Overseas Business Risk – Ethiopia
Political and Economic
Ethiopia is a federal republic with ethnically based regions. The Federal Democratic Republic of Ethiopia (FDRE) consists of the Federal Government, nine States and two chartered cities, with each entity vested with legislative, executive and judicial powers. The Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) overthrew the Derg regime in 1991 and has held power since then. The EPRDF pioneered the establishment of the current constitution in 1994 and this led directly to the first multiparty election in 1995.
Ethiopia held the most competitive election in its history in 2005. The opposition parties won 176 seats out of 547, a big increase from 12 in the previous parliament. This election was also marked by widespread protests and deaths due to allegations of electoral fraud by the governing Ethiopian People’s Revolutionary Democratic Front (EPRDF). The 2010 election, while peaceful, were also criticised for falling short of international standards. The EPRDF and parties aligned to it won 99.6% of seats in parliament.
There is insurgency activity in the Somali Region, particularly in the Ogaden, from groups fighting to establish an independent homeland. In the Gambella and Benshangul-Gumuz Regions, ethnically heterogeneous regions without a dominant ethno-linguistic community, rivalry for power and land led to inter-tribal clashes in the past. The situation has now improved but remains unpredictable.
In 1993, Eritrea, until then part of Ethiopia, became formally independent. In the years from 1998 to 2008 the two countries fought a bloody war over the disputed border town of Badme. Despite a peace agreement after the war, tension still remains between Ethiopia and Eritrea. The border dispute, the main cause of the conflict, is not yet settled – physical demarcation of the border has not been undertaken in line with the decision of the Eritrea-Ethiopia Boundary Commission. It is not possible to travel directly between Ethiopia and Eritrea.
According to IMF, Ethiopia’s GDP growth was 7% for the past decade and 8.5% in 2011/12. Its preliminary estimate for 2012/13 is also a robust 7% growth.
It is unlikely for the government to achieve its 11%growth target under the Growth and Transformation Plan (GTP) as domestic financing won’t meet the requirements and prospective external inflows are insufficient to fill the gap. Based on domestic financing which is less compared to full financing of the GTP, the IMF projection is for the economy to grow in the 7 – 7.5% range for the coming five years.
Inflation had followed a declining trend from its peak of 40.6% in August 2011 to 6.1% in April this year before it started to rise again to 6.3% in May and 7.4% in June. Although there was a slight increase in the last couple of months, inflation is projected to remain in single digits over the medium term. Monetary policy is still tight, despite some relaxations in 2012/13. A 13% base money target for 2013 is a tight monetary policy. In addition to the slowdown in global food and fuel price inflation, this has been instrumental in the recent decline in inflation.
Ethiopia faces a major challenge to sustain its current high growth rate, while ensuring that that growth is also shared. The agriculture industry is changing rapidly as growth in the sector slows and its share of GDP falls. That being said, agriculture still employs more than 85 percent of the population and contributes more than 90 percent of the export revenue. Given the mounting pressure on land, sustaining a higher rate of growth in agricultural production over the medium term will require substantial improvements in productivity. Transformation in the structure of production (which is mostly subsistence-based) to more commercially oriented and higher value added production, including for exports, will be key in sustaining growth.
There are overarching external factors that need to be addressed to sustain economic growth in the long-term. For example, overcoming the country’s dependence on rain fed agriculture and primary commodities; and ensuring equity while sustaining growth and diversification of the economy. There is strong correlation between weather conditions and Ethiopia’s economic performance. The last major shock to growth was in 2002/03 when the economy suffered a major decline in real GDP growth on account of severe drought
External sector risk
Worsening Current account deficit
The NBE data shows the current account deficit deteriorating from 4% of GDP in 2009/10 to 13.8% of GDP in 2011/12. The following are some of the reasons that had aggravated the current account deficit:
Imports are growing faster than exports. Exports grew from 6.7% of GDP in 2009/10 to 9.5% of GDP in 2011/12 whereas imports grow from 27.8% in 2009/10 to 33.2% in 2011/12.
The decline in the price of the two major export commodities – coffee and gold.
The overvaluation of the exchange rate due to high inflation. The IMF assessment of the exchange rate in Ethiopia for the fiscal year 2012/13, suggested an overvaluation of the real effective exchange rate in the range of 10 to 14%.
