Business Development and International Relationship

July 2013

COUNTRY STUDY:

ETHIOPIA

2

TABLE OF CONTENT

TABLE OF CONTENT ......................................................................................................................... 2

1. INTRODUCTION OF ETHIOPIA ................................................................................................. 3

2. POLITICAL SOUNDNESS OF ETHIOPIA .................................................................................. 7

3. ECONOMY OF ETHIOPIA .......................................................................................................... 13

4. TAX REGIME OF ETHIOPIA ..................................................................................................... 29

5. INVESTMENT REGIME OF ETHIOPIA .................................................................................. 37

6. BUSINESS CREATION REQUIREMENTS............................................................................... 42

7. INFRASTRUCTURE OF ETHIOPIA ......................................................................................... 47

8. AVAILABILITY OF SKILLED LABOR ..................................................................................... 57

9. LABOR COST IN ETHIOPIA...................................................................................................... 62

10. LAND COST IN ETHIOPIA ...................................................................................................... 63

11. AVAILABILITY OF ARABLE LAND ...................................................................................... 69

12. LEGAL FRAMEWORK OF ETHIOPIA .................................................................................. 70

13. NATIONAL DEVELOPMENT PLAN ...................................................................................... 75

SWOT ANALYSIS OF ETHIOPIA .................................................................................................. 79

LIST OF FIGURES ............................................................................................................................ 80

LIST OF TABLES .............................................................................................................................. 82

3

1. INTRODUCTION OF ETHIOPIA

Figure 1: Map of Ethiopia

4

Table 1: Key Facts of Ethiopia

Official Name Federal Democratic Republic of Ethiopia Location Eastern Africa, west of Somalia Area 1 104 300 Km2 Neighboring Countries Djibouti, Eritrea, Kenya, Somalia, South Sudan, Sudan Population 93 877 025 (July 2012 estimate) Population Growth 2.9% (2012 estimate) Official Languages Oromigna, Amarigna, Tigrigna, English, Arabic Religion Ethiopian orthodox (43.5%)

Muslim (33.9%) Protestant (18.6%) Traditional (2.6%) Catholic (0.7%) Other (0.7%)

Ethnic groups Oromo 34.5%, Amara 26.9%, Somalie 6.2%, Tigraway 6.1%, Sidama 4%, Gurage 2.5%, Welaita 2.3%, Hadiya 1.7%, Affar 1.7%, Gamo 1.5%, Gedeo 1.3%, other 11.3%

Age Structure 0 – 14 years (44.4%) 15 – 24 years (19.9%) 25 – 54 years (29.1%) 55 – 64 years (3.9%) 65 years and over (2.8%)

Literacy Rate Total: 42.7% (Male: 50.3%, Female: 35.1%) Life Expectancy at birth 60 years (2012 estimate) Unemployment rate n/a Labor Force 37.9 million Population below poverty line 29.2 % Natural Resources Gold, platinum, copper, potash, natural gas,

hydropower GDP per capita US$ 1200 (2012 estimate) GDP growth 7% (2012 estimate), 7.5% (2011), 10% (2010) Inflation rate 21.7 % (2012 estimate) ICT Telephone main lines in use: 829 000 (2011)

Mobile cellular: 14.127 million (2011) Broadcast media: 1 public TV station, 1 public radio broadcaster Internet users: 447 000 (2009)

Airports Total: 58 With 17 Paved runway: and 41 Unpaved runway:

Ports and Terminals Ethiopia is landlocked Railways 681 Km Roadways 46 812 Km

Asphalt road: 21 172 Km Source: CIA World Fact Book (2013)

