## _cr06122

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### I. MDG Scenario: Introduction and Costing
- Updates work from the 2004 Article IV consultation and draws on the authorities’ MDG Needs Assessment Synthesis Report and MAMS model results.
- Total costs of achieving the MDGs:
  - Total: US$101 billion
  - Upper bound public sector cost: US$76 billion
  - Lower bound public sector cost: US$58 billion
- Scenario design and implications:
  - MDG scenario incorporates the lower bound public sector cost (US$58 billion), implying a six fold increase in per capita aid flows to US$64 in 2015.
  - The lower bound scenario incorporates cross-cutting efficiency savings that reduce total costs by over 20 percent.
  - MDG scenario includes on-budget and additional costs by non-financial public enterprises to be consistent with total lower bound estimates.
  - Financing needs in the MDG macroeconomic scenario are shown as being met through external grants.

### II. Macroeconomic Framework and Targets
- Core assumptions and targets under the MDG scenario:
  - Annual growth target: around 7 percent
  - Annual inflation target: 7.5 percent
  - Gross international reserve cover target: 5.5 months of imports
  - Aim to protect domestic and external debt sustainability
- Key modeling assumptions:
  - Increased aid flows are both spent and absorbed via increases in the external current account.
  - Frontloaded increase in public investment to reduce the infrastructure gap.
  - Assumptions on import content and phasing of expenditures based on public enterprise infrastructure plans.
  - Baseline assumptions on exports’ contribution to GDP are maintained; increased competitiveness is assumed given higher GDP but unchanged external demand and international prices.
- Policy discussion focal points:
  - Fiscal sustainability and addressing shocks
  - Public expenditure management
  - Exchange rate policy
  - Priority policies in agriculture and private sector to realize productivity improvements
  - Role of infrastructure in promoting growth

### III. Growth, Infrastructure, and Productivity
- Growth targets and required inputs:
  - Growth target used: 7 percent (authorities consider necessary to halve poverty by 2015)
  - Requires a sharp rise in annual total factor productivity (TFP) growth to around 1.5 percent
  - Requires large increases in investment (to over 37 percent of GDP)
- Infrastructure impacts and private sector response:
  - Empirical studies suggest each additional 1 percent of GDP spending on infrastructure can add between 0.5 to 1 percent to the growth rate after 5 years; relationship is non-linear.
  - Given Ethiopia’s low infrastructure starting point, a growth response at the upper end of empirical ranges is plausible.
  - MAMS scenarios include assumptions of improvements in private sector TFP growth of one percentage point in response to improved infrastructure, with significant private sector productivity response starting in 2009.
  - Effectiveness depends on design and implementation quality.
- Agriculture and productivity requirements:
  - Historical agriculture real output growth: 2.9 percent (1991/92-2004/05)
  - Required agriculture growth to support 7 percent GDP growth: raise agricultural output growth from historical 2.9 percent to 7 percent.
  - Historical yield growth: around 0.2 percent per year (1991/92-2004/05)
  - World Bank estimates: doubling of cereal yields in food secure areas and increase of 50 percent in food insecure areas possible with better soil and water management and wider adoption of existing technologies.
- Private sector development needs:
  - Private sector remains in its infancy; industry contribution to GDP unchanged over last 13 years.
  - Required reforms: deeper financial sector reform, acceleration of the privatization program, further urban land reform.
  - Emphasis on public goods: infrastructure, institutions, disease control, agricultural research, efficient customs, market information, competition promotion.

### IV. Private Savings, Financial Sector, and Excess Reserves
- Financing assumptions and implications:
  - Significant financing for planned public enterprise spending implied to be sourced domestically via internally generated resources and recourse to domestic bank borrowing.
  - Commercial banks, most particularly the Commercial Bank of Ethiopia (CBE), currently hold excess reserves.
  - Private savings and intermediation need to rise over time to support higher private investment and financing needs of public enterprises.
- Authorities’ perspective and proposed mobilization:
  - Authorities view excess reserves as “savings” to be mobilized to help fund higher MDG-related infrastructure spending.
  - Promoting increased credit to public enterprises is seen as a way to provide extra‑budgetary funds and alleviate chronically high excess reserves.
  - Any credit expansion to public enterprises must be effected cautiously and monitored carefully.
- Risks and monetary policy implications:
  - Rapid domestic credit growth risks monetary and price stability and potential crowding out of the private sector.
  - Too rapid domestic credit growth could inject liquidity with attendant inflationary risks; these are dampened if increased spending goes on imports.
  - Essential policy actions: ensure policies to accelerate growth, improve coordination of fiscal and monetary policies, consolidate major public enterprises into the budget, continue relying on direct monetary instruments in short run, develop NBE capacity for indirect instruments, strengthen bank supervision.
- Historical excess reserves (Box 2 findings):
  - Excess reserves stood at Birr 11.3 billion in December 2005, equivalent to 34.7 percent of deposits.
  - Treasury bill rates: currently 0.05 percent.
  - Minimum savings deposit rate referenced: 3 percent.
  - Two‑year bonds issued: Birr 3.2 billion (November 2000); CBE purchased Birr 3 billion.

### V. Fiscal Strategy: Frontloading Infrastructure and Sequencing
- Fiscal strategy rationale:
  - Driven primarily by frontloading infrastructure investments to lessen medium-term recurrent social service delivery costs and to “crowd in” private savings and investment.
  - Frontloaded capital spending projected to raise public and private productivity growth, mitigating Dutch Disease risk by enabling higher domestic content.
- External assistance and aid frontloading:
  - Scaled-up capital spending would require a dramatic 6.5 percent of GDP increase in external assistance to 20.4 percent of GDP in 2006/07, compared to that projected for 2005/06 under the baseline scenario.
  - If estimated off-budget expenditure plans of ETC and EEPCo are included in the 2005/06 fiscal projections, the required increase is reduced to around 5 percent of GDP.
- Expenditure composition and timing:
  - Total infrastructure spending on roads, power, telecommunications and the railroad increases by 12.2 percent of GDP between 2005/06 and 2010/11.
  - Capital spending on roads increases by about 6.3 percent of GDP between 2005/06 and the peak in 2010/11.
  - Recurrent pro‑poor spending increases steadily to reach 10.7 percent of GDP by 2015/16, or 5.3 percent of GDP higher than 2005/06.
  - Pro‑poor spending peaks in 2010/11 at 37 percent of GDP but remains steady at about 75 percent of total spending throughout the scenario.
  - Between 2005/06 and 2015/16, pro‑poor expenditures increase by almost four times in per‑capita dollar terms.
  - Public sector wage bill projected to increase by 3.2 percent of GDP between 2005/06 and 2015/16.

### VI. Revenue Mobilization and Tax Policy Recommendations
- Exit strategy and revenue targets:
  - Objective: raise domestic revenue over the next ten years so that at least recurrent spending can be financed from own resources, enabling orderly exit from heightened aid dependence after 2015.
  - MDG scenario target: increase the revenue ratio to around 22½ percent of GDP from under 17 percent of GDP in 2006/07.
  - The higher domestic revenue level would cover scaled-up recurrent spending at 19 percent of GDP and a portion of the public investment program.
- Revenue administration and tax policy reforms (policy recommendations):
  - Strengthen the large taxpayer office and institute functional reorganization of tax administration.
  - Significantly enhance audit, compliance and taxpayer service functions.
  - Customs administration reforms: strengthen post‑release verification, anti‑smuggling efforts, and modernize human resources.
  - Review distortionary commodity‑ and industry‑specific exemptions from import tariffs to broaden the tax base and lower the average effective tariff rate (currently high at almost 20 percent).
  - Ensure tax policy reforms bolster buoyancy with envisaged growth pick‑up and avoid regressive taxation inconsistent with pro‑poor objectives.

### VII. MDG Fiscal Coverage, Public Enterprises, and Fiscal Risks
- Fiscal coverage:
  - Broader than the general government definition used by the authorities; consolidates full costs including off‑budget social development mandates of public enterprises.
  - Significant share of infrastructure investments would be undertaken by large public enterprises, including EEPCo and ETC.
  - Objectives include extending electricity coverage from 16 to 50 percent of the population during the next five years, and improving telecommunications and Internet connectivity rates.
- Quasi‑fiscal activity and contingent liabilities:
  - Social development investments are not solely commercially oriented; if tariffs are not permitted to rise sufficiently, the budget might need to absorb quasi‑fiscal costs through explicit transfers or implicitly through lower dividends and tax concessions.
  - A significant share of these investments is to be financed by government‑guaranteed bond sales to major state‑owned commercial bank, creating potential contingent liabilities.
  - MDG fiscal presentation consolidates full costs to capture these potential contingent liabilities.

### VIII. Resource Gaps, Financing, and Aid Composition
- Resource gaps and aid projections:
  - Scaled‑up spending results in large annual financing gaps; fiscal deficit excluding grants increases sharply, peaking in 2010/11 at almost 30 percent of GDP.
  - Domestic resources would be inadequate to finance higher spending by 20 percent of GDP between 2005/06 and 2010/11.
  - Resulting annual resource gaps are met by a projected increase in external assistance reaching over US$6 billion in 2015/16.
  - Per capita external assistance increases from about US$11 in 2004/05 to almost US$65 by 2015/16.
- Composition of scaled‑up aid:
  - More heavily weighted towards earmarked project support (infrastructure and roads) and direct budget support for recurrent pro‑poor spending and related capital spending in health and education, shifting from earlier assumptions of largely untied direct budget support.

### IX. Debt Sustainability and Risks
- Debt assumptions and outcomes:
  - MDG scenario assumes a declining domestic debt path to around 22 percent of GDP (see Annex).
  - Required external financing is assumed to be predominantly in the form of grants to ensure external debt sustainability.
  - Under this assumption, projected NPV of debt‑to‑exports ratio, after assumed full delivery of MDRI relief, is maintained at between 60-80 percent.
- Sensitivity:
  - Replacing a third of the currently assumed inflow of grants with concessional loans results in an increase in projected NPV of debt‑to‑exports ratio to 150 percent.
  - MDG scenario DSA results are not comparable with those presented in the staff report as GDP, exports, and external financing projections differ.

