30/07/2025
Money, Myths, and Meaning: A Conversation on Taxation and Government Spending in Ethiopia
By Kebour Ghenna
Here in Ethiopia, where goats still outnumber bank ATMs and the shadow of the IMF looms large over our economy, a curious myth lives on. It is repeated in parliamentary speeches, media commentary, and coffeehouse chatter alike: that government services – -schools, hospitals, roads – are all graciously funded by “taxpayers’ money.”
It sounds noble. Democratic. Even responsible. But it’s also – how shall we say this gently? – completely upside down.
As if the government were a struggling corner shopkeeper, anxiously counting coins before daring to buy a broom.
No, dear reader. The Ethiopian government, like any sovereign government with its own currency, doesn’t need your money before it can spend. It creates Birr by pressing a few keys at the National Bank. It spends first. It taxes later.
Don’t believe me? Perhaps this little parable will help.
Take time and go over an imaginary conversation between Senior Policy Manager (Ato Deressa) and a new recruit (Hasabe)
Hasabe: Sir, I’ve heard that we need more taxes to pay for hospitals, schools, and roads. But people say the government is running out of "taxpayers’ money." Is that really how it works?
Ato Deressa: It’s a common belief – but technically, it’s not accurate. The Ethiopian government creates every single Birr it spends before collecting it in taxes. That’s how sovereign currency systems work.
Hasabe: Wait… you’re saying the government doesn’t need taxpayers' money to spend?
Ato Deressa: Precisely. The government spends before it taxes. When the government wants to build a road, for example, it instructs the National Bank of Ethiopia to make payments to a contractor. That payment, those Birrs, are created electronically by the central bank at the government's instruction.
Hasabe: So taxes don’t fund government spending?
Ato Deressa: Not in the way most people think. Taxes don’t fund spending – -they follow spending. The government needs to tax not to get money, but to make sure too much money doesn’t stay in the economy, which could drive up inflation.
Hasabe: So what’s the point of tax then?
Ato Deressa: Good question. Taxes are essential, but for different reasons:
1. They control inflation by reclaiming money that the government has injected into the economy.
2. They give value to the currency – you need Birr to pay taxes, so you have to use the national currency.
3. They shape economic behavior – taxation can discourage harmful activities (like pollution) and encourage useful ones.
4. They redistribute wealth, depending on how the tax system is designed.
Hasabe: But if the government can create money, why not just print what it needs and stop taxing people altogether?
Ato Deressa: Because printing too much money without removing some of it through taxation leads to inflation. Think of it like watering a plant – too little and it wilts, too much and it drowns. The economy needs the right balance.
Hasabe: But the government says it needs to cut spending and raise taxes because it’s broke. Isn’t that because it’s borrowed too much?
Ato Deressa: What’s often called “being broke” is usually a political choice, not a technical one. Yes, Ethiopia has debt issues, especially in foreign currency. But domestically, we’re never out of Birr. What matters is how we use our spending capacity to build a productive economy.
Hasabe: Then why do we hear so much about austerity?
Ato Deressa: Austerity is often based on the assumption that the government budget works like a household budget. But a government with monetary sovereignty has a very different toolkit. Unfortunately, powerful institutions like the IMF still push for “fiscal discipline,” even if it undermines growth and hurts vulnerable people.
Hasabe: So what should our policy focus be instead?
Ato Deressa: We should focus on building economic capacity – invest in public services, education, health, and local production. Tax the ultra-wealthy and the idle capital. Strengthen supply chains. And stop pretending that the problem is "not enough tax revenue" when the real issue is underutilized national capacity.
Hasabe: That’s a lot to take in…
Ato Deressa: True. But remember this: Every Birr the government spends was created by the government. Taxes don’t fund spending –-they make spending sustainable. Understanding that changes everything.
Hassabe: One last question, can the government just print money to pay civil servants more?
Ato Deressa: Ah, the eternal question: “Why can’t the government just print money and give teachers, doctors, and civil servants the raise they deserve?” After all, we’ve just established that the Ethiopian government, like any sovereign government with its own currency, creates every Birr it spends. So what’s stopping it?
The short answer is: yes, it can – but it must do so wisely.
Government spending, including paying salaries, doesn’t have to be “funded” by taxes in advance. The government issues the Birr by instructing the National Bank to make payments. But just because it can create money doesn’t mean it should create too much, too fast, without considering the impact on the broader economy.
Here’s the key:
When the government spends, it adds money to the economy. If the economy is already running at full capacity, meaning all factories are busy, all food is bought, all homes are occupied, then more money chasing the same goods leads to price increases, and that can be inflationary.
But when there’s underutilized capacity, idle workers, unused resources, or unmet social needs, then new money, wisely directed, can stimulate growth without triggering inflation. That’s the situation Ethiopia is in today.
So if the government gives a well-deserved raise to its teachers and health professionals – people who, let’s be honest, are struggling on poverty-line wages – and if that raise goes into local markets, food purchases, transportation, school fees, rent – it immediately circulates and stimulates demand. That’s not inflationary, that’s common sense economics.
The government should also consider:
• Productivity: Are we supporting sectors that increase long-term capacity (education, health, infrastructure)?
• Leakages: Is the money staying in the local economy or being lost to imports and corruption?
• Tax Structure: Are we taxing idle wealth and waste, not just salaries and consumption?
So, What’s the Real Problem?
Well, the problem isn’t that the government can’t afford to pay its workers more. The problem is that too many policymakers still act like Ethiopia is a household, instead of a sovereign issuer of its own currency. They’re afraid of headlines about inflation or IMF disapproval. But failing to invest in public servants is a slow poison for any society, and a false economy.
So yes, Ethiopia can give its teachers, doctors, and civil servants the dignity of a living wage, not by reckless money printing, but by strategic, responsible investment in the people who keep the country running.
After all, what’s the point of having monetary sovereignty if you’re too afraid to use it?
Do you agree with Ato Deressa, or are you still holding tight to the coin purse? Should we be rethinking how we talk about taxation, austerity, and national development?
Let’s hear your view.
