Transparency of the 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. Investment decisions can involve multiple government ministries lengthening the registration and investment process.
The government engages the public for feedback before passage of draft legislation through public meetings, and regulatory agencies request comments on proposed regulation from stakeholders.
Most laws are available online: http://www.hopr.gov.et/web/guest/122 and https://chilot.me/federal-laws/2/.
In 2011, Ethiopia’s central bank, the National Bank of Ethiopia (NBE), issued a directive for all banks and insurance companies to adhere to International Financial Reporting Standards (IFRS).
Foreign investors have complained about the abrupt cancellation of some government tenders, a perception of favoritism toward vendors who provide concessional financing, and a general lack of transparency in the procurement system. In September 2009, the government established the Public Procurement and Property Administration Agency, an autonomous entity with its own judicial arm accountable to the Ministry of Finance and Economic Cooperation. Ethiopia participated in the U.S. Global Procurement Initiative, to improve the government procurement system.
A 2017 regulation requires the Auditor General’s office to directly identify irregularities in the procurement process. The regulation provides for criminal charges against officials involved in procurement irregularities. Those who are found to have knowingly signed off on falsified or incorrectly prepared documents will be punished with a 10-15 year prison sentence and a fine between ETB 25,000 to ETB 35,000.
Ethiopia is a member of UNCTAD’s international network of transparent investment procedures. Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal bases justifying the procedures.
International Regulatory Considerations
Ethiopia is a member of Common Market for Eastern and Southern Africa (COMESA), a regional economic block, which has 19 member countries and it has introduced 10% tariff reduction on goods imported from member states. However, Ethiopia has not yet joined the COMESA free trade area.
Ethiopian standards have a national scope and applicability and some of them which are related to human health and environmental protection are referred by Ethiopian regulations to be mandatory standards. The Ethiopian Standards Agency is the national standards body of Ethiopia.
Legal System and Judicial Independence
Ethiopia’s civil law as well as criminal law are codified and it has written commercial and contractual law. According to the contractual law, the contract agreement between contracting parties shall be taken as law between the parties. If there is any dispute between the parties, the case can be taken to the court. There is no specialized court in Ethiopia’s court structure, but there are specialized benches both at the Federal and state courts for criminal as well as civil matters.
There are allegations of executive branch interference in judiciary if a case has political implications, but there is no evidence of interference on purely commercial disputes. The country has a procedural code for civil and criminal court but the practice is minimal. Enforcement actions are appealable and there are at least three appealing processes from the lower to the supreme court. If the appealing body thinks that there is error of law on judge’s ruling, he/she can appeal to the Cassation Division of the Federal Supreme Court. The Criminal Procedure Code follows the inquisitorial system of adjudication.
Companies that operate businesses in Ethiopia assert that the courts lack adequate experience and staffing, particularly with respect to commercial disputes. While property and contractual rights are recognized, with respect to commercial and bankruptcy laws judges often lack understanding of commercial matters and cases can face extended scheduling delays. Contract enforcement remains weak, though Ethiopian courts will at times reject spurious litigation aimed at contesting legitimate tenders.
Ethiopia is in the process of reforming the Commercial Code to bring it in line with international best practices. The draft legislation appears to address many concerns raised by the business community, including creation of a commercial court under the regular court system to improve the expertise of judges in business practices as well as increase the speed with which commercial disputes can be resolved.
Laws and Regulations on Foreign Direct Investment
The following industrial sectors have been designated priorities: textiles and garments, leather and leather products, sugar and sugar-related products, cement, metals and engineering, chemicals, pharmaceuticals, renewable energy, and agro-processing. Investments in those areas receive tax and duty incentives as established in Proclamation 769/2012.
A 2014 amendment to the Investment Proclamation authorizes the EIC to adjudicate appeals submitted by foreign and domestic investors. The EIC Investment Board is empowered to authorize the granting of new or additional incentives other than those outlined under the regulations and to authorize foreign investment in areas otherwise exclusively reserved for domestic investors, if the exception is in the national interest. The EIC's website (http://www.investethiopia.gov.et/) outlines the government's focus sectors, registration processes, and provides regulatory details for investors.
