Last Updated on October 3, 2021 by Ope Quadri
Summary: Located in the Horn of Africa, Ethiopia is the second largest market in Africa and has enough resources to drive Foreign Direct Investment (FDI). The country’s huge investment in infrastructural development in the last 10 years is showing positive result while its rich soil is favourable to agriculture produce. As juicy as the country’s resources are, Ethiopia is still faced with some challenges.
If you’re planning to invest in Ethiopia as a foreign company or an individual, the market and the resources are enough for you to explore, however, we’ve also highlighted some of the negative signals you need to watch out before taking your investment to East African country as the government continues to open the state-dominated economy.
- Consumer market: Second largest in Africa
- Population: 115 million (world bank 2020 data)
- Legal protection of FDI: Yes
- Sub-region: East Africa
- GDP: $110.00 Billion by 2021 ending
- GDP 2021 Projection: $115Billion by 2023
- FDI: USD 3.9 billion (July 28, 2021 according to Ethiopian Investment Commission or EIC)
- Neighbour: Kenya, Eritrea, Somalia, Sudan, Djibouti, and South Sudan
Why Should I Invest In Ethiopia?
There are some reasons you must consider before investing heavily in a specific sector or country when it comes to international trade. In this guide we divided such investment factors into: 1) Positive signals, 2) Negative signals
Positive Investment Signals
- Rapidly developing infrastructure
- Inconsistencies in tax policy
- Air freight boom
- Fair Birr Exchange Rate Against USD
- Conducive macroeconomic environment
- Favourable climate for agriculture produce
- Multi-language society
- Fair FDI law
- Market accessibility
- Improved corruption index ranking
- Regional headquarters for international organisation
Negative Investment Signals
- Difficulty in repatriating profits
- Locust invasion
- Unstable peace in Tigray region
- Targeting companies suspected to be working with opposition
- Selective licence
- Complex multi-language society
Rapidly Developing Infrastructure
Ethiopia is one of the fastest growing economies in the world, it isn’t doing badly compared so some of its counterparts on the continent. Its massive investment in infrastructure has been one of the investment boosting factors.
No foreign investor would want to put their money in a country where there is massive deficit in infrastructural development. Exports is doing well, though there are still some challenges that the country leadership needs to address.
The country is gradually implementing the recommendations in its Growth and Transformation Plan which captures numerous areas the country needs to pay attention to and how infrastructural development will help drive investment through the areas the Ethiopia has comparative advantage.
Some of the key areas that has received attention and continue to get government attention include:
- Road projects
- Railway projects
- 6GW-generated power plant
- Dire Dawa
- Adama industrial zones among others.
Air Freight Boom
One of the booming sectors in Ethiopia is its airline. For manufacturers of perishable goods who want effective air cargo, Ethiopia is the best in Africa. It has dominated and won several laurels locally and international in airline management.
The first thing that comes to mind when the name of the country is mentioned is Ethiopian Airlines. It flies to more destinations in Africa than any carrier.
Its new cargo terminal is capable of delivering about 600,000 tons a year. Ethiopian Airlines handle two thirds of Africa’s air freight.
Significance to trade
This will help local manufacturing companies to get their produce across to the right destination faster and smarter.
Fair Exchange Rate of Birr Against USD
Whereas Nigerian currency is in total disarray, the Ethiopian Birr is fair in the forex exchange market, $1 was 43.3874 birr at the time of this publication, Naira on the other hand is N413 to $1 at the official rate while it’s higher at the black market, but Nigeria’s investment market strength is better which is one of the reasons foreign investor may want to choose the most populated African country.
It isn’t just fair, it has also shown signs of stability over time compared to naira that is being devalued over and over again as one of the short-term measures to resolve the wide disparity between the official rate and the parallel market rate.
Conducive Macroeconomic Environment
The World Economic Forum in its Global Competitiveness report between 2016 to 2017 ranks Ethiopia higher than its regional brother in terms of favourable macroeconomic environment
Favourable Climate For Agriculture Produce
With its large sparse of land and diverse topography and geographical location, Ethiopia is home to some globally products that are in high demand e.g cereals, coffee, tea and spices etc
It is the world’s largest producers of coffee, and the 3rd largest producer of Arabica beans in the world, according to the US Department of Agriculture.
The good thing is that its coffee industry hasn’t been fully explored, foreign investors can come in.
Fair FDI Law
No country does it alone. Any country that wants to attract Foreign Direct Investment (FDI) must be ready to open up its economy. Not just that, it must also put in place enabling policies and law for investors to achieve their business goals.
Before now, virtually all the sectors were state-controlled, it has opened up its market and one of the things it did was the “Investment Proclamation No1180/2020”, an Ethiopian investment law and trade policy to protect the business interest of the country, local and foreign investors.
The law also clearly spells out registration and licencing procedures, it’s aimed to “fast-tracks the global competitiveness of the National economy, increases export performance, generates more and better employment opportunities, and facilitates sustainable and entwined linkage among various economic sectors”
Consumer Market and Accessibility
Ethiopia is the second largest market after Nigeria. With over 100 million people. Its membership of Common Market for Eastern and Southern Africa (COMESA) is also an advantage as produce in the country can be supplied to 19 members countries in COMESA. This means access to over 400 million market.