### X. Aid Absorption, Spending Pattern, and Dutch Disease Considerations
- Historical and scenario-based absorption:
  - Historical aid inflows (since 2000) did not result in exchange rate appreciation or real interest rate pressures because a significant portion of aid was saved, accumulating international reserves.
  - MDG scenario assumes aid is absorbed and spent, producing corresponding increases in fiscal and current account deficits (excluding grants).
- Exchange rate and competitiveness implications:
  - Heavy frontloading of infrastructure spending with a high import content could limit appreciation pressures in initial years; later, spending shifts toward recurrent expenditures with lower import content, possibly necessitating some real exchange rate adjustment.
  - MDG scenario reflects a modest real exchange rate appreciation in the second half of the projection period and assumes some build up of reserves to cushion unpredictable and lumpy aid disbursements, particularly post 2015 when aid flows may decline.
  - World Bank MAMS model simulations suggest envisaged spending levels would have a modest impact on the relative price of non‑tradables; caution needed to ensure training in non‑tradables matches projected demand to avoid undue wage pressure.
- Absorptive capacity:
  - Overcoming absorptive capacity constraints is critical; Ethiopia has existing large‑scale infrastructure programs and sectoral plans underpinning absorption of aid through large‑scale imports in early years.

### XI. Education, Labor Market Capacity and PFM Reforms
- Education and labor market capacity findings:
  - UN assessments suggest Ethiopia will probably meet the MDG goal of universal primary education even before 2015.
  - Over the last 5 years, enrollment rates have been increasing by about 13 percent per annum.
  - TVET and university expansion during 2000/01-03/04 increased TVET enrollment from 25,000 to 102,649 and university intake capacity from 42,132 to 172,111.
- Public financial management (PFM) reforms (Box 1 key actions):
  - Budget preparation: transition towards program‑based budgeting on a pilot basis during 2005/06; strengthen medium‑term expenditure framework.
  - Budget execution: reconcile financing and fiscal accounting with banking statements and central bank monetary accounts more timely.
  - Budget reporting: clear backlog of annual fiscal accounts for finalization and audit; include extrabudgetary funds in fiscal reporting; roll out Budget Disbursement and Accounting system to all budget users by end‑2006; local governments to submit monthly fiscal reports as interim step.
  - Public investment program: strengthen project selection, prioritization and project management; carefully manage rapid scaling up of large investment programs.
- Fiscal reporting and transparency:
  - Consolidate major public enterprises into budgetary accounts or implement enhanced monitoring of their activities due to substantial macroeconomic impact.
  - Prioritize timely fiscal reporting based on double‑entry accounting; timely preparation and auditing of fiscal accounts are essential.

### XII. Selected Quantitative Projections and Key Indicators (MDG scenario projections, selected)
- Growth and price projections (annual percent change, 2006/07–2015/16, Proj.):
  - Real GDP growth (GDP at constant prices): 6.7; 7.0; 7.1; 7.2; 7.2; 7.2; 7.2; 7.2; 7.2; 7.2.
  - GDP deflator (annual percent change): 7.1; 6.5; 7.8; 7.4; 7.7; 7.7; 7.7; 7.7; 7.7; 7.7.
  - Consumer prices (period average, annual percent change): 7.4; 7.2; 7.5; 7.4; 7.5; 7.5; 7.5; 7.5; 7.5; 7.5.
- Financial balances and investment (percent of GDP):
  - Gross domestic saving: 8.6; 9.0; 9.2; 10.1; 11.4; 11.5; 11.5; 13.0; 13.9; 14.8.
  - Gross domestic investment: 36.9; 38.4; 39.8; 41.4; 42.9; 37.2; 37.2; 37.2; 37.3; 37.4.
    - Government investment: 21.5; 22.9; 24.2; 25.6; 27.0; 21.2; 21.1; 21.1; 21.2; 21.3.
    - Private investment: 15.4; 15.5; 15.6; 15.8; 15.9; 16.0; 16.1; 16.1; 16.1; 16.1.
- Resource gap and external balances (percent of GDP):
  - Resource gap: -28.3; -29.4; -30.6; -31.3; -31.5; -25.7; -25.7; -24.2; -23.4; -22.6.
  - External current account balance, including official transfers: -1.6; -1.2; -1.1; -0.3; 1.5; 0.7; 0.4; 1.6; 1.1; 1.0.
  - External current account balance, excluding official transfers: -20.1; -21.0; -22.2; -22.9; -23.2; -17.4; -17.5; -16.0; -15.3; -14.6.
- Government finances (percent of GDP, selected):
  - Revenue: 16.9; 17.4; 17.9; 18.4; 18.9; 19.4; 19.9; 20.6; 21.6; 22.8.
    - Tax revenue: 13.8; 14.4; 15.0; 15.6; 16.2; 16.8; 17.4; 18.2; 19.3; 20.6.
  - External grants: 18.6; 19.9; 21.1; 22.6; 24.7; 18.2; 17.9; 17.7; 16.4; 15.7.
  - Expenditure and net lending: 40.8; 42.3; 44.2; 46.2; 48.3; 42.2; 42.4; 42.7; 42.4; 42.6.
  - Fiscal balance, excluding grants (cash basis): -23.9; -24.9; -26.3; -27.8; -29.4; -22.8; -22.5; -22.1; -20.8; -19.8.
  - Fiscal balance, including grants (cash basis): -5.3; -5.0; -5.2; -5.2; -4.7; -4.6; -4.6; -4.4; -4.4; -4.2.
- Debt, reserves and balance of payments (selected):
  - Domestic debt (percent of GDP): 33.1; 32.1; 30.8; 29.7; 28.1; 26.8; 25.6; 24.3; 23.1; 21.9.
  - External debt (including to Fund, percent of GDP): 47.3; 46.1; 43.8; 42.1; 40.3; 38.4; 36.3; 34.4; 32.5; 30.7.
  - Gross official reserves (in millions of U.S. dollars): 1805; 2230; 2769; 3452; 4553; 5270; 6056; 6925; 7598; 8171.
    - In months of imports of goods and nonfactor services of following year: 3.0; 3.2; 3.5; 3.9; 5.1; 5.3; 5.6; 5.7; 5.6; 5.5.

### XIII. Domestic Debt Dynamics and Shock Scenarios
- Scenario outcomes (domestic debt stock, percent of GDP):
  - Baseline domestic borrowing scenario (2007/08–2010/11): 34.8; 33.6; 33.6; 33.4; 31.2.
  - PASDEP domestic financing plan: 34.8; 33.6; 33.8; 34.1; 34.7.
  - Two‑percent real interest rate shock: 34.8; 34.3; 34.9; 35.8; 38.2.
  - Drought shock during 2005/06: 34.8; 41.4; 41.6; 42.0; 42.8.
  - Combined scenarios (real rate shock + drought): 34.8; 42.2; 43.0; 44.1; 47.1.
- Domestic interest bill under combined scenarios rises to 3.0 (2010/11) from 0.5 baseline.
- Policy considerations:
  - Reduce domestic debt as share of GDP during favorable conditions to allow borrowing space during droughts.
  - Adopt a clear debt management strategy with a targeted debt threshold and adjustment path.

### XIV. Tax System Summary (selected features as of end October 2005)
- Income tax on employment:
  - First Br 150 of monthly income is exempted.
  - Marginal tax rates (Monthly taxable Income (birr) — Marginal tax rate (%)): 151 - 650: 10; 651 - 1,400: 15; 1,401 - 2,350: 20; 2,351 - 3,550: 25; 3,551 - 5,000: 30; 5,001 and above: 35.
- Rural land and agricultural activities (Oromia):
  - Rural land use rent: Farmers Br 10 for the first hectare and Br 7.50 for each additional half hectare; State enterprises Br 15 per hectare.
  - Agricultural income tax: for income less than Br 1,200 per annum: Br 15; marginal tax rates for higher income: 1,201 - 5,000: 5; 5,001 - 15,000: 10; 15,001 - 30,000: 20; 30,001 - 50,000: 30; 50,001 and more: 40; State farms owned by regional governments: 40 percent.
- Rental income tax:
  - First Br 1,800 of annual income is exempted.
  - Marginal tax rates (Annual taxable Income (birr) — Marginal tax rate (%)): 1,801 - 7,800: 10; 7,801 - 16,800: 15; 16,801 - 28,200: 20; 28,201 - 42,600: 25; 42,601 - 60,000: 30; 60,001 and above: 35.
- Tax on business and other profits:
  - Unincorporated business: first Br 1,800 exempted; marginal tax schedule same as rental income schedule.
  - Incorporated business: legal basis Proclamation No. 36/1996; Proclamation No. 286/2002 as amended (rates not separately specified in provided text).
- Capital gains tax: annual gains not exceeding Br 10,000 are exempted; rate: 15 percent.
- Excise tax (selected rates, Goods — Tax rate (%)):
  - Any type of Sugar (excluding Molasses): 33
  - All types of soft drinks (except fruit juice): 40
  - Water bottled or canned in a factory: 30
  - Alcohol (beer & stout, wine, whisky): 50
  - Other alcoholic drinks: 100
  - Tobacco and its products: 75
  - Automobiles up to 1300 cc: 30; 1301-1800 cc: 60; above 1800 cc: 100
  - Numerous other goods with specified rates.
- VAT:
  - Rate: Fifteen percent on value of goods and services produced locally or imported.
  - Exemptions include electricity, kerosene and water; medical services and goods; educational services; printed books; transport.
- Turnover Tax (TOT):
  - On goods: 2% on goods sold locally (for taxpayers not obliged to register for VAT).
  - On services: 2% on Contractors, grain mills, tractors and combine‑harvesters; 10% on others.
- Customs duties:
  - Ad valorem duty on imports with six rates ranging from 0 to 35 percent (raw materials, capital goods: 0-10; pharmaceuticals and chemicals: 0-20; consumer goods: 20-35; luxuries/local substitutes: 30-35).
- Withholding and other taxes:
  - Withholding tax on imports: 3 percent.
  - Income tax withholding on payments (category "A" taxpayers): 2 percent.
  - Withholding on interest income: 5 percent.

