Ethiopia’s Political Environment After a protracted civil war, the Soviet-supported military government, known as the Dergue, was ousted in 1991 and a broad-based transitional government was established. Elections were held in 1995 and new elections are due in 2000. The new constitution, adopted in late 1994, made Ethiopia a federal democratic republic. The federation is made up of nine regions and two chartered cities. The chartered cities are Addis Ababa, which is the seat of the Federal Government, and Dire Dawa, in the eastern part of the country. The federal government is headed by a President and a Prime Minister. The latter, together with his cabinet (Council of Ministers), exercises full executive powers. The regions, which make up the federation, also have their own respective regional governments. Each regional government has a head of the regional state, and bureaus, which are set up along the lines of federal ministries. The legislature consists of a Council of Representatives and a Council of Federation. The Council of Representatives is the law-making organ of the Republic. The Council of Federation is entrusted with the task of interpreting the federal constitution. Each regional state has its own legislative council. The Council of Representatives elects both the President and the Prime Minister. Ethiopia is currently at war with Eritrea. This conflict has, however, been relatively localised and confined to the far north-east of the country. Business Climate and Attitudes to Investment The Ethiopian government is committed to the development of a free market economy. Significant steps have been taken to transform the economy from a centrally planned command structure to a market-based economy, through the introduction of liberalization, deregulation and demonopolization measures. Privatisation of state-owned enterprises is under way. Taxes have been significantly lowered and streamlined, and the labour market has been liberalised. These measures have created an environment conducive to private-sector growth. Since 1992, the government has undertaken a series of reforms, and broad macroeconomic stability has been achieved. The government wishes to increase the volume of foreign investment across a wide part of the economy. There was a general view amongst investors interviewed during the preparation of this guide that Ethiopia is largely free from the culture of corruption which serves as a barrier to investment in certain other locations. Government policies on exchange rates and on average tariffs are generally considered advantageous by investors. However, further financial liberalisation (particularly in the foreign exchange regime) is still felt to be necessary. The Ethiopian economy remains heavily dependent on agriculture, which accounts for about 50% of GDP. An estimated 85% of the population gains its livelihood directly or indirectly from agricultural production. Coffee exports account for more than 65% of foreign exchange earnings, while hides and skins are the second key foreign exchange earner. Key sectors of expertise in manufacturing are food processing, textiles and garments, engineering and metal goods. The Ethiopian government’s economic strategy is based on Agricultural-Development-Led Industrialisation, supported by an Economic Reform Programme developed in cooperation with the World Bank and the IMF in 1992, and on the series of structural adjustment programmes since then. Major gains have been made from the reform programme, particularly through the establishment of liberalisation, low inflation, fiscal discipline (and low government borrowing), infrastructure improvement and the growth of the private sector. As indicated in Table 4, since the introduction of the reform programme, Ethiopia has registered an average annual growth rate of over 6%. As the economy is highly dependent on rain-fed agriculture, economic performance depends to a significant extent on the weather. Ethiopia has traditionally been a low-inflation country, except during the last few years of the civil war. Inflation has recently been held at below 5% and interest rates kept at positive but reasonable levels. Since 1995/96, a countrywide consumer price index has been introduced. The inflation rate was 2.2% in 1996/97 and -0.1% in 1997/98 (Source: National Bank of Ethiopia). Price stability is a cornerstone of the reform programme. Consistent with the economic reform programme, the government has been shifting its role from one of active participation in productive and service sectors to one of creating an enabling environment for the private sector and providing regulatory oversight. The government is still active, however, in many sectors including manufacturing, transport and construction. In telecommunication, power and water supply, the government enjoys de facto monopolistic positions. The privatisation programme under way will reduce the government’s direct role in the economy. The government has recently enacted a policy to encourage private sector participation in power and telecommunications.
Trade and exports are a major contributor to GDP (41%) and have been actively promoted and supported by the Government. In 1993, the Government harmonized customs duties and reduced the maximum import duty to 80%. Automated customs processing was introduced in 1995. The import tariff schedule was reformed in January 1996 and again in January 1997, which lowered customs duties on many import items. The maximum custom duty has now been lowered to 40%. Government policies on exchange rates and on average tariffs are generally considered advantageous by both investors and key agencies. Total foreign debt as at June 1998 (excluding debt to Russia) was $4.1 billion and debt to Russia worth 3.4 billion rubles, most of which was long-term, publicly guaranteed debt. (Source: Planning and Research Department of Ministry of Finance, Panorama of Major Financial and Economic Development, April-June 1998). Debt service was 1.6% of GNP and 9.5% of exports of goods and services. (Source: World Bank, World Development Indicators, 1999, tables 4.18 and 4.19) Official development assistance (ODA) in 1997 totalled $636.6 million. Of bilateral ODA commitments, the largest portion was allocated to social infrastructure and services, followed by food aid and production sectors, primarily agriculture. (Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients, 1999) Investment Track Record Foreign investment tripled in Ethiopia between 1996 and 1997, albeit from a low base. Considering the levels of investment in other African states, however, Ethiopia remains a relatively untapped and unexploited market for investors. In 1997, foreign investment levels reached US$178m, compared to US$250m in Uganda and the United Republic of Tanzania, countries with much smaller populations. As illustrated, in Tables 5 and 6, over the period July 1992 to July 1998 a total of 163 foreign-sponsored projects were approved. Italy, Britain, France and Germany from Europe, Saudi Arabia from the Middle East, South Korea from the Far East and the United States are currently the main sources of foreign investment in Ethiopia. The number of foreign investment approvals has shown an increasing trend in recent years, especially since 1996. A high proportion of the projects involve joint investments with domestic investors.
