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Ethiopia

Executive Summary

Ethiopia’s economy is in transition. Coming off a decade of double-digit growth, fueled primarily by public infrastructure projects funded through debt, the Government of Ethiopia (GOE) has tightened its belt, reducing inefficient government expenditures and attempting to get its accounts in order at bloated state-owned enterprises (SOEs). Just in the last year, the GOE has also introduced a new and more liberal investment code, started the privatization process for the telecommunications monopoly, and eliminated numerous burdensome regulations. The IMF put the growth of the Ethiopian economy at 9 percent for FY2018/19, driven by manufacturing and services. While recent growth estimates have been revised downward due to the COVID-19 pandemic, growth prospects for Ethiopia remain better than those for most Sub-Saharan African nations. Ethiopia is the second most populous country in Africa after Nigeria, with a population of over 110 million, approximately two-thirds of whom are under age 30. Low-cost labor, a national airline with well over 100 passenger connections, and growing consumer markets are key elements attracting foreign investment.

The Government of Ethiopia (GOE) in September of 2019 unveiled its “Homegrown Economic Reform Plan” as a codified roadmap to implement sweeping macro, structural, and sectoral reform, with a focus on enhancing the role of the private sector in the economy and attracting more foreign direct investment. The ambitious three-year plan prioritizes growth in five sectors, namely mining, ICT, agriculture, tourism, and manufacturing. In December of 2019, the IMF approved a three-year, 2.9 billion U.S. dollar program to support the reform agenda. The program seeks to reduce public sector borrowing, rein in inflation, and reform the exchange rate regime.

The challenges remain vast. Ethiopia’s imports in the last three years have experienced a slight decline in large part due to a reduction in public investment programs and a dire foreign exchange shortage. 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 is administered by the government and private ownership does not exist. “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 regional 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
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 96 of 180 https://www.transparency.org/
country/ETH
World Bank’s Doing Business Report “Ease of Doing Business” 2020 159 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2019 111 of 129 https://www.globalinnovationindex.org/
gii-2018-report#
U.S. FDI in partner country (M USD, stock positions) 2018 $676 http://www.investethiopia.gov.et/
World Bank GNI per capita 2018 $790 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies towards Foreign Direct Investment

Ethiopia needs significant inflows of FDI to meet its ambitious growth goals. Over the past year, to attract more foreign investment, the government has passed a new investment law, ratified the New York Convention on Arbitration, and streamlined commercial registration and business licensing laws. The government has also started implementing the Public Private Partnership (PPP) proclamation (law), to allow for private investment in the power generation and road construction sectors.

The Ethiopian Investment Commission (EIC) has the mandate to promote and facilitate foreign investments in Ethiopia. To accomplish this task, the EIC is charged with 1) promoting the country’s investment opportunities to attract and retain investment; 2) issuing investment permits, business licenses, and construction permits; 3) issuing commercial registration certificates and renewals; 4) negotiating and signing bilateral investment agreements; 5) issuing work permits; and 6) registering technology transfer agreements. In addition, the EIC has the mandate to advise the government on policies to improve the investment climate and hold regular and structured public-private dialogue with investors and their associations. At the local level, regional investment agencies facilitate regional investment. Though Ethiopia has shown relative progress in two doing business indicators, specifically the ease of obtaining construction permits and registering property, its overall rank on the 2020 World Bank Ease of Doing Business Index was 159 out of 190 countries, which is the exact same ranking from 2018 and 2019. In order to improve the investment climate, attract more FDI, and tackle unemployment challenges, the Prime Minister’s Office formed a committee to systematically examine each indicator on the Doing Business Index and identify factors that inhibit businesses.

The American Chamber of Commerce (AmCham) works on voicing the concerns of U.S. businesses in Ethiopia. AmCham provides a mechanism for coordination among American companies and also facilitates regular meetings with government officials to discuss issues that hinder operations in Ethiopia. The Addis Ababa Chamber of Commerce also organizes a monthly business forum that enables the business community to discuss issues related to the investment climate with government officials by sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish, acquire, own, and dispose of most forms of business enterprises. A new Investment Proclamation, approved in early 2020, outlines the areas of investment reserved for government and local investors. There is no private ownership of land in Ethiopia. All land is owned by the state, but can be leased for up to 99 years. Small-scale rural landholders have indefinite use rights, but cannot lease out holdings for extended periods, except in the Amhara Region. The 2011 Urban Land Lease Proclamation allows the government to determine the value of land in transfers of leasehold rights, in an attempt to curb speculation by investors.

