The Investment Climate in Ethiopia

Ethiopian Climate

The past few years have seen Ethiopia taking leaps towards creating an open and free investment climate. The homegrown reforms in investment policies and the construction of large industrial zones have significantly increased foreign direct investment entering into the country.

Ethiopia saw an FDI inflow of 3.989 Billion USD in 2016, 4.017 Billion USD in 2017, 3.301 Billion USD in 2018, and USD 2.5 billion in 2019. And despite the decline of FDI inflow in 2019; Ethiopia still maintains its place as the number one recipient of FDI in eastern Africa.                                               

Ethiopia currently has one of the fastest-growing economies in the world. This growth can partly be attributed to the state-led growth model which focuses on boosting the manufacturing sector, establishing a series of industrial parks, and investing heavily in road and rail infrastructure.

And while the manufacturing sector has been steadily growing and creating a significant amount of employment; the agriculture sector is still the major employer in the country. Meanwhile, the service sector takes the largest share in contributing to the country’s GDP.

High FDI Inflow and the Reasons Behind it

Most of the FDI inflow into Ethiopia comes from countries like Saudi Arabia, China, the United States, India, and Turkey. China has significantly increased its investment in the country over the past decade, notably in the construction, textile, power generation, and telecommunications sectors. Agriculture (particularly horticulture), renting of agricultural land and leather goods are the sectors that traditionally attract the most FDI.

The country’s comparative and competitive advantages are driven by the availability of a large workforce, increasing productivity, strategic geographic location, creation of backward and forward linkages, as well as the preferential access to key global markets including the US, EU, AU, Japan, China, India and other developed and developing countries.

In addition, the country also has various incentives in place to attract foreign investment. Fiscal incentives include customs duty exemption on imports of capital goods, such as plant, machinery and equipment, construction materials, and raw materials for exported products. New investments also receive an income tax exemption for a set number of years. This will depend on the type and location of the project.

Homegrown Reforms

Moreover, the most recent incarnation of the Ethiopian investment proclamation loosens a lot of the restrictions placed on the activities that foreigners can engage in. This is except for a few activities reserved for domestic investors and other activities permitted for foreign investors investing jointly with domestic investors or the government.

With that in mind, a foreigner’s project in Ethiopia can manifest in 4 forms. A sole proprietorship, a private limited company, a share company, or a branch of an existing company. The formation of a company through one of the above formats will affect the way projects are run , it however, will not affect their entitlement to incentives

The agriculture sector is the source of livelihood for many Ethiopians; however, the manufacturing sector is to slowly replace the agriculture sector as the driving force of the economy. For that reason, it has become a key aspect of Ethiopia’s 5 Year Growth and Transformation Plan (GTPII) and has been playing a significant role in attracting FDI.

The country has identified and is pushing a few major areas within the manufacturing sector. These include textile and apparel, leather and leather products, pharmaceutical, and agro-processing. With that being said, projects planning on engaging in the ICT sector are also highly encouraged.

Risks and Strides

Even though Ethiopia has been working to get rid of the hurdles that investors face, there are still certain risks that come with investing in Ethiopia. Most of these risks arise from poor infrastructure and structural deficiencies within institutions.

Some of these impediments to doing business include:

– High interference of the government in the economy, which includes the government’s strict control over foreign exchange.

– Difficulties in acquiring land outside industrial parks

– Unavailability or shortage of power, water and other in some areas

But despite all the impediments, significant strides are being made in electric power generation and infrastructure development. Moreover, the most recent investment law reforms have opened up entirely new avenues for anyone interested in investing in Ethiopia.