Foreign currency reserves
The foreign exchange reserve of the country has deteriorated from 2.4 months of imports in 2009/10 to 1.8 months of imports in 2012/13. International reserves contracted as the government sold reserves in an attempt to control domestic liquidity.
Dependence on Commodity exports
Ethiopia is highly dependent on agricultural commodity exports which are very sensitive to terms-of-trade shocks. The manufacturing sector is small and constitutes about 5% of GDP and 8% of exports in 2011/12.
High import share of commodities
Commodities, particularly fuel, constitutes a major share of the country’s imports. In 2011/12, the country used 67% of its foreign exchange earnings from export to buy fuel.
GDP will continue to grow in the coming years albeit at a slower rate of 7 – 7.5 %. Inflation will remain at single digit for the medium term. The current account deficit may further deteriorate due to the heavy import content of the GTP projects. As a result, importers (including UK manufacturing companies) may face occasional foreign exchange shortages.
Ethiopia also offers a wider market access opportunity to prospective investors beyond its growing domestic market. Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA), a regional trading block with 19 member countries and a combined population of 400 million, and enjoys a 10% preferential import duty privilege to access member country markets. Ethiopia also enjoys duty free and quota free market access to the US under the African Growth and Opportunity Act (AGOA), to the EU under the Everything but Arms (EBA) initiative and manufactured products preferential duty access to Canada, Japan, Norway, Switzerland, USA and most EU member countries under the Generalised System of Preferences (GSP).
The Constitution of Ethiopia and the Investment Proclamation protect private property. Investors are also eligible to repatriate capital and remit dividends accrued from their legitimate business and service external loans. Ethiopia is also a member of the Multilateral Investment Guarantee Agency (MIGA), a World Bank affiliate, which issues guarantee against non-commercial risks in signatory countries. Ethiopia is also signatory to the World Bank treaty, “the International Convention on Settlement of Disputes between States and the Nationals of other States (ICSID)”. Investment Promotion and Protection (IPPA) and Double Taxation Agreement with the UK are also in place.
Trade and Investment barriers
In Ethiopia, not all areas are open to foreign investment.
The following sectors are restricted:
Banking, insurance and microcredit and saving services
Travel and shipping agency services
Wholesale (except wholesale trade by foreign investors of their locally produced products) and retail trade
Air transport services using aircraft with a seating capacity of up to 50 passengers are exclusively reserved for Ethiopian nationals.
The telecommunication sector is a public monopoly.
Trade and investment between UK and Ethiopia is growing strongly from a low base. A number of British firms have invested in mining, food and drink, the leather industry and renewable energy. Trade between UK and Ethiopia is also growing. UK imports of goods from Ethiopia have grown by 41% from £61m in 2010 to £86m in 2012. In the same period UK exports to Ethiopia have also grown by 29% from £80 million to £103 million.
Ethiopia has ratified the two key International Labour Organisation (ILO) conventions that guarantee freedom of association and the right to organise and bargain collectively. However, under the 2003 Labour Proclamation, civil servants, the military and the police are denied these rights.
The right to strike is protected by law, but rigid and complicated procedures make it difficult for workers to engage in strike action in practice. In effect, lawful industrial actions are unknown in Ethiopia under these regulations.
The Global Gender Gap Index, a framework for capturing the magnitude and scope of gender-based disparities and tracking progress, ranks Ethiopia 116 out of 135 countries in 2011, a small improvement from the ranking of 121 in 2010. One notable factor for this improvement is the increase in the number of women in Parliament, which rose from 21% to 28%. However, the country comes last in the Index in terms of literacy rates.
Over the last couple of years, there have been allegations made by human rights groups that communities in Ethiopia have been forcefully moved from their land, sometimes in connection with potential commercial investments. Many of these allegations are focused on Ethiopia’s outer/peripheral regions. Separately, but related to the land issue, is the Ethiopian government’s “villigisation” programme, where communities are given the option of moving to new areas to improve their access to key services, such as health and education. HMG has not found any credible evidence of communities being forcefully moved from their land, but is monitoring the issue closely. If you or your company are thinking of investing in Ethiopia, you should ensure that a full social and environmental impact assessment is undertaken before you commit to any land related investment.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
In 2012, Ethiopia ranked 113 out of 176 countries in the Transparency International’s corruption perception Index (CPI), showing a slight improvement from the previous year’s rank of 120. This still indicates the seriousness of the problem of corruption in Ethiopia. One area where corruption still continues unabated in Ethiopia is land allocation. In Ethiopia land is public property. Individuals, companies and other organizations have only the right to use the land. The increase in the value of land in Addis Ababa, ambiguities between the rules and regulations for leasing land and lack of efficient land administration system have increased the incentive for corruption; created loopholes for corrupt officials and made it difficult to ensure transparent and accountable land administration.
