The International Monetary Fund (IMF) is urging the Ethiopian government to remove exchange rate restrictions on capital account transactions—restrictions it says bring up the cost of using the formal market.
The suggestion comes following the third review of Ethiopia’s USD 3.4 billion extended credit facility program, whose launch a year ago coincided with a milestone decision to shift to a market-determined foreign exchange rate.
While the Birr has depreciated significantly over the past 12 months, regulators at the National Bank of Ethiopia (NBE) have introduced restrictions on foreign exchange (FX) accounts, including increased limits for debit card withdrawals and a cap on bank fees for FX transactions.
In a comprehensive report published this week, the IMF underscored that “policy efforts should continue to focus on developing a well-functioning and unified FX market to enable efficient and transparent FX allocation. A key priority is the phased removal of remaining exchange rate restrictions on current account transactions which increase the costs of using the formal market, or leave some demand for FX unsatisfied, driving parallel market demand.”
Its experts predict that positive real interest rates that make holding Birr-denominated assets more attractive will reduce incentives to use the parallel market to hold wealth in FX.
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“In the longer term, a well-sequenced opening of the financial account can be considered, focusing first on strong regulatory and supervisory capacity and ensuring the financial sector can manage cross-border flows soundly, and attracting long-term capital flows before considering facilitating shorter-term investors,” reads the report.
The IMF wants to see the removal of a 2.5 percent NBE commission fee on forex sales, which, along with other transaction costs, it sees contributing to the 15 percent premium on the parallel forex market.
“Adoption of a market-determined exchange rate in July 2024 and the removal of most distortive exchange restrictions led to a rapid convergence between official and parallel market rates. The parallel market premium collapsed, reaching near-zero by early September 2024, as the official rate aligned with market conditions. Since then, the premium has increased to approximately 16 percent by late October 2024, then narrowed and stabilized in the single digits until the end of December. By early May, it gradually widened again to around 17 percent. FX reserves increased to approximately USD4 billion in April 2025, covering nearly two months of prospective imports,” reads the IMF report.
The organization recommended measures such as growing liquidity in interbank money and FX markets as well as creating the necessary pre-conditions to develop hedging instruments for Ethiopia to be able to reduce the demand for FX in the parallel market.
Earlier this month, the World Bank told The Reporter discrepancies and fluctuations in the parallel market were behind the decision to leave Ethiopia as “unclassified” on this year’s update of a global national income per capita index.
The IMF has called for “[e]nhancing competition in the banking sector, notably through more transparency on fees, commissions, and pricing, and including through possible participation by foreign banks, would allow customers to choose the most competitive bank, improving price discovery and the efficiency of FX intermediation”
The extent of capital and financial account restrictions, according to the report, varied significantly across countries undergoing similar reforms.
“Angola and Ethiopia have imposed stricter controls on the capital and financial accounts of the BOP than Egypt and Nigeria,” it reads. “The Financial Account Restriction Index (FARI), based on information in the IMF Annual Report on Exchange Arrangements and Exchange Restrictions, indicates that Angola and Ethiopia have regulations on approximately 70 to 80 percent of total capital account transactions, whereas Egypt and Nigeria have regulations on only 10–20 percent of total capital account transactions.”
The report also touches on Ethiopia’s troubles with tax collection.
“Ethiopia’s tax revenue performance remains below its potential, with the tax-to-GDP ratio among the lowest in Sub-Saharan Africa,” it reads. “Despite having statutory tax rates broadly aligned with regional peers, actual revenue collection is constrained by structural factors, including a narrow tax base, high informality, and administrative challenges, including those linked to the distinct features of Ethiopia’s intergovernmental tax system. Compared to similar economies, Ethiopia’s tax effort is among the lowest, indicating considerable scope to enhance revenue mobilization through improved efficiency and policy adjustments.”
It notes that while income and profit tax rates are relatively high, their contribution to total revenue remains limited.
“VAT revenues, though a crucial source of indirect taxation, are significantly lower than in peer economies, pointing to administrative inefficiencies and exemptions that narrow the tax base. Trade taxes, historically an important revenue stream, have declined as Ethiopia’s trade openness has contracted, further underscoring the need for policies that support a more robust and diversified tax system,” the report reads.
The government of Ethiopia earlier this week endorsed a revised income tax law, and it turned out to be a controversial one.
The renowned economic affairs analyst, Kebour Ghenna is one of critics to the revised law that aims to widen the country’s tax base. He just posted a sharp critique entitled “Taxing the Poor: Ethiopia’s Latest Economic Blunder” on his Facebook page.
He wrote: “…under the new tax schedule, anyone earning ETB 2,000 or less per month is spared [from tax]. Those pulling in less than ETB 4,000 pay 15%. If you make less than ETB 7,000? That’s 20%. And so on.
“Sounds fair? Maybe, until you realize that at today’s exchange rate, even someone earning ETB 8,000 a month – a sum still taxable – is making barely $2 a day. That’s the UN poverty line, folks. Yes, the government of Ethiopia, fresh from its budget meetings with the IMF and World Bank, now wants to tax its poorest citizens, those barely able to buy cooking oil or bus fare.”
He described the amended tax system as something enabling the robbing of the poor to “balance the books”.
“Let’s be clear about one thing,” he said. “When the government taxes the poorest, it doesn’t collect from ‘savers’ or ‘speculators’. It collects from people who spend everything they earn. Not on vacations or luxury goods but on food, rent, school fees, and the occasional trip to the clinic. These expenditures don’t disappear into a black hole; they go right back into the economy. They pay the shopkeeper, the minibus driver, the farmer, the tailor…and yes, they pay taxes again the form of VAT.”
During the parliamentary session that passed the amended income tax law, President of the Confederation of Ethiopian Trade Unions (CETU), Kassahun Follo criticized the bill saying it would make it beyond the means of the salaried, particularly civil servants.
Kassahun who recommended, albeit to no avail, that income tax start from earnings above a threshold of 8,324 Birr, expressed opposition also to the idea of a 35 percent tax on salaries beginning from 14,100 Birr.
“Tax ought to be collected, and development must be continued,” he told the members of parliament. “[But} human life must also continue; people cannot work while hungry, they cannot be productive [as such].”