Domestic Resource Mobilization:

Case Study on Ethiopia

By
Haile Kebret TAYE, Gashaw Tsegaye AYELE, Monica Kansiime KAGORORA

Commissioned by the African Capacity Building Foundation

Addis Ababa, Ethiopia/ July 2015

EXECUTIVE SUMMARY ............................................................................................................................. 4

1

INTRODUCTION ....................................................................................................................................... 7

OVERVIEW AND ANALYSIS OF STRATEGIES AND INITIATIVES ON DRM ................................................. 10

2.1 PUBLIC SECTOR SAVINGS ...............................................................................................................................10
2.1.1
An Overview of the Tax structure ...................................................................................................10
2.1.2
Relative Contributions of Tax Revenue ...........................................................................................13
2.2 PRIVATE SAVINGS ........................................................................................................................................14
2.2.1
The Formal Banking Sector in Ethiopia ..........................................................................................15
2.2.2
Savings in the Informal Financial Sector ........................................................................................17

EXTENT AND TRENDS IN DOMESTIC RESOURCE MOBILIZATION IN ETHIOPIA ........................................ 19

3.1
3.2
3.3
3.4

EXTENT AND TRENDS IN REVENUE GENERATION ................................................................................................19

EXTENT AND TRENDS IN SAVING MOBILIZATION ................................................................................................21
SPECIAL DRM SCHEMES ................................................................................................................................23
CAPACITY CHALLENGES .................................................................................................................................26

IMPACTS OF DRM AND FIGHT AGAINST ILLICIT FINANCIAL FLOWS ....................................................... 28

4.1 RESOURCE GAP AND ILLICIT FINANCIAL FLOW ...................................................................................................28
4.2 ECONOMIC IMPACTS OF DRM .......................................................................................................................30
4.3 SOCIAL AND CAPACITY DEVELOPMENT RELATED IMPACTS ...................................................................................32
4.4 PUBLIC SPENDING AND DRM PATTERNS ..........................................................................................................33
4.4.1
Public Spending Patterns ................................................................................................................33
4.4.2
DRM Patterns .................................................................................................................................34
4.5 EFFORTS AND ACHIEVEMENTS IN TERMS OF DRM AND ILLICIT FINANCIAL FLOWS ...................................................36

LESSONS LEARNT AND CAPACITY DEVELOPMENT IMPERATIVES ........................................................... 40

5.1
5.2

LESSONS LEARNT..........................................................................................................................................40
CAPACITY IMPERATIVES FOR EFFECTIVE DRM ...................................................................................................41

CONCLUSIONS ....................................................................................................................................... 44

REFERENCES .......................................................................................................................................... 47

List of Tables:
Table 1.1 Sectoral Contributions to GDP and GDP Growth ..................................................... 9
Table 3.1 Trends of Government Revenue and Contribution of Tax Revenues ...................... 20
Table 3.2 Annual Resource Mobilizations and Disbursements of Chartered Banks as of June
30, 2014 (Millions of Birr). ...................................................................................................... 22
Table 3.3 Selected Indicators of Financial Inclusion, Sources, Debt and Investments ........... 23
Table 3.4 Amount of Private Savings Mobilized and Contribution to GDP/GNS .................. 25
Table 3.5 Diaspora Bonds Issued by Government and Their Characteristics.......................... 26
Table 4.1 Size of Illicit Finance and Resource Gap in Ethiopia (2003-12) ............................. 29
Table 4.2 Public Expenditure Structure in Ethiopia ................................................................ 32
List of Figures:
Figure 2-1 Share of Government Revenue Sources (average share for 2000- 14) .................. 11
Figure 2-2 Non-tax Government Revenue Sources ................................................................. 13
Figure 2-3 Trends of Tax and Non-tax revenue of Ethiopia (in million Birr) ......................... 14
Figure 3-1 Trend in Tax ratio of Ethiopia Compared to Selected Regional and Sub-regional
Averages. .................................................................................................................................. 21
Figure 4-1 Net ODA flows and Foreign Reserves of Ethiopia (2005-12) ............................... 30
Figure 4-2 Gross Domestic Savings and Gross Capital Formation/Investment of Ethiopia
(2000-12) .................................................................................................................................. 31
Figure 4-3 Aggregate Government Expenditures .................................................................... 34
Figure 4-4 Taxation Structure (Tax ratio and tax mixes) in Ethiopia ...................................... 36

Domestic Resource Mobilization: Case Study on Ethiopia

By Haile Kebret TAYE, Gashaw Tsegaye AYELE, Monica Kansiime KAGORORA1

Executive Summary
Economic principle suggests that effective and optimal investment influences future economic
performance. Optimal investment is achieved through a concerted effort to mobilize and
efficiently use all available financial and non-financial resources. Hence, domestic resource
mobilization (DRM) is a crucial input to economic growth of a country. There is recognition
that DRM works either as a complement or a substitute (or both) to external resources such as
aid, foreign borrowing and/or FDI flows. Unlike these external sources, however, internal
sources ensure or guarantee independence, reliability and sustainability of growth momentum.
Hence the keen interest of many countries to rely more on DRM.
Ethiopia has put a lot of effort in mobilizing domestic resources using various strategies as
evidenced by the relatively notable economic growth registered in recent years. The strategies
it followed included public (revenue generation and saving mobilization) and the private
sectors (household and firm) savings. The effort has covered both formal (banking) and semiformal and informal financial institutions (microfinance, credit cooperatives, and even
traditional entities like Ekub and Iddir).
These programs have boosted the saving rate from 5.2 percent of GDP in 2009/10 to 17.7
percent in 2012/13 which in turn contributed to the raise in domestic investment as a share of
GDP from 24.7 percent in 2009/10 to 33 percent in 2012/13. In terms of growth, deposits
(net) almost doubled between 2012/13 and 2013/14. During the above period total resource
mobilized (saving, demand and time deposed) increased from 10 to 14 percent.
Some of the instruments used in mobilizing saving include Expanding bank branches, and
various initiatives that boost deposit and saving. The initiatives used include traditional
deposit mobilization and special provisions such as lottery coupons, special accounts for
youth, women, and interest-free banking, Micro finance institutions, pension schemes,
housing saving schemes couched with a lot of campaign on the need and benefit of saving
have also been used. Commercial bank branches have increased from 681 at the end of
FY2010 to 1,286 at the end of FY 2012 (89% increase). The majority of the increase comes
from the state-owned Commercial Bank of Ethiopia, which increased its branch network by
167 percent during the first two years of the Growth and Transformation Plan (GTP).
And the revenue that is generated in recent years has recently improved. To just focus on
recent years, tax revenue (direct + indirect tax) grew by 24% between 2012/13 and 2013/14.
And indirect taxes grew by about 22% during the same period. In terms of trade and non-trade
1

The Authors are members of the research staff at the Horn Economic and Social Policy Institute (HESPI)
Headquarters at Addis Ababa, Ethiopia.

taxes, foreign trade taxes grew by 19.4% while the domestic component grew by 24.8%. The
highest growth during the same period was that of urban land use fee and fees and charges
which both grew by about 40%.
The sharp increase in tax revenues has been attributed to a number of policy and
administrative measures taken by the government to improve domestic tax revenue collection,
including strengthening the capacity of the tax collection agencies, expanding the tax
identification number system, strengthening the value added tax system, increasing tax
compliance and taking stringent legal measures against tax evasion (MoFED, 2014).
Ethiopia faces many capacity related challenges in its effort to mobilize domestic resources.
Low income base and hence tax base, inefficient tax collection system and the structure of the
economy (informal, less recorded, and fragmented) also exaggerate the attendant capacity
challenges. Further, the financial sector is underdeveloped (pervasive financial depression,
uncompetitive, inefficient and unskilled staff) despite recent improvements.
In the midst of such limited resources in the country, a sizable chunk of that resource is
believed to leak from the system in the form of illicit flows. According to the Global Financial
Integrity/GFI (2014) rankings, Ethiopia is among the top five SSA counties and 39th in the
world in terms of its contribution to illicit financial flows. Its volume of illicit financial flows
averaged 2,206 USD annually (2003 - 2012). In particular, the absolute size of the illicit
financial flow between 2005 and 2012 was very high. This probably contributed to the
resource gap since Ethiopia has had a resource gap over the years. The gap remained 20
percent for most of the years. There are even years during which the illicit financial flow
almost equaled with the resource gaps. For instance, in 2010 the illicit financial flow reached
97 percent of the resource gap.
The crucial policy recommendations are based on the observation that the potential to
mobilize domestic resources has not been fully exploited in Ethiopia. To do so the following
capacity limitations and policy deficiencies should be addressed. Chief among these are:
increasing an effective computerization of the tax collection and administration ;working
towards minimizing the extent and organization of the informal sector such that all
transactions (particularly in the rural areas and small towns) are recorded; improve the
interbank money transactions instead of banks operating as bridgeless islands; limit the
rigidity and the existing inefficiency of the recently started teller machines (with both
depositing and withdrawing options); make the tax system clear and easy to implement such
that it avoids ambiguity among implementers and the general public; the staff should be
equipped with the required qualifications and are rewarded and with commensurate pay
package attached to consequences so that their engagement is incentive compatible to
minimize corrupt behavior.
The government should devise policies that would boost healthy competition among the
financial / banking institutions so that the banks and private household sectors could
effectively mobilize resources (i.e. eliminate the entry barriers, negative real interest rates
etc); and efforts to tap the potential of the huge Ethiopian Diaspora has recently increased and
has showed some positive results. But as noted in terms of its contribution in participating the
purchase of Diaspora bonds, the contribution is less than that of other countries experiences
and in terms of the size of the Diaspora. Additional effort that transcends any political
5

differences is required to maximize the potential. The governments effort has not been
consistent in trying to convince the Diaspora why it has a stake in building the country
beyond supporting their immediate families, however important that might be; this is better
harnessed with initiatives that could be viewed as politically neutral like the Renaissance
Dam and by creating a closer network rather than the arms-length approach which seems to
have been followed.
Not enough is known regarding the extent to which an effort is made to repatriate what has
leaked as illicit financial flows due to the hidden and sensitive nature of the activity. But the
government has to make a concerted effort to repatriate what has leaked both to recoup such a
substantial amount and to discourage future activities using what is internationally accepted
means of what called money laundering, tax evasion or other international agreements, norms
and protocols.