5

Table 2: Timeline of Ethiopia

100 AD The settlers from South-Arabia built up a big kingdom with the city

Axum as its centre and had trade-business with the Mid-East

325 – 350 AD The civilization founded by the Axumites reached its edge under the

leadership of Ezana. He converted to christianity which from then on

was the main religion of the Ethiopic state

900 AD The extension of Islam forced the Axumites to go to the south

1270 AD With King Yekune Amlak on the throne the family-line of King Solomon

was re-established

1434 - 1468 Zera Yacob, a great emperor, established the first diplomatic relationship

with Europe

1855 - 1868 The era of Emperor Theodor, who tried to modernize the country

1889 The crowning of Emperor Menelik II. Took place in the capital Addis

Abeba. He was forced to negotiate with the Italians about the frontiers of

the Italian territory, Eritrea

1896 On 1st March the Italians had been defeated in the battle of Adowa and

Ethiopia accepted as an independent nation

1923 Ethiopia entered the League of Nations.

1930 Emperor Zauditu died and Emperor Haile Selassie was crowned in Addis

Abeba.

1931 Haile Selassie introduced a constitution and opened a parliament.

1935 War with Mussolini

1936 - 1940 Ethiopia was occupied by Italy and Haile Selassie escaped to England.

1941 Year of Liberation - On 3rd July the last Italians were forced to give up

and Haile Selassie returned

1952 Eritrea joined Ethiopia

1973 6 years of dryness had led 300.000 people into a big catastrophe

1974 Haile Selassie was overthrown by a group of army officers under the

command of Major Mengistu

1975 Haile Selassie died. A revolution-government started to “socialize”

Ethiopia

1977 War with Somalia

1978 Somali forces defeated with massive help from the Soviet Union and

Cuba

1983 -1985 Dryness and hunger - 750.000 people died

1987 Mengistu elected president under a new constitution

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1988 Ethiopia and Somalia sign a peace treaty

1991 Ethiopian People's Revolutionary Democratic Front captures Addis

Ababa, forcing Mengistu to flee the country

1998 Ethiopian-Eritrean border dispute erupts into armed clashes

2000 Ethiopia and Eritrea sign a ceasefire agreement which provides for a UN

observer force to monitor the truce and supervise the withdrawal of

Ethiopian troops from Eritrean territory

2005 Disputed multi-party elections lead to violent protests over months

2006 Ethiopian troops enter Somalia, engage in fierce fighting with Islamists

controlling large parts of the country and capital

January 2009 Ethiopia formally withdraws forces from Somalia

May 2010 Ruling Ethiopian People's Revolutionary Democratic Front (EPRDF)

wins huge majority in parliamentary elections, handing PM Meles

Zenawi a fourth term

August 2012 Prime Minister Meles Zenawi dies after several months of rumors about

his declining health. Deputy Prime Minister and Foreign Minister

Hailemariam Desalegn takes over the following month Source: www.history-timelines.org.uk

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2. POLITICAL SOUNDNESS OF ETHIOPIA

2.1 Political Regime

The government of Ethiopia is currently a federal republic. The government runs by a

constitution which was adopted in 1994, after several decades of political unrest (during

which Ethiopia transitioned from an imperial regime towards a democratic one). The

constitution of 1994 establishes the prime minister as the head of the government and

the president as chief of state. The government is composed of an executive branch, a

legislative branch and a national supreme court.

The federal state comprises nine autonomous states vested with power for self-

determination. Each autonomous state is headed by a state president elected by the

state council. Ethiopia is structured as a bicameral parliament with 548-seat Council of

People’s Representatives being the highest authority and 117-seat Council of the

Federation being for the common interests of the nation. Members of both councils are

elected by universal suffrage for a five-year term. The judiciary is constitutionally

independent.

After the death of the Prime Minister Meles Zenawi in August 2012, Hailemariam

Desaglen succeeded him as prime minister, initially in an acting capacity. Hailemariam

was then elected as the Chair of the Ethiopian People's Revolutionary Democratic

Front (EPRDF), the ruling party, on 15 September 2012.

The EPRDF and the government apparatus exercise firm control over all aspects of

Ethiopian society. In the elections of May 2010 the EPRDF won an overwhelming

majority with 546 of the 547 seats. The strictly monitored elections went off peacefully

but press and other freedoms came under pressure. There was much International

criticism of the lack of scope for political opposition.