*Italic: Source — IMF staff report content from the provided PDF content unit.*

### References:.............................................................................................................

### _cr06122 - References:.............................................................................................................

### I. ETHIOPIA: AN MDG SCENARIO — A. Introduction and Costing
- The MDG scenario updates work from the 2004 Article IV consultation and draws on the authorities’ MDG Needs Assessment Synthesis Report and MAMS model results.
- Total costs of achieving the MDGs:
  - Total: US$101 billion
  - Upper bound public sector cost: US$76 billion
  - Lower bound public sector cost: US$58 billion
- The MDG scenario incorporates the lower bound public sector cost (US$58 billion), implying a six fold increase in per capita aid flows to US$64 in 2015.
- The lower bound scenario incorporates cross-cutting efficiency savings that reduce total costs by over 20 percent.
- The MDG scenario includes on-budget and additional costs by non-financial public enterprises to be consistent with the total lower bound cost estimates.
- Financing needs in the MDG macroeconomic scenario are shown as being met through external grants.

### II. Macroeconomic Framework and Policy Targets
- Core assumptions and targets under the MDG scenario:
  - Annual growth target: around 7 percent
  - Annual inflation target: 7.5 percent
  - Gross international reserve cover target: 5.5 months of imports
  - Aim to protect domestic and external debt sustainability
- Key modeling assumptions:
  - Increased aid flows are both spent and absorbed via increases in the external current account.
  - Frontloaded increase in public investment to reduce the infrastructure gap.
  - Assumptions made on import content and phasing of expenditures based on public enterprise infrastructure plans.
  - Baseline assumptions on exports’ contribution to GDP are maintained; increased competitiveness is assumed given higher GDP but unchanged external demand and international prices.
- Policy discussion focal points:
  - Fiscal sustainability and addressing shocks
  - Public expenditure management
  - Exchange rate policy
  - Priority policies in agriculture and private sector to realize productivity improvements
  - Role of infrastructure in promoting growth

### III. Growth, Infrastructure, and Productivity
- Growth target and required changes:
  - Growth target used: 7 percent (authorities consider necessary to halve poverty by 2015)
  - Requires a sharp rise in annual total factor productivity (TFP) growth to around 1.5 percent
  - Requires large increases in investment (to over 37 percent of GDP)
- Findings on infrastructure and private sector response:
  - Empirical studies suggest each additional 1 percent of GDP spending on infrastructure can add between 0.5 to 1 percent to the growth rate after 5 years; relationship is non-linear.
  - Given Ethiopia’s low infrastructure starting point, a growth response at the upper end of empirical ranges is plausible.
  - MAMS scenarios include assumptions of improvements in private sector TFP growth of one percentage point in response to improved infrastructure, with significant private sector productivity response starting in 2009.
  - The effectiveness of infrastructure in raising private returns depends on design and implementation quality.
- Agriculture and productivity:
  - Historical agriculture real output growth: 2.9 percent (1991/92-2004/05)
  - Required agriculture growth to support 7 percent GDP growth: raising agricultural output growth substantially from historical 2.9 percent to the 7 percent needed for overall GDP target.
  - Historical yield growth during 1991/92-2004/05: around 0.2 percent per year.
  - World Bank estimates: with better soil and water management and wider adoption of existing technologies, Ethiopia could achieve a doubling of cereal yields in food secure areas and an increase of 50 percent in food insecure areas.
- Private sector development:
  - Private sector remains in its infancy; contribution of industry to GDP has not changed significantly over the last 13 years.
  - Required reforms identified by the World Bank include deeper financial sector reform, acceleration of the privatization program, and further urban land reform.
  - Emphasis needed on providing public goods that foster private sector development (infrastructure, institutions, disease control, agricultural research, efficient customs, market information, competition promotion).

### IV. Private Savings and Financial Sector Development
- MDG scenario assumptions on financing:
  - Significant amount of financing for planned public enterprise spending implied to be sourced domestically via internally generated resources and recourse to domestic bank borrowing.
  - Commercial banks, most particularly the Commercial Bank of Ethiopia (CBE), currently hold excess reserves.
  - Private savings and their intermediation need to rise over time to support higher private investment and financing needs of public enterprises.
- Policy implications:
  - Need for financial sector reform over the medium term to mobilize domestic savings and intermediation.
  - If the financial system remains an obstacle, increasing FDI could be an alternative, but the MDG scenario does not factor in a large increase in inflows; FDI remains low relative to total private investment.

### V. Consolidated MDG Fiscal Framework and Fiscal Coverage
- Fiscal coverage in the MDG scenario:
  - Broader than the general government definition used by the authorities; consolidates full costs including off-budget social development mandates of public enterprises.
  - A significant share of infrastructure investments would be undertaken by large public enterprises, including the Ethiopia Electricity and Power Company (EEPCo) and the Ethiopia Telecommunications Company (ETC).
  - Objectives of public enterprise programs include extending electricity coverage from 16 to 50 percent of the population during the next five years, and improving telecommunications and Internet connectivity rates.
- Fiscal risk and quasi-fiscal activity:
  - These social development investments are not solely commercially oriented; if tariffs are not permitted to rise sufficiently to cover higher operating costs, the budget might need to absorb quasi-fiscal costs through explicit transfers or implicitly through lower dividends and tax concessions.
  - A significant share of these investments is to be financed by government-guaranteed bond sales to major state-owned commercial bank, creating potential contingent liabilities.
  - The MDG fiscal presentation consolidates full costs to capture these potential contingent liabilities.

### VI. Key Table Extracts and Quantitative Indicators
- Extracts from Table 1 (MDG Synthesis Report—Projected Sectoral Costs, in millions of constant 2005 US dollars):
  - Education: Upper bound 9,583; Lower bound 6,650
  - Health: Upper bound 14,532; Lower bound 10,756
  - Services: Upper bound 8,374; Lower bound 8,374
  - HIV/AIDS: Upper bound 6,000; Lower bound 2,224
  - Population: Upper bound 158; Lower bound 158
  - Rural: Upper bound 11,288; Lower bound 11,073
  - Water and sanitation: Upper bound 4,468; Lower bound 4,468
  - Food security: Upper bound 1,691; Lower bound 1,691
  - Agriculture and rural development: Upper bound 5,129; Lower bound 4,914
  - Gender: Upper bound 767; Lower bound 6
  - Urban development: Upper bound 4,145; Lower bound 3,972
  - Private sector development: Upper bound 2,702; Lower bound 2,589
  - Public investment: Upper bound 33,797; Lower bound 22,999
    - Roads: Upper bound 23,018; Lower bound 15,664
    - Irrigation/hydro/water infrastructure: Upper bound 5,549; Lower bound 3,776
    - Telecom: Upper bound 3,005; Lower bound 2,045
    - Power: Upper bound 568; Lower bound 387
    - Rail: Upper bound 1,657; Lower bound 1,128
  - Total: Upper bound 76,123; Lower bound 58,116
  - Note: Includes treasury and donor financed components only.
- Extracts from Table 2 (Sources of real GDP Growth, 1991/92-2004/05 actual vs 2005/06-2015/16 MDG scenario):
  - Actual 1991/92-2004/05 vs MDG scenario 2005/06-2015/16:
    - Real GDP at factor cost: 4.1 6.9
    - Agriculture: 2.9 6.9
    - Non-agriculture: 5.1 6.9
    - Real per capita GDP: 1.4 4.7
    - Nominal Investment/Nominal GDP (at m.p.):
      - Total: 19.6 37.6
      - Private: 12.8 15.8
      - Public: 6.5 21.8
  - Growth accounting (1991/92-2004/05 actual vs 2005/06-2015/16 MDG scenario):
    - Real GDP at factor cost: 4.1 7.0
    - Capital stock: 1.5 3.3
    - Labor: 2.1 2.2
    - TFP: 0.5 1.5

*Italic: Source — IMF staff report content from the provided PDF content unit.*

### 10.      The fiscal strategy is driven primarily by the relative frontloading of

### _cr06122 - 10.      The fiscal strategy is driven primarily by the relative frontloading of

### Fiscal strategy and frontloading of infrastructure
- Fiscal strategy is driven primarily by the relative frontloading of infrastructure investments to lessen medium-term recurrent social service delivery costs and to “crowd in” private savings and investment.
- Frontloaded capital spending is projected to raise public and private productivity growth, mitigating Dutch Disease risk by enabling the economy to more effectively absorb higher public spending with a relatively higher domestic content.
- The scaled-up level of capital spending would require a dramatic 6.5 percent of GDP increase in external assistance to 20.4 percent of GDP in 2006/07 (Table 2), compared to that projected for 2005/06 under the baseline scenario.
- If estimated off-budget expenditure plans of ETC and EEPCo are included in the 2005/06 fiscal projections, the required increase is reduced to around 5 percent of GDP.

### Expenditure composition and sequencing
- Total infrastructure spending on roads, power, telecommunications and the railroad increases by 12.2 percent of GDP between 2005/06 and 2010/11.
- Capital spending on roads increases by about 6.3 percent of GDP between 2005/06 and the peak in 2010/11.
- Recurrent pro-poor spending increases steadily to reach 10.7 percent of GDP by 2015/16, or 5.3 percent of GDP higher than 2005/06.
- Pro-poor spending peaks in 2010/11 at 37 percent of GDP but remains steady at about 75 percent of total spending throughout the scenario.
- Between 2005/06 and 2015/16, pro-poor expenditures increase by almost four times in per-capita dollar terms.
- The public sector wage bill is projected to increase by 3.2 percent of GDP between 2005/06 and 2015/16, consistent with initial 2004 Article IV MDG scenario findings; these projections depend on education investments producing sufficient skilled workers.

