Strategic investments in Ethiopia

Written by Gregor Pannike


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Ethiopia’s charismatic 42-year-old Prime Minister Abiy Ahmed from the marginalised Oromo ethnic majority of Ethiopia was sworn into power in April 2018. He introduced pioneering and rapid political, social and economic reforms with the potential to change Ethiopia’s political and economic landscape permanently and to prepare the multi-ethnic federation – consisting of nine autonomous regions – for the future.

Political achievements
One of the most significant political achievements of Prime Minister Abiy Ahmed is without doubt his initiated ‘2018 Eritrean – Ethiopia Summit’ which took place in Asmara, Eritrea from July 8 – 9, 2018. Both countries signed a joint declaration ending a 20-year-old boarder-conflict restoring full diplomatic ties, opening the borders and allowing the free flow of citizens, goods and services between both countries and resolving a major centre of conflict in the geopolitical volatile horn of Africa region. Besides that, he restructured the federal security apparatus and sent high-ranking military and security officials, known for their repressive past, into early retirement. He released thousands of political prisoners, invited dissidents living in exile to return to Ethiopia, largely restored the freedom of the press and boosted gender equality by appointing woman to half of the cabinet posts.

Forthcoming challenges
Ethiopia’s Prime Minister fast sweeping reforms created a discord within Ethiopia’s ruling party the EPRDF. An alliance of four regional parties largely representing the dominant ethnic groups within Ethiopia’s multi-ethic fabric that has controlled all tiers of government from the federal to the commune level since 1991, creating a political power vacuum within several federal states such as Amhara, Oromia, Tigray and Somali. As a result of the vacuum, newly established ethno-nationalist parties and movements with radical agendas are gaining momentum with the aim to oust incumbent ruling regional parties by representing themselves as the only proponents of their respective ethnic constituency. This triggered serious ethnicpolitical motivated assassination in June 2019 of Amhara’s regional leader Ambachew Mekonnen and two of his advisers in the regional capital Bahir Dar, as well as the shooting of General Seare Mekonnen, chief of staff of Ethiopia’s military and a retired officer, at the general’s home in the capital, Addis Ababa. Prime Minister Abiy Ahmed would need to tackle rising demand from regional leaders for greater autonomy and political power to the increasing ethnic intercommunal violence by restoring statewide security, calming ethnic tensions andgoverning more inclusively to address some of the latest worrying developments.

Ethiopia is experiencing a strong and sustainable growth in the last 10 years tripling its GDP from 2008 to 2018. While Ethiopia’s economy generated a GDP of only USD27.067 bn in 2008, it achieved an output of USD84.355 bn in 2018. Given Ethiopia’s strategic geopolitical location in the horn of Africa and proximity to the Middle East, its markets have greatpotential to benefit from broader regional growth and strategic inward investments from neighbouring countries

Ethiopia’s Economic Progress
Ethiopia’s economy experienced a strong, broad-based growth averaging 10.3 per cent a year from 2006/07 to 2016/17. Compared to a regional average of 5.4 per cent, Ethiopia’s economic growth is outstanding. However, Ethiopia’s real GDP growth decelerated to 7.7 per cent in 2017/18 and is expected to remain at a real growth rate of 7.7 per cent for 2019. The construction and services industry contributed to most of the economic growth. The agriculture and manufacturing sector accounted for lower growth in 2017 and 2018 compared to previous years. Private consumption and public investment have contributed significantly to the growth on the demand side and government investment is expected to increase and further stimulate growth. Ethiopia’s projected high levels of average consumer prices (CPI) for 2019 amounting to 9.3 per cent, not unusual for fast-growing emerging countries in their catching-up phase, may however, dampen (private) domestic consumption.

Envisaged Economic Policies and their future Perspective
Despite Ethiopia’s impressive growth during the last couple of years, it still remains one of the poorest African nations with a per capita income of only USD772.3 (in 2018). In comparison, neighbouring Kenya’s GDP per capita amounts to USD1,710.5 (in 2018), more than twice that of Ethiopia. The Ethiopian government pursues economic reforms and stimulus programs such as the first Growth and Transformation Plan (GTPI) aimed at increasing real GDP growth, infrastructure development, social development and capacity building at all levels. The second phase of the Growth and Transformation Plan (GTP II), currently implemented by the government and will take until 2019/ 2020, aims at continuing the expansion of physical infrastructure and transforming the country into a manufacturing hub through public investments. GTP II with its ambitious targets of an average annual growth of 11 per cent GDP, and in line with its manufacturing strategy, envisages the industrial sector to expand by 20 per cent on average, creating more jobs and further reducing poverty levels. The overarching government policy is to achieve lowermiddle- income status by 2025, which is a significant intermediate goal on Ethiopia’s way to become an advanceddeveloping country. 

Given Ethiopia’s strategic geopolitical location in the horn of Africa and proximity to the Middle East, its markets have great potential to benefit from broader regional growth and strategic inward investments fro neighbouring countries.