Introduction

Economic theory suggests that in economies like that of Ethiopia where domestic resource
gap (investment exceeding saving) exists, resource mobilization to close the gap is necessary.
And given the limitation in the availability of foreign financing, domestic saving is one of the
reliable sources of finance. And due to the presumed linkages between saving and investment,
saving mobilization influences the rate and level of investment in an economy. Effective and
optimal investment in turn influences future economic performance (Eklund, 2013). In that
sense, domestic resource mobilization (DRM) is a crucial input to economic growth of a
country. Culpeper and Bhushan (2008) summed up the relationships between Domestic
Resource Mobilization (DRM), investment and economic growth as follows:
There are compelling reasons, based both on theory and evidence, to believe that a greater
emphasis on DRM will enhance investment, productivity and growth in poor countries, thereby
making a significant contribution to development and poverty reduction that cannot be made to
the same extent and with the same impact by external resource mobilization (Culpeper and
Bhushan 2008, p. 12)

The desire of countries to initiate and sustain economic growth is therefore one of the main
reasons why they are keen to mobilize both financial and non-financial resources from
domestic and external sources. In addition to the need to grow, there are various other reasons
that justify relying more on domestic resource mobilization. These include Shone (1996):
First, self-sufficiency and sustainability are much more guaranteed when using domestic than
foreign resources such as aid, borrowing or FDI; because even though external resources also
serve as alternative /complementary sources to alleviate temporary shortages, they come with
some political conditions and are less predictable, unreliable and unsustainable;
Second, the keen interest in both the government and the general public for improvements in
overall well-being is another driving force for countries to focus on mobilizing own resources,
even when they command limited resources. Third, it is believed that ownership of the growth
path is more ensured when relying on own domestic resources; this is because unleashing the
dynamic growth momentum by initial injection of domestic resources is more likely to
generate more hope for a brighter future. All these and similar factors induced governments to
focus on the need to initiate various strategies and for the people to concentrate on resource
mobilization with a hope of accelerating economic growth.
7

Despite the keen interest of countries to focus on DRM, there is recognition that DRM works
either as a complement or as a substitute (or both) to external resources. Capacity permitting,
therefore, all countries attempt to rely on mobilizing domestic resources as much as possible
while supplementing it with external resources. Accordingly, as will be outlined via the
efforts of relevant stakeholders later, Ethiopia has been making a concerted effort to mobilize
and rely more on its domestic sources in recent years.

There are various factors that may weaken the capacity of countries in mobilizing domestic
resources. As United Nations Conference on Trade and Development /UNCTAD (2007) noted,
countries may fail to mobilize adequate domestic resources because of their low level of
income (which in turn might be affected by low resource mobilization). This vicious circle and
the level of alignment of financial markets with the real economy are well recognized factors
in influencing the extent to which countries succeed in mobilizing domestic resources. The
impact of each factor, of course, will vary from one country to another. For instance, in
countries like Ethiopia where agriculture has significant share in the economy and with a
relatively less developed financial sector, the extent to which tax authorities could mobilize
resources is relatively hampered than in advanced economies. This is because rural economies
are not amenable to tax increases consistent with income increase (absence of tax bouncy) due
to a limited coverage and the efficiency with which tax is collected. Similarly, a weak financial
sector is subject to financial depression. Ultimately coupled with population pressure, the
challenge to make quick progress in resource mobilization is daunting. That is, with negative
real interest rates in recent years (owing to low nominal interest rates and high inflation) which
is likely to depress private savings and with weak capacity to accelerate tax collection efforts,
resource mobilization is a challenge in such economic circumstances.

Irrespective of the challenges, in general, the strategies that countries follow to mobilize
domestic resources focus on the public and the private sectors, on formal and informal
financial institutions. The depth and scope of these strategies may vary depending on the
composition of the instruments employed, the specific initiative implemented and the linkages
with the economic sectors selected.
8

Ethiopia has also been engaged in an effort to mobilize its domestic resources in the last few
decades but particularly in the last fifteen years or so as evidenced by the relatively
appreciable economic growth registered in recent years and the saving and revenue resources
mobilized as will be detailed later. For instance, as noted in Table 1.1, real GDP and GDP per
capita growth average, grew 10.4 and 7.7 percent, respectively, between 2006/07 and
2013/14. The growths took place at a time of deteriorating international and national
economic environments. All the major sectors (agriculture, industry and services) contributed
to the annual average growth performance. While the agriculture and the service sectors are
dominant in terms of their share in GDP (constituting about 40 percent each), industry grew
by an average of about 15.1 percent per annum between 2006/07 and 2013/14.
Table 1.1 Sectoral Contributions to GDP and GDP Growth
Items

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Real GDP
(billions of Birr)

312.1

346.4

380.5

419.8

475.7

517.0

567.9

626.6

11.7

11.0

9.8

10.3

11.4

8.7

9.8

10.3

8.0

7.3

7.1

7.5

10.6

6.1

7.1

7.5

Agriculture

50.5

48.8

47.3

46.1

44.4

42.9

41.8

39.9

Industry

10.2

10.1

10.1

10.2

10.4

11.5

12.9

14.2

39.3

41.0

42.6

43.7

45.2

45.7

45.3

45.9

9.5

7.4

6.4

7.6

9.0

4.9

7.1

5.4

Growth in Real GDP

Growth in Real GDP
per capita
Share in
GDP (in %) Services
Agriculture

Absolute
Growth

Industry

9.6

10.3

9.6

10.8

15.8

19.7

24.0

21.2

Services

15.3

16.1

14.0

13.2

17.3

9.6

9.0

11.9

Agriculture

41.6

33.8

31.7

34.9

31.1

25.4

30.9

21.9

8.5

9.5

9.9

10.6

12.1

23.9

27.8

26.4

49.8

56.7

58.4

54.4

56.8

50.7

41.4

51.7

Contribution
to GDP
Industry
growth in %

Services

Source: MoFED (2014)

The objective of the paper is to examine, systematically, the extent to which efforts have been
made to mobilize domestic resources, identify the strategies employed to realize those
objectives, the efficiency with which they are implemented and the challenges encountered in
9

doing so. This will cover efforts related to the public sector (revenue generation and saving
mobilization) and the private sectors (household and firm savings). It also includes both formal
(banking) and semi-formal and informal financial institutions (microfinance, credit cooperatives, and
even traditional entities like Ekub and Iddir).

Following this brief introduction, the remainder of the paper is organized as follows. Section
two presents overview and analysis of the strategies and initiatives on Domestic Resource
Mobilization (DRM). This is followed by a presentation of the extent and trends in DRM in
Ethiopia. Impacts of DRM and state of illicit financial flows will be examined in section four.
Section five will highlight lessons learnt and capacity development imperatives, while Section
six presents conclusions and recommendations of the study.

Overview and Analysis of Strategies and Initiatives on DRM

2.1 Public Sector savings

The principal sources of domestic resources are private savings and government revenue.
Government revenue is comprised of tax revenues and non-tax revenues. Tax revenues
constitute direct and indirect taxes, while non-tax revenues come from, fees, interest earning,
bonds and state-owned enterprises. The average share of tax revenue (for 2000-14) at 80
percent makes tax the principal contributor to total domestic revenue, while non-tax revenues
constitute only 20 percent (NBE, 2014).

Private saving is composed of savings by households and firms. In order to enhance public

savings (from revenue sources and enterprise profits), the government of Ethiopia has put in
place a number of strategies and systems and attempted to enforce them more in recent years.
2.1.1 An Overview of the Tax structure

The government has constituted a tax mix incorporating both direct and indirect taxes. Direct
taxes comprise of personal income tax ( rates progressively increasing from 0 to 35%), rental
10

income tax (30%), business profit tax (5%) and other incomes tax at federal level such as
agricultural income tax, rural and urban land use fee at regional and chartered cities.

Indirect taxes are comprised of domestic taxes and foreign trade taxes, including customs
duties, excise tax, value added tax, surtax, and withholding tax. The Ethiopia Revenues and
Customs Authority (ERCA), the mandated institution for collecting government revenue,
collects customs duty only on imported items as no tax on exports is levied, except on raw
skins and hides (150%). As shown in Figure 2.1, customs duty provides significant revenue to
the government (contributed 12% of the gross domestic revenue between 2000 and 2014).
The remaining major indirect tax categories include excise tax that is levied on selected goods
such as luxury goods and basic goods which are demand inelastic, excise tax is also applied to
goods which are considered hazardous to health and may cause social problems2.

Figure 2-1 Share of Government Revenue Sources (average share for 2000- 14)

b)

a)
Direct and
indirect
domestic tax

20%
48%

Direct tax

1%
20%

27%

Foreign trade
tax
19%

32%

Non-tax revenue

21%

Indirect domestic
tax
Customs duty
Excise, VAT, other
import taxes
Export taxes

12%
Non-tax revenue

Source: Authors computation based on National Bank of Ethiopia /NBE (2014)

The Ethiopian Excise Tax Proclamation (proclamation No. 307/2002a) sets the maximum excise tax rate at
100 percent for perfumes, toilet waters, and motor vehicles of over 1,800 c.c. All types of pure alcohol and
cigarettes are taxed at 75 percent. The least (10 percent) excise tax is levied on textile products and Television
broadcast receivers. The excise tax rates are equally levied to imported and domestically produced goods.

11

Value Added Tax (VAT) on all commodities except some food items is levied at a flat
percentage rate of 15% of the sum of cost, insurance, freight, customs duty and excise tax.
VAT was introduced in 2003 and was designed to tax services in addition to production;
granting zero-rating to exports; and giving exemptions to fewer basic products than was the
case under the sales tax system it replaced. Surtax comprise of 10% of the sum of cost,
insurance, freight, customs duty, excise tax; and VAT is the base of computation for the
surtax on all goods imported into the country. A 3% withholding tax was also imposed on
imported items and a 2% on payments made in return for the purchase of goods and services.

