The Government of Ethiopia has mandated the collection of all federal fuel taxes at full statutory rates, a measure projected to generate revenue equivalent to 0.8 percent of gross domestic product (GDP) in the 2026/27 fiscal year.
Under the directive, the Ministry of Finance has authorised the Ethiopian Customs Commission to remit all fuel-tax proceeds directly to the federal treasury, marking a significant departure from previous practice. In the past, part of the revenue was retained by entities such as the Ethiopian Petroleum Supply Enterprise (EPSE) and the Road Fund to offset operational losses and finance subsidies.
The fuel-tax reform is a central component of Ethiopia’s broader IMF-supported structural reform programme. It is intended to phase out untargeted subsidies, strengthen public finances, support the restructuring of key state-owned enterprises and help curb inflation.
During the 2025/26 fiscal year, the government formally incorporated fuel subsidies into the federal budget. Under the new framework, revenue derived from excise tax, value-added tax (VAT) and other fuel-related charges is to be channelled directly into the central treasury. Authorities aim to eliminate off-budget accounts, secure more predictable revenue and strengthen macro-fiscal stability.
According to recent International Monetary Fund documents, the initiative forms part of a broader strategy to improve Ethiopia’s tax-to-GDP ratio, which has historically remained among the lowest in the region. The planned reforms include expanding the excise-tax base, introducing specific excise regimes with higher rates on alcohol and tobacco, removing selected VAT exemptions and introducing motor-vehicle transfer taxes.
The IMF programme states that all federal fuel taxes—estimated at 0.8 percent of GDP in 2026/27—will be collected in full at statutory rates by Customs and remitted to the federal budget. It specifies that VAT and excise liabilities must be assessed using the applicable statutory tax base, without caps or ad hoc adjustments that reduce effective tax collection.
The tighter enforcement is seen as vital to the government’s plan to eliminate costly fuel subsidies. For the 2025/26 fiscal year, the budget set fuel and fertiliser subsidy ceilings of 100 billion birr, or 0.6 percent of GDP, and 84 billion birr, or 0.4 percent of GDP, respectively. However, reported fuel-subsidy spending exceeded the original cap during the year.
As the country enters the 2026/27 fiscal year, the fuel-subsidy envelope is expected to decline substantially. To institutionalise the transition, the government is deploying an automatic fuel-price adjustment mechanism developed with IMF technical assistance.
In the 2025/26 fiscal year, the Ministry of Revenue collected 1.5 trillion birr, an increase of about 618.39 billion birr from the same period in the previous year. The performance was largely driven by income-tax reforms. The revenue impact of tax policy measures already implemented is projected to raise the general government tax-to-GDP ratio to 10.1 percent in 2026/27, moving towards a medium-term target of 10.5 percent by 2027/28.
To resolve legacy fuel-subsidy debt—arising mainly from exchange-rate volatility and the historical use of deferred letters of credit for fuel procurement—the government is undertaking a major financial restructuring of EPSE.
As a prior action under the IMF programme, the Ministry of Finance decided to allocate 286 billion birr to recapitalise the state-owned enterprise. The decision was approved by the Ethiopia Investment Holdings board.
According to IMF assessments, approximately 170 billion birr, equivalent to USD 1.05 billion or 0.9 percent of GDP, from anticipated World Bank Development Policy Operation and Rapid Response Option financing is expected to be transferred to the federal budget to strengthen EPSE’s capital position. The remaining 116 billion birr, sourced from central treasury resources, is expected to be transferred before the end of March 2027.
As part of broader fiscal reforms introduced in June 2026, the Ministry of Finance directed the Ethiopian Customs Commission to collect fuel taxes—including 15 percent VAT and 15 percent excise tax—at their full statutory rates and transfer all proceeds to the federal treasury. Excise and VAT liabilities will be assessed on statutory tax bases, a move intended to improve fiscal transparency and make revenue collection more predictable.
Industry analysts say the social and economic effects of heavier tax burdens will require close monitoring, particularly as successive policy changes risk placing additional pressure on households, businesses and productive sectors. They also note that continued volatility in global fuel markets, compounded by geopolitical tensions in the Middle East, remains an important macroeconomic risk.
Inflationary pressures have also re-emerged. After falling to 9.4 percent in March 2026, 12-month headline inflation rose to 11.7 percent in April and 13.4 percent in May, largely driven by food prices and higher global commodity costs.
The Consumer Price Index reached 13.9 percent in June 2026. Food inflation stood at 15.1 percent, while transport costs rose by 14.3 percent year on year.