There have been frequent reports by the Federal Ethics and Anti-corruption Commission (FEAC) of corruption cases being pursued against land developers. Land registration and recording have also started in Addis Ababa in to 2010 to promote land transaction process through registration and hence improving transparency to fight corruption. This solution will be use a blue print to be use in other regions of the country.
Other major reported cases of corruption includes bribing government employees to evade taxes, win public procurement contracts and establish and run illegal internet telephone services – an area where the public company Ethiopian Telecom has the exclusive right to provide these services.
One area where Ethiopia stands out among LDCs is in the near absence of corruption to perform routine tasks- such as issuing licenses or clearing customs. Bureaucratic delays certainly do exist, but they are not devices by which officials strive to line their pockets (UNCTAD, An Investment Guide to Ethiopia, 2004).
The registration of the assets and financial interests of federal officials began in December 2010 in accordance with the 2009 Proclamation for the Disclosure and Registration of Assets of government officials, employees and constituencies. Though the particulars of the registration and how the process will pan out are yet to be seen, many believe it is a step in the right direction to prevent and control corruption.
There is a high threat from terrorism in Ethiopia. Attacks could be indiscriminate including in places frequented by foreigners. On 13 October 2013 a bomb blast in Addis Ababa killed 2 people.
Be vigilant at all times, especially in crowded areas and public places like transport hubs, hotels, restaurants and bars. There is security around all major hotels, key government offices and major Western Embassies in Addis Ababa.
The terrorist group Al-Shabaab, although based in Somalia, poses a threat across the East Africa region. In July 2010, Al Shabaab claimed responsibility for attacks in Uganda. The group linked the attack to Uganda’s military presence in Somalia as part of an African Union peacekeeping mission.
Ethiopia may be seen as a legitimate target by Al Shabaab because of its military intervention in Somalia. Al Shabaab has previously issued public threats against Ethiopia.
There is a high threat of kidnapping in Ethiopia’s Somali region, particularly in the eastern areas to which we advise against all travel. You should be vigilant, particularly in towns and cities in the Somali region of Ethiopia, even in areas where the FCO do not advise against all travel.
Please consult the FCO’s travel advice for further details.
Protective Security Advice
The legal and institutional framework for the protection of intellectual property rights in Ethiopia is adequate although the record on implementation and enforcement of the rules and regulation is still very poor. The Ethiopian Intellectual Property Office (EIPO) was established in 2003. Intellectual property legislation in Ethiopia includes the Patent Proclamation and Implementing Regulations, issued in 1995, which covers Patents, Utility Models and industrial designs; the Trademarks Registration Directive issued in 1986; and the Copyright and Related Rights Proclamation issued in 2004. Ethiopia has also ratified the WIPO Convention since 1998, and is a signatory of the Nairobi Treaty [Olympic Symbol] since 1982.
It is no secret that some prominent international hotel names are being used by local business people in Ethiopia with the trademark infringement either condoned or ignored by EIPO. Illegal copying of artistic works and software is also widespread, with intermittent and often inadequate measures taken by the government and EIPO to prosecute and punish offenders.
Ethiopia has applied to join the WTO. Accession will require amendments to the existing intellectual property rules and regulations to bring them into conformity with the WTO Trade Related Intellectual Property (TRIPS) agreement. Once a WTO member, Ethiopia is also expected to tighten its currently lax intellectual property right enforcement regime in line with WTO standards.
The Bole international airport, in Addis Ababa, Ethiopia, is one of the key entry points for illicit drugs into East Africa, due to frequent commercial flights from Asia and the Middle East. The Ethiopian government in collaboration with the United Nations Office on Drugs and Crime (UNODC) is implementing a project against trafficking in the airport of Addis Ababa and capacity building training programmes for police, customs and immigration officers to improve law enforcement to counter organized crime.
A serious of measures has also been taken by the government of Ethiopia to prevent and control money laundering. The Ethiopian criminal code has been amended to criminalize money laundering; the Prevention and Suppression of Money Laundering and Financing of Terrorism Proclamation was enacted by Parliament; and the Ethiopian Financial intelligence Agency has been established.