A foreign investor intending to buy an existing private enterprise or shares in an existing enterprise needs to obtain prior approval from the EIC. While foreign investors have complained about inconsistent interpretation of the regulations governing investment registration (particularly relating to accounting for in-kind investments), they generally do not face undue screening of FDI, unfavorable tax treatment, denial of licenses, discriminatory import or export policies, or inequitable tariff and non-tariff barriers.

Other Investment Policy Reviews

Over the past three years, the government has not undertaken any third party investment policy review by a multilateral or non-governmental organization. The government has worked closely with some international stakeholders, however, such as the International Finance Corporation, in its recent attempts to modernize and streamline its investment regulations.

Business Facilitation

The EIC has attempted to establish itself as a “one-stop shop” for foreign investors by acting as a centralized location where investors can obtain the visas, permits, and paperwork they need, thereby reducing the time and cost of investing and acquiring business licenses. The EIC has worked with international consultants to modernize its operations, and as part of its work plan has adopted a customer manager system to build lasting relationships and provide post-investment assistance to investors. Despite progress, the EIC readily admits that many bureaucratic barriers to investment remain. In particular, U.S. investors report that the EIC, as a federal organization, has little influence at regional and local levels. According to the 2020 World Bank’s Ease of Doing Business Report, on average, it takes 32 days to start a business in Ethiopia.

Currently, more than 95 percent of Ethiopia’s trade passes through the Port of Djibouti, with residual trade passing through the Somaliland Port of Berbera or Port Sudan. Ethiopia concluded an agreement in March of 2018 with the Somaliland Ports Authority and DP World to acquire a 19 percent stake in the joint venture developing the Port of Berbera. The agreement will help Ethiopia secure an additional logistical gateway for its increasing import and export trade. Following the July 2018 rapprochement with Eritrea, the Ethiopian government has investigated the opportunity of accessing an alternative port at either Massawa or Assab.

The Government of Ethiopia is working to improve business facilitation services by making the licensing and registration of businesses easier and faster, though online registration is not yet available. An amended commercial registration and licensing law eliminates the requirement to publicize business registrations in local newspapers, allows business registration without a physical address, and reduces some other paperwork burdens associated with business registration. U.S. companies can obtain detailed information for the registration of their business in Ethiopia from an online investment guide to Ethiopia: (https://www.theiguides.org/public-docs/guides/ethiopia ). Though the government is taking positive steps to socially empower women (approximately half of cabinet members are women), there is no special treatment provided to women who wish to engage in business.

The full Doing Business Report is available here: http://www.doingbusiness.org/data/exploreeconomies/ethiopia 

http://www.doingbusiness.org/data/exploreeconomies/ethiopia  http://www.doingbusiness.org/en/data/exploreeconomies/ethiopia#DB_sb 

http://www.doingbusiness.org/en/data/exploreeconomies/ethiopia#DB_sb 

Outward Investment

There is no officially recorded outward investment by domestic investors from Ethiopia as citizens/local investors are not allowed to hold foreign accounts.

2. Bilateral Investment Agreements and Taxation Treaties

Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA) and it has bilateral investment and protection agreements with Algeria, Austria, China, Denmark, Egypt, Germany, Finland, France, Iran, Israel, Italy, Kuwait, Libya, Malaysia, the Netherlands, Sudan, Sweden, Switzerland, Tunisia, Turkey and Yemen. Other bilateral investment agreements have been signed but are not in force with Belgium/Luxemburg, Brazil, Equatorial Guinea, India, Morocco, Nigeria, South Africa, Spain, the United Kingdom, and the United Arab Emirates. Ethiopia signed 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.

There is no double taxation treaty between the United States and Ethiopia. Ethiopia has such taxation treaties with fourteen countries, including Italy, Kuwait, Romania, Russia, Tunisia, Yemen, Israel, South Africa, Sudan, and the United Kingdom.

6. Financial Sector

Capital Markets and Portfolio Investment

Ethiopia has a limited and undeveloped financial sector, and investment is largely closed off to foreign firms. Liquidity at many banks is limited, and commercial banks often require 100 percent collateral, making access to credit one of the greatest hindrances to growth in the country. Ethiopia has the largest economy in Africa without a securities market, and sales/purchases of debt are heavily regulated.

The IMF, as part of its Extended Credit Facility and Extended Fund Facility, in December of 2019 approved a three-year, 2.9 billion U.S. dollar program to support Ethiopia’s economic reform agenda. The program seeks to reduce public sector borrowing, rein in inflation, and reform the exchange rate regime. In preparation for the program, Ethiopia rescheduled much of its external debt with significant bilateral lenders.

