Research Paper

TAX REFORM IN ETHIOPIA & PROGRESS TO DATE

Paper Presented on the Ethiopian Economic Association

Sound International Conference on the Ethiopian Economy

June 3 - 4, 2004

By

Demirew Getachew

June 2004

Addis Ababa

Introduction

It is believed that public finance is one of the major factors that shape the course of economic development. It affects resource use and financing pattern, and together with monetary and exchange rate policies, influences the rate of inflation. Public spending and tax policies also affect the behavior of producers and consumers, and influences the distribution of wealth and income in the economy.

The fiscal and monetary policies, which have been undertaken by different political regimes in Ethiopia, have affected the course of economic development of the country. Between 1974 and 1991 the economic performance as measured by real GDP growth was 1.8 percent per annum, where as, the average population growth rate was 2.9 percent. During this period the country faced both internal and external imbalances. The overall government budget deficit including grant was on the average 7 percent of GDP. The current account deficit including grant averaged about 3.7 percent of GDP (5.2 percent of GDP excluding grant).

With the aim of stabilizing the economy, an Economic Reform Program (ERP) has been implemented in the country since 1992/93. As part of this reform program, the government has undertaken different tax policy measures.

Tax policies has played imperative role: - to raise government revenue so as to finance its expenditure; to redistribute income; to encourage the production and distribution of socially desirable goods and services and discourage those which are undesirable like cigarette, alcohol drinks etc. It also helps to maintain macroeconomic stability and encourage saving and investment. As a result of which governments have adopted specific tax systems that are inline with the political and...