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 Constitution is the highest law of the country. The Parliament enacts proclamations, which are followed by regulations that are passed by the Council of Ministers, and implementing directives that are passed by ministries or agencies. The government engages the public for feedback before passage of draft legislation through public meetings, and regulatory agencies request comments on proposed regulations from stakeholders. Ministries or regulatory agencies do neither impact assessment for proposed regulations nor ex-post reviews. Parties that are affected by an adopted regulation can request reconsideration or appeal to the relevant administrative agency or court. But there is no requirement to periodically review regulations to see whether they are still needed or should be revised.
All proclamations and regulations in Ethiopia are published in official gazettes and most of them are available online http://www.hopr.gov.et/web/guest/122 and https://chilot.me/federal-laws/2/
Legal matters related to the federal government are entertained by Federal Courts while state matters go to state courts. To ensure consistency of legal interpretation and promote predictability of courts, the Federal Supreme Court Cassation Division is empowered to give binding legal interpretation on all federal and state matters. Though there are no publicly listed companies in Ethiopia, all banks and insurance companies are obliged to adhere to International Financial Reporting Standards (IFRS).
Regulations related to human health and environmental pollution are often enforced. In January 2019, the Federal and Oromia State Environment, Forest and Climate Changes Commissions shut down three tanneries in Oromia state for what was said to be repeated environmental pollution offenses. The government also suspended the business license of MIDROC Gold Mine in May 2018 following weeks of protests by local communities who accused the company of causing health and environmental hazard in the Oromia regional state. In February 2019, the Ethiopian parliament passed a bill entitled ‘Food and Medicine Administration Proclamation,’ which bans smoking in all indoor workplaces, public spaces, and means of public transport and prohibits alcohol promotion on broadcasting media.
Ethiopia is a member of UNCTAD’s international network of transparent investment procedures. Foreign and national investors can find detailed information from the investment commission website http://www.investethiopia.gov.et/investment-process and https://www.theiguides.org/public-docs/guides/ethiopia 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.
The government released its five year public finance administration strategic plan (2018-2022) in March 2018, mapping out reforms in government revenue and expenditure forecasting, government accounts management, internal audit, public procurement administration, public debt management, and public financial transparency and accountability. In support of this initiative, the Ministry of Finance (MOF) issued a directive on Public Financial Transparency and Accountability in October 2018. The directive mandates that all public institutions report their budgetary performance and financial accounts in platforms that are accessible to the wider public in a timely manner. It also makes the MOF responsible for disseminating a regular and detailed physical and financial performance evaluation of large publically-funded projects. The directive further outlines a clear timeline for the publication of each major piece of budgetary information, such as the pre-budget macroeconomic and fiscal framework, the enacted budget, quarterly execution reports, annual execution reports, and the annual audit report.
International Regulatory Considerations
Ethiopia ratified the AfCFTA on March 21, 2019. ACFTA aims to create a single, continental market for goods and services, with free movement of business persons and investments. Ethiopia is also a member of Common Market for Eastern and Southern Africa (COMESA), a regional economic block, which has 21 member countries and has introduced a 10 percent tariff reduction on goods imported from member states. However, Ethiopia has not yet joined the COMESA free trade area. Ethiopia resumed the WTO accession process in 2018, which began in 2003, with the goal of acceding in 2020.
Ethiopian standards, however, have a national scope and applicability and some of them, particularly those related to human health and environmental protection, are mandatory. The Ethiopian Standards Agency is the national standards body of Ethiopia.
Legal System and Judicial Independence
Ethiopia has codified criminal and civil laws, including commercial and contractual law. According to the contractual law, a contract agreement is binding between contracting parties. Disputes between the parties can be taken to the court. There are, however, no specialized courts for commercial law cases, although there are specialized benches both at the federal and state courts.
While there have been allegations of executive branch interference in judiciary cases with political implications, there is no evidence of interference in 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 appeal processes from the lower courts to the Supreme Court. The Criminal Procedure Code follows the inquisitorial system of adjudication.
