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In 1991, the new Government of Ethiopia faced a triple fiscal challenge. First, a major effort was required to overhaul and modernize the tax system. Second, the need to switch expenditure from military to civilian uses had to take place within a potentially severely reduced resource total. The severity of the general financing problem was however ameliorated by a rise in aid flows. Third, there was the political imperative to press on with the process of fiscal decentralization that was the necessary accompaniment to political decentralization. The present government has, for the most part, been quite impressive in macroeconomic policy, fiscal reform and public expenditure management. It has embarked on a radical decentralization programme and an ambitious civil service reform. Its record on privatization has been mixed, and privatization has proceeded at a much slower pace than elsewhere in sub-Saharan Africa.

For many low-income countries, there has been an extended period in which fiscal policy was not a choice, or was a choice made by authorities external to the country. For a number of them, this situation is now changing. Their own success in stabilising the economy, coupled with a shift in the stance of the international community (most notably the IMF), has placed fiscal choices back on the domestic agenda. However, the scope for choice may be heavily circumscribed by the legacy of past fiscal laxity. There are two challenges to the domestic fiscal authority in these circumstances. First they must gauge how best to manage the transition from the immediate post-stabilisation period to the longer term (post-post-stabilisation). Second, they must see how these longer term fiscal choices can best accommodate the requirements of preserving macroeconomic stability with the encouragement of growth and poverty reduction.