By Amanuel Kindeya
Ethiopia's Private Sector Under Siege
On a chilly morning in Ethiopia’s capital, Belay Alemu stands outside his small hardware store, staring at the half-empty shelves. Just months ago, his business was thriving, supplying cement, nails, and paint to builders fueling the city’s construction boom. Today, customers are scarce, prices have skyrocketed, and the store—like the country itself—is on the verge of collapse.
“It’s not just my shop,” Belay says, shaking his head. “The whole economy is falling apart. Taxes are bleeding us dry, and prices change every day. How do you survive like this?”
Across Ethiopia, a once-promising economic transformation is unraveling at breathtaking speed. The numbers are staggering: GDP has plunged from 207 billion to 100 billion US dollars in a matter of months. Inflation, hovering between 15 percent to 20 percent over the last few months, is eroding purchasing power and pushing millions toward poverty.
The government, under Prime Minister Abiy Ahmed (PhD), had promised prosperity through economic reform, but for Asnake and countless others, those promises now seem hollow. The culprit, many say, is a bold but devastating policy shift.
In July 2024, Ethiopia abandoned its tightly controlled foreign exchange system in favor of a market-based regime, a move endorsed by the International Monetary Fund and the World Bank. The change was supposed to attract investment and stabilize the economy.
Instead, it triggered a collapse in the Ethiopian birr, making imports prohibitively expensive and igniting an inflationary spiral. With the birr in freefall, the cost of essential goods—fuel, food, medicine—skyrocketed. Businesses, already struggling with high operational costs, found themselves in a financial chokehold.
As the repercussions of the currency float deepened, the government pressed forward with an aggressive tax reform agenda. New tax laws expanded the scope of the Value Added Tax (VAT), removing exemptions that had previously softened the blow for businesses and consumers.
Excise duties were raised, adding further strain on manufacturers and importers already reeling from the effects of currency depreciation. Property taxes were introduced in vague and inconsistent ways, leaving homeowners confused and frustrated. Vehicle transfer taxes added yet another layer of financial pressure, particularly for businesses relying on transportation.
For Mentesnot Lemma, a factory owner in Addis Ababa, these changes made an already difficult situation unbearable. His plastic and rubber manufacturing plant, once a supplier to regional markets, is now barely staying afloat.
Foreign clients have become impossible to serve, he explains, because taxation has made operations uncompetitive. Across the country, more than 1,700 manufacturers have either shut down or significantly reduced production. For many, there is no way forward.
Electricity costs have become yet another burden. In September, the government implemented the first in a series of electricity tariff hikes, increasing rates by 20 percent. Over the next four years, quarterly increases will continue, adding pressure to businesses that rely on stable power supply. Rising production costs, combined with a rapidly shrinking consumer base, have left companies with little choice but to scale back or shut down entirely.
Inside the Ministry of Finance, however, the mood is different. Officials point to the government’s tax revenue performance as proof that the reforms are working. Preliminary data from the first four months of the fiscal year show tax revenues rising by 70 percent compared to the previous year, a reflection of the VAT expansion, the broadening of the tax base, and the removal of exemptions.
Revenue from imports surged by 92 percent in August alone, fueled by the new exchange rate regime. The numbers, on paper, suggest a government successfully mobilizing domestic resources. But on the ground, the cost of this revenue windfall is starkly visible: businesses shuttered, inflation spiraling, and consumers unable to afford basic goods.
For government officials, the reasoning is clear. Ethiopia’s tax-to-GDP ratio remains low compared to regional peers, and the push for greater tax revenue is part of a long-term strategy to strengthen state finances. Finance Minister Ahmed Shide insists that painful reforms are necessary to create a more resilient economy. But many experts argue that the short-term devastation could have lasting consequences.
Abdulmanan Mohammed (PhD), a financial expert, warns that Ethiopia is in danger of taxing itself into deeper economic distress. The surge in tax collection, he says, looks good on paper, but it comes at the cost of strangling economic activity. Business closures shrink the tax base, while rising poverty makes collection more difficult. The government, he argues, cannot keep squeezing the economy without breaking it entirely.
Ethiopia’s economic troubles are not just the result of domestic policy choices. They are also the product of IMF and World Bank-backed reforms that, while theoretically sound, have failed to account for local realities.
As part of its loan agreements, the Ethiopian government committed to adopting a fully market-driven exchange rate, eliminating tax exemptions, and increasing excise taxes to boost revenue. It also pledged to phase out subsidies, including those on electricity, to reduce fiscal strain. The logic behind these policies was clear: stabilize the economy, attract investment, and improve fiscal discipline. But in practice, the reforms have fueled a vicious cycle of inflation, business failures, and declining household incomes.
“The textbooks say this should work,” admits an economic adviser close to the government. “But Ethiopia is not a textbook case.”
For ordinary Ethiopians, the economic pain is becoming unbearable. Taxi drivers complain that fuel costs have doubled. Shopkeepers find themselves pricing goods daily because inflation is so volatile. Factory workers, once part of a growing industrial workforce, are now jobless. Even salaried professionals are feeling the strain, as rent and food costs rise beyond their reach. Frustration is mounting, and in a country with a history of unrest, the economic crisis is beginning to take on a political dimension.
Business consultant Kefelgen Hailu, who advises struggling enterprises, sees trouble ahead. The government, he argues, is pushing tax reforms without considering their real-world impact. Officials may celebrate rising tax revenue, but that success is coming at the expense of the very businesses that sustain the economy. He warns that unless the government adjusts its policies, the situation could spiral into deeper instability.
Real estate, once considered a safe investment, has also been affected. The new property tax laws have thrown homeowners into confusion. Many who purchased homes with bank loans now face additional tax burdens they hadn’t anticipated. Selam Faisal, a banker, is among them. Having taken out a loan to buy her car, she now struggles to keep up with both mortgage payments and the new tax obligations. The frustration in her voice is evident.
“I worked hard to buy my house,” he says. “Now they’re telling me I owe more taxes on it? When does it stop?”
Inside government circles, there is little sign of a shift in approach. Officials continue to defend the tax reforms and economic restructuring as necessary steps toward long-term stability. But many experts argue that without adjustments, the crisis will only deepen. Some are calling for a reassessment of tax hikes, a slower pace of electricity tariff increases, and targeted interventions to stabilize the birr. Others warn that failing to ease the burden on businesses could lead to a prolonged economic slowdown.
For now, uncertainty looms over Ethiopia’s future. The government remains committed to its path, even as businesses struggle, inflation soars, and frustration grows among ordinary citizens. At his hardware store, Belay wonders how much longer he can hold on.
“The government says things will get better,” he says, gesturing toward the empty street outside. “But when?”
For Ethiopia, the answer to that question remains as elusive as economic stability itself.
