Ethiopia
Executive Summary
Over the last year, Ethiopia has undertaken unprecedented economic and political reforms. The new Ethiopian government, led by Prime Minister (PM) Abiy Ahmed, who was sworn in on April 2, 2018, announced at the outset its plan to democratize the country, reform the economy, and increase private sector participation. Early in his tenure, PM Abiy addressed some of the public’s numerous longstanding grievances, including: ending the State of Emergency imposed by the government prior to his ascension; closing a notorious detention center; releasing thousands of detained individuals; restoring mobile internet throughout the country; retiring members of the political “old guard,” who were perceived as in the way of reform; and, reframing the government’s posture towards opposition parties.
On the economic front, the new administration is working to partially or wholly privatize major state-owned enterprises (SOEs) in the telecom, aviation, power, sugar, railway, and industrial parks sectors. In addition, the Government of Ethiopia (GOE) lifted a restriction on the logistics sector and enacted a law that allows Public Private Partnerships (PPP) to gradually open up some sectors of the economy to foreign investors. Ethiopia’s rapprochement with Eritrea could possibly open up alternative ports for trade. Furthermore, the country recently ratified the African Continental Free Trade Area Agreement and eased visa requirements for African Union member countries with the goal of enhancing regional trade and tourism and attracting foreign direct investment (FDI). The GOE announced its commitment to modernize the financial sector, improve the ease of doing business, and enhance macroeconomic and fiscal management.
Ethiopia’s economy is currently in transition. Coming off a decade of double-digit growth, fueled primarily by public infrastructure projects funded through debt, the GOE has tightened its belt, reducing inefficient government expenditures, putting a moratorium on most new government mega-projects, and attempting to get its accounts in order at bloated state-owned enterprises (SOEs). The IMF put the growth of the Ethiopian economy at 7.7 percent for FY2017/18 and is projecting an 8.5 percent annual growth rate for the medium term. Ethiopia is the second most populous country in Africa after Nigeria, with a population of over 100 million, approximately two-thirds of whom are under age 30. Low-cost labor, a national airline with 105 passenger connections, and growing consumer markets are key elements attracting foreign investment.
Ethiopia’s imports in the last year have experienced a slight decline in large part due to a reduction in public investment programs and a dire foreign exchange shortage. Distressingly, export performance remains weak, declining due to falling primary commodity prices and an overvalued exchange rate. The acute foreign exchange shortage (the Ethiopian birr is not a freely convertible currency) and the absence of capital markets are choking private sector growth. Companies often face long lead-times importing goods and dispatching exports due to logistical bottlenecks, high land-transportation costs, and bureaucratic delays. Ethiopia is not a signatory of major intellectual property rights treaties.
All land in Ethiopia belongs to “the people” and is administered by the government. Private ownership does not exist, but “land-use rights” have been registered in most populated areas. The GOE retains the right to expropriate land for the “common good,” which it defines to include expropriation for commercial farms, industrial zones, and infrastructure development. Successful investors in Ethiopia conduct thorough due diligence on land titles at both the state and federal levels, and undertake consultations with local communities regarding the proposed use of the land. The largest volume of foreign direct investment (FDI) in Ethiopia comes from China, followed by Saudi Arabia and Turkey. Political instability associated with various ethnic conflicts could negatively impact the investment climate and lower future FDI inflow.
Table 1
Kenya
Executive Summary
Kenya has a positive investment climate that has made it attractive to international firms seeking a location for regional or pan-African operations. In the World Bank’s 2019 Doing Business report, Kenya moved up 19 places, ranking 61 of 190 economies reviewed. In the last three years, it has jumped 47 places on this index. Year-on-year, Kenya continues to improve its regulatory framework and its attractiveness as a destination for foreign direct investment. Corruption, however, remains endemic and Transparency International’s (TI) 2018 Global Corruption Perception Index ranked Kenya 144 out of 180 countries, one place lower than in 2017. Kenya has strong telecommunications infrastructure, a robust financial sector, and extensive aviation connections throughout Africa, Europe, and Asia. In 2018, Kenya Airways initiated direct flights to New York City in the United States. Mombasa Port is the gateway for the majority of East African trade and Kenya’s membership in the East African Community (EAC), as well as other regional trade blocs, provides growing access to larger regional markets.