One of the things African countries have in common is the surplus of affordable labour unlike UK, US, Canada where labour is insufficient to meet demands.
For instance, UK had shortage of truck drivers and farm workers which made the government to announce vacancies for temporary workers and updated its A-Listing of companies that can sponsor foreign workers to work in the United Kingdom.
In countries like UK and US, most times, recruiting companies spend more in applying for sponsorship certificate to bring foreign workers to fill staff shortage, it isn’t like that in Ethiopia, there is a large group of labour ready to work.
Regional Headquarters For International Organisation
Playing host to two major globally recognised bodies – African Union (AU) and the United Nations Economic Commission for Africa – give Ethiopia some international trade advantage over its competitors across the continent.
Under the African Growth and Opportunities Act (AGOA) and the Everything But Arms (EBA) initiative, it enjoys products have duty-free, quota-free access to the U.S. and EU markets.
For instance, Nigeria can’t export yam to Canada, but Ethiopia products have access to Canadian, Australian, Russian, and Turkish markets among others.
Foreign investors in Ethiopia can benefit from the existing bilateral relations the country has with other countries.
Improved Corruption Index Ranking
In Corruption Perception Index (CPI), Ethiopia ranks better than some African countries on the continent. It ranked 94 out of the 180 countries on CPI.
And in a period of nine years – 2012-2020 – it has shown a significant improvement. For instance, it scores 33 in 2012, 2013, 2014, and 2015. In 2016, it scored 34 and in 2020, it scored 38, which is an improvement, it shows that corruption has reduced more than the previous years compared to Nigeria which never scored 30 in the years under review.
The CPI is a brainchild of the Transparency International which ranks 180 countries by their perceived levels of public sector corruption according experts and business people. Scoring zero on the index means highly corrupt while 100 indicates very clean.
We’ve talked about the opportunities, it’s also important to discuss some of the challenges of investment in Ethiopia which we call negative signals:
One of the drawbacks of investment is Ethiopia is bureaucracy and all sectors have not been fully opened for foreign investment. For instance, domestically registered businesses can’t access loans, according to the the founder of Ethio Lease, Frans Van Schaik.
Ethio Lease is a subsidiary of Africa Asset Finance Company, a New York-based equipment leasing firm.
Despite the fact that the company is the first foreign-owned company to get such licence, there are still restrictions, according to a report by Reuters, which authority denied.
Birr isn’t doing badly against USD, but insufficient of foreign exchange hinders business from performing some transactions, the private sectors are mostly affected by the shortage.
There is still trade imbalance in Ethiopia because imports are higher than exports, when this happens importers will need more forex, which cause scarcity.
Difficulty In Repatriating Profits
As a result of the forex shortage, foreign companies in Ethiopia now struggle to repatriate profits.
Unstable Peace in Tigray region
Tigray region in the Northern part of the county houses several untapped natural resources, yet it is such a difficult area for business to operate due to its fragile peace.
Foreign investors who plan a long-term investment must understand that the crisis in that region has been on for several years.
The crisis in the region can be traced to the 1991 civil war, so any political decision or indecision could spark violence any time. No wonder Ethiopian Prime Minister, Abiy Ahmed, committed1.2 billion birr in rebuilding Tigray region in the 2021/22 budget.
Ethiopia has reason for adopting Amharic (one of the indigenous languages) which is spoken by 29% of the population as the official language, although approximately 34% speaks Oromo.
It has close to 100 distinct ethnic groups wit more than 80 languages are being spoken, they include: Oromo, Tigrinya and Somali is multi-language country.
When doing business in such a multi-ethnic and language society, it’s important to know their norms.
How does this affect investment?
To penetrate Ethiopia investment market, you may have to employ the services of locals who understand the language and their culture better.
You need to conduct this research before entering Ethiopian market, this isn’t a big problem any longer as there are language interpreters can be found in the US and online who can help you cross this hurdle.
Locust invasion in the Horn of Africa is one of the problems agriculture investors face. The epidemic doesn’t only affect the agric sector, sometimes in January 2020, grasshoppers invasion forced Ethiopian Airlines B737-700 to divert from Dire Dawa Airport to Addid Ababa. This is a challenge for the agriculture sector, most especially sorghum farmers
While the government promised to embrace foreign investors, Ethiopian authorities are not fully committed to the course, most especially the banking and insurance.
This is why prospective investors must be careful on the sector they select.
Don’t be deceived by the investment law, the government still have a tight grip on some key sectors.
Inconsistencies In Tax Policy
Another investment challenges foreign investors complain about is the inconsistencies in tax assessments and excessive.
Not just that, companies that fail to remit returns face excessive penalties. This isn’t peculiar to Ethiopia, generally, tax collection is an issue in East Africa and other African countries.
Problematic Clearance of goods
“Ethiopia is an emerging market so issues do arise,” said Francis Agbonlabor, CEO of the Diageo Brewery. “Clearance of goods and transportation can be complicated but with patience and innovative thinking, solutions can easily be found. The government are always here to help.”
Despite the challenges, Ethiopia is still a great country for investment, the problems facing business there are surmountable. Every country has their peculiar problem.
- Business In East Africa & Ethiopia – Overcoming Some Of The Challenges By Ruari Philips on LinkedIn
- World Economic Forum