The resource mobilization strategy also introduced taxes (VAT, turn over tax, for instance)
expecting to increase revenue through a broader base, improved efficiency, promotion of
exports, and foster economic growth. It could be argued that the broadening of the tax base,
the associated increase in tax rate as well as the choice of tax exemptions may led to
differential effects on the incomes and expenditures of different groups of the Ethiopian
population because of variations in tax incidence and income elasticities. Further, exemptions
complicate the administration of the VAT system, erode the tax base and distort input-choice
decisions.

Non tax government revenues includes, government investment income, charges and fees,
reimbursements and property sales, sales of goods and services, and pension contributions.
Government investment income includes residual surplus, capital charge, interest payments
and state dividend. Non-tax revenue sources contributed 15.9% to total tax revenue in
2012/13, declining to 9.8% in 2013/14. This was attributed to a 57.3% decline in government
investment income (see Figure 2.2).

12

Figure 2-2 Non-tax Government Revenue Sources

10,000
2012/13

2013/14

Million Birr

8,000
6,000
4,000
2,000
Charges and Fees

Govt. Invt.
Income

Reimb. And Sales of Goods &

Property Sales
Services

Others

Source: Authors own computation from Ministry of Finance and Economic Development, Annual Report
2013/14.

2.1.2

Relative Contributions of Tax Revenue

Nominal amounts of both the tax and non-tax revenues in Ethiopia have been growing,
particularly since the 2000s (Guddisa and Mishra, 2014), with domestic direct revenue
increasingly gaining importance (Figure 2.3). Revenues from indirect domestic taxes and
foreign trade taxes, in absolute terms, have shown an upward trend. Non-tax revenues on the
other declined in 2012. This has been attributed to the transfer of most state-owned enterprises
to the private sector, that were the major contributors of non-tax revenues in the form of
residual surplus to the central treasury of the country (Delessa and Mishra, 2014). The sharp
increase in tax revenue has been attributed to a number of policies and administrative
measures taken by the government to improve domestic tax revenue collection, including
strengthening the capacity of the tax collection agencies, expanding the tax identification
number system, strengthening the value added tax system, increasing tax compliance and
taking stringent legal measures against tax evasion (MoFED, 2014).

13

Figure 2-3 Trends of Tax and Non-tax revenue of Ethiopia (in million Birr)
50000

Amount of revenue (million Birr)

Direct domestic taxes

40000

30000

Indirect domestic taxes

Foreign trade taxes
Non-Tax Revenue

20000

10000

0
2009

2010

2011

2012

2013

2014

Source: Authors computation based on WBs WDI data (2014)

In short, there have been upward movements in direct, indirect, and foreign trade taxes while
non-tax revenue seems to exhibit no appreciable change, at least in the last five years. This
attests to two aspects of the domestic resource mobilization effort. Namely these are the
strong effort to mobilize tax efforts (both in coverage, collection efficiency owing to proactive
enforcement derive and rate) and a relative decline in non-tax revenue due to the privatization
of public enterprises.

2.2 Private Savings

Private savings comprise household and corporate savings. Household savings dominate
savings in Africa (Ethiopia included), though not sufficiently channeled into productive use.
This is partly due to what is referred to as financial depression low interest rate and at times
negative real interest rates which in turn frustrates the incentive to save thereby reducing
investment3. The World Bank (2013) argues that the low level of saving in Ethiopia is partly
3

During years of soaring inflation in Ethiopia (2003-2008), the real interest rates remained significantly
negative. The rate for 2003-08 respectively was -5.11; 2.97; -2.62; -4.08;8.29; and; -17.12 ( WBs WDI,2014).

14

due to the negative real interest rate and demonetization. The nominal deposit rate has
remained well below inflation rate since 2003. The banking sector was, therefore, in effect
discouraging saving.

Banks are tapping to new areas of electronic and mobile banking to increase profitability and
maintain their market share. The initial focus of this expansion was on further deposit
mobilization as opposed to money transfer and other transactions (IMF, 2014a, p. 20).

In addition to public sector saving, the composition of household savings portfolio determines
availability of funds for investment, and is therefore relevant to a countrys development
(UNCTAD, 2007). Households, especially in rural areas, rely on volatile income sources. In
the absence of accessible credit and insurance services, drawing on saved assets is a necessary
strategy for households to smooth their consumption patterns (Dercon, 2002). Household
saving instruments fall into four categories: formal, semi-formal, informal financial savings
and, non-financial savings. In what follows, these sub-categories are briefly outlined.
2.2.1 The Formal Banking Sector in Ethiopia
The Ethiopian banking sector has been expanding despite still dominance of the three public
(commercial, construction, and development) banks. By fiscal year 2013/14, Ethiopias
banking industry was comprised of 19 banks of which 16 were private, and the remaining 3
state-owned. The state owned commercial bank of Ethiopia accounted for 70 percent of the
industrys total assets (Keatinge, 2014), and the public banks provided 77 percent of total
loans as of December 2012 (World Bank, 2013).

Further, since the enactment of the National Bank Bill in April 2011, the Government of
Ethiopia limited the private lending ability of banks due to the requirement it put on banks to
allocate 27 percent of any new loan disbursements for buying the National Bank of Ethiopias
(NBE) bills; this bill earns only 3 percent interest rate (below the 5 percent deposit interest
rate floor) and it matures in 5 years. This seems to have been done so that the banking sector
would contribute to the huge projects underway in the country and probably to limit the
potential multiplier effects of money supply.

15

As was the case in setting targets in revenue mobilization and investment sectors, the GTP
has also set targets in the banking sector to boost resource mobilization and ultimately the
performance of the Ethiopian economy. Two of these objectives are to increase or provide
financial access to the excluded population by expanding access to finance to 67% by
2014/15 from the level of 20% in 2010; and increasing the gross domestic saving to GDP
ratio from 6% in 2010 to 15% in 2015.

In addition to surrendering 27% of the deposits the chartered banks received, a number of
other policy requirements have also been imposed on the banking sector. Among such
interventions is the increase in the initial capital required to establish a bank from Birr
(Ethiopias domestic currency) 75 million, since June 2002, to Birr 500 million as of 11th
August, 2008 (Federal Negarit Gazeta, 2008).

This may have barred new entry hence potentially limiting the competitiveness of the banking
sector. Further, the financial sector is not open to foreign competitors to establish a safe haven
for domestic banks so that they earn high profits. This probably is done to ensure the financial
sustainability of the banks using the argument that this is more likely to protect the financial
health of the banking sector. Whether because of that or due to other factors, despite all these
interventions, the banking industry is one of the most lucrative with less fierce competition as
witnessed by the registered huge annual profits of all the banks (both public and private)4.
Part of the profit made by banks is due to the spread between the lending and deposit rates. In
2012/13, the lending rates ranged between 7.5 to 16.25 percent averaging around 11.9
percent. But the deposit rate has never exceeded 6% in any of the chartered banks.

By the end of fiscal year 2012/13 total deposits mobilized by commercial banks surged by
26.6 percent. Demand, savings and time deposits constituted 49 percent, 44.7 percent, and 6.3
percent, respectively. Due to the increase in deposits and high activity, the banking sector in

According to Zemen Banks (a private bank) annual report (2014), in 2013/14, private banks in Ethiopia
registered 19.3 percent Returns on Equity (RoE) and 2.9 percent Returns on Asset (ROA). Zemen Bank reported
that its earnings per share for the last 5 years averaged about 45 percent per year.

16

Ethiopia has been registering a high return, reporting less than 2 percent non-performing
loans, and overall high profitability, limited competition, and high financial exclusion.

2.2.2 Savings in the Informal Financial Sector

The informal financial institution in Ethiopia is composed of semi-informal to informal
entities. These range from modern arrangements like microfinance to traditional saving and
cooperation set ups (locally referred to as Ekub and Idder). While some of the semi-formal
institutions are recently introduced the informal institutions have existed as endogenous
instruments to mobilize financial resources and to facilitate both financial and in kind
collaboration in times of need for its members.

According to Aryeetey (2004), the informal sector in Africa accounts for 80% of household
savings. Of the 20 per cent of household assets that are held in financial form, 12 per cent are
held in the informal sector and 8 per cent in the formal sector. Even though no accurate
figures are available, the size of the informal financial institutions is also believed to be
significant given the widespread use and duration of its existence in society. The popularity
and longevity of its existence in Ethiopia partly reflects the difficulties in accessing formal
saving instruments and/or the lack of trust in formal financial institutions, as well as the
inadequacy of formal saving instruments to fulfill poorer households saving needs.
Due to Ethiopias huge rural population, asset portfolio is also held in the form of non-cash.
For instance, many people in Ethiopia (particularly rural households) use traditional or
informal ways of saving and mobilizing resources for their needs. Hence the portfolio choice
may slightly vary between rural and urban poor households, but both practice one or more of
the following deposit instruments. These include cash saving (when liquidity and convenience
is the priority), ownership of animals (both for current use and future re-sale), and gold, silver,
or other precious metals.

Microfinance institutions have only been in operation in Ethiopia for about 8 years, but have
started to play a big role in mobilizing resources. According to the National Bank of Ethiopia,
the industry has pulled a total asset of 7.2 billion Birr (55.1 million USD11), with 5.1 billion
17

Birr (38.9 million USD) in outstanding loans and mobilized a total deposit of 2.4 billion Birr
(18.4 Million USD), as of 2013/14.

In addition to the saving mobilization functions of the most widespread traditional

organizations (Ekub and Iddir) their contributions as sort of social-safety-nets (or insurance
schemes) also needs a brief description. The focus of Iddir is provision of collective support
for any member in times of need (sickness, death etc) using currently contributed or saved
resources by its members. It is usually formed among people living in proximate areas. It also
involves any support in person in addition to financial or in kind contributions. The focus of
Equb, on the other hand, is on mobilizing a rotating saving by its members during a fixed
time. The total collected amount is disbursed to a given member until all are given the
opportunity in turns. Equb is contributed either daily or weekly or monthly. The main
motivation of Equb is to collect large sum of money and disburse it in turn to members for
future investment based on a spot lottery or pre-agreed sequence, the turn at times determined
by the immediate need of the member.
It is at an early stage of the process, but the government has been engaged in coordinating and
making efforts to link the informal financial institutions both horizontally (among each other)
and vertically (with the formal institutions). The intention is to strengthen the financial,
technical, and organizational capacity of the institutions so that they will boost the resources
mobilization effort and learn best practices. Even though still at an early stage and hence no
tangible outcome has yet been observed, the process is in motion despite some resistance by
some members who do not want to lose the traditional functions of the informal institutions.

