billion) budget, an increase of nearly 20 percent from the previous year. From this the capital budget for the current year is 84 billion birr, expected to reach 461.5 billion birr, by the end of GTP II.
Expectations for growth over the GTP II period are high across sectors. Manufacturing’s GTP ratio – currently 4.5 percent-is expected to reach 8 percent by the end of GTP II and 18 percent in 2025.Industry and exports are expected to rise as agriculture’s GTP ratio shrinks over time. Despite performance in exports remaining below expectations in GTP I, targets for GTP II are that by 2020, earnings from the sector would be over USD 14 billion. Targets for industry will also see the sector take 23 percent GDP ratio in the end of the GTP moving to 28 percent in 2025.