An indicative list of the current foreign investors in Ethiopia is given in Annex 1.
A key factor in the growth of foreign investment has been the increase in investor confidence in Ethiopia’s protection regime for investors. As outlined in Table 7, this is evident in the survey of investors in Africa by the World Economic Forum and the Harvard Institute for International Development that ranked Ethiopia seventh (tied with Burkina Faso) out of 20 countries in terms of investor protection.
Limitations on Foreign Investment In an endeavour to stimulate the indigenous economy, the Ethiopian Government has reserved some sectors (see Annex 2) for domestic investors only. These primarily concern service industry developments and some small-scale manufacturing activities. All other areas are open to foreign investors except the defence industries and telecommunication services, where they may invest only jointly with the government. Foreign investors may also acquire existing local firms in sectors open for foreign investment. There is no local content requirement, although investors are encouraged to use domestic resources in their manufacturing processes as much as possible. A technology transfer agreement may be entered into between the parent company and the local company/subsidiary. Such agreements have to be submitted to the EIA together with the initial applications for approval. Export Markets Over the last two years there has been a significant increase in interest in Ethiopia as a location for export-oriented investment stimulated by the country’s relatively low operational cost base, economic stability and fiscal discipline, and the quality of the labour force. Ethiopia’s strategic location in the Horn of Africa has created an opportunity to establish strong ties with the countries of the Middle East and Europe. Over 50% of Ethiopian exports, which include coffee, meat and live stock, oilseeds and pulses, hides and skins and cut flowers, are marketed in these areas.
The Middle East Market access and low operational costs have made Ethiopia a significant location for exports to the Middle East, especially to Saudi Arabia. The Rest of Africa With a total population of over 750 million people, the African market represents an important area of potential for investors in Ethiopia. Ethiopia was a founder member of the Common Market for Eastern and Southern Africa (COMESA), a preferential trade area which embraces 23 countries with a total population of some 300 million. Preferential tariff rates are applied for imports and exports within the member countries. Over time, it is envisaged that this cooperation will develop into an African economic community. The Developed World Given Ethiopia’s membership of the Lomé Convention and its status under the Generalised System of Preferences (GSP), investors in the country have important opportunities to access advanced markets for both agricultural and manufactured goods. The Lomé Convention entitles export products from Ethiopia to duty reductions or exemptions and freedom from all quota restrictions. All industrial products and a wide range of agricultural products including fruit, vegetables, pulses and oilseeds enjoy the privilege of duty-free entry into the EU market. In addition, a wide range of Ethiopia’s manufactured products are entitled to preferential duty treatment under the GSP in the United States, Canada, Switzerland, Norway, Sweden, Finland, Austria, Japan, and most countries of the European Union. No quantitative restrictions are applicable on Ethiopian exports falling under the 3,000-plus items currently eligible for GSP treatment. Ethiopia has signed and ratified investment promotion and protection agreements with Italy, Kuwait, Switzerland, the Netherlands, China and Malaysia. Similar agreements are awaiting ratification for Romania and Tunisia. The agreements with Italy and Kuwait also provide for the avoidance of double taxation. Discussions are under way with several other countries to conclude similar agreements. With a view to providing additional guarantees to foreign investors, Ethiopia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA is the arm of the World Bank that insures foreign investors against political risks such as expropriation, inconvertibility and war damage. MIGA’s guarantee programme will become operational as soon as pending claims for compensation left over from the period of the previous military government have been resolved. The Ethiopian Investment Authority advises that the Ethiopian government is making progressive efforts to resolve these pending claims. Ethiopia has also signed the World Bank’s Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which provides for the international arbitration of disputes with foreign investors. The Convention will enter into force in Ethiopia once it has been ratified by the government. Labour availability and quality As indicated in Table 10, Ethiopia has a large workforce, and the majority of people live in rural areas. The workforce is also relatively young. Addis Ababa, the third largest inland city in Africa, with a population of some 3 million, is the capital and main commercial centre of Ethiopia.