18

Extent and Trends in Domestic Resource Mobilization in Ethiopia

3.1 Extent and Trends in Revenue Generation

There has been a concerted effort to optimize revenue collection by improving the efficiency
with which tax is collected and by expanding the tax base. After introducing the value added
tax in 2003 (initially to high income business entities but later covering most business
enterprises) the government increased its tax base. It also attempted to improve the efficiency
of tax collection by strengthening both tax collecting institutions and policies that both reward
tax payers and punish tax evasion.

Non-tax revenue showed no increase or a slight decline after 2012, total revenue (including
grants), total revenue (excluding grants) and domestic tax revenues increased by an annual
average of 16, 17 and 20%, respectively, between 2000 and 2014 (Table 3.1). And yet, when
it is viewed as a ratio of GDP, it shows little or no change.

Tax bouncy is low in Ethiopia despite the improvements in some tax components over time
(introduction of VAT, revising income tax slightly upward). Whether viewed in terms of tax
bouncy (the relative increase in tax revenue due to an increase in income) or as measured by
the attendant resource gap (saving and investment), revenue generation has a long way to go
to meet the economys resource needs. Further, the reason why tax revenue hasnt improved
when measured relative to GDP is partly some tax components (such as income, international
trade tax, for instance) were not increasing fast 5; but more importantly GDP has been
growing in double digits and that growth was coming mainly from the agriculture sector
which is the least taxed and yet has still significant share in GDP (although the share has
dropped from 48.8 percent in 2007/08 to 39.9 percent in 2013/14). Hence the tax bouncy
turned out to be low.

for instance international trade taxes which accounted for about 50 percent of total tax since 2001, its growth
as a share of GDP was stagnant during the period (WDI,2014)

19

As demonstrated (Table 3.1) the dominant revenue source in Ethiopia in recent years has been
tax revenue which, on average, constituted about 79% of total government revenue. But in
terms of growth, tax revenue as a % of total revenue on average grew by about 1.9 percent
while GDP during the period grew by about 8% suggesting that despite the significant
improvements in tax collection, tax revenue failed to much the growth in GDP.

Table 3.1 Trends of Government Revenue and Contribution of Tax Revenues

2000

11,220

Total revenue
(excluding grants) Million Birr
9,498

2001

12,805

2002
2003

Year

Total revenue (including

grants) Million Birr

Tax revenue as %
of GDP6

Tax revenue as %
of total revenue

10.3

71.4

10,177

11.0

73.1

12,833

10,409

12.0

76.1

15,703

11,149

11.3

73.9

2004

17,918

13,917

12.7

78.4

2005

20,147

15,582

11.8

79.6

2006

23,225

19,493

10.8

72.4

2007

29,381

21,797

10.2

79.6

2008

39,705

29,794

9.7

79.9

2009

40,422

31,924

7.0

72.7

2010

66,237

53,861

11.4

80.4

2011

85,611

69,120

11.5

85.3

2012

115,658

102,863

11.5

83.4

2013

137,192

124,077

12.6

86.2

2014

158,076

146,172

12.7

91.1

52,408

44,655

11.1

78.9

Average
Source: NBE (2014)

Tax ratio (the average share of tax revenue in GDP) 2000 to 2014 in Ethiopia is only 11%.
This is lower than that of Kenya (16.4%) and the Sub-Saharan average of about 17% for the
same period. It is only similar to that of Uganda which recorded 11.4%.

The comparison

showed on Figure 3-1 also corroborates the argument that tax ratio in Ethiopia is indeed low
comparable to the indicated regional and sub-regional averages.

The World Banks (see Figure 3.1) and the National Bank (Table 3.1) reported different figures for tax ratios of
Ethiopia. However, referring both of the reports, we can confidently conclude that the trend of tax ratio in
Ethiopia is fairly stagnant.

20

Figure 3-1 Trend in Tax ratio of Ethiopia Compared to Selected Regional and Sub-regional Averages.

20
18
16
14
12
10
8
6
4
2
0

East Asia & Pacific

(all income levels)
East Asia & Pacific
(developing only)
Ethiopia
Middle income
Sub-Saharan Africa
2005 2006 2007 2008 2009 2010 2011

Source: Authors construction using WBs WDI (2014) database

3.2 Extent and Trends in Saving Mobilization

The other domestic resource component (in addition to revenue) is saving, mainly mobilized
through the various formal and informal instruments of financial institutions. In addition to
the state of saving in the last few years, Table 3.2 outlines the movement of saving via the
various components. As the table shows, saving deposits (net) almost doubled between
2012/13 and 2013/14; saving and time deposits contributed the most to the growth - jumping
from32 to 66 and -70 to 56% while demand deposits declined during the same period. During
the period total resource mobilized (saving, demand and time deposits) increased from 10 to
14%. According to media reports (Ethiopian Broadcasting Corporation 5 April, 2015),
however, the recent increase is much more significant. According to the report, saving as a
ratio of GDP jumped to 22% due to the various initiatives presented in section-2 of this paper.
Due to the various initiatives to mobilize resources, the same report also noted in less than
two months Birr 6.3 billion was mobilized (mainly related to the Renaissance Dam). This is
about 11.32% of total resources mobilized via saving, demand and time deposits as noted in
Table 3.2).

21

Table 3.2 Annual Resource Mobilizations and Disbursements of Chartered Banks as of June 30, 2014 (Millions of Birr).

2011/12
Particulars

Public
Banks

Private
Banks

2012/13
Total

Public
Banks

1. Deposits (net change)

37,005

9,754

46,759

32,950

1.1 Demand Deposits

19,199

2,213

21,412

1.2 Savings Deposits

12,049

5,917

17,966

5,756

1,625

7,247

Private
Banks

Year-on-Year Growth
of totals (%)

2013/14
Total

16,961

49,911

18,782

5,107

12,938

10,857

7,381

1,231

7,247

7,232

15

3. Collection of Loans
4. Total Resources
Mobilized (1+2+3)
5. Disbursement

Public
Banks

Private
Banks

Total

2012/13

2013/14

40,054

15,593

55,647

12

23,889

9,350

3,294

12,645

12

-47

23,794

29,851

9,685

39,536

32

66

997

2,228

853

2,613

3,466

-70

56

6,343

6,343

4,034

4,034

-13

-36

7,232

5,076

5,076

2,926

2,926

-30

-42

15

1,267

1,267

1,108

1,108

8,515

-13

18,480

16,708

35,187

22,936

18,885

41,820

26,128

25,617

51,745

19

24

62,732

26,462

89,193

62,228

35,846

98,074

70,215

41,210

111,425

10

14

36,949

19,153

56,102

33,250

21,002

54,252

38,938

21,028

59,965

-3

11

6. Change in Liquidity (4-5)

25,782

7,309

33,091

28,979

14,844

43,822

31,278

20,182

51,460

32

17

7. Outstanding Credit*

85,722

36,740

122,462

103,585

47,619

151,204

127,634

53,693

181,327

24

20

1.3 Time deposits

2. Borrowing (net change)
2.1 Local
2.2 Foreign

Source: NBE (2014)

*Includes government borrowing in the form of bonds and treasury bills from commercial banks, DBE and other sectors other than NBE

22

Participation in the financial sector as measured by the number of borrowers and depositors
increased as noted in recent years. Consequently, both saving and investment as a percentage
of GDP have also increased steadily in recent years. What is of interest is that, though modest
by other countrys standards and the size of the Diaspora, personal remittances has also
become an appreciable share of GDP. In short as shown in Table 3.3, all the relevant resource
flows showed a notable increase between 2007 and 2012.
Table 3.3 Selected Indicators of Financial Inclusion, Sources, Debt and Investments
2006

2007

2008

2009

2010

2011

2012

Borrowers from commercial banks (per 1,000 adults)

1.2

1.1

1.2

1.7

1.8

1.8

2.1

Depositors with commercial banks (per 1,000 adults)

66.4

74.9

78.0

90.7

103.2

111.1

136.8

Gross capital formation (% of GDP)

27.9

24.5

24.7

25.6

27.4

27.9

33.1

Gross domestic savings (% of GDP)

5.0

4.9

4.9

7.1

7.5

12.7

15.0

Gross fixed capital formation (% of GDP)

27.9

24.5

24.7

25.6

27.4

27.9

33.1

Gross fixed capital formation, private sector (% of GDP)

11.9

10.4

10.0

13.3

11.9

9.2

18.7

Gross savings (% of GDP)

13.2

22.5

21.1

17.8

23.9

28.9

27.0

Personal remittances, received (% of GDP)

1.1

1.8

1.5

0.8

1.2

1.6

1.5

Tax revenue (% of GDP)

8.4

8.0

8.0

6.7

8.3

9.4

Source: WBs WDI (2014)

3.3 Special DRM schemes

In addition to the various formal and semi-formal privately initiated savings, the government
of Ethiopia has also taken various measures to boost savings. These measures include
schemes to increase household savings through improving financial sector accessibility and
attracting funding from the large Ethiopia diaspora. The following strategies have been used
to promote and mobilize domestic savings:

a) Deposit mobilizing Schemes Initiated by the Commercial Bank of Ethiopia (CBE)

i.

Expanding bank branches to create access to unbanked groups in society. This is

aimed at increasing access to financial services. The number of commercial bank
branches have increased from 681 at the end of FY2010 to 1,286 at the end of FY
23

2012 (89% increase). The majority of the increase comes from the state-owned
CBE, which increased its branch network by 167 per cent during the first two
years of the Growth and Transformation Program (GTP). The branch expansion in
all regions of Ethiopia has led to a significant increase in the likelihood of saving
in banks by individuals according to the Urban Employment and Unemployment
Survey 2012. Expanding bank branches is therefore a major saving-supporting
policy measure in Ethiopia. This is because the number of branches has had a
positive and significant impact on improving the access of individuals to formal
saving opportunities.

ii.

