Ethiopia set out – and in large measure achieved – a very ambitious program of economic and social development under its Growth and Transformation Plan (GTP-I). The scale of public sector involvement was very large: for the five-year Plan period, it called for budgetary government spending and public enterprise off-budget spending of 41% of GDP, more than half of which was to come from budgetary resources. As Ethiopia prepares for the second version of its GTP (GTP-II), it must confront a fiscal numbers problem: Ethiopia’s tax share of GDP under GTP-I reached only the12%-13%level, and revenue flows from official international assistance are shrinking. This paper dissects the financing challenge that Ethiopia must meet to achieve its goal of becoming a middle income country. It concludes that only export-led manufacturing in a context of a major expansion of the number of active formal enterprises coupled with best practice performance in all other areas related to revenue generation will square the circle of Ethiopia’s development financing challenge.
