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Diplomacy in Action

2011 Investment Climate Statement - Ethiopia


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness to Foreign Investment

In November 2010, the Ethiopian Parliament approved a five-year Growth and Transformation Plan (GTP). The GTP envisages an annual Gross Domestic Product (GDP) growth base case scenario of 11% and a high case growth scenario of 14.9%. Improving the quality of social services and infrastructure, ensuring macroeconomic stability, and enhancing productivity in agriculture and manufacturing are major objectives of the plan. Ethiopia will need massive inflows of foreign direct investment to even approach its ambitious GTP goals. The GTP puts a significant emphasis on developing local production so the country becomes less dependent on imported goods. Ethiopia continues to encourage investment in the export-oriented sectors of textiles/garments, leather/leather products, cut flowers, fruits and vegetables, and agro-processing areas.

The World Bank's Doing Business indicators ranked Ethiopia at 104 out of 183 countries in 2010, holding its ground from the 2009 ranking of 103. The country rated relatively well in terms of starting a business, obtaining construction permits, amount of taxes paid, and the closing of a business.

In October 2010, the International Monetary Fund (IMF) issued Ethiopia's Second Review of the Arrangement under the Exogenous Shocks Facility (ESF). In this report, the IMF cited good progress for Ethiopian in terms of macroeconomic stability and growth momentum. The Ethiopian government stated in its October 2010 public report that it is committed to meeting the structural reforms proposed by the IMF. The government also reported its commitment to preserving low external public debt and improving the quality of its macroeconomic statistics.

The government has eliminated most of the discriminatory tax, credit and foreign trade treatment of the private sector, simplified administrative procedures, and established guidelines regulating business activities. Foreign investors do not face unfavorable tax treatment, denial of licenses, discriminatory import or export policies, or inequitable tariff and non-tariff barriers. Although bureaucratic hurdles continue to affect project implementation, the Ethiopian Investment Agency (EIA) has improved its services and provides an expedited "one-stop shop" service that has significantly cut the time and cost of acquiring investment and business licenses. A business license can be obtained in one day if all requirements are met. A foreign investor intending to buy an existing private enterprise or buy shares in an existing enterprise needs to obtain prior approval from the EIA. EIA has newly designed website at: http://www.ethioinvest.org.

The Public-Private Dialogue Forum (PPDF), a joint consultative forum between the private sector and the government, is scheduled to hold its first meeting in early 2011. The private sector will be represented by the Ethiopian Chamber of Commerce and Sectoral Associations (ECCSA) and the government by the Ministry of Trade (MOT). The PPDF will serve as a forum for businesses to openly discuss the challenges and opportunities of doing business in Ethiopia. Despite this recent breakthrough for the private sector, state-owned enterprises and ruling party-owned entities dominate many sectors of the economy.

Ethiopia's World Trade Organization (WTO) accession process has been underway since 2003. Ethiopia submitted a Memorandum of Foreign Trade Regime to the WTO Secretariat in December 2006, sent replies to the first round of WTO member questions in January 2007, and held its first working party meeting in May 2008. In March 2009, Ethiopia submitted its replies to a second round of questions. The scheduling of the second working party meeting has been subject to extensive procedural delay, but is expected to be held in early 2011.

In 2009, the Ethiopian government shifted its agricultural policy focus towards encouraging private investment (both domestic and foreign) in larger-scale commercial farms. The Ministry of Agriculture (MOA) created a new Agricultural Investment Support Directorate that is currently negotiating long-term leases (all land is owned by the government) on over 7 million acres of land for these commercial farms. The new Directorate's goal is to boost productivity, employment, technology transfer, and foreign exchange reserves by offering incentives to private investors. The program, even in its early stages, has encountered some protests from individuals and groups claiming interests in land to be made available to new investors.

Rampant power outages forced factories and businesses to cease operations for several days per week in 2009 and 2010. Power supply improved in 2010, but power transmission lines proved incapable of transferring the energy supply to the end user and some hydro power dams were unable to operate at full capacity. The Ministry of Water and Energy (MOWE) is actively seeking additional investment in Ethiopia's energy sector as it has ambitious plans to export electricity to neighboring countries. MOWE is specifically interested in renewable energy sources and is finalizing a draft feed-in tariff bill which will establish the rates and conditions for independent power producers to sell electricity to the national grid.