In 2018, Kenya took steps to improve its business environment, including passage of the Tax Laws (amended) Bill (2018) and the Finance Act (2018), establishing new procedures and provisions relating to income taxes, value-added taxes, and excise duties. In 2017, Kenya instituted broad business reforms: simplifying registration procedures for small businesses; improving access to credit information; reducing the cost of construction permits; enhancing electricity reliability; easing the payment of taxes through the iTax platform; and establishing a single window system to speed movement of goods across borders.
Kenya’s macroeconomic fundamentals remain among the strongest in Africa, with five to six percent GDP growth over the past five years, six to eight percent inflation, improving infrastructure, and strong consumer demand from a growing middle class. A prolonged and acrimonious national election period during the second half of 2017 raised business anxiety and created a drag on growth but, following the elections, business and investment quickly recovered, and tourism was little affected by this turmoil. President Kenyatta has remained focused on his second term “Big Four” development agenda, seeking to provide universal healthcare coverage; establish national food security; build 500,000 affordable new homes; and increase employment by doubling the manufacturing sector’s share of the economy.
The World Bank’s annual Kenya Economic Update, released in April 2019, cited some short term economic risks to Kenya’s continued growth such as the interest rate cap inhibiting monetary policy and continuing drought conditions, but noted positive developments including the Government of Kenya (GOK) enhancing agricultural financing programs. At the same time, Kenya’s medium-term economic outlook appears strong especially in the agricultural sector. There has been great interest on the part of American companies to establish or expand their business presence and engagement in Kenya, especially following President Kenyatta’s August 2018 meeting with President Trump in Washington, D.C. Sectors offering the most opportunities for investors include: agro-processing, financial services, energy, extractives, transportation, infrastructure, retail, restaurants, technology, health care, and mobile banking.
Table 1
Mozambique
Executive Summary
The once-promising Mozambican economy, which had seen steady 8 percent growth for many years, skidded into economic crisis following the revelation of USD 2 billion in illicit government debt in 2016, causing the IMF to cancel a second tranche of its standby credit facility and donors to suspend direct budget support. In 2016, economic growth rates fell to 3.5 percent, the local currency– the metical– devalued by over 40 percent against the U.S. dollar, and inflation rates climbed above 20 percent. Through decisive actions, the Central Bank was able to stabilize the currency and reduce inflation rates to the single digits. Devastated by Cyclones Idai and Kenneth in 2019, the IMF revised Mozambique’s economic growth forecasts down to 1.8 percent in 2019 and 6 percent in 2020, with growth accelerating to near 10 percent after 2023 with the advent of liquefied natural gas (LNG) exports. Two consortiums led by ExxonMobil and Anadarko are expected to take final investment decisions (FID) in 2019, which would eventually lead to more than USD 50 billion in investment to the LNG sector in Mozambique.
The country still faces significant security challenges related to violent extremism in Cabo Delgado province, the future home of the LNG investment. Since 2017, Islamic extremists have carried out more than 200 unprecedented attacks against government facilities and communities, killing scores of government security personnel and local villagers. The extremists, which claim affiliation with ISIS and claim to wish to establish an Islamic state, reject secular government, secular education, and gender equality. Most members of the extremist group appear motivated by local socio-economic grievances, income inequality, and perceptions of political favoritism and corruption.
Negotiations between the Government of Mozambique (GRM) and Renamo, the main opposition party, made significant progress towards a lasting peace. The two sides have agreed to a decentralization package, which was incorporated into the Mozambican Constitution by Parliament in May 2018, and will allow for the first time, the election of provincial governors during the October 2019 elections. The parties have also agreed in principle to the integration of Renamo personnel into leadership and working level positions in Mozambican security forces, and some critical appointments have already been made. With ongoing technical and financial support from the international community, a comprehensive plan for disarmament and demobilization of Renamo military personnel and their reintegration into local communities is being developed and is scheduled to be implemented prior to the October 2019 elections.
