Africa’s seventh-largest economy, Ethiopia, is cutting its exposure to external funding, one budget at a time.
Evidence of that shift is written all over the government’s newly approved spending plan. Of the record ETB 2.3 trillion budget proposed for the 2026/27 fiscal year, new foreign loans and grants are projected at ETB 94 billion, down from ETB 139 billion a year earlier. That is enough to finance just 4% of total spending, compared with nearly 10% in 2022.
To close the gap, Addis Ababa says it will lean more heavily on domestic sources. Nearly two-thirds of this year’s planned spending will be financed through tax revenue. Domestic borrowing is also set to rise sharply to ETB 320 billion from ETB 207 billion in the previous budget.
On paper, the numbers are increasingly pointing to a country on track to greater fiscal self-reliance. In reality, they underpin the transfer of a growing financing burden to taxpayers and private sector businesses.
Why Ethiopia is looking inward
Ethiopia’s latest budget did not mark the start of its pull away from foreign borrowing. That process has been underway for years. What has changed is the country’s ability to fall back on it.
By 2018, public debt had climbed to $51 billion, equivalent to 62% of gross domestic product (GDP). Of the total, more than half was owed to external creditors, reflecting years of borrowing to finance roads, railways and other flagship infrastructure projects. The model delivered rapid public investment but failed to generate enough export earnings to keep pace with the country’s growing foreign obligations.
As reserves came under pressure, the International Monetary Fund (IMF) raised Ethiopia’s debt distress rating from “moderate” to “high”, prompting the government to halt new non-concessional borrowing.
The shocks that followed left little room for the East African nation to reverse course. Prolonged war in Tigray following the COVID-19 pandemic further stretched public finances, disrupting economic activity and deepening the foreign currency shortages.
By the time Ethiopia defaulted on its sole $1 billion Eurobond in December 2023, commercial borrowing had effectively dried up. Debt restructuring became the only route back to international capital markets.
The pool of external lenders has narrowed ever since as talks with creditors stalled. In the last fiscal year, the IMF and World Bank accounted for about 97% of all new external loan disbursements. Bilateral creditors provided just $86 million. Commercial lenders provided none as the defaulted Eurobond remains outside any finalised restructuring agreement.
Those flows increasingly reinforce the government’s own HomeGrown reform agenda. Under its current IMF programme, Ethiopia has committed to raise domestic financing from about 1% to 1.5% of GDP this fiscal year and continue to avoid new non-concessional borrowing.
Ahead of the latest budget vote, Prime Minister Abiy Ahmed told lawmakers Ethiopia must strengthen domestic resource mobilisation rather than rely on others to finance its development.
With external financing far more constrained than it once was, that pledge is becoming a fiscal necessity as much as a policy choice.
Taxpayers pick up the larger bill
Taxpaying Ethiopians are increasingly picking up the tab for the country’s changing financing model.
In its 2025/26 mid-year budget implementation report, the Ministry of Finance said it collected ETB 580 billion in tax revenue in six months, just ETB 13 billion short of what it raised in the whole of 2023. It is aiming even higher this fiscal year, projecting ETB 1.49 trillion in tax receipts, up 17% from the previous budget.
Authorities are banking on ongoing tax reforms to do the heavy lifting as it aims to raise its tax-to-GDP ratio to 13.2% by 2028. Despite an average annual GDP growth of 8%, Ethiopia’s tax-to-GDP ratio had declined steadily over the past decade. At 7.5% in 2024, the figure represents half of Sub Saharan Africa average.
Since mid-2024, the government has rewritten tax laws, tightened enforcement and expanded the use of digital systems to improve compliance.
Fuel prices have seen some of the most visible adjustments. From December 2025, the government imposed a combined 15% value added tax and 15% excise duty on petrol as it gradually phased out fuel subsidies. The move comes as Ethiopia continues to grapple with chronic fuel shortages. Last year alone, the country reportedly spent about $4.6 billion importing petroleum—more than its estimated $4.4 billion in gross international reserves.
That dependence has left consumers especially exposed to external shocks. Recent geopolitical tensions in the Middle East have brought those vulnerabilities into sharp focus.
Supply disruptions linked to the conflict have since pushed pump prices up by more than 35%, with higher transport and food prices worsening the cost of living crisis.
Macroeconomist Merid Tullu says rising tax burdens fall heaviest on poorer households.
“Since these households allocate a significant portion of their income to necessities, any rise in consumption taxes substantially increases their cost of living,” he told Addis Standard.
Beyond fuel, public services fees have also risen sharply.
Ethiopia began implementing quarterly electricity tariff increases in September 2024 under an IMF-backed four-year adjustment plan. The initiative, introduced to return the loss-making state-owned electricity provider to profitability, led to an estimated 122% jump in tariffs during the first phase alone. While lower-income households continue to receive subsidised rates, the IMF expects the adjustments to slow disinflation in the near term.
Inflation in the Horn of Africa nation rose for two consecutive months to 13.4% in May, exceeding the IMF’s 12% mid-year forecasts in January amid global oil shocks. It also marks a sharp reversal from a moderating trend that gained momentum toward the end of last year.