In January 2009, the first American Chamber of Commerce (AmCham) in Ethiopia was established to enhance the bilateral trading relations between the two countries. AmCham currently has about 72 members.

The revised Investment Code of 1996 provided incentives for development-related investments, reduced capital entry requirements for joint ventures and technical consultancy services, created incentives in the education and health sectors, permitted the duty-free entry of capital goods (except computers and vehicles), opened the real estate sector to foreign investors, extended the losses carried forward provision, and cut the capital gains tax from 40% to 10%.

The 1998 and 2002 amendments to Ethiopia's Investment Proclamation further liberalized the investment regime and removed most of the remaining restrictions. The remaining state-controlled sectors include telecommunications, power transmission and distribution, postal services with the exception of courier services, and passenger air service using aircraft with more than 20 seats. Manufacturing of weapons and ammunitions and provision of telecommunications services can only be undertaken as joint ventures with the government.

Ethiopia's investment code prohibits foreign investment in banking, insurance, and financial services. Other areas of investment reserved for Ethiopian nationals include: broadcasting; air transport services; travel agency services, forwarding and shipping agencies; retail trade and brokerage; wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their locally-produced products); most import trade; export trade of raw coffee, chat, oilseeds, pulses, hides and skins bought from the market; live sheep, goats and cattle not raised or fattened by the investor; construction companies excluding those designated as grade 1; tanning of hides and skins up to crust level; hotels (excluding star-designated hotels); restaurants and bars (excluding international and specialized restaurants); trade auxiliary and ticket selling services; transport services; bakery products and pastries for the domestic market; grinding mills; hair salons; clothing workshops (except garment factories); building and vehicle maintenance; saw milling and timber production; custom clearance services; museums, theaters and cinema hall operations; and printing industries. Ethiopian-Americans can obtain a local resident card from the Ministry of Foreign Affairs that allows them to invest in many sectors closed to foreigners. Foreign firms can supply goods and services to Ethiopian firms in the closed sectors.

The minimum capital requirement of foreign investors is $100,000 per project for wholly-owned foreign investments and $60,000 for joint investments with domestic investors. The minimum capital required of foreign investors in the areas of engineering, architectural, accounting and auditing services, business and management consultancy services, and publishing is $50,000 for wholly-owned foreign investment; and $25,000 for joint ventures undertaken with domestic partners. A foreign investor reinvesting profits/dividends or exporting at least 75% of the output will not be required to meet minimum capital requirements or the 27% equity requirement of local partners in joint ventures.

The Ethiopian government established a Trade Practices Commission in April 2003 as an investigative commission accountable to the Ministry of Trade and Industry. This Commission was designed to promote a competitive business environment by regulating anti-competitive, unethical, and unfair trade practices to enhance economic efficiency and social welfare. Some of the Commission's powers include: investigating complaints by aggrieved parties; compelling witnesses to appear and testify at hearings; and searching the premises of accused parties. The Trade Practices law was amended in 2010 in efforts to increase the effectiveness of the Commission and overall consumer protection. As a result, the government is in the process of establishing a new body, the Trade Practice and Consumers Protection Authority (TPCPA).

Nearly all tenders issued by the Ethiopian government's Privatization and Public Enterprises Supervising Agency (PPESA) are open to foreign participation. In some instances, the government prefers to engage in joint ventures with private companies rather than sell an entire entity. The government has sold approximately 260 public enterprises since 1994. Most of these enterprises were small enterprises in the trade and service sectors. About 18 of these enterprises were privatized in 2010 and close to 80 public enterprises remain under PPESA control.

Foreign investors have complained about the abrupt cancellation of some government tenders, a perception of favoritism toward Chinese vendors, and a general lack of transparency in the procurement system. In September 2009, the government established a new public procurement and property administration agency. This agency is an autonomous government organ, has its own judicial arm, and is accountable to the Ministry of Finance and Economic Development. The government established this new agency in order to achieve better transparency, efficiency, fairness, and impartiality in public procurement processes and to ensure that the government achieves the maximum benefit from public property use.

The Ethiopian government cites FY 2009/10 (fiscal year ending July 7, 2010) Gross Domestic Product (GDP) growth at 10.4%, while the International Monetary Fund (IMF) and the World Bank estimate it at 7% to 8%. According to the government, Ethiopia's economy has grown at an average of 11% during the past five years.