Companies that operate businesses in Ethiopia assert that courts lack adequate experience and staffing, particularly with respect to commercial disputes. While property and contractual rights are recognized, judges often lack understanding of commercial matters, including bankruptcy and contractual disputes. In addition, cases often 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 the creation of a commercial court under the regular court system to improve the expertise of judges as well as increase the speed with which commercial disputes can be resolved.
Laws and Regulations on Foreign Direct Investment
The Investment Proclamation and Regulation of 2012 (later amended in 2014), is Ethiopia’s main legal regime related to foreign direct investment (FDI). These laws instituted the opening of economic sectors to FDI, the requirements for FDI registration, and the investment incentives that are available to investors.
The following industrial sectors have been designated investment 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.
The 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 policy and priorities, registration processes, and provides regulatory details for investors. In addition, the Ethiopian Investment Guide website (https://www.theiguides.org/public-docs/guides/ethiopia) provides relevant laws, rules, procedures, and reporting requirements for investors.
The revised Commercial Registration and Business Licensing Proclamation eliminated some cumbersome and duplicative requirements, including the yearly renewal of business registrations and the minimum capital requirements to set up limited liability companies, and requires a competency certificate in sectors such as health, security and environment. The Proclamation allows registration of franchises and holding companies.
Competition and Anti-Trust Laws
Ethiopia’s Trade Practice and Consumers Protection Authority (TPCPA), operating under the Ministry of Trade and Industry, is tasked with promoting a competitive business environment by regulating anti-competitive, unethical, and unfair trade practices to enhance economic efficiency and social welfare. It has an administrative tribunal with a jurisdiction on matters pertaining to market competition and consumer protection. The authority also annually entertains many cases associated with consumer protection and unfair trade practices.
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. Nonetheless, companies have complained that SOEs receive favorable treatment in the government tender process. The public sector’s heavy involvement in economic development means that SOEs often obtain a sizeable portion of 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 partially, 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) remain 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. Public Enterprises, Assets, and Administration stopped accepting requests from owners for return of expropriated properties in July of 2008.
According to local and foreign businesses operating in the Oromia region, there have been a number of isolated incidents threatening investors in the region. Various pretexts have been used to close down legitimate operations. False charges have been filed with regional courts, property has been confiscated, and bank accounts have been frozen, all in the name of “returning the land” to the “rightful owners” or “creating job opportunities” for the youth. Regional officials, however, deny any systematic attack on investors and have repeatedly provided assurance that all legitimate investors will be protected. Meanwhile, other investors who have invested heavily in government and community relations and actively engaged local and regional officials have prospered. The experience of investors is overall uneven and clear trends are not evident.
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
The constitution as well as the investment law guarantees the right of any investor to lodge complaints related to his/her investment with the appropriate investment agency. If he/she has a grievance against the decision, he/she can appeal to the investment board or to the respective regional agency as appropriate. While disputes can be resolved by international arbitration if both parties agree, enforcement of an arbitration decision is contingent on the Ethiopian court system. 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 2019 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
Arbitration has become a widely used means of dispute settlement among the business community as Ethiopian civil code recognizes Alternative Dispute Resolution (ADR) mechanisms as means of dispute resolution. The Addis Ababa Chamber of Commerce has an Arbitration Center to assist with arbitration. However, there is no guarantee that the award of an international arbitral tribunal will be accepted and implemented by Ethiopian authorities. Ethiopia is not a party to the Convention on the Recognition and Enforcement of Arbitral Awards, which creates uncertainty for potential investors and serves as disincentive to invest. There are no publicly available statistics that indicate courts’ decision bias towards state-owned enterprises (SOEs) on investment/commercial disputes that involve them.
The Ethiopian Commercial Code (Book V) outlines bankruptcy provisions and proceedings and establishes a court system that has jurisdiction over bankruptcy proceedings. 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 2019 World Bank Doing Business Report, Ethiopia stands at 148 in the ranking of 190 economies with respect to resolving insolvency. Ethiopia’s score on the strength of insolvency framework index is 5.0. (Note: The index ranges from zero to 16, with higher values indicating insolvency legislation that is better designed for rehabilitating viable firms and liquidating nonviable ones.)