The Ethiopian government has announced, as part of its overall economic reform effort, its intention to liberalize the financial sector. The government has already made good progress by allowing non-financial Ethiopian firms to participate in mobile money activities, introducing Treasury-bill auctions with market pricing, and reducing forced lending to the government on the part of the commercial banks. Still, the creation of a stock market and the fuller participation of foreign financial firms in the sector likely remain years away.

The NBE began offering, in December of 2019, a limited number of 28-day and 91-day Treasury bills at market-determined interest rates. The move was part of an effort to expand the NBE’s monetary policy tools and finance the government in a more sustainable way. Previously, the NBE had only sold Treasury bills at below-market interest rates, and the only buyers were public sector enterprises, primarily the Public Social Security Agency and the Development Bank of Ethiopia.

Ethiopia issued its first Eurobond in December of 2014, raising 1 billion U.S. dollars at a rate of 6.625 percent. The 10-year bond was oversubscribed, indicating continued market interest in high-growth sub-Saharan African markets. According to the Ministry of Finance, the bond proceeds are being used to finance industrial parks, the sugar industry, and power transmission infrastructure. Due to its increasing external debt load and the terms of its IMF program, the Ethiopian government has committed to refrain from non-concessional financing for new projects and to shift ongoing projects to concessional financing when possible.

The Ethiopian Commodity Exchange (ECX), launched in 2008, trades commodities such as coffee, sesame seeds, maize, wheat, mung beans, chickpeas, soybeans, and green beans. The government launched ECX to increase transparency in commodity pricing, alleviate food shortages, and encourage the commercialization of agriculture. Critics allege that ECX policies and pricing structures are inefficient compared to direct sales at prevailing market rates, triggering an amendment to the ECX law in July 2017 that eliminated a number of criticized regulations, and permitted the trading of financial instruments at a future date.

Money and Banking System

Ethiopia has 18 commercial banks, two of which are state-owned banks, and 16 of which are privately owned banks. The Development Bank of Ethiopia, a state-owned bank, provides loans to investors in priority sectors, notably agriculture and manufacturing. By regional standards, the 16 private commercial banks are not large (either by total assets or total lending), and their service offerings are not sophisticated. Mobile money and digital finance, for instance, remain limited in Ethiopia. Foreign banks are not permitted to provide financial services in Ethiopia, however, since April 2007, Ethiopia has allowed some foreign banks to open liaison offices in Addis Ababa to facilitate credit to companies from their countries of origins. Chinese, German, Kenyan, Turkish, and South African banks have opened liaison offices in Ethiopia, but the market remains completely closed to foreign retail banks. Foreigners of Ethiopian origin are now allowed to hold shares in financial institutions.

Based on recently made available data, the state-owned Commercial Bank of Ethiopia mobilizes more than 60 percent of total bank deposits, bank loans, and foreign exchange. The NBE controls the bank’s minimum deposit rate, which now stands at 7 percent, while loan interest rates are allowed to float. Real deposit interest rates have been negative in recent years, mainly due to inflation. The government of Ethiopia in November of 2019 rescinded the so-called “27 percent Rule,” which mandated forced, below inflation rate lending by the commercial banks to the NBE.

Foreign Exchange and Remittances

Foreign Exchange

All foreign currency transactions must be approved by the NBE. Ethiopia’s national currency (the Ethiopian birr) is not freely convertible. The GOE removed in September 2018 the limit on holding foreign currency accounts faced by non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin.

Foreign exchange reserves started to become depleted in 2012 and have remained at critically low levels since then. At present, gross reserves stand at about 4 billion U.S. dollars, covering approximately 2 months of imports. According to the IMF, heavy government infrastructure investment, along with debt servicing and a large trade imbalance, have all fueled the intense demand for foreign exchange. In addition, the decrease in foreign exchange reserves has been exacerbated by weaker-than-expected earnings from coffee exports and low international commodity prices for other important exports such as oil seeds. Businesses encounter delays of six months to two years in obtaining foreign exchange, and they must deposit the full equivalent in Ethiopian birr in their accounts to begin the process to obtain foreign exchange. Slowdowns in manufacturing due to foreign exchange shortages are common, and high-profile local businesses have closed their doors altogether due to the inability to import required goods in a timely fashion.

Due to the foreign exchange shortage, companies have experienced delays of up to two years in the repatriation of larger volumes of profits. Local sourcing of inputs and partnering with export-oriented partners are strategies employed by the private sector to address the foreign exchange shortage, but access to foreign exchange remains a problem that limits growth, interferes with maintenance and spare parts replacement, and inhibits imports of adequate raw materials.

