16 Sept 2019
Section 4: Regulations & Tax Incentives in Ethiopia
Fitch Solutions Trade & Investment Risk Index
- Ethiopia's government is moving towards economic liberalisation in a bid to attract foreign investment as it implements an ambitious programme that seeks to make manufacturing a key part of economic activity.
- Ethiopia receives a score of 30.6 out of 100 for Trade and Investment Risk, ranking sixth place out of 11 states in East Africa, behind regional peers such as Kenya, Tanzania and Uganda.
Trade and Investment Risk Index: Methodology and Components
- Trade and Investment Risk Index quantitatively compares the challenges of operating in 201 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest risk. Each country has a headline Trade and Investment Risk Index score, which is made up of three categories, further broken down into sub-categories. The individual categories and sub-categories are also scored out of 100, with 100 the best. The overall Trade and Investment Risk Index score is calculated using the average of the Economic Openness, Government Intervention and Legal sub-component scores.
- Economic Openness: Analyses a country's openness to foreign investment and international trade. This is generated from indicators such as import, export and foreign direct investment (FDI) values as a percentage of GDP, which are used as a barometer of openness. A country that is more open to private and foreign businesses will score more highly on this indicator.
- Government Intervention: This score is composed of information on taxation and the availability of financing. The scoring system favours countries which offer lower taxation and open, sophisticated financial markets with easy access to loans.
- Legal: This score reviews the strength, transparency and efficiency of the legal system and bureaucracy in a given country. It measures the extent to which the rule of law is upheld, the prevalence of corruption, and the delays and costs involved with the bureaucratic procedures required to set up a business.
Foreign Investment Climate Overview
Attracting foreign investment is a key objective for the Ethiopian government and is embedded within its current GTP II (2016-2020). In particular, the government is seeking to attract investment in the high-priority sectors including heavy and light manufacturing, agri-business, textiles, sugar, chemicals, pharmaceuticals, and mineral and metals processing. The largest volume of foreign investment in Ethiopia comes from China, followed by Saudi Arabia and Turkey.
The government is taking steps to streamline the investment process by developing a more efficient one-stop-shop facility for foreign investors. Investment policies and legislations are currently being revised to facilitate investment and ease operations. We expect to see changes aimed at clarifying regulations, standardising appropriate accounting practices to more accurately assess tax and other operating liabilities, increasing protection for shareholders and provisions for bankruptcy filings, and modernising trade and registration processes. This will help the development of new industrial sites, which will improve domestic manufacturing capacity.
Investors involved in disputes will face a judicial system that is perceived to be unreliable and inefficient, resulting in potential delays and additional costs. While investment disputes in Ethiopia can be resolved in international arbitration forums at the agreement of both parties, there is no guarantee that the award of an international arbitral tribunal will be fully accepted.
Official and unofficial barriers to foreign investments persist. Preference can still be given to state-owned enterprises (SOEs) for investment, access to credit, FX, land, procurement contracts and import duties even though the government has taken a number of crucial first steps to rein in the risks posed by SOEs.
The tax burden on private entities in Ethiopia is considerable owing to the range of direct and indirect taxes applicable to businesses. Corporate income tax is charged at the same rate for both resident and non-resident businesses on all income derived from within Ethiopia (30% of profits). The administration of tax payments is rather onerous, with the country having the longest time to pay taxes in East Africa at 300 hours.
Incentives for Manufacturing Relocation
Foreign Trade Zones/Free Ports/Trade Facilitation
Investment development zones, both state-run and private, have favourable investment, tax and infrastructure incentives. The minimum capital requirement is US$200,000 per project for wholly owned foreign investments and US$150,000 for joint investments with domestic investors. A foreign investor reinvesting profits or dividends may not be required to allocate a minimum amount of capital.
Industrial parks will be particularly beneficial to the manufacturing sector, with tax and duty incentives set by the government to accompany investments in the textile and garment industry, leather and leather products, sugar and sugar-related products, cement, metal and engineering, chemicals, pharmaceuticals, and agro-processing.
Free Trade Agreements
Ethiopia is currently not a member of any customs unions but is in the process of joining the WTO. Ethiopia is also a member of the Common Market for Eastern and Southern Africa (COMESA) and is in the final negotiation stages to join COMESA’s free trade area.
Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA) and it has bilateral investment and protection agreements with Algeria, Austria, China, Denmark, Egypt, Germany, Finland, France, Iran, Israel, Italy, Kuwait, Libya, Malaysia, Netherlands, Qatar, Russia, Sudan, Sweden, Switzerland, Tunisia, Turkey and Yemen. Ethiopia is also a member of UNCTAD’s international network of transparent investment procedures.
Currency & Finance
Currency: Ethiopia’s national currency (birr) was devalued significantly in September 2010 and October 2017. Moreover, the government maintains a policy of slow but steady annual devaluation at a rate of 5.0-6.0%.
Capital Controls: The birr is not freely convertible and all foreign currency transactions must be approved by the National Bank of Ethiopia (NBE). Nonetheless, a 2004 NBE directive allows non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin to establish and operate foreign currency accounts up to US$50,000. Ethiopia is currently experiencing FX shortages. All foreign currency transactions must be approved by the NBE. Businesses are likely to experience delays in FX supply for up to a year and slow-downs and downtime in the manufacturing sector are especially common.
The government allocates financial resources to its priority areas (agriculture, industrial activities, trade and infrastructure) in line with its strategic objectives as it is perceived that liberalising the sector will weaken the government’s ability to implement its objectives. This undermines competition and limits innovation in the financial sector, leading to poor services offered to customers and businesses. In addition, businesses (especially SMEs) experience challenges in securing foreign currency to support their trade-related operations, while state-owned enterprises receive priority in terms of foreign currency allocation and credit availability.
Remittances: Legally, Ethiopia’s Investment Proclamation allows all registered foreign investors to remit profits and dividends, principal and interest on foreign loans, and fees related to technology transfer. The right of expatriate employees to remit their salaries is granted by NBE foreign exchange regulations. However, in practice, a shortage of foreign exchange in the banking system means that companies experience delays of up to two years in the repatriation of large volumes.
Access to Credit: Access to finance is a major impediment to investment in Ethiopia. While credit is available to investors on market terms, a 100% collateral requirement limits the ability of investors to take advantage of business opportunities.