### Domestic revenue needs and exit strategy from aid dependence
- Objective: raise domestic revenue over the next ten years so that at least recurrent spending can be financed from own resources, enabling an orderly exit from heightened aid dependence after 2015.
- MDG scenario target: increase the revenue ratio to around 22½ percent of GDP from under 17 percent of GDP in 2006/07.
- The higher domestic revenue level would cover scaled-up recurrent spending at 19 percent of GDP and a portion of the public investment program.
- Real GDP growth will affect the scope for expanded real government spending consistent with fiscal sustainability and acceptable aid dependency; spending plans should be reassessed over the medium term based on growth effects of initial infrastructure expansion and private-sector development.

### Revenue administration and tax policy reforms (policy recommendations)
- Strengthen the large taxpayer office and institute functional reorganization of tax administration.
- Significantly enhance audit, compliance and taxpayer service functions.
- Customs administration reforms should strengthen post-release verification, anti-smuggling efforts, and modernize human resources.
- Review distortionary commodity- and industry-specific exemptions from import tariffs to broaden the tax base and lower the average effective tariff rate (currently high at almost 20 percent).
- Ensure tax policy reforms bolster buoyancy with envisaged growth pick-up and avoid regressive taxation inconsistent with pro-poor objectives.

### Public expenditure management and PFM reforms (findings and recommendations)
- Strengthen public expenditure management and capacity building, especially at the subnational level where scaled-up resources will be spent.
- Consolidate major public enterprises into budgetary accounts or implement enhanced monitoring of their activities due to their substantial macroeconomic impact.
- Prioritize timely fiscal reporting based on double-entry accounting to improve fiscal transparency and accountability; timely preparation and auditing of fiscal accounts are essential.
- Box 1: Key PFM reform actions under the Civil Service Reform Project (CSRP):
  - Budget preparation: transition towards program-based budgeting on a pilot basis during 2005/06; strengthen medium-term expenditure framework.
  - Budget execution: reconcile financing and fiscal accounting with banking statements and central bank monetary accounts more timely.
  - Budget reporting: clear backlog of annual fiscal accounts for finalization and audit; include extrabudgetary funds in fiscal reporting; roll out Budget Disbursement and Accounting system to all budget users by end-2006; local governments to submit monthly fiscal reports as interim step.
  - Public investment program: strengthen project selection, prioritization and project management; carefully manage rapid scaling up of large investment programs.

### Resource gaps and external financing projections
- Scaled-up spending would result in large annual financing gaps; fiscal deficit excluding grants increases sharply, peaking in 2010/11 at almost 30 percent of GDP.
- Domestic resources would be inadequate to finance higher spending by 20 percent of GDP between 2005/06 and 2010/11.
- Resulting annual resource gaps are met by a projected increase in external assistance reaching over US$6 billion in 2015/16.
- Per capita external assistance increases from about US$11 in 2004/05 to almost US$65 by 2015/16.
- Composition of scaled-up aid in this MDG scenario is more heavily weighted towards earmarked project support (infrastructure and roads) and direct budget support for recurrent pro-poor spending and related capital spending in health and education, shifting from earlier assumptions of largely untied direct budget support.

### Debt sustainability assumptions and risks
- Fiscal policy should protect public debt sustainability and enable an orderly exit from higher aid.
- MDG scenario assumes a declining domestic debt path to around 22 percent of GDP (see Annex).
- Required external financing is assumed to be predominantly in the form of grants to ensure external debt sustainability.
- Under this assumption, projected NPV of debt-to-exports ratio, after assumed full delivery of MDRI relief, is maintained at between 60-80 percent.
- Sensitivity: replacing a third of the currently assumed inflow of grants with concessional loans results in an increase in projected NPV of debt-to-exports ratio to 150 percent.
- The MDG scenario DSA results are not comparable with those presented in the staff report as the GDP, exports, and external financing projections are different.

### Aid absorption, spending, and Dutch Disease considerations
- Historical aid inflows (since 2000) did not result in exchange rate appreciation or real interest rate pressures because a significant portion of aid was saved, accumulating international reserves.
- The MDG scenario assumes aid is absorbed and spent, producing corresponding increases in fiscal and current account deficits (excluding grants).
- Heavy frontloading of infrastructure spending with a high import content could limit appreciation pressures in initial years; later, spending shifts toward recurrent expenditures with lower import content, possibly necessitating some real exchange rate adjustment.
- MDG scenario reflects a modest real exchange rate appreciation in the second half of the projection period and assumes some build up of reserves to cushion unpredictable and lumpy aid disbursements, particularly post 2015 when aid flows may decline.
- World Bank MAMS model simulations suggest envisaged spending levels would have a modest impact on the relative price of non-tradables, but caution is needed to ensure training in non-tradables (health and education) matches projected demand to avoid undue wage pressure.
- Labor market constraints are assumed to be alleviated through education investments to increase skilled labor availability and through nontraditional hiring practices (e.g., training semi-skilled health extension workers).
- Productivity gains from infrastructure spending during the first five years could mitigate adverse competitiveness impacts from real appreciation.
- Overcoming absorptive capacity constraints is critical; Ethiopia has existing large-scale infrastructure programs and sectoral plans underpinning absorption of aid through large-scale imports in early years. Managing required aid flows and investment operations is key.

### Education and labor market capacity findings
- UN assessments suggest Ethiopia will probably meet the MDG goal of universal primary education even before 2015.
- Over the last 5 years, enrollment rates have been increasing by about 13 percent per annum.
- During 2000/01-03/04 SDPRP, TVET initiative and university expansion increased TVET enrollment from 25,000 to 102,649 and university intake capacity from 42,132 to 172,111.

### Exchange rate and monetary policy implications
- Dutch Disease may not be a major concern, but there may be periods requiring sterilization of liquidity impacts from aid-related spending.
- Limited scope exists for market-based domestic sterilization instruments; treasury bill sales have weak effects in presence of significant excess reserves.
- Foreign exchange sales are expected to play a dominant role in sterilization until financial system development reduces CBE dominance.
- High public domestic debt (over 30 percent of GDP) argues against reliance on domestic sterilization measures.
- Management of the exchange rate will need to be much more flexible under an MDG scenario than currently.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 26.      The authorities tend to view excess reserves as  “savings” that should be

### _cr06122 - 26.      The authorities tend to view excess reserves as  “savings” that should be

### Authorities' perspective and proposed mobilization
- The authorities tend to view excess reserves as “savings” that should be mobilized to help fund higher MDG related infrastructure spending.
- Promoting an increase in credit to public enterprises is seen as a way to:
  - provide extra-budgetary funds for infrastructure development, and
  - alleviate the problem of chronically high excess reserves.
- Any credit expansion to public enterprises would need to be effected cautiously and monitored carefully.
- Planned recourse to large scale domestic bank financing by public enterprises carries risks for:
  - monetary and price stability, and
  - a potential crowding out of the private sector.
- Such activities would need to be pursued within the context of a broader macroeconomic and fiscal framework that includes the activities of public enterprises, so as to be able to asses the potential risks.

### Risks of rapid domestic credit growth and liquidity management
- Too rapid domestic credit growth could result in a large injection of liquidity with attendant inflationary risks.
- Inflationary risks will be dampened to the extent that increased spending goes on imports (and thus also helps absorb aid inflows).
- The impact on domestic liquidity, on top of the expected aid-funded fiscal injection, will need to be carefully managed.
- Essential accompanying policy actions:
  - ensure policies are in place to accelerate growth so as to allow for a non-inflationary expansion in money supply,
  - improve coordination and monitoring of fiscal and monetary policies,
  - consolidate the operations of major public enterprises into the budget where possible,
  - in the short run continue relying on direct monetary instruments given the undeveloped nature of the financial sector,
  - develop NBE capacity to use indirect instruments through better liquidity forecasting and development of interbank money and foreign exchange markets,
  - strengthen bank supervision to ensure banking sector soundness in the face of prospect of sustained strong credit growth.

### Box 2 — Ethiopia: A History of Excess Reserves (findings)
- Chronic excess liquidity remains a major obstacle to financial market development and monetary policy implementation, as well as posing a risk to macroeconomic stability.
- Although all banks hold excess reserves, the CBE accounts for the vast majority of these excess reserves.
- Excess reserves stood at Birr 11.3 billion in December 2005, equivalent to 34.7 percent of deposits.
- Past efforts to reduce excess reserves had only temporary success:
  - During the conflict with Eritrea in 1999-2000, several factors caused excess reserves to rise to 30 percent of deposits, including a surge in NBE credit to the government and administrative restrictions on foreign exchange which curbed imports.
  - The authorities issued Birr 3.2 billion in two years bonds in November 2000 to reduce excess liquidity — of which CBE purchased Birr 3 billion — and started to conduct regular treasury bill auctions.
  - The emphasis since then has been on a cautious withdrawal of excess liquidity with the ultimate objective of tightening overall liquidity sufficiently to move treasury bill rates (currently 0.05 percent) up to a level where the 3 percent minimum savings deposit rate can be safely removed.
  - After an initial decline, excess reserves continued to rise — mainly reflecting large external inflows and a compression in commercial bank non-government credit through 2002/03 — and on maturity the two-year bonds were rolled over into 91-day treasury bills by CBE.
  - More recently CBE has allowed these treasury bill holdings to mature, and NBE has stepped in to meet the government’s domestic financing needs, leading to a sharp rise in excess reserves.

### Key statistics and time references
- Excess reserves: Birr 11.3 billion (December 2005).
- Excess reserves as percent of deposits: 34.7 percent (December 2005).
- Historical peak during 1999-2000 conflict: 30 percent of deposits.
- Two-year bonds issued: Birr 3.2 billion (November 2000).
- CBE purchase of two-year bonds: Birr 3 billion.
- Treasury bill rates: currently 0.05 percent.
- Minimum savings deposit rate referenced: 3 percent.
- Chart/title reference: Ethiopia: Excess Reserves 1998/99-November 2005.