The foreign exchange shortage distorts the economy in a number of other ways: it fuels the contraband trade through Somaliland because the Ethiopian birr is an unofficial currency there and can be used for the purchase of products from around the world. Exporters, who have priority access to foreign exchange, sell their allocations to importers at inflated rates, creating a black-market for dollars that is roughly 30 to 40 percent over the official rate. Other exporters use their foreign exchange earnings to import consumer goods with high margins, rather than re-investing profits in their core businesses. Meanwhile, the lack of access to foreign exchange impacts the ability of American citizens living in Ethiopia to pay their taxes, or for students to pay school fees abroad.

The Ethiopian birr has depreciated significantly against the U.S. dollar over the past ten years, primarily through a series of controlled steps, including a 20 percent devaluation in September 2010 and a 15 percent devaluation in October 2017. The NBE increased the devaluation rate of the Ethiopian birr starting in November of 2019, and it has continued to be devalued at a more rapid rate since that time, as per the terms of the IMF program. The official exchange rate was approximately 33.60 Ethiopian birr per dollar as of May 2020. The illegal parallel market exchange rate for the same time was approximately 42 Ethiopian birr per dollar.

Following the 15 percent devaluation of the Ethiopian birr, the NBE increased the minimum saving interest rate from four percent to seven percent, and limited the outstanding loan growth rate in commercial banks to 16.5 percent, which limits their loan provision for businesses other than those in the export and manufacturing sectors. Moreover, banks were instructed to transfer 30 percent of their foreign exchange earnings to the account of NBE so the regulator can use the foreign exchange to meet the strategic needs of the country, including payments to procure petroleum, wheat, and sugar, as well as to cover transportation costs of imported items.

Ethiopia’s Financial Intelligence Unit monitors suspicious currency transfers, including large transactions exceeding 200,000 Ethiopian birr (roughly equivalent to U.S. reporting requirements for currency transfers exceeding 10,000 U.S. dollars). Ethiopia citizens are not allowed to hold or open an account in foreign exchange. Ethiopian residents entering the country from abroad should declare their foreign currency in excess of 1,000 U.S. dollars and non-residents in excess of 3,000 U.S. dollars. Residents are not allowed to hold foreign currency for more than 30 days after acquisition. A maximum of 1000 Ethiopian birr in cash can be carried out of the country.

Remittance Policies

Ethiopia’s Investment Proclamation allows all registered foreign investors, whether or not they receive incentives, to remit profits and dividends, principal and interest on foreign loans, and fees related to technology transfer. Foreign investors may 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 servicing or other international payments. The right of expatriate employees to remit their salaries is granted by NBE foreign exchange regulations. In practice, however, foreign companies and individuals have experienced difficulties obtaining foreign currency to remit dividends, profits, or salaries.

Sovereign Wealth Funds

Ethiopia has no sovereign wealth funds.

9. Corruption

The Federal Ethics and Anti-Corruption Commission (FEACC) is charged with preventing corruption and is accountable to the Office of the Prime Minister. The Commission provides ethics training and education to prevent corruption. The Federal Police Commission is responsible for investigating corruption crimes and the Federal Attorney General handles corruption prosecutions.

The Attorney General’s Office opened in February a new and consolidated Anti-Corruption Directorate to recover stolen assets and fight corruption. The Directorate is empowered to enter into mutual legal assistance treaties (MLAT’s) and otherwise coordinate with foreign nations to fight corruption.

The Federal Police is mandated with investigating corruption crimes committed by public officials as well as “Public Organizations.” The latter are defined as any organ in the private sector that administers money, property, or any other resources for public purposes. Examples of such organizations include share companies, real estate agencies, banks, insurance companies, cooperatives, labor unions, professional associations, and others.

Transparency International’s 2019 Corruption Perceptions Index, which measures perceived levels of public sector corruption, rated Ethiopia’s corruption at 37 (the score indicates the perceived level of public sector corruption on a scale of zero to 100, with the former indicating highly corrupt and the latter indicating very clean). Its comparative rank in 2019 was 96 out of 180 countries, an improvement from its rank of 114 out of 180 countries in 2018. The American Chamber of Commerce in Ethiopia recently polled its members and asked what the leading business climate challenges were; transparency and governance ranked as the 4th leading business climate challenge, ahead of licensing and registration and public procurement.

Ethiopian and foreign businesses routinely encounter corruption in tax collection, customs clearance, and land administration. Many past procurement deals for major government contracts, especially in the power generation, telecommunications, and construction sectors were widely viewed as corrupt.