Mozambique offers the experienced investor the potential for high returns, but remains a challenging place to do business. Investors must factor in corruption, an underdeveloped financial system, poor infrastructure, and significant operating costs. Transportation inside the country is slow and expensive, while bureaucracy, port inefficiencies, and corruption complicate imports. Local labor laws remain an impediment to hiring foreign workers, even when domestic labor lacks the requisite skills. The financial crisis also impacted the GRM’s ability to secure financing for even the most critical infrastructure projects. Additionally, because of the economic crisis, inflation, and currency fluctuations, local Mozambican partners selling imported products in the local currency have trouble making payments in U.S. dollars to suppliers.
Natural gas development will drive economic growth in Mozambique, presenting many investment opportunities. There are also significant opportunities for investment in the power and infrastructure sectors, particularly related to the reconstruction after Cyclones Idai and Kenneth in Manica, Sofala, and Cabo Delgado provinces. The agriculture and tourism sectors remain underdeveloped relative to their potential, as do critical services sectors, such as the health care sector.
Table 1: Key Metrics and Rankings
Tanzania
Executive Summary
The United Republic of Tanzania enjoys a relatively stable political environment, reasonable macroeconomic policies, resiliency from external shocks, and debt relief. However, recently adopted Government of Tanzania (GoT) policies have raised questions about long-term prospects for foreign direct investment (FDI), and fostered a more challenging business environment. Tanzania slipped 12 spots in two years on the World Bank’s “Doing Business” rankings. Despite Tanzania’s GDP growth, 28.2 percent of the population lives below the GoT-determined poverty line and youth unemployment remains a problem. The IMF continues to warn of a slowdown in economic growth, and possible economic risks including private sector concerns about heavy-handed and arbitrary enforcement of rules; stagnated credit growth; poor budget credibility and implementation; and excessive domestic arrears.
In 2016, the GoT began a campaign to raise revenue, encourage the hiring of Tanzanian citizens over foreigners, and protect/grow local industry. These measures included new taxes in certain industries as well as aggressive collection by the Tanzania Revenue Authority (TRA) that some labeled as arbitrary and harassing. On the employment front, the GoT implemented labor regulations that make it more difficult to hire foreign employees, creating unclear bureaucratic standards. Finally, on the local industry front, the GoT continued to use increased tariffs and import and export bans as a stated, but ineffective way to protect/grow local industry.
The private sector continues to struggle with recent legislation that is vague and often punitive to the private sector. These laws increased the risk/cost of investing in broadly defined natural resources, primarily by removing rights to international arbitration and giving Parliament the unilateral right to rewrite undefined “unconscionable” contract terms. In addition, new mining local content laws strongly encourage the hiring of, contracting with, and partnering with Tanzanian companies or individuals. In 2019, in response to calls from local and international investors, as well as the World Bank and the IMF, the GoT renewed its efforts to engage in public private dialogue and address challenges in the business environment. President Magufuli named 2019 “the year of investment” and as such has made a number of high-profile remarks highlighting the importance of the private sector.
Profitable sectors for foreign investment in Tanzania have traditionally included agriculture, mining and services, driven by banking, construction, tourism, and trade. However, aggressive revenue raising measures and unfriendly investor legislation have made investment less attractive in recent years. Corruption, especially in government procurement, privatization, taxation, and customs clearance remains a concern for foreign investors, though the government has prioritized efforts to combat the practice. GoT plans for infrastructure development are expected to offer investment opportunities in rail, real estate development, and construction.
Compared to its many neighboring countries, Tanzania remains a politically stable and peaceful country, as well as a regional leader, including in the East African Community (EAC). Since November 2015, however, the government is placing increasing restrictions on political activity, including severely limiting the ability of opposition political parties and civil society organizations to debate issues publicly, or peacefully assemble. October 2015 general elections were conducted in a largely open and transparent atmosphere; however, simultaneous elections in Zanzibar were controversially annulled after an opposition candidate declared victory. A re-run election was boycotted by the opposition. By-elections in 2017 and 2018 were marred by allegations of irregularities and instances of political violence.