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Table 3: Democracy Index of Ethiopia in 2011

Global

Rank

Overall

score

Electoral process

and pluralism

Functioning of

government

Political

participation

Political

culture

Civil

liberties

Ethiopia 121 3.79 0.00 3.93 5.00 5.63 4.41

Score on a scale of 10 Source: Economist Intelligence Unit’s Democracy Index 2011

According to the Economist Intelligence Unit, Ethiopia is the 121st most democratic state

in the world as at 2011 (118th in 2010). Ethiopia which was labeled an authoritarian

regime in the classification fell short of being a hybrid regime because of weaknesses in

electoral process and pluralism.

2.2 Conflicts and Crimes

The border conflict with Eritrea plays a significant part in Ethiopia’s foreign policy.

Although the two countries signed a peace agreement on border demarcation in Algiers

in 2000, the current situation is ‘no war, no peace’. The eastern part of Ethiopia, which

borders on Somalia, has a large Somali minority. One of Ethiopia’s aims is to stabilize the

situation in Somalia. Coface (2013) believes that strong military tensions with Southern

Somalia and Eritrea will remain. Ethiopia was also alert to the threat of conflict in Sudan

following the split between North and South in July 2011. There were fears that an influx

of refugees could cause conflict to spill over from both Somalia and Sudan.

2.3 Corruption

The government's attitude in dealing with the problem of corruption largely reflects the

overall system and character of governance in the country. The government strategy is

clearly top-down, dominating anti-corruption institutions, the anti-corruption debate

and the formulation of anti-corruption policy. Global Integrity 2010 reports that

corruption has become increasingly prevalent in public institutions in Ethiopia, and

the Bertelsmann Foundation 2012 claims that Ethiopian society's deeply ingrained

“clientelism” does not foster a culture of accountability and transparency. Despite the

introduction of anti-corruption initiatives in previous years, including the Federal Ethics

and Anti-corruption Commission (FEAC) in 2001, corruption remains widespread at

many levels of government administration in the country. A December 2011 article

by Ethiopian Review reports that public assets are acquired by officials and regime

supporters through means of fraud, the judiciary is corrupted through political

9

interference and manipulation, and the Ethiopian government is allegedly spending

millions of dollars, acquired through the US food and anti-poverty aid program, on the

basis of political favoritism.

In addition, Ethiopia's Anti-Corruption Commission (FEAC) estimates in a 2007

report that corruption is worst in the interaction between the public and private sectors.

Corruption has traditionally been perceived by foreign companies to be a major

impediment to their operations in Ethiopia. For example, according to the World Bank &

IFC Enterprise Surveys 2006, there are indications that petty corruption is widespread

in Ethiopia, given that approximately 13% of the companies surveyed expect to

pay facilitation payments to 'get things done', while 23% identify corruption as a major

constraint. This perceived challenge is supported by Global Integrity 2006, referring to a

businessman who describes Ethiopia as 'the land of 10%', which implies that hardly

anything can be accomplished without adding this amount to the costs as

a kickback. Freedom House 2011, reports that the state's active intervention in the

economy affords low-level officials the discretion of soliciting bribes, while offering

high-level officials the opportunity of self-enrichment by colluding with economic

interests to evade regulations or commit fraud. This problem is also referred to in a

December 2011 article by the Ethiopian Review which notes that some enterprises

owned by officials enjoy bank loans of USD millions without sufficient collateral.

Moreover, some businessmen allegedly make huge payments in the form of kickbacks

and bribes to participate in procurement and contracting, and that import/export

businesses complain about corrupt customs officials.

Nonetheless, as emphasized by the Bertelsmann Foundation 2010 and other sources,

there have been some improvements in the perception of corruption in Ethiopia.