Foreign exchange reserves have improved in the past two years, but Ethiopia continues to endure a foreign exchange crisis. Reserves dropped to one month of import coverage in December 2008, but have recovered to 2.1 months of import coverage. Reserves have not completely stabilized due to Ethiopia's widening trade deficit. Ethiopia's total imports were $8.4 billion for FY 2009/10 due to a heavy reliance on imported petroleum and machinery products. On the other hand, Ethiopia's exports totaled only $2.0 billion in the same year, creating a trade deficit of $6.4 billion.

Ethiopia has been battling high inflation in recent years. Year-on-year inflation peaked at 64% in July 2008--the second highest in Sub-Saharan Africa after Zimbabwe--but it has declined to 10.2% as of November 2010. In efforts to combat inflation, the Ethiopian government enacted various measures beginning in late 2008, including: capping the lending limits of banks; reducing government borrowing from domestic banks; eliminating the domestic fuel price subsidy; depreciating the local currency; importing wheat and selling at subsidized prices; and lifting import duties on food imports. The lending limit on banks is expected to be lifted soon.

Ethiopian Airlines (EAL) now offers daily direct flights between Addis Ababa and Washington Dulles airport on new Boeing 777 aircraft. EAL joined the Star Alliance in September 2010 and is negotiating a code share agreement with several Star Alliance member airlines.

Ethiopia's ranking on various indices:


Measure

Year

Index/Ranking

TI Corruption Index

2010

2.7/116th out of 178 countries

Heritage Economic Freedom

2011

50.5/144th out of 179 countries

World Bank Doing Business

2010

104th out of 183 countries

MCC Gov’t Effectiveness

2011

0.50/85th percentile

MCC Rule of Law

2011

0.15/58th percentile

MCC Control of Corruption

2011

0.06/58th percentile

MCC Fiscal Policy

2011

-2.5/47th percentile

MCC Trade Policy

2011

65.6/41st percentile

MCC Regulatory Quality

2011

-0.29/34th percentile

MCC Business Start Up

2011

0.985/92nd percentile

MCC Land Rights Access

2011

0.634/60th percentile

MCC Natural Resource Mgmt

2011

52.47/27th percentile


Conversion and Transfer Policies

All foreign currency transactions must be transferred through Ethiopia's central bank, the National Bank of Ethiopia (NBE). The local currency (Birr) is not freely convertible. In 2004, the NBE issued a directive that allows non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin to establish and operate foreign currency accounts up to $50,000.

Ethiopia's Investment Proclamation allows all foreign investors, whether or not they receive incentives, to remit freely profits and dividends, principal and interest on foreign loans, and fees related to technology transfer. Foreign investors may also remit proceeds from the sale or liquidation of assets, from the transfer of shares or of partial ownership of an enterprise, and funds required for debt service or other international payments. The right of expatriate employees to remit their salaries is granted in accordance with NBE foreign exchange regulations. While these transfers are legally allowed, foreign companies face significant delay in the repatriation of profits, as the NBE does not have enough hard currency to allocate to this process. Banks started rationing foreign currency during 2008 on a priority basis, given preference to the state-driven growth in construction, transport, and communication as well as domestic food and agricultural subsidization programs. Many foreign investors continue to face delays in importing equipment and spare parts and businesses must apply for foreign exchange for imports at least six-to-nine months in advance of their intended need.

On September 1, 2010 the government devalued the local currency Birr by 20% (in local currency terms). The Ethiopian government depreciated the Birr over 90% against the U.S. Dollar between 2006 and 2010. In January 2011, the Birr traded at 16.57 per U.S. Dollar. The rate offered in the illegal parallel market made a marked divergence from the official rate starting in 2005, but the spread between the rates narrowed after the government significantly depreciated the Birr in 2009 and enforced a crackdown on illegal currency dealers. The parallel market exchange rate was approximately 17.30 Birr per U.S. Dollar in January 2011.

In December 2009, the Proclamation on Prevention and Suppression of Money Laundering and the Financing of Terrorism became effective. This legislation created a financial intelligence unit (FIU), but the FIU has not yet become operational.

Investors are now required to pay state-owned Ethiopian Shipping Lines (ESL) with foreign exchange.

Expropriation and Compensation

Per Ethiopia's 1996 Investment Proclamation and subsequent amendments, assets of a domestic investor or a foreign investor, enterprise or expansion cannot be nationalized wholly or partly, except when required by public interest and in compliance with the laws and payment of adequate compensation. Such assets may not be seized, impounded, or disposed of except under a court order.