CBE promotes deposit mobilization through the provision of lottery coupons for
additional new savings made by depositors and for those who opened new
accounts (with a fixed minimum amount).That is, every client who deposits Birr
1000 is allotted some lottery tickets to enable the client to participate in a lottery
for various prizes.

iii.

Initiatives have been underway by CBE to boost deposits by encouraging special

accounts for youth, women, and interest-free banking in line with Islamic banking
traditions for those who oppose interest earnings due to religious beliefs.

b) Initiatives have also been underway to promote establishment and outreach of Micro
finance institutions to the majority of the rural areas. At the end of 2012, there were 31
licensed microfinance institutions (MFIs) operating in Ethiopia, representing 2.6
million clients, with deposits amounting to 5.5 million Birr. MFI savings constituted
4.5% of Gross Domestic Savings (GDS) in 2012. However, the MFI sector is highly
concentrated, with at least 5 of the largest MFIs owned by regional governments and
located in different regions. These correspond to 89 per cent of the total MFI assets and
83 per cent of the total MFI borrowers.
c) Pension schemes the government has established pension schemes for employees of
NGOs and private companies, in addition to the government pension scheme under
24

which employees contribute 7% of gross pay and the government contributes 11% of
the gross pay. Being long term by nature, pension funds are expected to provide
reliable financing for long-term development projects that would normally face
difficulty attracting suitable investment. The insurance sector has similar potential, with
the added benefit of providing an income safety net for businesses and individuals. The
total number of employees covered with the private pension scheme reached about
360,000 (at end-December 2012). In the first year of its operation, the private
employees pension scheme managed to collect about 0.5 billion Birr (0.3 per cent of
Gross National Savings /GNS).
Table 3.4 Amount of Private Savings Mobilized and Contribution to GDP/GNS

Year

Pensions
(million Birr)

Off which
private pensions

pension

MFI savings

MFI savings

(% of GNS)

(million Birr)

(% of GDP)

1.1
0.9
0.7
0.7
1.4

1,489
2,223
2,555
3,696
5,474

0.61
0.67
0.68
0.73
0.74

(million Birr)
2008
2009
2010
2011
2012
2013

1598
1743
1700
2400
4540
2656

0
0
0
0
550
586

Source: Adapted from World Bank (2013)

d) Housing savings scheme - A new scheme is being implemented in the city of Addis
Ababa since June 2013. The scheme aims to encourage low- and middle-income
earners to deposit money for a given period, to meet two goals: to encourage saving as
a way of life to meet their future needs and to mobilize sufficient savings to enable
them to buy a subsidized home. The scheme provides three main choices for the
individual saver: the 10/90, the 20/80 and the 40/60 options. Accordingly, an
individual saves ten per cent (or 20 per cent or 40 per cent) of the housing cost in
closed saving accounts at Commercial Bank of Ethiopia branches. By the time the
savings reach a predefined per cent of the estimated housing cost, the savers will be
entitled to a house depending on additional eligibility criteria.

25

e) Diaspora bonds In a bid to attract foreign savings, the government of Ethiopia has
issued Diaspora bonds. This is a new approach, and Diaspora bonds have been issued
only twice. The purpose of Diaspora bonds is to raise savings domestically and abroad
to finance specific projects. In 2008, Ethiopia was the first country in Africa to
introduce Diaspora bonds. The Millennium Corporate Bonds, issued by the Ethiopian
Electric power Authority, aimed to finance national projects. Drawing on the
experiences of the first bond, the government issues a second bond in 2011, aimed at
securing financing for the Grand Renaissance Dam project as shown in Table 3.5.
Table 3.5 Diaspora Bonds Issued by Government and Their Characteristics

Millennium Corporate Bond

Grand Renaissance Dam bond

Objective

Raising funds for the

Ethiopian Electric Power
Corporation

Financing the Grand Renaissance Dam

Date of Issuance

2008

2011

Amount and
currency

Amount unknown USD

EUR other convertible
currency

Amount unknown but project cost $4.8bn USD

EUR GBP and Birr

Maturity (type
and value)

5, 7 and 10 years

Range of 5-10 years

Interest rate

Fixed: 4%, 4.5% and 5%

depending on tenor

Floating: 5y: Libor +1.25% 6-7y: Libor +1.5% 810y: Libor + 2%

Special features

Limited to Ethiopians with

access to foreign exchange

Sovereign instrument

Source: Plaza (2011)

3.4 Capacity Challenges

As is the case in many developing countries, Ethiopia faces many capacity related challenges
in its effort to mobilize domestic resources. Low income base and hence tax base, inefficient
tax collection system and the structure of the economy (informal, less recorded and
fragmented) also exaggerate the attendant capacity challenges. Chief among the factors that
directly and indirectly contribute to capacity limitations in mobilizing resources in Ethiopia
are the following.

26

1. One of the most important capacity challenges of resource mobilization in Ethiopia is

absence of a well-organized, transparent and coherent tax collection system. Tax
assessment and administration tend to be arbitrary, inconsistent and not well executed.
Partly this emanates from the unrecorded economic activities of in the economy owing
to the pervasive nature of the informal sector.
2. Consequently, tax compliance in Ethiopia has been very low partly due to weak
enforcement mechanisms and low consequence on evasion. A fragmented rural based
economy is difficult to effectively tax partly due to its low income level and its
amenability for tax evasion. Hence tax compliance in economies dominated by small,
fragmented and poor households like that of Ethiopia is a major challenge.
3. Another challenge in mobilizing resources through the tax regime when the share of
the informal sector in the economy is significant. Due to the unrecorded and an
accounted nature of the informal sector, it is difficult to mobilize resources from the
informal sector. The destination, size of economic activity and ownership structure is
difficult to identify. And since the informal sector both in the rural and urban areas in
Ethiopia is presumed a significant portion of the economy, it is a serious challenge to
mobilizing resources.
4. Another serious challenge is finding well trained staff with integrity. As a developing
and poor country availability of effective tax administrators is limited. And due to the
very low incentive structure, the level of integrity of the employees is compromised.
5. Public financial management tackling endemic weaknesses on the formulation and execution
of investments of poor reporting and accounting practices, and long delays in auditing and
preparing annual national accounts. All these are manifested in poor or low public trust
particularly political trust of officials in properly utilizing public resources. This negatively
affects the extent to which people are willing to contribute to public funds and avoid evasion.
Further, public trusts in how accumulated savings are managed, audited and reported are
crucial in investors /savers in particular and the public in general to have the confidence in
actively participating in resource mobilization efforts.

6. Weak capacity of organizations engaged in the governance of the tax collection system
is also a challenge. Because of the reasons described up to this point (weak incentive
structure, inadequate training, and absence of computer and other relevant facilities)
limits the capacity and negatively affects effective resource mobilization.

27

Impacts of DRM and fight against illicit financial flows

4.1 Resource Gap and Illicit Financial Flow

The saving rate in Ethiopia has been low at least compared to the attendant level of
investment in the country (i.e. huge resource gap exists). The gap remained 20 percent for
most of the years. And one of the manifestations of the resource gap is the low level of credit
allocated to the private sector even by poor countries standards. The credit given to the
private sector in Ethiopia in 2011 was 14 percent of GDP. This was far less than the 23
percent of GDP, on average, in SSA (World Bank, 2013).

For an economy like that of Ethiopia where domestic resources have always fallen short of
attendant investment, availability of credit is one of the binding constraints. This is
particularly the case at a time when external financial resources were inadequate (either due to
decreases in ODA, low FDI and /or low export receipts) to fill the ex-ante saving and
investment gap. In such instances, illicit financial flows have had an added negative impact on
the ability of the economy to mobilize adequate resources.
The widespread illicit financial flow is one of the factors that exacerbated Ethiopias resource
gap in recent years7. According to the Global Financial Integrity rankings (GFI, 2014),
Ethiopia is among the top five SSA counties and 39th in the world in terms of its contribution
to illicit financial flows. Its volume of illicit financial flows averaged 2,207 million USD
annually (2003-12). As could be seen from Table (4.1), the absolute size of the illicit financial
flow that was estimated in Ethiopia during the period was very high given the acute scarcity
of foreign exchange and resource gap.

Illicit Financial Flows are illegal movements of money or capital from one country to another (GFI, 2014).
Amidst the huge illicit financial flow there has been significant resource gap in Ethiopia as exhibited by the huge
gap between ex-post saving and investment. The saving rate has not kept pace with the growth in investment to
make up or fill the traditional external sources such as FDI, aid, and remittances.

28

Table 4.1 Size of Illicit Finance and Resource Gap in Ethiopia (2003-12)

Illicit financial
Illicit
Resource gap
Illicit financial flow
flow
financial
( % of
(% of GDP)
( Nominal
flow
GDP)
(B)
Years
Millions of USD)
Growth (%)
(A)
2003
495
-14
6
2004
406
-18
-17
4
2005
785
93
-21
6
2006
1,152
47
-23
8
2007
1,491
29
-20
8
2008
1,823
22
-20
7
2009
2,999
65
-19
9
2010
5,650
88
-20
19
2011
4,149
-27
-15
13
2012
3,117
-25
-18
7
Cumulative:22,065
Average: 2,206
Source: Global Financial Integrity Report (2014) and WBs WDI, (2014).

Illicit flow as a
percent of resource
gap
(B/A)*100
41
24
31
33
39
35
51
97
87
40

There are years during which the illicit financial flow almost equaled with the resource gaps.
For instance, in 2010 the illicit financial flow reached 97 percent of the resource gap. That is,
under an ideal condition of zero illicit flows, the country could have financed the resource gap
from own internal sources. For most of the year, the value of illicit finance was between half
and two-third of total government budget. The figure for such financial flow in 2010 (Table
4.1), for instance, was well above the governments annual budget.