*Source: _cr06122 - 26. The authorities tend to view excess reserves as “savings” that should be — excerpt from IMF content unit.*

### 28.      The finalization of the MDG Synthesis Report is an important step in working

### _cr06122 - 28.      The finalization of the MDG Synthesis Report is an important step in working

### MDG implementation: principal challenges and policy priorities
- Finalization of the MDG Synthesis Report is an important step toward achievement of the MDGs, but translating costings into an operational framework faces considerable challenges.
- Key challenges identified:
  - increasing agricultural productivity, and ensuring supporting policies to achieve the expected private sector productivity response to improved infrastructure provision, necessary to raise GDP growth rates;
  - raising fiscal revenues by over 5 percentage points of GDP in order to cover the recurrent costs of higher spending, and allow for an exit strategy from high aid dependence;
  - strengthening public expenditure management and capacity building to ensure effective implementation of expenditure plans, including infrastructure investments of public enterprises;
  - addressing potential labor market constraints through appropriate investment and training in order to ease pressures on wages;
  - managing the sequence of spending to mitigate potential pressures on the real exchange rate through an initial focus on import heavy infrastructure investment which results in productivity gains, and eases labor constraints at a later date when the emphasis shifts to recurrent spending.

### Macro projections and external sector (selected)
- Real GDP growth (GDP at constant prices, annual percent change): 6.7; 7.0; 7.1; 7.2; 7.2; 7.2; 7.2; 7.2; 7.2; 7.2 (2006/07–2015/16, Proj.).
- Price measures:
  - GDP deflator (annual percent change): 7.1; 6.5; 7.8; 7.4; 7.7; 7.7; 7.7; 7.7; 7.7; 7.7.
  - Consumer prices (period average, annual percent change): 7.4; 7.2; 7.5; 7.4; 7.5; 7.5; 7.5; 7.5; 7.5; 7.5.
- External sector (annual percent change unless noted):
  - Exports, f.o.b.: 12.2; 8.3; 11.9; 11.0; 10.3; 10.6; 10.6; 10.8; 10.8; 11.2.
  - Imports, c.i.f.: 22.6; 14.2; 14.8; 12.2; 12.1; -3.3; 10.9; 7.3; 9.8; 9.9.
  - Export volume: 12.2; 12.0; 9.9; 9.2; 8.6; 8.9; 8.9; 9.1; 9.1; 9.6.
  - Import volume: 20.9; 13.6; 14.8; 10.8; 12.1; -3.3; 10.9; 7.3; 9.8; 9.9.
  - Terms of trade (deterioration - , percent change): -1.7; -4.2; 2.0; 0.3; 1.7; 1.7; 1.7; 1.7; 1.7; 1.6.

### Financial balances, fiscal stance and financing (selected, percent of GDP)
- Gross domestic saving: 8.6; 9.0; 9.2; 10.1; 11.4; 11.5; 11.5; 13.0; 13.9; 14.8.
  - Government saving: -3.0; -2.8; -1.5; -1.6; -1.7; -1.0; -0.9; -0.4; 0.9; 1.9.
  - Private saving: 11.5; 11.7; 10.7; 11.7; 13.1; 12.5; 12.4; 13.5; 13.0; 12.9.
- Gross domestic investment: 36.9; 38.4; 39.8; 41.4; 42.9; 37.2; 37.2; 37.2; 37.3; 37.4.
  - Government investment: 21.5; 22.9; 24.2; 25.6; 27.0; 21.2; 21.1; 21.1; 21.2; 21.3.
  - Private investment: 15.4; 15.5; 15.6; 15.8; 15.9; 16.0; 16.1; 16.1; 16.1; 16.1.
- Resource gap: -28.3; -29.4; -30.6; -31.3; -31.5; -25.7; -25.7; -24.2; -23.4; -22.6.
- External current account balance, including official transfers: -1.6; -1.2; -1.1; -0.3; 1.5; 0.7; 0.4; 1.6; 1.1; 1.0.
- External current account balance, excluding official transfers: -20.1; -21.0; -22.2; -22.9; -23.2; -17.4; -17.5; -16.0; -15.3; -14.6.

### Government finances (percent of GDP, selected)
- Revenue: 16.9; 17.4; 17.9; 18.4; 18.9; 19.4; 19.9; 20.6; 21.6; 22.8.
  - Tax revenue: 13.8; 14.4; 15.0; 15.6; 16.2; 16.8; 17.4; 18.2; 19.3; 20.6.
  - Nontax revenue: 3.1; 3.0; 2.9; 2.8; 2.7; 2.6; 2.5; 2.4; 2.3; 2.2.
- External grants: 18.6; 19.9; 21.1; 22.6; 24.7; 18.2; 17.9; 17.7; 16.4; 15.7.
- Expenditure and net lending: 40.8; 42.3; 44.2; 46.2; 48.3; 42.2; 42.4; 42.7; 42.4; 42.6.
- Fiscal balance, excluding grants (cash basis): -23.9; -24.9; -26.3; -27.8; -29.4; -22.8; -22.5; -22.1; -20.8; -19.8.
- Fiscal balance, including grants (cash basis): -5.3; -5.0; -5.2; -5.2; -4.7; -4.6; -4.6; -4.4; -4.4; -4.2.
- Total financing: 5.3; 5.0; 5.2; 5.2; 4.7; 4.6; 4.6; 4.4; 4.4; 4.2.
  - External financing: 1.8; 1.8; 2.2; 2.2; 2.2; 2.1; 2.1; 2.2; 2.2; 2.2.
  - Domestic financing (including residual): 3.5; 3.3; 3.0; 3.0; 2.5; 2.5; 2.5; 2.3; 2.3; 2.0.

### Debt, reserves and balance of payments (selected)
- Domestic debt (percent of GDP): 33.1; 32.1; 30.8; 29.7; 28.1; 26.8; 25.6; 24.3; 23.1; 21.9.
- External debt (including to Fund, percent of GDP): 47.3; 46.1; 43.8; 42.1; 40.3; 38.4; 36.3; 34.4; 32.5; 30.7.
- External debt-service ratio (before debt relief; percent of exports of goods and nonfactor services): 11.5; 10.4; 9.2; 8.2; 7.3; 6.8; 6.4; 5.9; 5.1; 4.7.
- Overall balance of payments (in millions of U.S. dollars): 451; 425; 539; 683; 1101; 717; 787; 869; 673; 573.
- Gross official reserves (in millions of U.S. dollars): 1805; 2230; 2769; 3452; 4553; 5270; 6056; 6925; 7598; 8171.
  - (In months of imports of goods and nonfactor services of following year): 3.0; 3.2; 3.5; 3.9; 5.1; 5.3; 5.6; 5.7; 5.6; 5.5.
- GDP at current market prices (in millions of birr): 129,207; 147,821; 170,937; 197,323; 228,512; 264,982; 307,362; 357,063; 414,991; 483,036.

### Fiscal resource allocation and MDG-related spending (selected levels and shares)
- Total revenue and grants (millions of birr): 45,831; 55,051; 66,617; 80,870; 99,591; 99,605; 116,196; 136,685; 157,562; 185,670 (2006/07–2015/16, Proj.).
- Revenue (millions of birr): 21,819; 25,702; 30,575; 36,282; 43,159; 51,372; 61,125; 73,508; 89,584; 110,069.
  - Tax revenue (millions of birr): 17,774; 21,221; 25,565; 30,695; 36,918; 44,400; 53,346; 64,828; 79,911; 99,293.
    - Direct taxes (millions of birr): 5,962; 7,265; 8,914; 10,881; 13,287; 16,202; 19,716; 24,332; 30,355; 37,747.
    - Indirect taxes (millions of birr): 11,811; 13,956; 16,652; 19,814; 23,631; 28,198; 33,630; 40,496; 49,556; 61,546.
- Grants (millions of birr): 24,012; 29,349; 36,042; 44,589; 56,432; 48,234; 55,071; 63,176; 67,978; 75,601.
- Total expenditure and net lending (millions of birr): 52,724; 62,488; 75,501; 91,071; 110,258; 111,918; 130,341; 152,500; 175,915; 205,757.
  - Recurrent expenditure (millions of birr): 21,831; 24,921; 29,578; 34,945; 41,704; 49,470; 58,352; 68,612; 78,078; 91,545.
  - Capital expenditure (millions of birr): 30,893; 37,567; 45,923; 56,126; 68,554; 62,449; 71,990; 83,888; 97,836; 114,212.
- Of which: MDG-related expenditure (millions of birr): 28,084; 34,152; 41,748; 51,024; 62,322; 56,772; 65,445; 76,262; 88,942; 103,829.
  - Education (MDG-related, millions of birr): 3,876; 4,561; 5,409; 6,405; 7,590; 9,012; 9,922; 11,657; 13,700; 16,119.
  - Health (MDG-related, millions of birr): 2,651; 3,260; 4,014; 4,923; 6,012; 7,347; 8,979; 10,976; 13,420; 16,410.

### Fiscal policy and macroeconomic stabilization: analysis and modalities
- Background and rationale:
  - Fiscal policy can play a stronger role in stabilizing the economy after macroeconomic shocks, particularly given rural households' limited private insurance and low ability to smooth consumption after droughts.
  - Greater stabilization of household consumption (including through food security) could raise trend growth rates.
- Domestic debt and stabilization policy:
  - Domestic debt can be used to smooth delivery of essential public services and cover food import costs by maintaining a low level of domestic debt and sufficient foreign exchange reserves.
  - Policy considerations:
    - Domestic debt management: reduce domestic debt as a share of GDP during favorable conditions to allow borrowing space during droughts; adopt a clear debt management strategy with a targeted debt threshold and adjustment path.
    - Sustainability: the stock of domestic debt is high by regional standards; negative real interest rates and solid nominal GDP growth have fostered stable debt dynamics but the high stock limits future domestic borrowing space.
    - Vulnerability: a scenario with higher real borrowing rates and a severe drought could increase domestic debt by 12 percentage points of GDP between 2004/05 and 2010/11 and raise domestic debt service by 2½ percent of GDP, risking crowding out pro‑poor spending.
- Other stabilization modalities (caveats emphasized):
  - Agricultural price support schemes: can stabilize prices and incomes but often entail significant contingent budgetary liabilities and do not remove risk of low crop yields.
  - Segmented budget funds (e.g., special funds to buy/sell staples): can stabilize prices but have resulted in governance problems; require prudent safeguards, internal controls and regular external audits.
  - Foreign exchange reserves: targeted reserves could include an additional “precautionary balance” to cover high food import needs during droughts; the size could be linked to the targeted domestic debt threshold and adjustment path.