Regulatory Limitations
Foreign investors are generally required to obtain investment and business licenses prior to carrying out commercial activities in Ethiopia. The Ethiopian Investment Commission (EIC) is the competent body to issue such licenses. The EIC has set-up a one-stop shop service to cut the time and cost of obtaining such investment and business licenses. Foreign investors that intend to (i) take over existing private enterprises or (ii) acquire shares in a corporate vehicle need to obtain prior approval from the EIC. The minimum capital required for a fully foreign-ownedenterprise is USD200,000. However, in the case of joint ventures, the minimum capital required lowers to USD150,000. The investment capital needs to be registered with the EIC.
In general, no land can be privately owned in the country. All land is owned by
the state but can be leased for up to 99 years.

Ethiopia is facing problems with regards to the Foreign Exchange Market as a result of weak export performance and high demand for foreign currency.

Ethiopia’s tax system is sophist aced. Personal income tax is levied progressively with rates from 0-35 per cent. In general, corporate income tax (CIT) is levied at a rate of 30 per cent. It should be noted, however, that promoted activities (e.g. manufacturing, agribusiness, generation, transmission, & supply of electrical energy; and information & communication technology development (ICT)) may be entitled to CIT exemptions for periods ranging from 1 to 9 years, depending on the specific activity and the location. Ethiopia concluded Double Taxation Agreement with 18 countries.

Foreign Exchange Market
Ethiopia is facing problems with regards to the Foreign Exchange Market (Forex) as a result of weak export performance and high demand for foreign currency. In practice, the result of this foreign currency crunch for some foreign investors has been to reinvest their profits in the country.

Current and Future Growth Sectors
The logistics and textile producing industries are certainly among the most fastest growing industries in Ethiopia. Ethiopian Airlines is forcing this trend with the aim of becoming Africa’s leading aviation group. The extension of the a new 38,000 sqm air cargo terminal in Addis Ababa is another indicator of the country’s ambitions to play a leading role in East Africa’s logistics sector. While Ethiopia is a land-locked country, the country has been able to secure three main gateways through ports in Eritrea, Djibouti and Somaliland. Textile and garment investments are attractive in Ethiopia since the government has set-up industry parks throughout the country. Investors are relocating from countries such as Bangladesh and Vietnam due to cheaper producing costs (average monthly wage for factory workers is around USD50-60 in Ethiopia´, compared to USD140-160 in neighbouring Kenya, USD70-90 in Bangladesh, USD150-170 in Vietnam and USD400-500 in China.

Finance Options
Access to capital and financing for Ethiopia’s private sector (e.g. SME sector), still creates significant challenges, affecting the growth of the advancing private economy. Often local financial institutions asking for vast collaterals such as significant cash deposits, real estate or other tangible assets within Ethiopia to grant interim, long-term credit lines or trade finance facilities. The National Bank of Ethiopia must approve loans from financial institutions overseas that require hard currency debt repayments. To bridge structural finance gaps in the Ethiopian lending sector, many funding options are provided by international or governmental financial institutions such as the World Bank’s International Finance Corporation, African Development Bank (“ADB”) and the Development Bank of Ethiopia (“DBE”). Mostly export oriented projects and initiatives involved in production are financed by ADB in line with Ethiopia’s economic policies to boost its export capabilities. Energy generation and transmission & distribution projects as well as transportation and other key infrastructure projects, are financially supported by the ADB jointly with Power Africa. The DBE for example generally allocates funds up to 70 per cent for certain investment projects in selected sectors such as commercial farms, agro processing, export-oriented businesses and manufacturing sector, remaining investments are mostly contributed by owners by shareholder equity or loans.

Determining the Risk Appetite
The risk appetite for market entrants is defined by its overall corporate and business strategy, existing organisational risk framework, but also by specific country risk factors such as jurisdictional, geopolitical, economic and security risk, influencing the decision on the size, structure, allocated funds and time horizon of an investment. Given Ethiopia’s evolving mid-to-long-term political and security challenges causing economic volatility, it is advisable to monitor regularly critical market risk factors and adopt effective risk mitigation measures.

Common Structures
Prior to setting-up and/or acquiring a corporate vehicle in Ethiopia, investor can either engage a commercial agent to sell the investor’s products. Representative offices are interesting for investors who would like to deepen their knowledge of the market. It should be noted that representative offices require a minimum capital of USD 100,000 and are not allowed to make any revenue. Based on the high capital amount and the limited radius of action, investors typically tend to incorporate a fully foreign-owned limited liability company.

Prime Minister Abiy Ahmed’s staggering reform program and Ethiopia’s robust growth over the last decade offer the potential to transform it into a powerhouse within East Africa with a broad emergent lower income class, competitive local industries and resilient export capabilities. To preserve Ethiopia’s positive economic development, it will be key that Ethiopia’s government understands the need to address – in a timely and moderately manner – pressing governance and ethno-political problems, which have been intensified and (re-)surfaced by his introduced reform program.

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