The revised Commercial Registration and Business Licensing Proclamation eliminates some cumbersome and duplicative requirements, like the yearly renewal of business registrations and the minimum capital requirements to set up limited liability companies. The law removes the requirement to obtain a “competency certificate” except in technical sectors such as health and environment. The Proclamation now allows registration of franchises and holding companies.
Competition and Anti-Trust Laws
Ethiopia’s Trade Practice and Consumers Protection Authority (TPCPA), under the Ministry of Trade, is tasked with promoting a competitive business environment by regulating anti-competitive, unethical, and unfair trade practices to enhance economic efficiency and social welfare. In addition, the Authority provides market information on some goods to the public using print and electronic media.
There are no restrictions for foreign companies or foreign-owned subsidiaries in the areas open to foreign investments. The EIC reviews investment transactions for compliance with FDI requirements and restrictions as outlined by the Investment Proclamation and its amendments. However, companies have complained that state-owned enterprises receive favorable treatment in the government tender process. As the public sector is heavily involved in economic development, this translates into a sizeable portion of the open tenders.
Expropriation and Compensation
Per the 2012 Investment Proclamation, no investment by a domestic or foreign investor or enterprise can be expropriated or nationalized wholly or partly, except when required by public interest in compliance with the law and with payment of adequate compensation. Such investments may not be seized, impounded, or disposed of except under a court order.
The former Derg military regime nationalized many properties in the 1970s. The current government's position is that property seized lawfully by the Derg (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 the rightful owners or their heirs through a lengthy bureaucratic process. Claimants are required to pay for improvements made by the government during the time it controlled the property. Ethiopia's Ministry of Public Enterprises stopped accepting requests from owners for return of expropriated properties in July 2008.
ICSID Convention and New York Convention
Since 1965, Ethiopia has been a non-signatory member state to the International Centre for Settlement of Disputes (ICSID Convention), but has not ratified the convention on The Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).
Investor-State Dispute Settlement
According to the Investment Proclamation, any investor shall have the right to lodge complaints related to his investment with the appropriate investment organ. If he/she has a grievance against the decision of the appropriate investment organ, he/she can appeal to the investment board or to the concerned regional organ as appropriate. However, if a dispute arises between foreign investors and the state, it will be settled based on the relevant bilateral investment treaty.
Due to an overloaded court system, dispute resolution can last for years. According to the 2017 World Bank’s Ease of Doing Business report, it takes on average 530 days to enforce contracts through the courts.
International Commercial Arbitration and Foreign Courts
While disputes can be resolved by international arbitration at the agreement of both parties, enforcement is contingent on the Ethiopian court system. Both foreign and domestic investors involved in disputes have expressed a lack of confidence in the judiciary to objectively assess and resolve investment disputes. Ethiopia's judicial system is overburdened, poorly-staffed and inexperienced in commercial matters, although efforts are underway to strengthen its capacity. 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 Addis Ababa Chamber of Commerce has an Arbitration Center to assist with arbitration. There is no guarantee that the award of an international arbitral tribunal will be accepted and implemented by Ethiopian authorities.
The Ethiopian Commercial Code (Book V) outlines bankruptcy provisions and proceedings and confirms that the Ethiopian court system has jurisdiction over bankruptcy filings and proceedings subject to international conventions. The primary purpose of the law is to protect creditors, equity shareholders and other contractors. Bankruptcy is not criminalized. In practice, there is limited application of bankruptcy procedures due to lack of knowledge on the part of the private sector.
According to the 2017 World Bank Doing Business Report, Ethiopia stands at 120 in the ranking of 190 economies with respect to resolving insolvency. Ethiopia’s score on the strength of insolvency framework index is 7.0 out of 16. (The index ranges from 0 to 16 with higher values indicating insolvency legislation that is better designed for rehabilitating viable firms and liquidating nonviable ones).