1

Executive Summary

Ethiopia is one of the fastest-growing economies in the world. It has registered impressive GDP

growth for several years, ranging between 6% and 12%, depending on source data. The World

Bank and IMF forecast continued average growth of 7% over the next three years. With a

and energy projects.

While these developments are positive indicators for future private sector development, it

translates into the flow of significant amounts of capital into public sector projects. World Bank

estimates show that infrastructure spending requires approximately 19% of Ethiopia’s total GDP

in fiscal year 2011 – 2012.

Competitive labor and energy costs as well as the budding consumer markets are key pulls for

foreign direct investment. Current challenges to the private sector include foreign exchange

shortages and limited access to finance capital, long lead-times for inputs and exports due to the

current logistic infrastructure, and bureaucratic delays. Areas closed to foreign investment are

banking, retail, tele-communications and transportation. Businesses interested in entering the

registration, logistic, and tax processes. Key energy generation and distribution projects as well

as transportation infrastructure projects are scheduled for completion by the end of 2015.

1. Openness to, and restrictions upon, foreign investment

Ethiopia’s five-year Growth and Transformation Plan (GTP) – 2010 to 2015, which was

approved by the Ethiopian Parliament in November 2010 and is currently in its fourth year, is

driving Ethiopia’s demand for and openness to foreign investment. The GTP overarching goals

are to achieve the Millennium Development Goals and middle-income status by 2025. The plan’s

overarching goals translate to a focus on improving the quantity and quality of social services

Department of State: 2014 Investment Climate Statement June 2014

2

manufacturing, agribusiness, textiles, sugar, chemicals and pharmaceutical and mineral and

metal processing underscore the government’s focus and openness to foreign direct investment

(FDI), the recent credit worthiness ratings by the international rating agencies has opened up

Ethiopia’s access to commercial foreign loans.

After six months of research, Moody’s rated Ethiopia’s credit worthiness a ‘B+’, while S&P and

Fitch gave a ‘B’ in May 2014. The rating agencies underscored Ethiopia’s stable outlook and

positive prospects for continued economic growth in the short and medium term. Key drivers of

their ratings were the huge investments in infrastructure and power generation and its likely

effect in improving trade conditions. The country’s peace and stability was also positively

bankruptcy filings as well as modernization of trade and registration processes.

The revised Investment Code of 1996, as well as the Investment Proclamation provide incentives

for development-related investments and have gradually removed most of the sectorial

restrictions on investment.

However, Ethiopia’s investment code prohibits foreign investment in banking, insurance, and

financial services. The remaining state-owned sectors include telecommunications, power

transmission and distribution, and postal services with the exception of courier services.

Manufacturing of weapons and ammunition can only be undertaken as joint ventures with the

government.

Other areas of investment reserved for Ethiopian nationals include: broadcasting; air transport

designated hotels); restaurants and bars (excluding international and specialized restaurants);

trade auxiliary and ticket selling services; transport services; bakery products and pastries for the

Department of State: 2014 Investment Climate Statement June 2014

3

Foreign firms can supply goods and services to Ethiopian firms in the closed sectors.

The 2012 amendment to Ethiopia’s investment proclamation introduced provisions for the

establishment of industrial development zones, both state-run and private, with favorable

investment, tax, and infrastructure incentives. The amendment also raised the minimum capital

requirement to US$200,000 per project for wholly-owned foreign investments and US$150,000

for joint investments with domestic investors (or US$100,000/US$50,000 respectively in the

areas of engineering, architectural, accounting and auditing services, business and management

consultancy services and publishing). A foreign investor reinvesting profits / dividends may not

be required to allocate minimum capital.

In alignment with GTP goals to further develop medium and large scale industries, the

pharmaceutical and agro-processing. Investments in this area are accompanied with additional

tax incentives as established in proclamation 769/2012.

The government continued to implement its privatization program for some government-

owned entities, which were largely nationalized by the Derg military regime in the 1970s. The

current government's position is that property seized "lawfully" by the Derg (i.e., by court order

or government proclamation published in the official gazette) remains the property of the state.

Nearly all tenders issued by the Ethiopian government's Privatization and Public Enterprises

Supervising Agency (PPESA) are open to foreign participation. In some instances, the

government prefers to engage in joint ventures with private companies rather than sell an entire

entity. The government has sold over 300 public enterprises since 1995. Most of these

face undue screening of FDI, unfavorable tax treatment, denial of licenses, discriminatory

import or export policies, or inequitable tariff and non-tariff barriers.

Department of State: 2014 Investment Climate Statement June 2014

4

existing enterprise needs to obtain prior approval from the EIA.

Currently, within the sectors allowing foreign investment, there are no laws restricting to

competition for foreign companies or foreign-owned subsidiaries. The Ethiopian Investment

Agency reviews investment transactions for compliance with FDI requirements and restrictions.

However, companies have complained of favorable treatment of the state-owned enterprises in

the governmental tender process. As the public sector is heavily involved in the economic

development, this translates into a sizeable portion of the open tenders on the market.

Because of its consistent GDP growth of between 6% - 12 % over the past 10 years, its

population of over 90 million and its stable investment climate, Ethiopia is becoming an

exchange shortages for import of inputs and logistic costs remain high both in actual cost and

lead time requirements, most manufacturing companies still identify a cost advantage on the

whole due to low power, labor and customs cost.

Ethiopia’s ranking among key indices is as follows:

Department of State: 2014 Investment Climate Statement June 2014

5

development grants to countries that have demonstrated a commitment to reform, produced

scorecards for countries with a 2012 per capital gross national income (GNI) of $4,085 or less. A

list of countries / economies with MCC scorecards and links to those scorecards is available here.