PM Abiy Ahmed has launched a corruption clean-up that has resulted in several hundred arrests. In connection with the embezzlement schemes involving hundreds of millions of U.S. dollars, particularly with government procurement irregularities, the government arrested and charged in September 2018 over 40 mid- and senior-level Metal Engineering Technology Corporation (METEC) officials. In addition, the PM transferred the management of large government projects from METEC (which is widely viewed by the public as corrupt) to other government organizations. Similarly, the government arrested 59 officials and business people suspected of corruption in April of 2019. The officials are primarily from the following government institutions: Public Procurement & Property Disposal Service, Food & Drug Administration Agency, Pharmaceuticals Fund & Supply Agency, and the Ethiopian Water Works Construction Enterprise. A former Communications Minister was charged with corruption and mismanagement of public companies in May; he was sentenced to six years in jail.

Ethiopia is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Ethiopia is a signatory to the African Union Convention on Preventing and Combating Corruption. Ethiopia is also member of the East African Association of Anti-Corruption Authorities. Ethiopia signed the UN Anticorruption Convention in 2003, which was eventually ratified in November 2007. It is a criminal offense to give or receive bribes, and bribes are not tax deductible.

Resources to Report Corruption

Contacts at government agency or agencies are responsible for combating corruption:

Federal Police Commission
Addis Ababa +251 11 861-9595
+251 11 861-9595

Contact at “watchdog” organization:

Transparency Ethiopia
Addis Ababa +251 11 827-9746
+251 11 827-9746
Email: TiratEthiopia@gmail.com

10. Political and Security Environment

Ethnic conflict — often sparked by historical grievances or resource competition, including land disputes — has resulted in varying levels of violence across Ethiopia. According to surveys and research conducted by the International Organization for Migration, the number of internally displaced persons has dropped from its peak last year of 3.2 million, but remains at 1.8 million people nationwide. 1.17 million of those are displaced due to conflict, with the remainder being displaced due to climactic reasons. Insecurity, often driven by ethnic tensions, persists in many areas, notably Gedeo, West Guji, and other areas of southern and western Oromia and eastern SNNP, and in the Hararges on the border of the Somali Region. In the four Wellega Zones in Western Oromia, the Oromo Liberation Army and other illegal armed groups continue to execute attacks on the public and local government officials, violence which occasionally spills over into other parts of Oromia. Regional security forces and the Ethiopian National Defense Forces (ENDF) have been engaged in combatting these groups. In Amhara Region, there have been incidents of violence along a main road between Gondar and Bahir Dar. In early April, the government deployed the ENDF to the area around Gondar in Amhara Region to control the activities of what the Gondar City Administration identified as an illegal armed group in the area. Disputed territory in the north between the Amhara and Tigray regions is a continuing flash point.

Under PM Abiy’s administration, political space in Ethiopia has opened dramatically. Constitutional rights, including freedoms of assembly and expression, are now widely supported at the level of the federal government, though the protection of these rights remains uneven at regional and local levels. Most political prisoners have been released, though there have been some concerning reports of short-term detentions. Opposition parties usually operate freely, although regional and local authorities have occasionally employed politically-motivated procedural roadblocks to hinder opposition parties’ efforts to hold meetings or other party activities. The media has become significantly more free following reforms instituted by PM Abiy Ahmed. Still, journalism in the country remains undeveloped, social media is often rife with unfounded rumors, and government officials occasionally react with heavy-handedness, especially to news they feel might spur social unrest. The Parliament is currently considering potential dates in 2021 for the national and regional parliamentary elections, originally scheduled for May of 2020, which were delayed due to technical challenges and the COVID-19 pandemic. The electoral and pre-electoral period may represent a potential catalyst for unrest.

PM Abiy has also initiated a process of modernization, de-politicization, professionalization, and civilian accountability in the security services. Still, there are certain geographic areas where the security situation remains fraught due to clashes between illegal armed groups and security forces. Though foreigners are rarely targeted, spillover ethnic violence has occasionally resulted in the death of foreigners.

The new administration has also increased regional autonomy. Successful American investors tell us that understanding the different business climates across the regions — there are different regional taxation regimes, unique ethnic conflicts, varying levels of reception towards profit-making companies, and contrasting approaches to policing and security issues — is key to successfully investing in Ethiopia.

The Ethiopian Parliament on April 10 approved a five-month long State of Emergency (SOE) focused on COVID-19 mitigation. Actions mandated under the SOE include discontinuation of meetings involving more than four people; closure of entertainment and sports centers; requirements that restaurants distance tables and seating; and limitations on the number of passengers in public transport vehicles.  Social distancing is required, facemasks are mandatory in public, and handshakes are prohibited.  Other restrictions included limitations on prison visits (except to deliver food) and land border closures, with the exception of cargo transportation.

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