The Derg military regime nationalized many properties in the 1970s. The current government's position is that property seized "lawfully" by the Derg (i.e., by court order or government proclamation published in the official gazette) remains the property of the state. In most cases, property seized by oral order or other informal means is gradually being returned to lawful owners or their heirs through a lengthy bureaucratic process. Claimants are required to pay for improvements made by the government during the time of its control over the property. Ethiopia's Privatization and Public Enterprises Supervising Agency (PPESA) stopped accepting requests from owners of these formerly expropriated properties in July 2008. U.S. citizens are still involved in negotiating the return of some of these properties seized by the Derg with the Ethiopian government.

In recent years, U.S. citizens have reported threatened or actual property expropriation by the government and are involved in ongoing contractual investment disputes with the federal government and regional governments. There are also complaints against the government by U.S. companies of unlawful contract termination and non-transparent tender award processes.

Dispute Settlement

According to the Investment Proclamation, disputes arising out of foreign investment that involve a foreign investor or the state may be settled by means agreeable to both parties. A dispute that cannot be settled amicably may be submitted to a competent Ethiopian court or to international arbitration within the framework of any bilateral or multilateral agreement to which the government and the investor's state of origin are contracting parties.

Investors involved in disputes have expressed a lack of confidence in the judiciary to objectively assess and resolve disputes. Ethiopia's judicial system is overburdened, poorly staffed and inexperienced in commercial matters, although efforts are underway to strengthen its capacity. There is significant government influence and intervention into legal proceedings, particularly those related to government entities or officials. While property and contractual rights are recognized and there are commercial and bankruptcy laws, judges often lack understanding of commercial matters and case scheduling suffers from extended delays. The Ethiopian government recently created a separate court specifically to speed up the processing commercial cases; however, arbitration still appears to be the most efficient means of dispute resolution. The Addis Ababa Chamber of Commerce has an Arbitration Center dedicated to assist those with the arbitration process. There is no guarantee that the award of an international arbitral tribunal will be fully accepted and implemented by Ethiopian authorities. Ethiopia has signed, but never ratified, the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Performance Requirements and Incentives

The 2003 amendment to the Investment Proclamation outlines the investment incentives for investors in specific areas. New investors engaged in manufacturing, agro-processing activities, or the production of certain agricultural products and who export at least 50% of their products or supply at least 75% of their product to an exporter as a production input, are exempt from income tax for five years. An investor who exports less than 50% of his product or supplies his product only to the domestic market is income tax exempt for two years. Investors who expand or upgrade existing enterprises and export at least 50% of their output or increase production by 25% are eligible for income tax exemption for two years. An investor who invests in the relatively under-developed regions of Gambella, Benishangul Gumuz, South Omo, Afar or Somali Region will be eligible for an additional one-year income tax exemption. An investor who exports hides and skins after processing only up to crust level will not be entitled to the income tax incentive.

The government has established a special loan fund through the Development Bank of Ethiopia (DBE) and made available land at low lease rates for priority export areas such as floriculture, leather goods, textiles and garments, and agro-processing related products. An investor can borrow up to 70% of the cost of the project from this special fund without collateral upon presenting a viable business plan and 30% personal equity.

Investors are allowed to import duty-free capital goods and construction materials necessary for the establishment of a new enterprise or for the expansion of an existing enterprise. In addition, spare parts worth 15% of the value of the capital goods can be imported duty-free. This privilege may not be granted if comparable capital goods or construction materials can be produced locally and have competitive prices, quality, and quantity. Imported duty-free capital goods can no longer be used as loan collateral. In 2010, travel agencies/tour companies were granted increased duty-free privileges for the importation of goods such as vehicles.

The Ministry of Agriculture's (MOA) Agricultural Investment Support Directorate offers grace periods of up to seven years on land rents. The Directorate is currently focused on land deals in the remote regions of Gambella, Benishangul Gumuz, Southern Nations, and Afar.

In July 2008, the Ethiopian government introduced an export tariff of up to 150% on raw and semi-processed hides and skins in an effort to shift domestic production to focus more on higher-value finished leather, hides and skins. In October 2010, the Ethiopian government applied similar exorbitant export tariffs on raw cotton in order to force more locally-produced cotton into the bourgeoning domestic textile industry. In January 2011, the Ethiopian government put price controls in effect for 18 commodities aimed at addressing "unhealthy market competition," according to Prime Minister Meles Zenawi. The commodities affected include: bread, meat, sugar, fruit, vegetables, beer, and imported products including milk powder and rice.