Average unemployment in Ethiopia is estimated at 2.9%, although it should be noted that under-employment is also common, particularly in rural areas. The average urban unemployment rate is 22%. Labour Costs Labour costs in Ethiopia are low even in comparison with the African average. There is no minimum wage legislation in Ethiopia but a wage of 120 birr ($15) per month is currently acceptable as the minimum rate payable for unskilled workers. Fringe benefits are negotiated between the employer and the employees’ trade unions. Benefits can include bonuses, medical expenses, insurance and pension schemes. Graduate salaries range from 600 birr ($75) to 800 birr ($100) per month, depending on the level of qualifications. Skills and Qualifications Although the Ethiopian government has placed a strong emphasis on investing in education, literacy levels are still low. Only 28% of children attend primary schools, and only 15% attend secondary schools. To help counter this, training allowances are now included in the incentives package offered to investors, and a programme of educational reform, which gives greater attention to vocational training, is well under way. Some US$809m is being spent on upgrading and providing educational facilities under the Education Sector Development Programme 1997-2001. Around 3,000 students graduate from the universities annually with diplomas, first degrees and advanced degrees. As indicated in Table 11, investors’ satisfaction with the availability of skills in Ethiopia is positive and high in comparison to the rest of Africa. English is the medium of instruction in secondary and further education. A number of foreign community schools, including US, English, French and Italian schools, are already established in Ethiopia.
Labour Conditions and Regulations Labour regulations in Ethiopia have been considerably modernised and brought into line with international practice in recent years. Normal working hours are limited to 8 hours a day or 48 hours a week. A worker is entitled to 14 working days of annual leave for the first year of service plus one working day for every additional year of service. A weekly rest period of 24 hours is required by law. All public holidays (13 of them altogether) are paid holidays. There are no restrictions under Ethiopian law regarding the employment of female workers. Male and female workers are subject to the same working hours. It is prohibited, however, to employ women in jobs that are arduous or harmful to their health. A pregnant woman cannot be assigned to night work. Maternity leave, which has to be paid, is for a total of 90 days. Employment of expatriates is permitted without any restriction for key management posts, including those of general manager, finance controller, technical manager and marketing manager. Expatriates may also be employed for non-management positions in areas where suitable Ethiopian nationals are not available, once permission is secured from the EIA. Property Issues A new legal framework has been established for the leasing of urban land, the value of which is established by public auction or via pre-set rates established by the market. Costs & Availability Property suitable for business and residence is available in Addis Ababa. Property costs in Addis Ababa are currently $85 m2 for office accommodation and $24 m2 for industrial property. Foreign firms may acquire real estate provided they have the normal investment certificate and the necessary legal status. Legally the government is the sole owner of land. Land titles may be issued under a leasehold arrangement for a certain number of years, up to a maximum of 100 years. Transfer of titles may be effected at the local municipality level. The acquisition of real estate was flagged as an issue of concern by private-sector participants in UNCTAD-ICC workshops. Improvements are needed to enhance both the speed and the simplicity of the process. Ethiopia does not have any export-processing or similar zones that provide special facilities, treatment, rights or privileges. Industrial zones provided with basic infrastructure are being developed in the Oromia and Tigray regions. Plans are under way to develop similar zones in the other regions, including Addis Ababa. The financial sector has been liberalized and there are now six local private banks and eight insurance companies in Ethiopia. Foreign banks are not yet permitted to operate in Ethiopia. Some local entrepreneurs indicated that they have had difficulties in raising capital locally. Foreign-owned firms can have access to local capital. Electricity Ethiopia obtains its electricity from two sources - hydroelectric power plants and thermal power stations. The former, with an aggregate power generation capacity of 350 MW, is by far the largest source. All hydroelectric power plants are connected to the national grid, which covers all major cities and towns. The supply system is being expanded through the construction of additional power plants at four sites, two of which, with an aggregate capacity of 250 MW, are at an advanced stage. Ethiopia’s hydropower potential is estimated at 30,000 MW, of which currently only about 1% is utilised. On average, power costs are $0.07 per kWh. Water All major cities and towns have municipal water supply systems, and underground water is abundantly available in most parts of the country. Roads As indicated in Table 12, Ethiopia’s road transport infrastructure is relatively weak, but the improvement of the country’s road network has been identified by the government as a core component of the economic reform programme. More than 20% of the government’s total capital budget in 1998 was allocated to road construction and repairs. US$3.9 billion has been earmarked by the government to expand the road network by 80% over a period of 10 years. International highways link Addis Ababa to the neighbouring countries of Djibouti, Eritrea and Kenya.