Foreign reserves, illicit flows and inflation seem to have coincided in Ethiopia. Inflation rates
were very high in 2004-2011. And without inferring causality, these years witnessed an
accelerated growth in illicit financial flows (see second column of Table 4.1). Regardless of
the causality, a co-movement of illicit financial flows and the attendant high inflation rates
was observed; a possible reason might be because inflation often erodes confidence in the
domestic currency and the overall macroeconomic stability. Consequently, the country
witnessed a huge drop in its foreign reserve account (Figure 4-1). Importers experienced
limited access to hard currencies usable for importation, following the banks rationing of the
available limited hard currency reserves. The global financial crises might have also
contributed to the shortage since foreign funds coming through export receipts and ODA had
fallen. The trend started to reverse after 2011 following a significant fall in inflation. After
29

2011 the reserve level reached the governments target of 2.5 to 3 months of imports (Figure
4-1).

Figure 4-1 Net ODA flows and Foreign Reserves of Ethiopia (2005-12)

6E+02
4E+02

45
40
35
30
25
20
15
10
5
0

2E+02
0E+00
-2E+02
-4E+02
-6E+02
-8E+02
-1E+03
-1E+03
-1E+03
-2E+03
Net ODA received (% of GNI)

Reserves and related items (BoP,

million current US$)

Net ODA received (% of imports of

goods, services and primary income)
Source: Authors constriction using WBs WDI (2014) database

4.2

Economic Impacts of DRM

In the face of the challenges noted above (improved but relatively low saving and illicit
financial flows etc.), the government has initiated various programs to address these
challenges. Chief among these initiatives is the Growth and Transformation Program (GTP)
which sets targets to be achieved in various sectors of the economy during specified periods.
With regard to resource mobilization, in addition to the efforts in revenue generation and
private saving noted above, it aims to boost overall savings to 15 percent of GDP through
various initiatives. These include continued public awareness creations and mass
mobilizations, making the financial services accessible, launching social insurance programs
for private sector employees, improving government social insurance coverage, introducing
saving bonds and other instruments such as housing, women, youth, prize schemes for clients
that deposit 1, 000 Birr or more and non-interest banking initiatives, to name a few.
30

The result is, according to a report by Ethiopias Ministry of Finance and Economic
Development (2014), these programs have boosted the saving rate from 5.2 percent of GDP in
2009/10 to 17.7 percent in 2012/13 which in turn raised domestic investment as a share of
GDP from 24.7 percent in 2009/10 to 33 percent in 2012/13. Savings and investments show
similar growth patterns (see figure 4.2) even though the direction of causality between the two
cannot be ascertained. Bridging the gap is, however, still a big challenge that Ethiopia has to
face in the coming years. Recent performances show that saving is indeed growing at a
slightly higher rate than investment signaling hope for catching up.

Figure 4-2 Gross Domestic Savings and Gross Capital Formation/Investment of Ethiopia (2000-12)

35
30
25
20
15
10
5
0

Gross capital
formation (% of GDP)
Gross domestic
savings (% of GDP)

Source: Authors Graph using WBs WDI (2014) database

A related economic impact of the recent initiatives is the housing scheme which both helps
mobilize resources but also enables low income groups own their own housing. As described
in detail earlier and elaborated further in Box 3 in relation to the Growth and Transformation
Program (GTP), urban dwelling (particularly in the capital, Addis Ababa) being very scarce
and expensive beyond the reach of many middle class people, has been one of the major
initiatives due to the existing urgent needs. This initiative, therefore, has had economic
impact in both mobilizing resources, promote social equity by narrowing income gaps and
alleviate poverty (MoFED, 2014).

31

4.3

Social and Capacity Development Related Impacts

Domestic resource mobilization is in part aimed at financing pro-poor public expenditures to

narrow income inequalities. In low income countries like Ethiopia, public expenditure and
revenue raising activities have a lot to do in combating poverty and correcting economic and
social injustices.

Pro-Poor Expenditure
During the first three years of the GTP, 69 percent of government expenditure was on propoor sectors: education, health, water and sanitation, agriculture and road infrastructure
(MoFED, 2014). Public expenditures directed to poverty reduction were kept steady at 12
percent of GDP in 2012/13 (IMF, 2014b).
Table 4.2

Public Expenditure Structure in Ethiopia

Expenditure category

2010/11

2011/12

2012/13

2010/11 - 2012/13
Average performance

Recurrent expenditure

43

41

41

42

Capital Expenditure

57

59

59

58

Total Expenditure

100

100

100

100

Pro poor sector expenditure

Education

66
25

70
24

70
23

69
24

Health

Agriculture

10

Water

Source: MoFED (2014)

Between 2009/10 and 2012/13, pro-poor public expenditure allocation has resulted in
significant increases in the provision of various social services. Since this coincided with the
increase in resource mobilization, it could be assumed that the domestic component of the
mobilized resources has contributed to this outcome.

32

Among the notable changes during this period:

3,544 primary schools were constructed;

primary gross enrolment rate increased from 93.4 to 95.1 percent;

577 secondary schools were constructed;

undergraduate enrolment rate increased from 447,693 to 553,849;

girls enrolment rate in undergraduate programs reached 30 percent;

number of health posts increased from 14,192 to 16,048;

The number of Health Centers increased from 2142 to 3100;

the ratio of population to Health Centers declined from 1: 37,299 to 1:27,706;

the number of hospitals increased from 116 to 127;

primary health service coverage reached 93.4 percent; and

huge investment is made to produce medical doctors, nurses, and health extension
workers (MoFED, 2014).

4.4 Public Spending and DRM Patterns

4.4.1 Public Spending Patterns
Some of the effective RDM reforms focused on increasing public revenue mainly through
international trade taxes and Value Added Taxes. The World Bank (2013) estimated that twothird of recent years growth in Ethiopia is gained from huge public investment while private
consumption accounted only a third of it. Since 2000, however, the budget envelope has
remained largely unchanged (as a share of GDP). The growing public investment is at the
expense of falling government consumption as overall GDP share of government spending
changes only marginally. A third of public investment is financed from domestic sources.

A series of 5-year Growth and Transformation Plans target to raise Ethiopia to a middle
income status by 2025.This requires large public borrowing and domestic resource
mobilization to finance high level of investment. According to IMFs report (2014b), for the
GTP that will end the coming 30 June 2015, Ethiopia envisaged borrowing level will reach
33

about 15 percent of GDP; two-third of it is expected to come from external sources. The
experiences in the first three years (2010/112012/13) of the GTP suggest that the sharply
increasing public investments are partly competing with the private sector in acquiring
domestic credit and foreign exchange. The need for enhanced domestic resource mobilization
trough taxation and private saving is, therefore, paramount.

Figure 4-3 Aggregate Government Expenditures

30

Government Capital
Expenditure as % of
GDP

25
20
15

Government Current
Expenditure( % of
GDP)

10
5
0
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14

Total government
Expenditures (% of
GDP)

Source: NBE (2013/14)

4.4.2 DRM Patterns

The significant rise of revenue from value added taxes has boosted tax revenue mobilization.
This is supported by Electronic Sales Registry Machines (ESRMs) that enabled ease of tax
collection and appreciably reduced tax evasion. Over the last five years, the indirect domestic
tax share of VAT reached about half and it also accounted for the fifth of the total tax revenue
over the last half a decade (Ali, Shifa, Shimeles, and Woldeyes 2015). Council of ministers
regulation number 139/2007:
Tax payers specified in directives to be issued by the Ministry shall be subject
to obligatory use of Sales Register Machine that are accredited in accordance
with the provisions of these Regulations, to generate sales Receipts.
(Ethiopian Council of Ministers, 26 January 2007, p-2).
Despite the recent slight fall in contribution following shifts to domestic indirect taxes such as
VAT, trade taxes constitute over 50% share of overall tax revenue and remains as the lead
contributor. Domestic indirect taxes and direct taxes have more or less equal share each
34

contributing 20 to 30 percent of total tax revenues.

As shown in Figure 4.4, trade taxes are slightly losing their importance while direct and
domestic indirect taxes are gaining momentum. This is attributed to the acceleration of
domestic resource mobilization. The growth of indirect taxes is mainly because of the
introduction of VAT. The Inland Revenue authority of Ethiopia has made various institutional
reforms (tax brackets dependent on earned level of income, sales registry machines in almost
all enterprises initially starting from only large business entities, chief among the) to increase
the Inland Revenue collection. Tax collections are now well decentralized to lower
administrative units. Such decentralization has helped tax inspections and tax determination
relatively simpler as the lower level administrators are better informed to estimate earnings of
the business communities within their jurisdictions.
Ethiopias tax system is at best de jure progressive and de facto regressive According to
KPMG Africa Limiteds Ethiopia Fiscal Guide (2013/14), the payroll tax has 6 brackets with
increasing progressivity. The rate grows progressively from 0% (exemption) for low income
levels to 35 % for high income levels. Business income from body corporates is taxed at a flat
rate of 30%. For instance, high earning businesses seldom declare their true earnings and
hence they are under taxed i.e. tax evasions in this income group is widespread to put
progressivity of the tax regime in question (see evasion case reports in the box below).
Melaku Fenta, the then Director General of the Ethiopian Revenue and Customs Authority (ARCA),
heads up the press conference at his office on August 12, 2010 and provided the following detail:
The authority had stepped up audits of customs, tax, and investigation as well as prosecution of tax evaders in
the past year to increase the collection and enforcement of tax. The audits led to the discovery of 6.8 billion Birr
owed to it from desk audits, customs, taxes, and investigation audits, out of which 2.8 billion Birr was collected.
Fourteen companies alone owed the authority 1.2 billion Birr. The authority is working on collecting the
remaining four billion Birr owed to it. The prosecution department of the ERCA had 1,936 criminal cases in
different stages of processing throughout the year. It won 905 cases out of the 1,160 criminal charges it had
instituted, leading to prison sentences of six months to 15 years for 1,122 people. The ERCA has also taken 165
cases to the Cassation Bench of the Federal Supreme Court, involving massive tax evasion and fraud. The
authority, through its different branch offices, also confiscated goods worth 150.9 million Birr that were being
smuggled into the country and goods worth 25.8 million Birr and cash in the amount of 2.4 million Birr and 1.1
million dollars that were being smuggled out of the country. It has also confiscated gold worth 12.2 million Birr
and cars worth 182.5 million Birr that were circulating in Ethiopia illegally. The Basic Tax Administration
Process (BTAP) has taken steps to harmonize facilitation and control procedures, according to the one-year
performance report. To this end, the ERCA has prepared a list of 100 importers and 50 forwarders which have a

35

high record of tax and customs fraud and a profile of 2,245 companies who pose a high risk.
Figure 4-4 Taxation Structure (Tax ratio and tax mixes) in Ethiopia

70
tax revenue ( %
GDP)

60
50
40
30

direct tax ( %
total tax revenue)

20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

international
trade tax ( % total
tax revenue)

Source: WBs WDI (2014)

4.5

Efforts and Achievements in Terms of DRM and Illicit Financial Flows

This section briefly highlights three cases of government effort to mobilize

resources and reduce capital flight. The boxes show the attempt to use innovative
and intensive efforts either in mobilizing resources or tackling to reduce and if
possible eliminate illicit financial flows. Box 1 attempts to show the efforts that
tax authorities are doing to limit the extent and the practice of illicit flows. In
particular, the Ethiopian Revenue and Customs Authority (ERCA) is devising
schemes as a counter measure to limit under invoicing while at the same
encouraging resource mobilization. Through a specific proclamation the authority
tried to change how it does business both in terms of efficiency, monitoring of
illicit flows and the overall performance of the foreign trade administration.
Box 2 examines the experience of introducing a bond in order to mobilize resources. It
documents the initial experience and the reasons why it wasnt successful initially and the
reasons why its acceptance level was low among the Ethiopian Diaspora. Following the initial
experience it then briefly outlines how the recent bond performed in terms of mobilizing
36

resources.