Table 1: Key Metrics and Rankings
Zambia
Executive Summary
The Republic of Zambia is a landlocked country in Southern Africa that shares its borders with eight countries: Angola, Democratic Republic of the Congo, Tanzania, Malawi, Mozambique, Zimbabwe, Botswana, and Namibia. The country has a population of 17.2 million and GDP per capita of USD 1,513, according to the World Bank.
The economy grew by 4 percent in 2018, meeting IMF projections, and inflation remained broadly stable and within the Bank of Zambia’s target range of 6-8 percent. Though the agriculture sector performed poorly in 2018 due to erratic rainfall, other sectors such as mining, energy (electricity generation), manufacturing, and financial services performed above expectations. The mining sector grew 6 percent, with copper production increasing above 850,000 metric tons (MT) in 2018 from 797,000 MT in 2017; electricity generation increased by 11.7 percent; manufacturing and financial sector growth was at 5 percent and 4 percent, respectively. Overall, GDP growth was better than expected, as many financial analysts did not expect the economy to achieve the 4 percent growth rate projected by the IMF in 2017, and the World Bank had revised its projections down to 3.6 percent.
Zambia’s large debt load remains a concern. Zambia’s external debt rose to USD 10.05 billion in 2018, up from USD 8.74 billion in 2017. The fiscal deficit ended 2018 at 7.6 percent of GDP, well above the 2018 target of 6.1 percent. This was mainly due to the increase in interest payments on Eurobond debt and service payments on foreign financed projects. Domestic arrears rose to K15.1 billion from K12.7 billion (approximately USD 1.3 billion and USD 1.2 billion, with respective exchange rates for 2018 and 2017). The kwacha also depreciated against the dollar by 22.4 percent in 2018, increasing the cost of external debt service. Investor appetite for domestic bonds continued to shrink, and short- and long-term domestic borrowing costs rose. Government austerity and fiscal consolidation remain key to ensuring that the macroeconomic fundamentals do not deteriorate further. Foreign exchange reserves stood at USD 1.59 billion at the end of 2018, representing 1.9 months of import cover. Reserves are projected to fall further in 2019, making Zambia vulnerable to outside shocks to its economy. In addition to debt sustainability concerns, erratic rainfall in the 2018/2019 growing season, with severe drought in certain areas, poses threats to agricultural output and electricity generation; eighty-five percent of the latter relies on hydroelectric dams. These challenges will constrain businesses looking to partner with the government on new projects.
Budget execution by the Government of the Republic of Zambia (GRZ) has historically been poor, with documented evidence of significant extra-budgetary spending. The IMF has delayed a much-anticipated USD 1.3 billion loan deal due to large-scale borrowing by, and lack of clarity on fiscal policies from, the government; the government requested the IMF recall the Resident Representative in August 2018, and as of early 2019 there did not appear to be substantive discussions on a new IMF program taking place.
Foreign direct investment (FDI) into Zambia to support structural transformation that can lead to domestic production of export-quality products remains low. FDI in the manufacturing sector eroded from 9.4 percent of total FDI in 2007 to 3.3 percent in 2017. Zambia recorded USD 310 million of FDI inflow by mid-year 2018, down from USD 329 million over the same time period for 2017. Large mining investments from Canada, Australia, UK, China, and the United States, in addition to large infrastructure and other projects performed almost entirely by Chinese companies, continue to dominate FDI flows.
The legal environment is generally conducive to U.S. investors, although there is a relatively small commercial presence of U.S. companies in Zambia. Agriculture and mining continue to be the headlining sectors of Zambia’s economy. While U.S. companies continue to incrementally grow their presence in the agricultural sector, new, large-scale agricultural investments remain elusive. Despite these challenges, interest from U.S. firms in new projects remains high, and could translate into growth in economic sectors beyond mining, such as tourism, power generation, and agriculture, particularly if the government continues with its plan to reduce or eliminate market-distorting subsidies.
In spite of broad economic reforms in the early 2000s, Zambia today confronts the challenge of diversifying its economy and accelerating private-led growth to address the poverty of its people. Cumbersome administrative procedures, unpredictability of legal and regulatory changes, lack of transparency in government contracting, the high cost of doing business due to poor infrastructure, the high cost of finance, inadequate human resources, and the lack of reliable electricity and internet service remain concerns.
Table 1