Ethiopia does not have discriminatory or excessively onerous visa, residence, or work permit requirements for foreign investors; however, investors may face bureaucratic delays in obtaining these documents.

Right to Private Ownership and Establishment

Both foreign and domestic private entities have the right to establish, acquire, own and dispose of most forms of business enterprises.

There is no right of private ownership of land. All land is owned by the state and can be leased for up to 99 years.

Protection of Property Rights

Secured interests in property are protected and enforced, although all land ownership remains in the hands of the state. Certain residents have been relocated (and usually compensated) when the government decides that the land they are living on should be used for a road or other public use. Land leasehold regulations vary in form and practice by region. Mortgages are uncommon as loan terms are generally quite short.

Ethiopia has yet to sign a number of major international intellectual property rights (IPR) treaties, such as: the Paris Convention for the Protection of Industrial Property; the World Intellectual Property Organization (WIPO) copyright treaty; the Berne Convention for Literary and Artistic Works; and the Patent Cooperation Treaty. The Ethiopian Intellectual Property Rights Office (EIPO) has been tasked primarily to protect Ethiopian copyrighted materials and pirated software. Generally, EIPO has weak capacity in terms of manpower and law enforcement. In addition, a number of businesses, particularly in the tourism and service industries, operate in Ethiopia freely using well-known trademarked names or symbols without permission.

Transparency of Regulatory System

Ethiopia's regulatory system is generally considered fair, though there are instances in which burdensome regulatory or licensing requirements have prevented the local sale of U.S. exports, particularly health-related products. Government ministries often pass decisions and associated paperwork to various ministries before any decision is finalized. In many cases, this paperwork gets stuck in one ministry and no decision is made.

The government is in the process of establishing a new accounting standards body. According to the draft legislation, the new National Accounting and Audit Board (NAAB) would have the power to accredit accounting and auditing firms as well as oversee financial reporting standards of both private and public enterprises. The central bank has already issued a directive for all banks and insurance companies to adhere to International Financial Reporting Standards (IFRS) in 2011.

Investment, business, and other licenses for foreign investors can now be obtained from the Ethiopian Investment Agency in a matter of hours.

Proposed national laws are generally circulated for public comment prior to enactment.

Efficient Capital Markets and Portfolio Investment

Access to finance is an impediment to increased private investment. While credit is available to investors on market terms, the 100% collateral requirement limits the ability of some investors to take advantage of business opportunities. In addition, due to current inflationary concerns, the National Bank of Ethiopia (NBE) (central bank) does not allow commercial banks to lend above their current limits.

Ethiopia currently has fifteen banks--three state-owned and twelve privately-owned. Six more private banks are under formation but not yet licensed. Foreign banks are not permitted to provide financial services in Ethiopia. The state-owned Commercial Bank of Ethiopia owns 42% of the $0.9 billion in total capital of the banking sector (as of end March 2010 using exchange rate of 13.4 Birr/U.S. Dollar). Due to the NBE's recently-imposed stringent supervision, the commercial banks' non-performing loan ratio is declining and below 15%.

Ethiopia does not have a securities market, although the government is drafting private share trading legislation to better regulate the private share market.

The NBE controls the bank minimum deposit rate, which now stands at 5%, while loan interest rates are allowed to float. Real interest rates have been negative in recent years mainly driven by high inflation. The government offers a limited number of 28 days, 3-month, and 6-month Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate. The yields on these T-bills are 1% and below. This market remains unattractive to the private sector and over 95% of the T-bills are held by the state-owned Commercial Bank of Ethiopia.

The Ethiopia Commodity Exchange (ECX) was launched in 2008 and currently offers trades of commodities such as coffee, sesame seeds, maize, wheat, and haricot beans. The government launched ECX to increase transparency in commodity pricing, alleviate food shortages, and encourage the commercialization of agriculture.

Competition from State-Owned Enterprises

State-owned enterprises and ruling party-owned entities dominate major sectors of the economy. There is state monopoly or state-run dominance in sectors such as telecommunications, power, banking, insurance, air transport, shipping, and sugar. Ruling party-affiliated "endowment" companies have a strong presence in the ground transport, fertilizer, and textile sectors. Both state-owned enterprises and "endowment" companies dominate the cement sector.