### Domestic debt dynamics: scenario illustrations (percent of GDP)
- Cross-country context (selected): Ethiopia domestic public debt series and regional comparators are presented in Table 1 (cross‑country comparison of domestic public debt).
- Table 2 scenario outcomes (selected entries):
  - Baseline domestic borrowing scenario domestic debt stock (2007/08–2010/11): 34.8; 33.6; 33.6; 33.4; 31.2.
  - PASDEP domestic financing plan domestic debt stock: 34.8; 33.6; 33.8; 34.1; 34.7.
  - Two‑percent real interest rate shock domestic debt stock: 34.8; 34.3; 34.9; 35.8; 38.2.
  - Drought shock during 2005/06 domestic debt stock: 34.8; 41.4; 41.6; 42.0; 42.8.
  - Combined scenarios (real rate shock + drought): 34.8; 42.2; 43.0; 44.1; 47.1.
  - Corresponding domestic interest bill (percent of GDP) under combined scenarios rises to 3.0 (2010/11) from 0.5 baseline.
- Notes on scenarios:
  - Baseline scenario entails a decline in net domestic borrowing from 4 to 2.5 percent of GDP between 2005/06 and 2010/11.
  - PASDEP scenario reflects the net domestic financing path summarized in the PASDEP until 2009/10, and assumes a constant 4 percent of GDP in net domestic financing beginning from 2008/09.
  - The two‑percent real interest rate shock assumes a permanent 2‑percentage point jump in real interest rates with higher debt service covered through additional domestic borrowing.
  - The drought shock assumes a 2005/06 drought equivalent to the major 2002/03 shock; nominal GDP growth reverts to baseline after 2005/06.

- Empirical illustrations:
  - Figure 1 shows the revenue impact of droughts (domestic revenue percent of GDP falls during drought years).
  - Figure 2 shows the projected path of domestic debt under alternative macro scenarios (Baseline; PASDEP scenario; Real interest rate shock; Drought shock; Combined scenarios), with domestic debt rising markedly under adverse scenarios.

*Source: Excerpt from the IMF staff report content in the supplied PDF.*

### References

### _cr06122 - References and Statistical Appendix (Ethiopia, 1999/00–2004/05)

### Major citations and thematic literature
- References cited focus on aid, scaling up aid, MDGs, aid volatility, fiscal space, absorptive capacity, and country strategies for Ethiopia:
  - Aiyar, S., Berg, A., and M. Hussain, 2005, “The Macroeconomic Challenge of More Aid.” Finance and Development, Vol. 42 (September), pp. 28-31.
  - Andrews, D., Lodewyk, E., and R. Powell, 2005, “Ethiopia: Scaling Up.” Finance and Development, Vol. 42 (September), pp. 32-55.
  - Berg, A., and Z. Qureshi, 2005, “The MDGs: Building Momentum.” Finance and Development, Vol. 42 (September), pp. 21-23.
  - Eifert, B., and A. Gelb, 2005, “Coping with Aid Volatility.” Finance and Development, Vol. 42 (September), pp. 24-27.
  - Gupta, S., Clements, B., Pivovarsky, A., and E.D. Tiongson, 2003, “Foreign Aid and Revenue Response: Does the Composition of Aid Matter?” IMF Working Paper 03/176.
  - Gupta, S., Powell, R. and Y. Yang, 2005, “The Macroeconomic Challenges of Scaling Up Aid to Africa.” IMF Working Paper 05/179.
  - Heller, P. S., and S. Gupta, 2002, “Challenges in Expanding Aid Flows.” Finance and Development, Vol. 42 (June); Heller P.S., 2004, “Understanding Fiscal Space,” IMF Policy Discussion Paper 05/4; Heller (2005) “Making Aid Work” and IMF Working Paper 05/180.
  - Lofgren, H., and Diaz-Bonilla, C., 2005, “An Ethiopian Strategy for Achieving the Millennium Development Goals: Simulations with the MAMS Model.” World Bank, mimeo.
  - Radelet, S., Clemens, M., and R. Bhavnani, 2005, “Aid and Growth.” Finance and Development, Vol. 42 (September), pp. 16-20.
  - Sundberg, M., Lofgren, H., and F. Bourguignon, 2005, “Absorptive Capacity and Achieving the MDGs: The Case of Ethiopia.” World Bank Development Economics Working Paper.
  - World Bank. Ethiopia: A Strategy to Balance and Stimulate Growth: A Country Economic Memorandum, January 31, 2005.

### National accounts and prices (selected figures)
- GDP (current market prices, in millions of birr):
  - 1999/2000: 63,924
  - 2000/01: 65,689
  - 2001/02: 62,665
  - 2002/03: 68,144
  - 2003/04: 83,892
  - 2004/05: 96,676
- GDP at factor cost (constant 1999/2000 prices, in millions of birr):
  - 1999/2000: 59,575
  - 2000/01: 63,973
  - 2001/02: 63,756
  - 2002/03: 61,654
  - 2003/04: 68,472
  - 2004/05: 74,506
- GDP growth (annual percentage change, at 1999/2000 prices): 5.3; 7.4; -0.3; -3.3; 11.1; 8.8 (1999/00–2004/05)
- GDP deflator (annual percentage change): 5.7; -5.2; -5.8; 13.0; 9.4; 6.2 (1999/00–2004/05)
- Consumer price index (annual average): 6.2; -5.2; -7.2; 15.1; 8.6; 6.8 (2000/01–2004/05 as presented)
- Terms of trade, goods (- deterioration): -33.9; -3.1; -10.1; -6.5; -14.7; 10.8 (1999/00–2004/05)

### Fiscal sector — central government (selected figures)
- Total revenue and grants (millions of birr): 11,222; 12,804; 12,834; 15,702; 17,918; 20,031 (1999/00–2004/05)
- Grants (millions of birr): 1,724; 2,628; 2,425; 4,553; 4,001; 4,565
- Total expenditure and net lending (millions of birr): 17,184; 15,382; 16,680; 19,840; 20,232; 24,551
- Recurrent expenditure (millions of birr): 13,742; 10,379; 10,550; 13,527; 11,961; 13,036
- Development and net lending (millions of birr): 3,442; 5,003; 6,130; 6,313; 8,271; 11,515
- Overall balance (including grants, millions of birr): -5,961; -2,982; -5,282; -5,526; -4,572; -5,789
- Overall balance (in percent of GDP, including grants): -9.3; -4.5; -8.4; -8.1; -5.5; -6.0
- Tax revenue (millions of birr): 6,482; 7,439; 7,926; 8,244; 10,906; 12,265 (1999/00–2004/05)
- GNI per capita, World Bank Atlas method, 2003 estimate: US$90
- Population, 2005 estimate: 73.0 million
- Population average annual growth (1993/94–2004/05): 2.8 percent

### Government revenues and composition (selected figures and shares)
- Total revenue (millions of birr): 9,498; 10,176; 10,409; 11,149; 13,917; 15,466
- Nontax revenue (millions of birr): 3,016; 2,737; 2,483; 2,906; 3,010; 3,202
- Tax revenue as percent of total revenue: 68.2; 73.1; 76.1; 73.9; 78.4; 79.3
- Direct taxes and indirect taxes shares reported (percent of total revenue and of GDP) — see source tables for detailed breakout.

### Expenditure by function and social spending (selected figures)
- Current expenditure (millions of birr): 13,742; 10,379; 10,550; 13,527; 11,961; 13,653
- Capital expenditure (millions of birr): 3,442; 5,003; 6,130; 6,313; 8,271; 11,515
- Total social spending (current and capital, percent of GDP): 6.8; 9.3; 10.4; 10.9; 12.1; 14.5 (1999/00–2004/05)
- Education (total social spending percent of GDP): 2.6; 3.2; 3.7; 4.5; 5.0; 5.0
- Health (total social spending percent of GDP): 0.8; 1.2; 1.3; 1.2; 1.0; 1.2

### Balance of payments and external sector (selected figures)
- Current account balance (millions of U.S. dollars): -335; -233; -347; -178; -499; -1,013 (1999/00–2004/05)
- Current account balance (percent of GDP, including official transfers): -4.2; -2.9; -4.7; -2.2; -5.1; -9.1
- Exports, f.o.b. (millions of U.S. dollars): 486; 463; 452; 483; 600; 818
- Imports, f.o.b. (millions of U.S. dollars): -1,611; -1,557; -1,696; -1,856; -2,587; -3,633
- Trade balance (millions of U.S. dollars): -1,125; -1,094; -1,243; -1,374; -1,986; -2,815
- Gross official international reserves (end of period, U.S. dollars, millions): 349; 337; 664; 931; 1,350; 1,555
- Gross official international reserves (months of next year's imports): 2.2; 2.0; 3.3; 3.5; 3.7; 3.9
- External debt (stock, end of period, U.S. dollars, millions): 5,452; 5,731; 6,223; 6,782; 7,371; 6,021
- External debt (in percent of GDP): 68.5; 71.8; 84.5; 85.3; 75.8; 54.3

### Exports by commodity (selected figures)
- Coffee exports (millions of U.S. dollars): 262.0; 182.0; 163.2; 165.2; 223.6; 335.4 (1999/00–2004/05)
  - Coffee volume (thousand metric tons): 116.6; 95.6; 110.3; 126.1; 156.4; 161.0
  - Coffee price (U.S. dollars per thousand metric tons): 2.2; 1.9; 1.5; 1.3; 1.4; 2.1
- Other export categories with reported values: Pulses (9.8; 8.7; 32.9; 19.9; 26.7; 35.5), Oilseeds (31.4; 32.4; 32.6; 46.5; 83.6; 102.3), Leather and leather products (35.2; 76.0; 55.5; 52.0; 44.3; 63.7), Chat (76.0; 61.2; 49.0; 57.5; 88.0; 100.0)
- Total exports (millions of U.S. dollars): 485.9; 462.7; 452.4; 482.7; 600.4; 817.7

### Imports by end use (selected figures)
- Total imports, c.i.f. (millions of U.S. dollars): 1,610.8; 1,556.8; 1,695.7; 1,856.4; 2,586.9; 3,633.3 (1999/00–2004/05)
- Fuel imports share and value: fuel imports account for a notable and rising share; fuel imports (in percent of GDP) series reported and fuel value components included in table breakdowns.
- Capital goods, consumer goods, raw materials, semifinished goods, and food import components provided in detailed tables.