Despite the squeeze, the government has consistently maintained that the measures remain necessary to restore fiscal stability. For many households, however, they represent the most immediate cost of Ethiopia’s shift away from foreign borrowing.
The new reality for businesses
Ethiopia’s search for domestic revenue is also changing the rules for businesses.
Corporate income tax collections surged by more than 92% year-on-year in the first half of the 2025/26 fiscal year, according to the Ministry of Finance. The increase followed one of Ethiopia’s biggest income tax overhauls in years, with new measures designed to bring revenue into government coffers earlier and make tax collection harder to avoid.
Among the biggest changes is a requirement for large companies to pay corporate income tax in quarterly installments based on projected annual profits. Instead of waiting until the end of the year, businesses now pay as they earn. The arrangement strengthens government cash flow, but it can also tie up working capital.
“Without an efficient refund and credit system from the tax authority, this measure could place considerable strain on liquidity,” tax advisory firm Afriwise warned.
The reforms go further. Since July 2025, businesses with annual turnover above ETB 2 million have also been subject to a 2.5% alternative minimum tax (MAT), regardless of whether they make a profit. The measure targets widespread tax avoidance by guaranteeing a minimum tax payment even in low-profit years.
Critics argue that certainty for the tax authority comes at the expense of certainty for businesses. Because the tax is based on turnover rather than profit, companies can face tax bills even when margins are weak, reducing the immediate benefit of investment incentives and leaving less cash available for expansion.
Some analysts argue that state revenue drive has implications beyond taxation.
“That pace of resource mobilisation reflects a state building real fiscal capacity, but it also means private banks and firms are increasingly competing with a fast-growing government claim on domestic income and savings,” financial analyst Degol Gossaye said.
Over time, he warns, that could create a form of fiscal drag, shrinking the pool of capital available to the private sector as government finances become stronger.
Borrowing without the squeeze
Taxes represent only one side of Ethiopia’s financing shift. The other is unfolding in the Treasury bill market.
Once a negligible source of funding, T-bills are now the government go-to short-term borrowing instrument. Competitive auctions introduced under the Homegrown Economic Reform Agenda have completely replaced direct advances from the National Bank of Ethiopia (NBE). Banks, pension funds and, more recently, individual investors have all joined the market.
Growth has accelerated at unprecedented levels in recent years. Treasury bills financed nearly 68% of Ethiopia’s budget deficit in 2021/22, while gross issuance jumped almost 160% the following year to ETB 858.5 billion. The latest budget extends that reliance, with planned domestic borrowing rising to ETB 320 billion from ETB 207 billion a year earlier.
Ordinarily, such an expansion would raise concerns about crowding out. As governments borrow more at home, banks often favour the safety of government securities over riskier private loans. Credit becomes harder to access. Borrowing costs rise.
For now, that pressure has faded.
Demand for government paper remains strong. In May alone, Treasury bill auctions were oversubscribed by ETB 667.8 billion, according to the NBE data.
Yields have moved lower even as issuance has increased, with the rate on 91-day bills falling to 11% from 16.1% a year earlier. Interbank rates declined as well, reflecting what the central bank described as excess liquidity, although concentrated in a few banks. Private-sector credit, meanwhile, expanded by 50% year-on-year through March 2026. Earlier this week, the NBE removed banks’ credit growth limits altogether, giving lenders greater scope to extend loans.
That resilience, however, rests on conditions that may not last. Abundant liquidity has helped contain borrowing costs, supported partly by stronger foreign exchange reserves from record gold purchases. But Ethiopia still relies heavily on short-term funding to finance its deficit. Those securities mature quickly and must be refinanced regularly. If inflationary pressures push yields back towards their 2025 highs, the government could face a much more expensive refinancing cycle, bringing rollover and crowding-out risks back into focus.
A financing model with few easy exits
Whether Ethiopia’s financing mix changes again will depend on the forces that pushed it here in the first place.
For now, the signals point towards continuity. The IMF continues to place domestic resource mobilisation at the centre of its programme, arguing that stronger revenue collection is needed to “meet social and development needs, rebuild fiscal space, and address debt vulnerabilities.” For Ethiopia, continued access to external support depends heavily on staying aligned with those reforms.
The debt restructuring process also offers little room for a quick return to foreign borrowing. Ethiopia secured a $3.5 billion debt relief package from official creditors, but negotiations with commercial lenders remain fragile after repeated setbacks. An agreement in principle reached with bondholders earlier this year still needs to hold. Until then, Ethiopia’s access to external markets will remain limited.
That leaves taxpayers and businesses carrying much of the burden. To its credit, the government has tried to ease the adjustment through targeted support. Fuel subsidies, though being gradually reduced, remain in place. In the 2026/27 budget, Ethiopia allocated ETB 236.4 billion, or 19.1% of total spending, to fuel and fertilizer subsidies and capital support for the Ethiopian Petroleum Supply Enterprise.
Removing value added tax on some essential goods has also provided relief. At the same time, broader economic conditions have improved. Inflation has fallen sharply from its 2024 peaks, while the birr has become less volatile than during the height of the foreign exchange crisis.
These improvements have bought Ethiopia time. Whether they will be enough to protect household purchasing power and business margins as the government continues relying on domestic financing remains the defining question ahead.
