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.
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.
Rwanda enjoys strong economic growth, high rankings in the World Bank’s Ease of Doing Business Index, and a reputation for low corruption. The Government of Rwanda (GOR) has undertaken a series of policy reforms intended to improve Rwanda’s investment climate and increase foreign direct investment (FDI). In 2018, the GOR implemented additional reforms to decrease bureaucracy in construction permitting, improve the timely provision of electricity, and reduce customs processing times for exporters. The GOR also introduced online certification processes for certificates of origin and phytosanitary approvals. The country presents a number of FDI opportunities, including: manufacturing, infrastructure, energy distribution and transmission, off-grid energy, agriculture and agro-processing, low cost housing, tourism, services, and information and communications technology (ICT). The Investment Code includes equal treatment between foreigners and nationals with regard to certain operations, free transfer of funds, and compensation against expropriation; this treatment is reinforced in the 2008 U.S.-Rwanda Bilateral Investment Treaty (BIT). .
According to the National Bank of Rwanda (BNR), the country’s Central Bank, Rwanda attracted USD 342.2 million in FDI inflows in 2016 (the most recent data available), representing 4 percent of gross domestic product (GDP). Rwanda had a total USD 1.68 billion of FDI stock in 2016, the latest year data is available. In 2018, the Rwanda Development Board (RDB) reported registering more than USD 2 billion in new investment commitments, mainly in manufacturing, mining, agriculture, and agro-processing, 47 percent of which were FDI. In pursuit of Rwanda’s goal to become a regional hub for tourism, services, and logistics, the GOR has plans for a number of high-profile infrastructure projects, including Kigali Innovation City in Kigali’s Special Economic Zone (SEZ), which will accommodate technological universities and companies working in the tech sector. Construction of Kigali Innovation City is ongoing, with the new campus of Carnegie Mellon University Africa set to open in 2019. Construction of Bugesera International Airport began in 2017, with completion of the first phase planned for 2021, although delays are probable. The GOR is also discussing a rail line to connect with Tanzania.
In February 2019, Standard and Poor’s affirmed Rwanda’s “B/B-” long and short-term foreign and sovereign credit ratings. The GOR has developed an export promotion program called “Made in Rwanda.” This campaign seeks to diversify exports, ease exchange rate pressure, and reduce the country’s trade deficit. Government public debt has rapidly increased over the past few years to more than 50 percent of GDP, but most of these loans are on highly concessionary terms. A 2017-2018 investor perception survey by the International Finance Corporation (IFC) found that the majority of existing large companies in Rwanda have plans to invest further in the country. According to the same survey, the most frequently perceived obstacles for current company growth are: access to working capital, shortage of qualified labor, tax levels, tax predictability, and lack of reliable electricity and water (particularly for mining and manufacturing). In the same report, investors suggested that RDB should focus more on after-care services and improving coordination among government institutions.
Many companies report that although it is easy to start a business in Rwanda, it can be difficult to operate a profitable or sustainable business due to a variety of hurdles and constraints. These include the country’s landlocked geography and resulting high freight transport costs, a small domestic market, limited access to affordable financing, payment delays with government contracts, and inconsistent enforcement of laws and regulations. Government interventions designed to support overall economic growth can significantly impact investors, with some expressing frustration that they were not consulted prior to the abrupt implementation of government policies and regulations that affected their business. A number of investors have said that tax incentives included in deals signed by RDB are not honored by the lead tax agency, the Rwanda Revenue Authority (RRA). Similarly, some investors stated that Rwanda’s immigration authority does not always honor the employment and immigration commitments of investment certificates and deals. Some investors reported difficulties in registering patents and having rules against infringement of their property rights enforced in a timely manner. There are neither statutory limits on foreign ownership or control, nor any official policies that discriminate against foreign investors, though some complain about competition from state-owned enterprises (SOEs) and ruling party-aligned businesses.
General labor is available, but Rwanda suffers from a shortage of skilled workers, including accountants, lawyers, electricians, and technicians. Higher institutes of technology, private universities, and vocational institutes are improving. The establishment of Carnegie Mellon University Africa and the opening of a regional Andela office could boost the supply of qualified software developers in the coming years. While electricity and water supply have improved, businesses may continue to experience intermittent outages, especially during peak times, due to distribution challenges. Some investors report difficulties in obtaining foreign exchange from time-to-time, which may be caused by the country running a persistent trade deficit.
Rwanda promotes women and gender equality in all walks of life. Rwanda pioneered a number of projects to promote women entrepreneurs. Both men and women have equal access to investment facilitation and protections.
Table 1: Key Metrics and Rankings
- According to the National Institute for Statistics for Rwanda (NISR), GDP per head in current USD was USD 787 in 2018
- According to BNR, stock of U.S. FDI in the country stood at USD 87.4 million in 2016, however many American investments are via subsidiaries from third countries
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
Uganda’s investment climate continues to present both important opportunities and major challenges for U.S. investors. With a market economy, ideal climate, ample arable land, young and largely English-speaking population, and at least 1.4 billion barrels of recoverable oil, Uganda offers numerous opportunities for investors. Uganda’s Gross Domestic Product (GDP) grew by 6.3 percent in fiscal year (FY) 2017-2018, and the International Monetary Fund expects nearly the same growth rate in 2018-2019. Uganda maintains a liberal trade and foreign exchange regime. Foreign Direct Investment (FDI) grew by nine percent in FY 2017-2018, powered by increased equity investment, infrastructure spending, and investment in the oil and gas sector. Uganda’s power, agricultural, construction, infrastructure, technology, and healthcare sectors present important opportunities for U.S. business and investment. President Yoweri Museveni and Ugandan government officials vocally welcome foreign investment in Uganda.
The government’s actions sometimes do not support its rhetoric, however. Closing political space, poor economic management, endemic corruption, growing sovereign debt, and the government’s failure to invest adequately in the health and education sectors or give a voice to its burgeoning young population all create risks for investors. U.S. firms may also find themselves competing with third country firms that cut costs and win contracts by disregarding environmental regulations and labor rights, dodging taxes, and bribing officials. Shortages of skilled labor and a complicated land tenure system also impede investment.
An uncertain mid-to-long-range political environment also increases risk to foreign businesses and investors. In February 2019, the government arrested and deported four top executives of a leading foreign-owned telecommunications company on spurious charges of treason and maintaining connections to a leading opposition politician. The government also levied a seemingly arbitrary charge for renewal of the company’s operating license. These types of actions could increase in the run- up to 2021 elections as the 34-year incumbent president faces new challengers, with a resultantly chilling effect on foreign investment.
On the legislative front, a new 2019 investment law introduces some new protections and incentives, but also includes vague language about minimum investment thresholds and performance requirements. Early analysis suggests that two new taxes on social media and mobile money transactions, largely seen by analysts as regressive, are affecting financial inclusion and technological innovation.
Table 1: Key Metrics and Rankings