### Monetary and banking sector (selected figures)
- Broad money (M3, end-period, millions of birr): 22,456; 24,598; 26,586; 29,475; 33,822; 40,452 (1999/00–2004/05)
- Money (M1, end-period, millions of birr): 13,265; 13,778; 14,420; 15,784; 18,137; 21,430
- Domestic credit (annual percent of beginning-of-period broad money): 33.2; 2.9; -0.6; 2.7; 11.4; 29.5
- Claims on government (net, millions of birr): 15,757; 15,544; 16,268; 17,855; 20,009; 23,165
- Claims on nongovernment (millions of birr): 11,357; 12,220; 11,349; 10,477; 11,672; 18,493
- Reserve requirement (five percent of net deposits): reserve requirement values reported; actual reserves and excess reserves series included (e.g., excess reserves: 4,049; 993; 1,698; 2,923; 3,034; 10,068)
- Structure of interest rates (selected): deposit rates—savings deposits minimum 3.0 (various periods); time deposit weighted rates and bank lending minimum/maximum values reported (e.g., lending maximum 14.0 percent in later periods). Treasury bill yield (91-day bill, at auction) reported series down to 0.0 percent in recent end-period.

### Banking system lending and deposits (selected figures)
- Total reported commercial bank claims on nongovernment sectors (millions of birr): 15,101.8; 15,968.4; 15,748.0; 15,543.4; 17,750.0; 21,749.0
- Sectoral shares (percent of total) for 1999/00–2004/05 include agriculture 8.2; 7.6; 8.2; 7.7; 6.5; 9.3 and manufacturing 13.6; 15.3; 16.0; 17.7; 23.7; 23.6
- Deposits (millions of birr): total deposits 19,724; 22,002; 24,298; 27,095; 31,307; 37,077
  - Demand deposits: 10,525; 11,174; 12,124; 13,396; 15,615; 18,047
  - Savings deposits: 8,356; 9,824; 11,071; 12,529; 14,447; 17,403
  - Time deposits: 842; 1,003; 1,102; 1,170; 1,245; 1,627

### Agriculture, food, and coffee sector (selected figures)
- Cultivated area and production, cereals and pulses (area in thousands hectares; production in thousands quintals):
  - Total area (thousands hectares): 9,445; 8,653; 8,467; 9,303; 10,787 (2000/01–2004/05 reporting)
  - Total production (thousands quintals): 110,393; 103,497; 78,439; 108,597; 125,269
- Coffee: production, marketing, and stocks (in thousands of metric tons):
  - Opening stocks: 152; 144; 130; 124; 99; 79
  - Production: 230; 221; 245; 250; 260; 300
  - Domestic consumption: -98; -100; -110; -110; -110; -110
  - Exports (as recorded on loading at port): -120; -85; -116; -137; -142; -172
  - Closing stocks: 144; 130; 124; 99; 79; 54
- Monthly export and arrival volumes and coffee prices (October 2002–August 2005): detailed monthly series of estimated export volume, export arrival volume, ICO price (U.S. cents per pound), producer price (Birr per metric ton), auction price, composite price, and unit value; examples include March 2003 ICO 50, April 2003 ICO 52, March 2004 ICO 61, March 2005 ICO 101.

### Investment projects and private sector (selected figures)
- Approved investment projects, July 1992–September 2005 (units indicated):
  - Total approved projects: 14,202
  - Total approved cost (millions of birr): 193,183
  - Capital-labor ratio (percent of approved projects): 0.2947 (total approved)
  - Number of projects in implementation phase: 1,490; in operation: 2,894 (as reported)
- Sectoral distribution provided in Table 6 (Agriculture, Manufacturing, Electricity supply, Construction, Real estate, Trade, Hotel and tourism, Transport and storage, Education, Health, etc.) with approved, implementation, and operational counts and costs.

### Public and publicly guaranteed external debt (selected figures)
- Public and publicly guaranteed external debt outstanding (millions of U.S. dollars):
  - Total debt outstanding: 5,393; 5,478; 6,218; 6,551; 7,369; 6,021 (1999/00–2004/05)
  - Multilateral share examples: 2,795; 2,929; 3,642; 4,249; 4,670; 4,881
  - Official bilateral and commercial components reported with shares and arrears information where applicable.

### Exchange rate and external price indices (selected figures)
- Birr per U.S. dollar (end of period): 6.22; 6.32; 6.35; 6.78; 7.09; 8.12; 8.23; 8.47; 8.57; 8.61; 8.63; 8.67 (historic series across periods)
- Merchandise trade unit values and volume indices (index, 1996/97 = 100):
  - Unit value index — imports: 115.2; 112.8; 111.0; 119.4; 135.0; 151.7 (1999/00–2004/05)
  - Unit value index — exports: 75.6; 71.8; 63.4; 63.8; 61.5; 77.1
  - Terms of trade: 65.6; 63.6; 57.2; 53.4; 45.6; 50.5

### Prices of petroleum products (retail Addis Ababa and import border; selected periods)
- December 2001–March 2002 (Birr per liter): Import border price — Regular Gasoline 1.29; Gas Oil (Diesel) 1.48; Fuel Oil 1.32; Lighting Kerosene 1.52. Addis Ababa retail — Regular Gasoline 4.30; Gas Oil 2.62; Fuel Oil 2.23; Kerosene 2.00.
- December 2004–December 2005 (Birr per liter): Import border price — Regular Gasoline 2.93; Gas Oil 3.21; Fuel Oil 1.88; Kerosene 3.45. Addis Ababa retail — Regular Gasoline 5.50; Gas Oil 4.31; Fuel Oil 3.52; Kerosene 3.00.
- U.S. dollars per liter conversions reported alongside local prices for each period.

### Consumer Price Index (selected monthly and annual percent changes)
- National CPI (December 2000 = 100): National index examples — March 2003: 114.3; June 2003: 120.3; September 2003: 123.6; December 2003: 115.9; March 2004: 117.8; September 2004: 125.8; December 2004: 125.0; March 2005: 126.6; June 2005: 138.3; September 2005: 143.4.
- Annual percentage change (national): March 2003 20.4; June 2003 23.5; September 2003 16.6; December 2003 6.2; March 2004 3.1; June 2004 1.7; September 2004 1.8; December 2004 7.9; March 2005 10.6; June 2005 13.0; September 2005 14.0.
- Monthly percentage changes and other CPI components (food/nonfood; Addis Ababa series) provided in Table 8.

### Additional sectoral and regional detail
- GDP by economic activity (at 1999/2000 factor costs) with levels and annual percentage changes for Agriculture and allied activities, Industry, Services, Manufacturing, Construction, Transportation and communications, Education, Health, and more (see Table 1 and associated breakdowns).
- Regional government finances: total revenue and expenditure series, overall balance, and shares by function provided (see Table 13).
- Detailed tables on sectoral composition of imports by country of origin and exports by country of destination (Tables 25–26).
- Comprehensive tables included for merchandise trade breakdowns, unit values and volume indices, monetary survey, loan portfolios, commercial bank lending by sector, reserve and liquidity positions, interest rate structure, and investment project registers.

*Source: _cr06122 - References; Statistical Appendix tables and listings as provided in the source PDF.*

### 1.       Taxes on income and profits

### 1.       Taxes on income and profits

### Income tax on employment
- Legal basis: Income Tax Proclamation No. 173/1961, as amended by Proclamation No. 286/2002; Proclamation No. 30/1992; Proclamation No. 107/1994; Proclamation No. 286/2002.
- Nature: Tax on income from employment, including, without limitations, salaries, wages, allowances, directors’ fees, and other personal emoluments. Employer withholds tax (withholding tax).
- Exemption: The first Br 150 of monthly income is exempted.
- Marginal tax rates (Monthly taxable Income (birr) — Marginal tax rate (%)):
  - 151 - 650: 10
  - 651 - 1,400: 15
  - 1,401 - 2,350: 20
  - 2,351 - 3,550: 25
  - 3,551 - 5,000: 30
  - 5,001 and above: 35

### Rural land and agricultural activities
- Legal basis: Proclamation No. 77/1997; Proclamation No. 152/1978; Proclamation No. 8/1995 (Oromia).
- 1.21 Rural land use rent:
  - Nature: An annual rent payable on rural land used for agricultural activities in Oromia regional state.
  - Exemptions: Agricultural investors are exempted for two-five years.
  - Rates:
    - Farmers: Br 10 for the first hectare and Br 7.50 for each additional half hectare.
    - State enterprises: Br 15 per hectare.
- 1.22 Agricultural income tax:
  - Nature: Tax payable on any annual income derived from agricultural activities.
  - Exemptions: Agricultural investors are exempted for two-five years.
  - Rates and amounts:
    - For income less than Br 1,200 per annum: Br 15.
    - For income of Br 1,200 per annum or higher, marginal tax rates (Annual taxable Income (birr) — Marginal tax rate (%)):
      - 1,201 - 5,000: 5
      - 5,001 - 15,000: 10
      - 15,001 - 30,000: 20
      - 30,001 - 50,000: 30
      - 50,001 and more: 40
    - State farms owned by regional governments: 40 percent.

