A Taxing Tax Burden

The administration of Prime Minister Abiy Ahmed (PhD) seems to be intent on ingraining in the public’s psyche the perception that “comprehensive macroeconomic policy reform” it has been implementing for the past six months is an unqualified success. In an apparent media drive the ministers of finance, planning and development, and government communication service all issued statements this week declaring the reform has achieved its major objectives, namely  creating a stable foreign currency regime, meeting revenue targets, and containing the anticipated inflationary pressure. They were at pain to point out that unlike other nations which had carried out their own reforms the Ethiopian government had taken extra care to cushion the effects of the macroeconomic reform on the populace, maintaining that the allocation of over 400 billion birr subsidy for fuel, fertilizers, medicines and edible oil as well as to raise the salaries of public sector workers is proof that the government has Ethiopians’ welfare at heart.

The Ethiopian government has wasted no time to assert that the shift to a market-driven exchange rate, one of the key pillars of the economic reform initiative it is pursuing as part of its homegrown economic reform strategy, was progressing without a hiccup and occasioning a significant distortion of the overall economy, saying a notable stride has been made in terms of narrowing the difference between the formal and informal markets in the exchange rate has narrowed to low single digits, down from the 100 percent it stood at prior to the Birr’s floating. It has also claimed that the has swelled gold export earnings, remittances as well as the foreign currency reserve positions of the central bank and commercial banks. The government has further credited the reform with boosting government revenue, lowering government borrowing, enhancing import substitution, promoting savings and bringing down inflation from 30 percent to 17 percent.

The roll out of the macroeconomic policy reform has not been entirely replete with upsides as the government is wont to say.  The sharp depreciation of the birr it has brought about has prompted a rise in the cost of imported essential goods, aggravating food insecurity and other inflationary challenges for households barely making a living on the pittance they earn.  The credit cap the central bank has been implementing with a view to slash inflation to single has not helped either, limiting the supply of money and thereby making it hard to obtain the financing required to import basic necessities and other goods. To make matters worse the government’s introduction of a raft of taxes to shore up its coffers has disproportionately weighed down the poor. Admittedly, Ethiopia’s economy has long been in need of a major restructuring. The country has been beleaguered with severe economic challenges for quite some time now attributable to several factors, including such shocks as the debilitating inflation, the eruption of conflicts and violence across several regions, unsustainable debt levels, low international reserves, and chronic unemployment. The tragic effects of these challenges have decidedly imperiled the health of the economy, highlighting the imperative for unprecedented reforms.

Akin to its predecessors the current government tends to make light of the downsides of the policy measures it takes.  The birr’s floating is likely to widen Ethiopia’s trade imbalance in the long run as it is apt to lead to a situation where exports are cheaper and imports get dearer. The depreciation of the birr is moreover bound to result in a stiff rise in government expenditure and the amount of local currency it must set side to repay the billions of dollars of Ethiopia owes in external  loans, potentially compelling the government to resort to measures that stoke inflation. The astronomical surge in the fees the government charges for practically all the services it provides coupled with the imposition of a slew of new taxes is further likely to worsen the hardship that the vast majority of Ethiopians are living under, raising the specter of disillusionment and political upheaval. The government’s proud claims that the temporary subsidization of strategic goods is lessening the painful socio-economic impacts of the macroeconomic reforms offer a scant consolation to the poor in light of the fact that the benefits of the subsidies are outweighed by the extra tax burden.

While the government’s profound macroeconomic policy reform undoubtedly has some upsides for Ethiopia’s struggling economy, its drawbacks need to be prudently addressed. As such it is crucial to implement a comprehensive strategy that includes improving institutional frameworks, aligning monetary policy reforms with suitable fiscal policies, promoting social equity, and establishing a clear communication plan that helps manage expectations and build confidence. If the challenges concomitant with the reforms are to be successfully tackled, it is important to recognize that, regardless of how well the reforms are designed, achieving the desired outcomes hinges on certain fundamental prerequisites—stability, effective governance, a shared vision, strong institutions, and a supportive environment. Even if bolstering is one of the planks of the government’s macroeconomic policy reform, it should rethink about increasing the tax burden of citizens and businesses for it has consequences that not only defeat its intended purpose but also exacerbate existing socio-economic and political woes.