According to the Transparency Ethiopia Corruption Diagnostic Baseline Survey 2009,

59% of the surveyed citizens living in the Ethiopian capital, Addis Ababa, believed that

the level of corruption would decrease in the future. The same tendency is reflected by

surveyed households in Transparency International's Global Corruption Barometer

2010/2011, where 59% perceived the government's fight against corruption as

‘effective’, while 41% perceived the level of corruption to have decreased over the past

three years.

10

On the positive side, the World Economic Forum Global Competitiveness Report 2011-

2012 indicates that foreign companies' perception of the occurrence of petty

corruption in Ethiopia has changed slightly for the better. For example, whereas the

surveyed companies in the 2008-2009 report ranked corruption as the single most

problematic factor for conducting business in the country, corruption is now perceived

by companies to be much less of a constraining factor compared to access to financing,

inflation, tax regulations, and inefficient government bureaucracy. The same report also

reveals that foreign businesses perceive the demand for bribes and other irregular

payments for routine government services to be less widespread than in other countries

in the region.

2.4 Regulatory Quality

According to the US Department of State 2012, Ethiopia's regulatory system is generally

considered to be non-discriminatory, although, there have been instances in which

burdensome regulatory requirements have acted as obstacles to doing business in the

country. According to the US Department of State investment climate statement 2012,

the government of Ethiopia has eliminated most of its discriminatory tax, credit and

foreign trade treatment of the private sector as well as simplified administrative

procedures and established guidelines regulating business activities.

Although official and unofficial barriers, such as corruption, still deter foreign

investment and certain sectors remain off-limits to foreign participation (e.g. banking),

the country has taken several steps to liberalize its foreign investment laws, such as

those relating to agriculture, and to streamline the regulatory environment and

registration process to obtain a business license. For instance, the government-

established Ethiopian Investment Agency (EIA) provides investment information and a

one-stop shop that, according to the US Department of State 2012, significantly cuts the

cost and time of obtaining investment and a business license. A business license can now

be obtained in one day if all requirements are met. Other investment and trade related

information is provided by the Ethiopian Chamber of Commerce and Sectoral

Association, which is an autonomous private sector organization.

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The legal system is based on common law, but consistent enforcement is an issue. The

rule of law consequently remains limited, due to the lack of checks and balances

between state powers and a traditional interference of the executive branch in judicial

matters. Moreover, according to the US Department of State 2012, judges often lack

understanding of commercial matters and case scheduling suffers from extended delays.

This constitutes a major impediment for settling commercial disputes and results in a

weak understanding and enforcement of property and contractual rights. Both

the Ethiopian Arbitration and Conciliation Center and the Addis Ababa Chamber of

Commerce provide commercial dispute services. International arbitration is also

possible for foreign companies, but there is no guarantee that a decision made by an

international arbitration body will be fully accepted and implemented by Ethiopian

authorities, as reported by the US Department of State 2010. Ethiopia is not a member of

the International Centre for the Settlement of Investment Disputes (ICSID) or of the New

York Convention of 1958.

Table 4: Governance indicators of Ethiopia in 2011

Governance Indicator Percentile Rank Governance Score

(0-100) (-2.5 to +2.5)

Voice and Accountability 10.80 -1.34

Political Stability/Absence of Violence 6 -1.63

Government Effectiveness 42 -0.40

Regulatory Quality 18 -0.99

Rule of Law 29.11 -0.71

Control of Corruption 26 -0.69

Score ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance Percentile rank among all countries Source: Worldwide governance indicators (2013)

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Figure 2: Country Risk of Ethiopia

Source: ONDD (Office national du ducroire)

13

3. ECONOMY OF ETHIOPIA

Ethiopia, like many countries in Sub-Saharan Africa, has enjoyed a period of rapid

growth in the past decade. The economic results of this state-led development model

have been impressive. As a matter of fact, despite the lack of commercially exploitable

hydrocarbons reserves found elsewhere on the continent, Ethiopia has achieved export-

driven economic growth rates that are the envy of other African countries.

