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The Ethiopian government is preparing to roll out a new set of fuel and vehicle taxes as part of a broader fiscal reform aimed at boosting domestic revenue and easing pressure on state finances. The plan includes a 15% value-added tax (VAT) on fuel, a 15% excise duty, and a newly proposed vehicle circulation tax for fuel-powered cars.
While no formal launch date has been announced, the Ministry of Finance recently briefed members of parliament on the proposal. Officials say the move is essential to modernize Ethiopia’s tax system and reduce the country’s reliance on unsustainable fuel subsidies.
Toward a Post-Subsidy Economy
Since mid-2022, the government has been gradually scaling back its fuel subsidy program, citing mounting fiscal pressures and a desire to correct market distortions. The partial removal of subsidies has already caused diesel and petrol prices to rise by over 50%.
However, amid high inflation—currently at 13% annually—the government has retained some fuel subsidies, framing the new tax measures not as a substitute but as a complementary step in a long-term fiscal restructuring.
Finance Minister Ahmed Shide emphasized this during a recent parliamentary session, saying, “The goal is not to generate profit from the fuel tax. It’s to create a mechanism to continue subsidizing fuel in a more sustainable way, while reducing the burden on public finances.”
Political Pushback
The proposed taxes have drawn swift backlash from opposition lawmakers and civil society groups. Many see the plan as contradictory and burdensome to ordinary citizens already grappling with the rising cost of living.
“Why is the government claiming to protect consumers through subsidies while imposing new taxes that cancel out the benefit?” asked Desalegn Chane (PhD), an opposition MP, during the session. “This is mixed messaging that hurts the public.”
The vehicle circulation tax—expected to apply only to fuel-powered cars—has raised further questions about fairness and feasibility, especially in a country with limited access to electric or alternative-fuel vehicles.
Revenue Imperative
Despite the controversy, economic analysts argue that the government has little choice. Ethiopia’s tax-to-GDP ratio stands below 10%, one of the lowest in Sub-Saharan Africa, leaving the state heavily dependent on foreign aid, loans, and inflationary financing.
“With shrinking aid flows, constrained borrowing, and inflation risks from monetary expansion, increasing domestic tax revenue is the only option left,” said a former advisor to the National Bank of Ethiopia.
Officials at the Ministry of Finance say the tax reform is part of a broader consolidation strategy, intended to improve fiscal stability and allow for targeted investments in public services and infrastructure.
While many details remain unclear—including when the taxes will be enacted and how the vehicle circulation levy will be enforced—the government insists the reforms are part of a larger effort to create a fairer, more resilient tax system.
Communicating that message to the public, however, may prove just as challenging as the policy itself.