Box 3, on the other hand, outlines the resource mobilization efforts by chartered banks and
other initiatives ranging from housing schemes to other encouragement like offering prizes for
depositors. Following such efforts saving deposit jumped from birr 12.9 to 29.8 million
between 2012/13 and 2013/14. This jump is partly due to the governments initiative of low
cost housing scheme. This scheme required residential house seekers to open saving deposit
accounts at the publicly owned Commercial Bank of Ethiopia on a regular basis until a
minimum deposit is reached that would warrant qualification to be considered in the scheme.
BOX 3 also outlines all the other schemes utilized to mobilize domestic resources by the
dominant Commercial Bank of Ethiopia to show some of the initiatives and the success
achieved.

BOX 1: ILLICIT FINANCIAL FLOWS AND GOVERNEMNT RESPONSE

Enactment of Customs proclamation number 622/2009 and subsequent institutional improvements of

the Ethiopian Revenue and Customs Authority (ERCA) have contributed to growth of revenue from
international transactions (Federal Negarit Gazetta, 2009). According to a senior official at the ERCA,
the major institutional changes are directed to increasing efficiency and reducing corrupt and fraudulent
acts. The enormous networks of corrupt practices established among sizable number of importers and
similar clients, customs officials, and transit agents has been reduced and a number of newly entering
customs officials, most of whom women, have created inconvenience for the reestablishment of such
networks and hence untangled the perpetuating fraudulent actions. [Despite instituted strategies to
reduce it, import under invoicing remains to be a challenge] the principal sources of illicit flows are
export under-invoicing and import over understanding, as well as correct contracting practices etc]
what is explained here might be relevant to tax evasion and . Although the law stipulates import under
invoicing as an illegal act, it has now become almost a norm in real practice. Ethiopian Revenue and
Customs Authority/ERCA uses a customs valuation CD that lists the minimum international prices of
goods and services using which imports are revalued for tax and tariff determination. However,
importers or their transit agents have access to this customs valuation CDs using which they adjust
import prices accordingly. It is likely that the actual import prices are much higher than the ones in the
valuation CD and illicit financial flow of this form is huge. As a further remedy, the Authority has also
identified trade partner countries that recorded the accuracy of imported items; and documentations and
hence import values from these countries are subject to the authoritys scrutiny. For instance,
importations from most of the EU countries are considered genuine whereas importation from countries
often with non-genuine pricing is subject to close scrutiny by customs officials. Regardless of all these
efforts, illicit flow in the import sector is still unacceptably high in Ethiopia.

37

BOX 2: DIASPORA BONDS

Ethiopia introduced the first diaspora bond called Millennium Corporate Bonds in 2008, making it the
first country in Africa to introduce diaspora bonds. The millennium corporate bonds were issued by the
Ethiopian Electric Power Corporation (EEPCO) to finance national projects. The first diaspora bond
issuance did not meet sales expectations, despite the efforts of the Commercial Bank of Ethiopia and the
embassies and consulates to sell them. Some risks that the diaspora faced were: i) risk perceptions on
the payment ability of EEPCO on its future earnings from the operations of the hydroelectric power; ii)
lack trust in the government as a guarantor; and iii) political risks.

Although the millennium bond was not as successful as had been hoped, the Ethiopian Government
issued a second bond in 2011. The second bond issuance was aimed to secure financing for the Grand
Renaissance Dam project. Based on the experience of the first bond, the second bond issuance
incorporated new features to make it more appealing and practical. The features that were included in
the second bond include; i) consolidation of the Renaissance bond with the Millennium bond; ii)
considerable marketing and awareness-raising campaigns by the government to encourage the diaspora
to buy it; iii) bond offering in minimum denominations of USD 50, which many Ethiopians can have
access; iv) transferability of the bond up to three people, and ability to use it as collateral in Ethiopia;
and v) covering any remittance fees associated with the purchase of these bonds by the Commercial
Bank of Ethiopia.
Performance of the new bond amount raised as a proportion of GDP
Some lessons have been learned from the Ethiopias experience:
i. the need to ensure that the bonds are marketable and will appeal to the diaspora;
ii. ability to identify and locate nationals living abroad;
iii. establishment of an entity that can attract and maintain ties with the diaspora;
iv. improvement of financial literacy among members of the diaspora to help them to become active
investors; and
v. demonstrated good governance, transparency and political stability to enhance trust by members of the
diaspora.

38

BOX 3: Resource Mobilization Commercial Banks

Resources
Public banks
Deposits (million Birr)
2011/12
37,004.6
2012/13
32,949.9
2013/14
40,053.9
Total resources mobilized (million Birr)*
2011/12
62,731.5
2012/13
62,228.4
2013/14
70,215.4
*deposits + borrowing (net change) + collection of loans

Private banks

Total

% change

9,754.3
16,960.8
15,592.7

46,758.9
49,910.7
55,646.6

6.7
11.5

26,461.9
35,845.5
41,209.9

89,193.4
98,073.9
111,425.3

10.0
13.6

Contributions of Selected Components to Total Deposit (%)

Source of deposit

Contributions to total deposits (%)

2011/12
2012/13
2013/14
2.16
1.77
1.96

1.

Grand Ethiopian Renaissance Dam Bond

2.

Public Sector Social Security

3.45

3.99

4.38

3.

Private Sector Social Security

0.30

0.91

1.54

4.

Insurance Premiums

2.65

2.53

2.03

5.

MFI Deposits

3.61

3.97

4.82

6.
7.

Other Deposits (primarily saving, time, and demand deposits )

Housing scheme Initiatives (elaborated below*)

87.82

86.82

85.28

*According to MoFED (2012/13)In the first three GTP periods, a total of 95 thousand houses were under
construction some of which are completed and transferred to users. A total of 24,068 housing units have been
transferred to users both in Addis Ababa and the regions. About 6,262 (26%) of these beneficiaries are
women. Integrated Housing Development Program In 2012/13, it was planned to construct and transfer
30,000 new housing units in Addis Ababa, and complete and transfer all condominium houses under
construction in all regions. As a result, in Addis Ababa 33,120 housing units are under construction and the
construction of 23,503 houses is 29.6% completed. In the first three GTP periods, a total of 95 thousand
houses were under construction some of which are completed and transferred to users. A total of 24,068
housing units have been transferred to users both in Addis Ababa and the regions. About 6,262 (26%) of these
beneficiaries are women. It has been planned to reduce the slum areas of Addis Ababa to 42% from the base
year level of 60% at the end of this planning period. Hence, the city government of Addis Ababa took various
development measures to downsize slums to 45%. Domestic saving: with regard to domestic saving the target
was to increase to 15 percent of GDP. Accordingly, various measures have been taken to achieve this target in
the past three years, including awareness raising of the citizens on saving culture, expanding access to
financial services, launching and implementing social insurance program for private sector employees,
strengthening Government social insurance coverage, introducing saving bonds and other saving instruments
such as housing saving program, investment equipment saving program, etc. and allocating more Government
expenditure on investments that increase capital accumulation. As a result of these measures, domestic saving
increased from 5.2 percent in 2009/10 to 17.7 percent in 2012/13. Similarly, the share of gross domestic
investment increased from 24.7 percent in 2009/10 to 33 percent in 2012/13 which is relatively high
compared to countries at similar stage of development with Ethiopia. Though the achievements made so far in
domestic savings and investment were remarkable, the gap between gross domestic savings and investment

39

has remained high indicating that additional efforts are required to further increase growth in domestic
savings in the remaining two years of GTP.

5.1

Lessons Learnt and Capacity Development Imperatives

Lessons Learnt

The lessons learnt are mainly inferred from the capacity constraints outlined in section 3.4.
The first important lesson learnt in the last few years in Ethiopia has been how resourceful the
people have been if the proper policies, implementation and productive utilization of
resources are visible and verifiable. Taxes, fees, and charitable donations (in the form of
bond purchases and free donations for various projects) have been imposed on citizens; but
despite the heavy burden the people have responded well to the tasks as expected. That is,
they continue to contribute to the various government initiated projects despite the heavy
burden. These lessons are demonstrated by the various initiatives (the response to the various
saving mobilization efforts, the participation in the various bond purchases such the Diaspora
bond, the Renaissance Dam etc) described in section 3.4.
The second important lesson learnt is that the slight improvements in the efficiency with
which taxes and various charges are collected has significantly improved the tax outturns.
Despite the improvement, however, the level of tax collected has not been optimal. Hence, the
efficiency has a long way to go to eliminate the various inefficiencies in the system;
The third important lesson is that if the government makes even effort to demonstrate that the
revenue collected from taxes are being utilized to benefit them via health, education and
similar provisions and make that connection transparent than it has done so far, there room to
even mobilize more resources as everything the people do becomes incentive compatible.
A fourth lesson worth noting is related to the structure of the economy. Despite the
improvements in resource mobilization in recent years, the extent to which resources would
be mobilized is going to be limited as long as the informal sector remains out of each of tax
authorities. There is no any time tested means of incorporating the informal sector into the
40

formal sector. But there are incentive enhancing policies that both increase their capacity and
to be attracted as well to engage themselves in formal lucrative activities; and
A fifith lesson worth emphasizing is the effort that should be made to increase confidence and
fairness in the tax system. To achieve these authorities should avoid arbitrariness and unfair
practices in designing and implementing the tax administration process. The issue of
arbitrariness and unfair levy has been a serious complaint of small and multi-commodity city
traders. Bestowing confidence in such practices would make the resource mobilization
process more acceptable and predictable. These issues were discussed earlier in the context of
lack of well-trained tax collectors, inefficiency in the system and arbitrary enforcement
practices.

