Despite its current instability, Ethiopia remains a good investment opportunity for foreign investors. According to the FT, by 2020 Ethiopia will be ranked 66th in the world ahead of Bulgaria, Guatemala and Kenya. However in order to invest in Ethiopia an investor has to do preliminary work. As well as understanding the local militia politics, it is essential that they build trust with the government, and invest in line with what the government wants to achieve.
The Ethiopian government follows an integrated 5 year development plan, the Growth and Transformation Plan (GTP). The first plan ran from 2010-2015, and the second plan took effect in 2016. These plans have driven Ethiopia's demand for and openness to foreign investment. An investment in line with this plan would be viewed favourably.
The areas of investment open to foreign investors
It is important to note from the outset that some areas are simply not open to any investors (foreign or otherwise). Under the Investment Proclamation No 769/2012 areas of investment exclusively reserved for the Government are:
- Transmission and distribution of electrical energy through the integrated national grid system;
- Postal services with the exception of courier services; and
- Air transport services using aircraft with a seating capacity of more than fifty passengers.
Within the same proclamation under Art 6(2) areas of investment that can only be done jointly with the Government are:
- Manufacturing of weapons and ammunition; and
- Telecom services.
Other areas are reserved for Domestic Investors (Ethiopian nationals) and there are set out in art 3 of the Council of Ministers Regulation No. 270/2012:
- Banking, insurance and micro-credit and saving services;
- Packaging, forwarding and shipping agency services;
- Broadcasting service;
- Mass media services;
- Attorney and legal consultancy services;
- Preparation of indigenous traditional medicines;
- Advertisement, promotion and translation works;
- Air transport services using aircraft with a seating capacity up to 50 passengers
All this does not mean that there are no opportunities in Ethiopia for a foreign investor. The Growth and Transformation plan particularly encourages investment in areas such as manufacturing. Furthermore, the following areas of investment are expressly stated as being open to foreign investment. These include:
- Food Industry;
- Beverage Industry;
- Textile and Textile product Industry;
- Leather and Leather Product Industry;
- Wood Product industry;
- Paper and Paper product industry (except the printing industry);
- Chemical and Chemical Product industry;
- Basic pharmaceutical and Pharmaceutical industry;
- Rubber and Plastic Product Industry;
- Other non –Metallic Mineral Product Industry;
- Fabricated Mineral Products Industry excluding machinery and equipment;
- Computer /Electrical and Optical Industry
- Machinery and Equipment Industry
- Vehicle Trailers and Semi-Trailers Industry
- Animal Production
- Hotel and Tourism
- Construction Contracting
- Real Estate Contracting
- Education and Training
- Health Service
- Architectural and Engineering Work
- Import Trade, Export Trade and Wholesale Trade.
If a foreign investor seeks to work specifically within one of the above mentioned areas then this will help to ensure local support.
The Pros and Cons of investing in Ethiopia
Investing in Ethiopia is interesting for the following reasons:
- Cheap labour costs
- Cheap energy costs
- Relative proximity of the market to Europe and the Middle East.
However, an investor should also bear in mind that the energy supply is unreliable (sometimes 30-40% will be down); the local skill set can be limited and labour productivity has historically been low (although this is improving); and access to finance is not always easy. It is also important to be aware of the following risks:
- Debt - The Ethiopian government owes a lot of money to foreigners particularly from the International Monitory Fund (IMF), Chinese government and Chinese banks. If the current instability continues the creditors are even less likely to be paid. Even before the start of the current crisis, the IMF referred to this as "Debt stress''.
- ForEx - The ForEx is controlled by the National Bank of Ethiopia. Many investors need to get their money out but there are considerable delays. There are very little reserves of foreign currency in the treasury of the National Bank of Ethiopia.
- Politics - The current political situation in the country has led to considerable uncertainty.
- Local Politics - Although central government assures any potential investor that land is available for their investment operations, often the local community does not want this and many conflicts around land rights have arisen.
- Corruption - Historically corruption has not been a major issue in Ethiopia, but there are signs that this is changing. While central government has moved towards a developmental state model, it seems as though this has somehow brought about a change of mentality in the country, and there are increasingly high levels of corruption being recorded.
Local content rules
In general there is not requirement for foreign businesses investing in Ethiopia to use locally produced raw material, local labour, etc. However, in some specific sector areas such rules are in force. For example, under the Proclamation to Regulate Petroleum Operation (Proclamation 295/1986) contractors and sub-contractors are required to give preference to the local employees of Ethiopia rather than expatriate employees. Even in this situation though, the proclamation does not set out a minimum quota.
Registering business in Ethiopia
Another thing to bear in mind when considering investment in Ethiopia, is commitment needed to register a business there. Although the process is not lengthy and legal fees are not extortionate, it does require regular visits to the Ethiopian Investment Agency and considerable patience and perseverance from the person on the ground. "Come back tomorrow" is a frequently repeated phrase.
Investing in Ethiopia can be challenging for a foreign investor, but if they take advice, build trust with the government, invest in line with the Growth and Transformation Plan and make big investments, then there can be rich rewards.