A limited rail service stretching 780 km links Addis Ababa with the port of Djibouti via the eastern Ethiopian city of Dire Dawa. Currently, Ethiopia uses Djibouti for its import-export trade. The shift from Asab in Eritrea to Djibouti appears to have occurred smoothly, without negative effect on Ethiopia's trade. Other ports in the region include Berbera, Port Sudan and Mombassa. Aviation is an important means of transport in Ethiopia, with 18 domestic and 3 international airports. Addis Ababa has developed as an important aviation hub serving North America, Europe, the Far East, Africa and the Middle East. Ethiopian Airlines flies to over 40 destinations in Africa, Europe, North America, Asia and the Far East, with about 50 weekly outbound flights from Addis Ababa. Telecommunications Telecommunication services, including telephone, telex, facsimile, internet and data communication, are currently provided by the state-owned corporation. Direct microwave links are available to all major cites and towns in the country. International communication links are maintained via satellite. Microwave links exist with Eritrea, Kenya and Djibouti. Presently, about 200,000 direct exchange lines are served. This number is expected to increase dramatically to over 750,000 lines in two years’ time. A mobile system has been introduced recently in Addis Ababa. As illustrated in Table 13, local calls are among the cheapest in Africa and, although Ethiopia has a low density of lines per head of population, Addis Ababa and other major towns are reasonably well served by regional standards.
In general the tax regime is relatively benign for the investor, with low corporate taxes and assistance with import and export duties. Investors should note that for some sectors (particularly mining) special tax arrangements may apply. For personal taxes, the first 120 birr ($15) earned per month is tax-free. Salaries and wages above 120 birr are taxed progressively at rates of 10% to 40% (the latter applies at 3001 birr ($375) per month and above). Transportation allowances, medical treatment expenses, travelling expenses and insurance premiums provided for in the employment contract are deductible insofar as they constitute a reasonable proportion of total income. Expatriates are subject to personal income tax on income derived from local sources. For sales tax, the rate of sales tax is 4% for selected lists of agricultural and essential goods, such as live animals and products, vegetables, fruits, printed materials and hides. A levy of 12% is charged on all other products. Excise tax is levied on selected items when produced locally or imported from abroad. The tax rate ranges from 10% in the case of textiles and television broadcasting receivers to 50% in the case of alcohol. Excise tax is payable on goods produced locally by the producer within a period of three days from the date of production, and on goods imported from abroad by the importer at the time of clearing the goods from the customs net. Customs duties are payable on imports by all persons and entities without duty-free privileges. The main regulation on customs duty is Proclamation No. 38/1993, which has introduced a harmonised system of classification of goods. The rate of customs duty ranges from 0 to 40%. There are no taxes on export products (except coffee) or services from Ethiopia. Ethiopia has treaties with Italy and Kuwait to avoid double taxation, and discussions on similar treaties are under way with several other countries. Intra-company charges, involving the local subsidiary and the parent company abroad, are allowed, provided they are incurred through arm’s-length transactions. To encourage investment, the Ethiopian government has developed a range of incentives for investors engaged in new enterprises and expansion across a range of sectors. The incentives include: Customs Import Duty A 100% exemption from the payment of import customs duties and other taxes levied on imports is granted to all investment capital goods, such as plant, machinery and equipment, as well as spare parts worth up to 15% of the value of the imported investment capital goods, provided that the goods are not produced and not available locally in comparable quantity, quality and price. Investment capital goods imported without the payment of import customs duties and other taxes levied on imports may be transferred to another investor enjoying similar privileges. Exemptions from customs duties or other taxes levied on imports are granted for raw materials necessary for the production of export goods. Taxes and duties paid on raw materials are drawn back at the time of export of finished products. The duty drawback scheme applies to all taxes at the time of import and to those paid on local purchases. Income Tax Holiday As illustrated in Table 14, any income derived from an approved new investment (made pursuant to Proclamation No. 37/1996) is exempted from income tax for periods ranging from 1 to 5 years, depending upon the priority of investment activity and the location in which the investment is undertaken. Income derived from an expansion whose invested capital is in accordance with the Council of Ministers Regulation No. 7/1996, Article 6 (2), is exempted from income tax for a period of two years for pioneer activities and one year for promoted activities.
Research & Development Incentives An investor is entitled to deduct expenditure on research, improvement studies or training from taxable income. Remittance of Capital Any remittance made by a foreign investor from the proceeds of the sale or transfer of shares or assets upon the liquidation or winding up of an enterprise is exempted from the payment of tax. Business enterprises that suffer losses during the tax holiday period can carry forward such losses following the expiry of the exemption period under the conditions specified in Table 15.
The investor may opt for a straight-line or an accelerated method for the depreciation of assets based on book value. Business Associations There are chambers of commerce in Addis Ababa and other major cities and towns. The chambers are federated under the Ethiopian Chamber of Commerce. In addition to the chambers, several sector-specific business associations have also been formed in the past few years. They include the Coffee Exporters Association, the Ethiopian Private Industries Association and the Ethiopian Hotels Association. |
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