Lake Ayalew, minister of Revenues, moved to address complaints about inflationary distortions on capital gains taxes. Last month, the Minister instructed five branches in Addis Abeba and six regional offices to consider inflation when assessing the tax on transactions of shares with companies.

The new rule makes no adjustments to the tax rate, but it reduces the amount of taxable income significantly. It slashes dues owed to the government when shareholders and property owners transfer their assets to buyers. The rule ends the previous practice where officers tax "illusory gains" exaggerated by high inflation.

Taxes on income, profits and capital gains account for nearly a third of federal tax revenues.

Since he took the helm at the Ministry two years        ago, Lake has faced mounting pressure from a decline in federal revenues, in contrast to mounting public expenditure. Tax officials collected 309 billion Br over the first 11 months of the fiscal year. Federal authorities expect to mobilise 480 billion Br next year, covering 61pc of the 786.6 billion Br budget bill table to lawmakers last month.

Lake, who once served as deputy president of the Amhara Regional State, is tasked with executing the administration's plan to collect 2.6 trillion Br in taxes over 10 years and boost the tax-to-GDP ratio to around 20pc. It is an ambitious target, as Ethiopia's ratio has been continuously declining for the last decade, dropping to nine percent last year. It is nearly half the 17pc average for Sub-Saharan Africa.

The adjustment on the taxable amounts from capital gains is to be determined based on an index prepared by the Ministry of Finance. In 2019, its officials introduced the capital gains tax on the sale of shares over their par value. Gains from the sale of shares are subject to a 30pc tax, while the rate for earnings from the transfer of properties held by businesses is half this amount.

The directive had sent shockwaves to companies and shareholders alike. They have since been lobbying against capital gains tax, arguing it discourages investment and savings, as well as limits capital flow.

"Growing complaints from start-ups, share companies, and financial institutions led the Ministry to take the measure,” said a tax expert at the Revenues Ministry who requested anonymity.

Experts believe Lake's latest move will respond to inflationary distortions and returns on long-term investments.

Million Kibret is a managing partner at BDO Consulting Plc, an investment advisory services, taxes and accounting. He foresees that the adjustment can encourage capital accumulation by the private sector.

Nonetheless, inflationary pressure in the economy remains a pressing issue. High inflation erodes consumers’ purchasing power and gives rise to distortions that expose asset owners to higher losses while settling capital gains tax. Year-on-year inflation for May was registered at 36.6pc, five-fold to the interest rate banks pay depositors.

Million believes taking inflation into account is crucial to encourage foreign direct investment. It grew rapidly in the five years beginning in 2012 and reached 4.1 billion dollars in 2017. However, it has been shrinking since. According to official figures, Ethiopia attracted 2.4 billion dollars in FDI over the first three quarters of this year.