5.2

Capacity Imperatives for Effective DRM

The capacity imperatives for effective domestic resource mobilization efforts are many and
that cover many aspects of the capacity issues ranging from personal skills of staff to
organizational structures and an enabling policy environment.
In the case of Ethiopia the first crucial capacity imperatives for effective domestic resource
mobilization is related to the designing and implementing of appropriate policies to
broadening the tax base. Except the recent limited initiatives underway to cover more
economic activities, the tax base in Ethiopia is very narrow, owing to the economic base. It
has only been able to effectively capture income and foreign trade taxes. All other activities
have been beyond the reach of the tax system. Therefore, the potential to mobilize domestic
resources has not been fully exploited. This is partly due to the limitation of the
implementation capacity of the government and partly due to the absence of proper recording
of transactions.

Second, a related capacity imperative is the low skill level of administrative staff engaged in
resource mobilization, particularly tax collection. For the most part staff are poorly qualified,
inexperienced and according to many clients very corrupt. This led to high staff turnover due
to layoffs to minimize corrupt behavior. This is a serious problem, particularly in the foreign
41

trade tax administration as it involves imported goods with a lot at stake for importers (due to
size and ambiguity in valuation).
Third, the problem of efficiency and integrity of the tax administration is complicated by the
limited introduction of computerized systems to both expedite the process and provide
reliable information. There have been minor improvements in computerizing the tax
collection process but its spread is limited and it more often than not fails to function. This
has been a problem in almost all government offices partly due to unqualified operators and
partly poorly functioning machines. Improving on the training of staff, the computerization of
the tax administration and its effectiveness will definitely improve the resource mobilization
outcome; introduction of a computerized system is underway but it has to be expedited to
bring about noticeable changes;
Fourth, a related capacity imperative of staff is the seemingly incompatible benefit package of
staff and the asset size that they decide on. It is appreciated how difficult it is to make a policy
that takes into account the relative pay in a government structure, the incentive compatibility
of a benefit package in a specific activity and its budgetary implications for the overall salary
structure. But all these have to appreciate the inherent incentive incompatible employee
reward system. For instance, an employee is paid few thousands a month but decides on
whether to levy taxes worth million every day. This inherently creates a temptation for both
the client and the staff to find a mutually rewarding arrangement since the consequences are
minimal at best (losing a job that pays few thousands a month, at worst).This seems to suggest
that, the stick and carrot approach has to be carefully examined to make sure the setup is
incentive compatible if resource mobilization is to continue and more importantly improve its
performance.
Fifth, equity issues are important in the Ethiopian tax system, but the prevalence of
exemptions (as was stated in relation to the VAT) complicates the effectiveness of tax
administration and resource allocation. This also makes the equity issue less targeted and
creates some loop-holes in the process. It is therefore more effective if the equity related
issues are more targeted than addressed using exemptions since it both distorts resource
allocation and complicates the tax administration thereby hampering revenue mobilization.

42

Sixth, the inability of the financial sector (particularly banking) to integrate is an important
constraint for resource mobilization. As noted the number of private banks recently increased
but the inter-bank linkages and efficiency between them is still inadequate. This is
demonstrated by the recent increases in minimum capital requirement from 200 million to 500
million which creates an entry barrier; the spread between the deposit rate and the lending rate
(lending rate is more than twice the deposit rate); the negative real interest because the
inflation rate almost always exceeds the nominal at least the deposit rate; and almost absent
facility to make direct interbank transfers or money market transactions regardless of the
proximity of the banks / branches concerned. Among the branches of the same bank are slow,
though slightly improved due to the recent branch-networking that just started. The
competition and efficiency of the financial /banking sector needs to greatly improve for the
sake of effective resource mobilization.
Seventh, Ethiopia has a scattered and farm based rural economy both in geographic sense and
composition of activities. Small farm households and even more fragmented non-farm
households in the rural areas are not easy to tax or coordinate their fragmented activities to
optimize economies of scale. It is, therefore a challenge to both maximize available resources
and coordinate an optimal investment schemes. But most importantly, a fragmented rural
economy is difficult to effectively administer taxes partly due to its low income level and its
amenability for tax evasion. Hence tax compliance in economies dominated by small,
fragmented and poor households like that of Ethiopia is a major challenge.

Eighth, another challenge is related to the fragmented to the low infrastructure facilities of a
rural based economy is its low out reach of financial services. Modern financial services need
close proximity of dwellings and some level of information symmetries to facilitate deposit,
loan and other transactions. Therefore, in addition to trust and literacy, physical proximity and
easy access supported by adequate infrastructure is crucial in enhancing an effective resource
mobilization. Absence and /or inadequate of such facilities is therefore another challenge in
economies like Ethiopia.
.
Ninth, in addition to being fragmented, another challenge in mobilizing resources is the share
of the informal sector in the economy. Due to the unrecorded and an accounted nature of the
43

informal sector, it is difficult to mobilize resources from the informal sector. The destination,
size of economic activity and ownership structure is difficult to identify. And since the
informal sector both in the rural and urban areas in Ethiopia is presumed a significant portion
of the economy, it is a serious challenge to mobilizing resources.
Tenth, Low savings rates, a general lack of awareness and financial literacy, and inadequate
consumer protection are also other challenges. It is a challenge to mobilize savings in a
subsistence economy as low income implies, other things being equal, low saving. In addition
to low income, lack of exposure, trust and understanding of modern financial services is a
challenge since most people in rural areas and even in small towns depend /channel their
assets in the form of durable assets which are less liquid and hence not easy to mobilize for
investment purposes. It takes time to build the trust in the modern financial system, educate
on the public benefits of tax collection, and other collective benefits that need individual
contributions.

Eleventh, lack of effective investment guidelines as well as limited capacity to implement

investment strategies also limits the ability of urban dwellers in mobilizing sufficient
investable resources.

Conclusions

The main key issues that would be drawn as conclusions of the study could be summarized as
follows: the size and overall trends of domestic resource mobilization in the areas of revenue
generation and saving accumulation, the improvements made in mobilizing domestic
resources and that there is a long way to go to tap the huge potential, the capacity constraints
in resource mobilization efforts and the scope and opportunity costs of the leakages through
illicit financial flows.
First, the recent improvements in resource mobilization both in public finances (saving and
revenue generation) and private saving (of households and firms) is encouraging.
Particularly, the improvements in tax collection efforts and household saving are significant.
These should be strengthened and deepened to ensure the reliability of domestic resources and
limit the dependence on foreign sources in financing development;
Second, The governments effort to use the mobilized resources for socially productive and in
an inclusive manner is appreciable. It utilized the mobilized resources to improve social and
44

economic wellbeing of citizens. As noted in the allocation of government expenditures, the

government focused on health, education and infrastructure expenditures in general and on
pro-poor expenditures in particular;
Third, due to the complicated nature of the leakage of financial flows, a proven and reliable
device may not exist to eliminate it, but coherent, aggressive and practical mechanisms should
be devised to limit and discourage capital flight. This has been a significant leakage from the
system from a country with limited means. Parallel to harnessing the potential domestic
resources, therefore, a concerted effort to minimize or attempt to eliminate the leakages must
be made;

Fourth, increasing an effective computerization of the tax collection administration;

Fifth, working towards minimizing the extent and organization of the informal sector such
that all transactions (particularly in the rural areas and small towns) are recorded;

Improve the interbank money transactions instead of banks operating as bridgeless

islands;

Further, to limit the rigidity and the existing inefficiency the recently starting teller
machines (with both deposing and withdrawing option) should be further encouraged
and to increase the availability of such facilities. coverage areas; more automation
facilities will definitely facilitate better mobilization of financial resources;

Make the tax system clear and easy to implement such that it avoids ambiguity among
implementers and the general public;

The staff should be equipped with the required qualifications and are rewarded and
with commensurate pay package attached to consequences so that their engagement is
incentive compatible to minimize corrupt behaviour.

Sixth, government should devise policies that would boost healthy competition among the
financial / banking institutions so that the banks and private household sectors could
effectively mobilize resources (i.e. eliminate the entry barriers, negative real interest rates
etc);
Seventh, efforts to tap the potential of the huge Ethiopian Diaspora have recently increased
and have showed some positive results. But as noted in terms of its contribution in
participating the purchase of Diaspora bonds, the contribution is less than that of other
countries experiences and in terms of the size of the Diaspora. Additional effort that
45

transcends any political differences is required to maximize the potential. The governments
effort has not been consistent in trying to convince the Diaspora why it has a stake in building
the country beyond supporting their immediate families, however important that might be;
this is better harnessed with initiatives that could be viewed as politically neutral like the
Renaissance Dam and by creating a closer network rather than the arms-length approach
which seems to have been followed.
Eighth, not enough is known regarding the extent to which an effort is made to repatriate what
has leaked as illicit financial flows due to the hidden and sensitive nature of the activity. But
the government has to make a concerted effort to repatriate what has leaked both to recoup
such a substantial amount and to discourage future activities using what is internationally
accepted means of what called money laundering, tax evasion or other international
agreements, norms and protocols. That is, an analysis of the legal and political procedures of
any attempt to repatriate what has already crossed the border is beyond the scope of this
paper, but efforts to close loop-holes in the process and making arrangements with partner
countries should be given priority.

46

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