Ethiopia Tightens Fuel Tax Collection as Subsidy Reform Puts 0.8% of GDP in Focus
Ethiopia is tightening the collection of fuel taxes as part of a broader fiscal reform that will direct all federal fuel-tax revenue to the treasury at full statutory rates, potentially generating revenue equivalent to 0.8 percent of GDP in 2026/27.
The measure, implemented through a Ministry of Finance directive to the Ethiopian Customs Commission, requires fuel-related VAT and excise liabilities to be assessed using their full statutory tax bases, without caps or ad hoc adjustments. The proceeds are to be transferred directly to the federal treasury rather than retained by other entities.
The change is part of Ethiopia’s IMF-supported effort to strengthen domestic revenue mobilisation while moving away from costly, untargeted fuel subsidies. The IMF says the government has effectively eliminated untargeted subsidies and plans to limit the remaining FY2026/27 fuel-subsidy envelope to 0.1 percent of GDP.
The fiscal shift at a glance
| Indicator | Figure |
| Federal fuel-tax revenue | 0.8% of GDP |
| FY2026/27 fuel-subsidy envelope | 0.1% of GDP |
| EPSE recapitalisation | ETB 286B |
| World Bank financing earmarked for EPSE | ETB 170B |
| Remaining government contribution | ETB 116B |
| Temporary fuel-price surcharge proceeds | ETB 80B |
The reform is closely linked to the restructuring of the Ethiopian Petroleum Supply Enterprise (EPSE), which has accumulated legacy liabilities associated with exchange-rate losses and deferred letters of credit used for fuel imports.
The government has allocated 286 billion birr to recapitalise EPSE. About 170 billion birr is expected to come from World Bank financing, while the remaining 116 billion birr will come from the FY2026/27 budget by March 2027.
The recapitalisation is intended to give EPSE sufficient liquidity to shift toward lower-cost payment arrangements for future fuel imports and reduce the recurrence of fuel-subsidy liabilities.
From subsidies to automatic pricing
The tax reform is also part of a larger effort to change how Ethiopia prices fuel.
With IMF technical assistance, the government is preparing an automatic fuel-price adjustment mechanism designed to move fuel pricing toward full cost recovery while reducing the need for government subsidies.
The government has already raised fuel prices substantially during 2026. The IMF reported that diesel prices were increased by 40 percent for retail customers and 94 percent for commercial customers, while gasoline prices increased by 30 percent since early March.
The policy creates a significant fiscal trade-off. Collecting fuel taxes in full strengthens government revenue and improves fiscal transparency, but higher fuel costs can feed into transportation, food, and production costs.
That risk is particularly relevant as Ethiopia continues to face inflationary pressure and external commodity-price shocks.
The broader objective is therefore not simply to collect more fuel taxes. It is to replace an opaque subsidy system with a more transparent fiscal framework, while restructuring EPSE and allowing fuel prices to increasingly reflect actual import costs.
If implemented successfully, the reform could strengthen government revenues, reduce recurring liabilities at EPSE and make fuel pricing more predictable. But its success will ultimately depend on whether the government can manage the inflationary and social impact of higher fuel costs while protecting vulnerable households through targeted support.