### Rental income tax
- Legal basis: Proclamation 286/2002.
- Nature: Tax on income derived from the rent of houses or office buildings, manufacturing plants, materials and goods, etc. Tax computed on annual rent income after deducting allowable expenses.
- Deductions and exemptions: Annual depreciation and allowable expenses are deducted from gross income. The first Br 1,800 of annual income is exempted.
- Marginal tax rates (Annual taxable Income (birr) — Marginal tax rate (%)):
  - 1,801 - 7,800: 10
  - 7,801 - 16,800: 15
  - 16,801 - 28,200: 20
  - 28,201 - 42,600: 25
  - 42,601 - 60,000: 30
  - 60,001 and above: 35

### Tax on business and other profits
- 1.41 Unincorporated business
  - Legal basis: Proclamation No. 286/2002.
  - Nature: Tax on income from all sources other than those mentioned elsewhere.
  - Exemption: The first Br 1,800 of annual taxable income is exempted.
  - Marginal tax rates (Annual taxable income (birr) — Marginal tax rate (%)):
    - 1,801 - 7,800: 10
    - 7,801 - 16,800: 15
    - 16,801 - 28,200: 20
    - 28,201 - 42,600: 25
    - 42,601 - 60,000: 30
    - 60,001 and above: 35
- 1.42 Incorporated business
  - Legal basis: Proclamation No. 36/1996; Proclamation No. 286/2002 as amended.
  - Nature: Tax on incorporated business profits (rates not separately specified in the provided text).

### Tax on income from mining activities
- Legal basis: Proclamation No. 53/1993; Proclamation No. 23/1996.
- Nature: Profits tax on income received or credited from mining operations within Ethiopia by the holder of large- and small-scale mining licenses.
- Deductions and exemptions:
  - Awards for adopted or suggested innovations and cost saving measures.
  - Public awards for outstanding performance tax and any field.
  - Income specifically exempted from income tax by the law in force in Ethiopia, by international treaty or by an agreement made or approved by the Minister.
  - Artisan mining is exempted.
- Rates:
  - 30 percent of taxable income.
  - 35 percent (text lists both 30 percent and 35 percent; both figures are preserved as presented).

### Capital gains tax
- Legal basis: Proclamation No. 286/2002.
- Nature: Tax on gains realized from the increase in value upon the sale of shares, bonds, and urban houses.
- Deductions and exemptions: Inflation adjustment and capital losses in the preceding year are deducted from the value of capital. Annual gains not exceeding Br 10,000 are exempted.
- Rate: 15 percent.

### Other sources of income
- Nature and rates (as presented):
  - Income from dividends paid to shareholders: None (deductions/exemptions column shows "None"; rate column shows "10 percent").
  - Income from chance winnings and lotteries: Exemption for income not exceeding Br 100; rate: 15 percent.
  - Income from royalties: None (no deductions/exemptions); rate: 5 percent.
  - Income of nonresident persons or organizations for services rendered to persons or organizations in Ethiopia: None (no deductions/exemptions); rate: 10 percent.

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### 2. Taxes on goods and services
- Legal basis: Proclamation No. 68/1993.

### 2.1 Excise tax
- Legal basis: Proclamation No. 68/1993; Proclamation No. 77/1997; Proclamation No. 149/1999; Proclamation No. 307/2002.
- Nature: Excise tax levied on selected list of locally produced and imported goods. Collected within seven days of the preceding month of the production for local goods and at the time of clearing customs for imported goods. Rates are based on the cost of production or the c.i.f. value for imports.
- Deductions and exemptions: None.
- Rates (Goods — Tax rate (%)):
  - Any type of Sugar (excluding Molasses): 33
  - All types of soft drinks (except fruit juice): 40
  - Powder soft drinks: 40
  - Water bottled or canned in a factory: 30
  - Alcohol: All types of beer & stout, wine, and whisky: 50
  - Other alcoholic drinks: 100
  - All types of pure Alcohol: 75
  - Tobacco leaf: 20
  - Tobacco and its products: 75
  - Salt: 30
  - Petroleum and its products: 30
  - Perfumes and Toilet Waters: 100
  - Leather, tanned or dressed: 20
  - Furs: 50
  - Textile and Textile products: 10
  - Personal adornments: 20
  - Dishwashing machines (in homes): 80
  - Washing machines (in homes): 30
  - Video decks: 40
  - TV and Video Cameras / TV broadcast receivers, radio, or sound receivers and reproducers: 10
  - Automobiles:
    - up to 1300 cc: 30
    - 1301-1800 cc: 60
    - above 1800 cc: 100
  - Carpets: 30
  - Asbestos and its products: 20
  - Clocks and watches: 20
  - Dolls and toys: 20

### 2.2 Value Added Tax on goods and services
- Legal basis: Proclamation No. 68/1993; Proclamation No. 285/2002.
- Nature: Levied on locally produced goods at the manufacturing level or on imported goods at the import gate. Bases: producer’s wholesale price plus excise tax for local goods or the c.i.f. value plus customs duty and excise tax for imports. Tax payable monthly within three to five days of the end of the month. For imported goods, tax collected at same time as customs duty.
- Exemptions include:
  - sales/transfer of used dwelling/lease
  - financial services
  - religious service
  - medical services and goods
  - educational/child-care services
  - humanitarian goods and services
  - electricity, kerosene and water
  - post office supplies
  - transportation
  - printed books
  - permits and license fees
  - import of gold and currency
- Rate: Fifteen percent tax rate applied on the value of all goods and services produced locally or imported.

### 2.3 VAT on services
- Legal basis: Proclamation No. 08/1993; Legal Notices No. 1/1994 and 3/1998; Proclamation No. 149/1999; Proclamation No. 285/2002.
- Nature: Value Added Tax levied on all services rendered locally. Tax paid by the person or organization rendering services and computed on basis of the service charge.
- Exemptions: Water, electricity, and medical and educational services are exempted.
- Rate: Fifteen percent on the rendering all services.

### 2.4 Turnover Tax (TOT) on goods
- Legal basis: Proclamation No. 308/2002.
- Nature: Levied on all goods sold locally by taxpayers not obliged to register for VAT by law.
- Exemptions include (selected):
  - The sale or transfer of a dwelling used for a minimum of two years, or the lease of a dwelling;
  - the supply of national or foreign currency (except for that used for numismatic purposes) and securities;
  - the supply of prescription drugs specified in directives issued by the relevant government agency;
  - the supply of goods and rendering of services in the form of humanitarian aid;
  - the supply of electricity, kerosene, and water;
  - the supply of goods or services by workshop employing disabled individuals if more than 60% of the employees are disabled;
  - the supply of books.
- Rate: 2% on Goods sold locally.

### 2.5 Turnover Tax (TOT) on services
- Legal basis: Proclamation No. 308/2002.
- Nature: Levied on all services rendered locally by taxpayers not obliged to register for VAT by law.
- Exemptions include (selected):
  - the rendering of financial services;
  - the rendering by religious organizations of religious or other related services;
  - the rendering of medical services;
  - the rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institutions;
  - the supply of goods and rendering of services in the form of humanitarian aid;
  - the provision of transport;
  - permits and license fees;
  - the supply of goods or services by workshop employing disabled individuals if more than 60% of the employees are disabled.
- Rates:
  - 2% on Contractors, grain mills, tractors and combine-harvesters
  - 10% on others.

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### 3. Tax on international trade

### 3.1 Taxes on imports
- 3.11 Customs duty
  - Legal basis: Tariff Regulations No. 122/1993; Proclamation No. 67/1993; Tariff Regulation / 1998; Tariff Regulation / 2002.
  - Nature: Customs tariff applies to all imports. Items are classified according to a schedule of 97 chapters, based on the Harmonized System of Tariffs Classification Code.
  - Exemptions: Diplomatic and consular missions, personal effects, grants and gifts to Ethiopia, firefighting instruments and appliances, trade samples, defense and public security equipment, materials and equipment for the handicapped, and sheath contraceptives are exempted. Exemptions and concessions are granted to certain organizations and items.
  - Rates: Ad valorem duty on imports consisting of six rates, ranging from 0 to 35 percent, as follows:
    - Raw materials, capital goods: 0-10
    - Pharmaceuticals, and chemicals: 0-20
    - Durable and nondurable Consumer goods: 20-35
    - Luxuries and goods that can be produced locally: 30-35
- 3.12 Import excise tax
  - Nature: Levied on selected imported goods.
  - Deductions/exemptions: None. As specified in (2.1).
- 3.13 Import Value Added tax
  - Nature: Value Added tax levied on imports; basis is the c.i.f. value plus the customs duty and excise tax paid.
  - Exemptions: See items in (2.2) for exemptions.
  - Rate: As specified in (2.2).

### 3.2 Taxes on exports
- All export duties and taxes except those on coffee are abolished.
- Duty drawback scheme:
  - Ninety-five percent of the duty drawn back is refunded for raw materials or commodities if re-exported and 100 percent if exported after being processed or used for packing or containing.
- Duty free import scheme:
  - Persons or organizations wholly engaged for supplying their products to foreign markets are allowed a duty free purchase of local or imported raw material for their production, and the product should be exported within one year of the purchase of such raw materials.

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### 4. Other taxes

### 4.1 Stamp duties
- Legal basis: Decree No. 26/1975, as amended by Proclamation No.110/1998.
- Nature: Obligatory use of stamped paper for many legal documents, such as contracts or papers in court proceedings; requirement that stamps be affixed to other documents, such as property titles, power of attorney, notary acts, etc.
- Exemptions: Stamp duties are not levied on documents where the Ethiopian government, foreign embassies, consulates, etc., would be the party subject to duty.
- Rates: Varies according to the type document and value of transaction.

### 4.2 Withholding tax on imports
- Legal basis: Proclamation 227/2001.
- Nature: Tax collected at the time of import of goods for commercial use, where the collected tax is treated as tax withhold that is creditable against the taxpayer.
- Rate: Three percent.

### 4.3 Income tax withholding on payments
- Legal basis: Proclamation 227/2001.
- Nature: Category "A" taxpayers, government agencies, private nonprofit institution and NGOs withhold income tax on payments made to persons within categories specified, in the regulation No.75/2001.
- Rate: Two Percent.

### 4.4 Withholding on interest income
- Legal basis: Proclamation 286/2002.
- Nature: Payers of interest shall withhold income tax on the payment or crediting of interest paid or credited.
- Rate: Five percent.

*Source: MOFED — Ethiopia: Summary of the Tax System as of end October 2005*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06122.pdf_