Ethiopia is preparing to introduce a major shift in its fuel pricing regime, with a combined 30% tax on petroleum products set to take effect next month. The measure reflects the government’s wider move away from decades-long fuel subsidies as it pursues fiscal consolidation, tackles budget pressures, and advances the Homegrown Economic Reform Agenda.

The Ethiopian Petroleum Supply Enterprise (EPSE) will begin collecting the new charges—15% VAT + 15% excise tax—as part of a phased transition toward market-based pricing for petrol and diesel. The Ministry of Finance (MoF) has instructed EPSE to remit all federal fuel-related taxes directly to the Ministry of Revenues, signaling the centralization and tightening of fuel-related fiscal flows.

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Reforming One of Ethiopia’s Costliest Subsidies

Fuel subsidies have long been among the government’s largest fiscal burdens. Since mid-2022, authorities have been dismantling them gradually, a process that has already resulted in higher pump prices across the country.

The new tax regime brings Ethiopia a step closer to the government’s stated goal: achieving full cost recovery for petrol and diesel by December 2025, including all statutory taxes.

To smooth the transition, the MoF has capped net cash transfers to EPSE at 30 billion birr in the upcoming fiscal year—effectively limiting how much the state will spend to stabilize prices during the subsidy phase-out.

The government argues that shifting from blanket subsidies toward market-based financing will free up fiscal space for priority spending. “Domestic tax revenue has not kept pace with economic growth,” Finance Minister Ahmed Shide said while presenting the budget. “Reforms in fuel pricing and taxation are essential for long-term economic stability.”

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Targeted Protection for Low-Income Households

While the broader subsidy framework is being dismantled, the government has pledged to maintain “pro-poor” protections, particularly for public transportation. These mechanisms include:

• Digital rebates
• Mobile wallet support
• Targeted subsidies for city and regional bus operators

Officials argue that these measures will shield low-income households who rely heavily on public transport and would otherwise be hardest hit by fuel price shocks.

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Tax-to-GDP Pressure and the Push for Revenue Mobilization

Ethiopia’s attempt to introduce the fuel tax comes at a time when the country’s tax-to-GDP ratio is below 7%, one of the lowest in Sub-Saharan Africa. The Ministry of Finance is deploying a suite of reforms aimed at increasing domestic revenue collection. Among these is the Minimum Alternative Tax (MAT), which targets companies reporting little or no taxable profit.

Government data indicates nearly two-thirds of registered businesses report zero taxable profit, a pattern officials argue reflects widespread underreporting. MAT is therefore positioned as a tool to broaden the tax base, curb evasion, and level the playing field.

However, the tax has already created friction. Traders and business associations argue that, despite proclamations indicating MAT should apply to the current fiscal year, in practice it has effectively been implemented for the 2024/25 tax year, creating confusion and compliance concerns.

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Macroeconomic Pressures and Public Concerns

The timing of the new 30% fuel tax has stirred unease. With household budgets already strained by inflation, forex shortages, and rising food and utility prices, critics warn that imposing a significant tax on a critical commodity risks triggering social frustration and deepening economic stress.

The government acknowledges the public’s concerns but maintains that fiscal reform is unavoidable. Ethiopia is currently facing a widening budget deficit, which authorities plan to cover through a combination of domestic borrowing and support from development partners.

Officials argue that without reforms—particularly in fuel subsidies and tax administration—the state cannot sustainably fund essential public services, let alone finance large-scale development priorities.

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A Pivotal Step in Ethiopia’s Economic Reform Journey

The introduction of the 30% combined fuel tax marks one of the most consequential fiscal changes since the launch of Ethiopia’s Homegrown Economic Reform Program. By realigning fuel prices with market realities and restructuring subsidies, the government aims to stabilize macroeconomic conditions and improve public finance management.

Yet the transition will be politically and socially sensitive. Fuel remains a cornerstone of Ethiopia’s transport, logistics, and agricultural economy. Any rapid price movement has an immediate and broad-based impact.

The coming months will test the government’s ability to balance revenue needs, inflationary pressures, and public expectations as Ethiopia pushes ahead with one of its most ambitious economic reform phases in years.

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