State-owned enterprises have considerable advantages over private firms, particularly in the realm of Ethiopia's regulatory and bureaucratic environment, including ease of access to credit and speedier customs clearance. Local business owners as well as foreign investors complain of the lack of a level playing field when it comes to state-owned and party-owned businesses. While there is no report of credit advancement to these entities, there are indications that they receive incentives such as priority foreign exchange allocation, preferences in government tenders, and marketing assistance. Ethiopia's publishes aggregate financial data of state-owned enterprises, but detailed information is not including in the national budget.

Corporate governance of state-owned enterprises is structured and monitored by a board of directors composed of senior government officials and politically-affiliated individuals. In 2010, the Ethiopian government "corporatized" state-owned enterprise Ethiopian Telecommunications Corporation (ETC) by turning over 50% of its management to France-Telecom per a two-year contract. As part of this process, a new company, Ethio Telecom (ET), is being formed to replace ETC.

Corporate Social Responsibility

Some larger international companies have introduced corporate social responsibility (CSR) programs; however, most local companies do not practice CSR. There is a movement to develop CSR programs by the Ministry of Industry in collaboration with the World Bank, U.S. Agency for International Development, and others. The Ethiopian Chamber of Commerce, in cooperation with regional chambers, is also creating awareness on generally accepted CSR principles.

Political Violence

Ethiopia has been relatively stable and secure for investors. Insurgents operating in the Somali Region of Ethiopia have warned investors against exploring oil or natural gas resources in this area. In April 2007, the Ogaden National Liberation Front (ONLF) attacked Chinese and Ethiopian workers at an oil exploration site which was surrounded by military forces. Over 70 workers were killed in this attack. In 2010, a British oil worker was killed in the Somali Region.

The May 2010 national election was peaceful and resulted in the ruling party Ethiopian People's Revolutionary Democracy Front (EPRDF) and affiliates capturing 99.6% of all seats in the federal and regional parliaments. There were numerous claims of voter intimidation and coercion of opposition party candidates and members in the run up to the 2010 election.

In 2009, the Ethiopian government passed an Antiterrorism Proclamation granting executive branch-controlled security services virtually unlimited authority to take unilateral action to disrupt suspected terrorist activities. Terrorist activities are broadly defined in the legislation and could be used to define political activities.

Corruption

Ethiopia ratified the United Nations (UN) Anticorruption Convention in 2007.

The UN Investment Guide to Ethiopia (2004) asserted that routine bureaucratic corruption is virtually non-existent in Ethiopia. The guide added that bureaucratic delays certainly exist, but are not devices by which officials seek bribes.

Transparency International’s 2010 Corruption Perceptions Index, which measures perceived levels of public sector corruption ranked Ethiopia as 2.7 out of 10 (with 0 indicating “highly corrupt” and 10 indicating “very clean”). Ethiopia's corruption perception rating has continued to improve over the past few years after spiking in the aftermath of the 2005 elections. Ethiopia ranked 116th out of 178 rated countries in 2010.


The Ministry of Justice and the Federal Ethics and Anti-Corruption Commission (FEACC) are charged with combating corruption. Since its establishment, the Commission has arrested many officials on charges of corruption, including managers of the Privatization Agency, Ethiopian Telecommunications Corporation, National Bank of Ethiopia, Ethiopian Geological Survey, the state-owned Commercial Bank of Ethiopia, and private businessmen. In 2010, there were several arrests of businessmen for alleged tax evasion.

It is a criminal offense to give or receive bribes, and bribes are not tax deductible.

Bilateral Investment Agreements

Ethiopia has bilateral investment and protection agreements with China, Denmark, Italy, Kuwait, Malaysia, Netherlands, Russia, Sudan, Switzerland, Tunisia, Turkey, Yemen, Spain, Algeria, Austria, UK, Belgium/Luxemburg, Libya, Egypt, Germany, Finland, India, and Equatorial Guinea and a protection of investment and property acquisition agreement with Djibouti. A Treaty of Amity and Economic Relations, which entered into force in 1953, governs economic and consular relations with the United States. Ethiopia also has double taxation treaties with thirteen countries, including Italy, Kuwait, Romania, Russia, Tunisia, Yemen, Israel, South Africa and Sudan. There is no double taxation treaty between the U.S. and Ethiopia despite interest of the growing U.S.-Ethiopian business community in having one.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has offered risk insurance and loans to U.S. investors in Ethiopia in the past, but has not originated any investment in Ethiopia in recent years. In 2007, OPIC established the Enterprise Development Network (EDN)--an alliance between OPIC and the private sector--to help source and process small business deals.

Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

Approximately 85% of Ethiopia's 80 million people work in subsistence agriculture. The Ethiopian government and armed forces are the most important sectors of employment outside of agriculture. Approximately 40% of the urban workforce is unemployed. The high urban underemployment is partially offset by an informal economy. According to a May 2006 International Labor Organization (ILO) survey, the informal sector constitutes 70% to 80% of the workforce.

Ethiopia has ratified all eight core ILO conventions. The Ethiopian Penal Code outlaws work specified as hazardous by ILO conventions. The Ethiopian Parliament ratified ILO Convention 182 on the Worst Forms of Child Labor in May 2003.

According to the 2010 Index of Economic Freedom (produced by the Heritage Foundation), Ethiopia scored a 61.5 out of 100 for labor freedom, just below the world average. The index rating states “relatively rigid labor regulations [in Ethiopia] hinder employment and productivity growth. The non-salary cost of employing a worker is very low, but firing unneeded or poorly performing employees is difficult. Restrictions on work hours are inflexible.”

Ethiopia generally enjoys labor peace. There was one formal labor strike in 2010. The right to form labor associations and engage in collective bargaining is constitutionally guaranteed for many workers, but excludes managerial employees, teachers, and civil servants. Although the constitution and law provide workers with the right to strike to protect their interests, detailed provisions make legal strike actions difficult to carry out. During the past year, there was no reported government interference in trade union activities.

Child labor is widespread in Ethiopia. While not a pressing issue in the formal economy, child labor is common in rural agrarian areas and the informal economy in urban areas. Both NGO and Ethiopian government sources concluded that goods produced (in the agricultural sector and traditional weaving industry in particular) via child labor are largely intended for domestic consumption, and not slated for export. Employers are statutorily prohibited from hiring children under the age of 14. There are strict labor laws defining what sectors may hire "young workers," defined as workers aged 14 to 18, but these laws are infrequently enforced.

Labor remains readily available and inexpensive in Ethiopia. Skilled manpower, however, is scarce in many fields. Ethiopia's illiteracy rate is over 60%. There is no national minimum wage standard.

Foreign Trade Zones/Free Trade Zones

There are no areas designated as foreign trade zones and/or free ports in Ethiopia. Because of the 1998-2000 Ethiopian-Eritrean war, Ethiopian exports and imports through the Eritrean port of Assab are prohibited. As a result, Ethiopia conducts almost all of its trade through the port of Djibouti with some trade via the Somaliland port of Berbera and Sudan's Port Sudan. Despite Ethiopia's efforts to clamp down on small-scale trade of contraband, unregulated exports of coffee, live animals, chat (a mildly narcotic amphetamine-like leaf), fruit and vegetables, and imports of cigarettes, alcohol, textiles, electronics and other consumer goods continues.

Foreign Direct Investment Statistics

Foreign direct investment (FDI) flows into Ethiopia have gradually increased in the last few years. According to estimates by the National Bank of Ethiopia, it increased from $150 million in 2005 to $1.1 billion in 2010. Floriculture, horticulture, textile, and leather are the sectors that have attracted the most FDI. Recently, commercial farming has attracted Indian, Saudi, European, and U.S. investors. According to the Ethiopian Investment Agency, the stock of U.S. foreign direct investment since 1993 in Ethiopia reached nearly $1 billion as of December 2010, which includes both projects under implementation and operation.

U.S. companies with a presence and participation in Ethiopia's economy include (either through direct presence or licensing/distribution agreement): Boeing, Coca-Cola, Pepsi-Cola, Caterpillar, John Deere, Proctor & Gamble, Johnson & Johnson, Ford, Mack Trucks, General Motors, Ernst & Young, Radisson, Sheraton, Hilton, Motorola, Microsoft, IBM, Cessna, Bell Helicopters, Perkins, Massey Ferguson, Case III, 3M, Lucent Technologies, Cisco, Federal Express, United Parcel Service, Rank/Xerox Corporation, Cargill, Navistar, and Hughes Network.



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