A list of countries/economies with MCC scorecards and links to those scorecards is available

here: http://www.mcc.gov/selection/scorecards. To access Ethiopia’s scorecard, please use the

following link: http://www.mcc.gov/documents/scorecards/score-fy14-english-et-ethiopia.pdf.

Details on each of the MCC’s indicators and a guide to reading the scorecards are available here:

http://www.mcc.gov/documents/reports/reference-2013001142401-fy14-guide-to-the-

indicators.pdf.

receive incentives, to remit freely profits and dividends, principal and interest on foreign loans,

and fees related to technology transfer. Foreign investors may also 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 service or other international payments. The right of expatriate

employees to remit their salaries is granted in accordance with NBE foreign exchange

regulations.

Forex reserves were heavily depleted during 2012 but showed signs of stabilizing towards the

end of 2012. By the end of 2013 the gross reserve coverage was at 2 months. According to the

IMF, the use of forex sales as a means of sterilizing local currency liquidity is the main cause of

the shortfall; though it has been further exacerbated by weaker than expected exports of coffee,

The birr depreciated approximately 100% against the U.S. Dollar between November 2006 and

November 2012, through a series of controlled step-downs, including 20% devaluation in

September 2010. As of December 2013, the exchange rate was approximately 19.02 birr per

Department of State: 2014 Investment Climate Statement June 2014

6

currency transfers exceeding US$10,000).

3. Expropriation and Compensation

Per Ethiopia's 1996 Investment Proclamation and subsequent amendments, assets of a domestic

investor or a foreign investor, enterprise or expansion cannot be nationalized wholly or partly,

except when required by public interest and in compliance with the laws and with payment of

adequate compensation. Such assets may not be seized, impounded, or disposed of except under

Department of State: 2014 Investment Climate Statement June 2014

7

government and private sector attendees. However, since its inception, the TPCPA has been

primarily focused on self-organization and administrative work, and had not conducted any

significant enforcement activities as of January 2013.

Ethiopia does not formally impose performance requirements on foreign investors.

The 2003 amendment to the Investment Proclamation outlines investment incentives for

investors in specific areas. New investors engaged in manufacturing, agro-processing activities,

or the production of certain agricultural products, who export at least 50% of their products or

be eligible for an additional one-year income tax exemption. An investor who exports hides and

skins after processing only up to crust level will not be entitled to the income tax incentive.

A special loan fund through the Development Bank of Ethiopia (DBE) provides land at low lease

rates for priority export areas such as floriculture, leather goods, textiles and garments, and agro-

processing related products. An investor can borrow up to 70% of the cost of the project from

this special fund without collateral upon presenting a viable business plan and 30% personal

equity.

Investors are allowed to import duty-free capital goods and construction materials necessary for

the establishment of a new enterprise or for the expansion of an existing enterprise. In addition,

spare parts worth 15% of the value of the capital goods can be imported duty-free. This privilege

periods of up to seven years on land rents. The Directorate is currently focused on land deals in

the remote regions of Gambella, Benishangul Gumuz, Southern Nations, and Afar.

Department of State: 2014 Investment Climate Statement June 2014

8

enacted a controversial urban land lease proclamation that allows the government to determine

the value of land in transfers of leasehold rights, in an attempt to curb speculation by investors.

Secured interests in property are protected and enforced, although all land ownership remains in

the hands of the state. Certain residents have been relocated (and usually compensated) when the

government decides that the land they are living on should be used for a road or other public use.

Land leasehold regulations vary in form and practice by region. Mortgages are uncommon as

loan terms are generally quite short.

(EIPO) has been tasked primarily to protect Ethiopian copyrighted materials and pirated

software. Generally, EIPO has weak capacity in terms of manpower and none in terms of law

enforcement. In addition, a number of businesses, particularly in the tourism and service

industries, operate in Ethiopia freely using well-known trademarked names or symbols without

permission.

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,

perception of favoritism toward vendors who provide concessional financing, and a general lack

of transparency in the procurement system. In September 2009, the government established a

Department of State: 2014 Investment Climate Statement June 2014

9

Access to finance is an impediment to increased Ethiopian domestic private investment. While

credit is available to investors on market terms, a 100% collateral requirement limits the ability

of some investors to take advantage of business opportunities. Additionally, an April 2011

measure forcing non-government banks to invest the equivalent of 27% of each loan made in

National Bank of Ethiopia (NBE) bonds has contributed to liquidity shortages that have reduced

the ability of banks to lend to the private sector.

Ethiopia currently has nineteen banks--three state-owned, and sixteen privately-owned. In

September 2011, the NBE raised the minimum paid up capital required to establish a new bank

from Birr 75 million to 500 million which effectively stopped the entry of most new banks into

the market. Foreign banks are not permitted to provide financial services in Ethiopia. The state-

rates are allowed to float. Real interest rates have been negative in recent years mainly due to

high inflation. The government offers a limited number of 28 days, 3-month, and 6-month

Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate. The

government began to offer a one year Treasury bill in November 2011. The yields on these T-

bills are below 2%. This market remains unattractive to the private sector and over 95% of the T-

bills are held by the state-owned Commercial Bank of Ethiopia and public enterprises.

The Ethiopia Commodity Exchange (ECX), launched in 2008, trades commodities such as

coffee, sesame seeds, maize, wheat, and haricot beans. The GOE launched ECX to increase

transparency in commodity pricing, alleviate food shortages, and encourage the

commercialization of agriculture. However, critics allege that ECX policies and pricing

banking, insurance, air transport, shipping, and sugar. Ruling party-affiliated "endowment"