Ethiopian production has grown from nil to make Ethiopia one of the largest exporters

of cut flowers in the world. This reflects Ethiopia’s facilitation of just-in-time supply

chain participation in the perishable export sector.

Ethiopia’s strategic location, natural resources, and abundant labor position it to attract

labor-intensive manufacturing. Ethiopia is centrally located in the global economy,

within non-stop transport distance to all major markets, being roughly equidistant

between the United States and Japan, between China and Brazil, between Europe and

India, and between Russia and South Africa.

Table 5: Ethiopia’s distance to G7 and BRICS economies

Source: bkp Development Research & Consulting

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3.1 Economic Growth

In 2011, the economy continued on the high-growth trajectory of the previous seven

years. Growth has been broad-based, with the services and the industrial sectors

growing at the highest rates. This momentum is expected to continue in 2012 and 2013,

albeit at a slower pace. The five-year Growth and Transformation Plan (GTP), however,

which emphasizes agricultural transformation and industrial growth, projects the

economy to grow at much higher rates.

Figure 3: Real GDP Growth

Figures for 2010 are estimates; for 2011 and later are projections

Source: African Economic Outlook, Ethiopia 2012

The 11.4% economic growth in 2011 marked the eighth consecutive year of rapid

growth. Moreover, growth has continued to be broad-based with industry, services and

agriculture growing by 15%, 12.5% and 9% respectively. Hotels and restaurants, real

estate, renting and business activities, and financial intermediation made the largest

contribution to the growth of the services sector. The services sector is expected to

continue to grow rapidly, though at a slower pace than in previous years, at 7% and

7.6% in 2012 and 2013 respectively.

The strong industrial sector performance of 2011 was driven by rapid expansion in

mining and, to a lesser extent, manufacturing. In 2011 mining grew by an unprecedented

48% reflecting the impact of investments in the expansion of mining activities and

exports, especially gold. Although Ethiopia’s industrial base is still relatively small, the

growth prospects of this sector are significant, as new industries – such as cement,

15

textile factories and leather – are coming on stream and new projects are planned in

other areas including steel, chemicals and pharmaceuticals. Five cement factories are

currently under construction.

The agricultural sector, which accounts for 80% of employment, remains a key source of

growth. In 2011 the sector grew by 9%, driven by cereal production which reached a

record high of 19.1 million tons in 2011. Agricultural production has been boosted by

favorable weather conditions in cereal-growing areas, enhanced government support

services to smallholders, improvement in yields and expansion in the area under

cultivation.

Figure 4: GDP Contribution by Sector

Source: African Economic Outlook, Ethiopia 2012

3.2 International Trade

Despite a continued robust performance in export of goods and remittances in 2011/12,

strong consumer goods imports and the deteriorating service balance in the first half of

the period, moved the current account into a deficit. Notwithstanding these

improvements, large errors and omissions recorded in 2011/12 need to be addressed.

16

Figure 5: Current account of Ethiopia

-4500

-4000

-3500

-3000

-2500

-2000

-1500

-1000

-500

0

500

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

In m

illi

on

US

Do

lla

rs

Source: IMF Country report 2012, Ethiopia

Strong export growth in 2011 followed a drop in merchandise exports in 2009 caused by

the global financial crisis. The value of exports jumped to USD 2.7 billion (US dollars)

from USD 2.0 billion in 2010, an increase of 35%, while merchandise exports, as a share

of GDP, increased from 8.4% in 2010 to an estimated 8.9% in 2011. Exports in 2012 and

2013 are expected to continue performing well, in view of the expansion of export

capacity in mining, agro business and manufacturing, as well as the special incentives

offered by the government for non-traditional exports.

Since 2006, Ethiopia’s annual import growth had averaged 6.6%, but in 2011 import

growth decelerated sharply. The slowdown was partly due to the tightening of credit

conditions and the introduction of more restrictive business and licensing regulations.

The result was an improvement in the trade deficit from 23.8% of GDP in 2010 to 22.5%

in 2011. Looking ahead, imports are projected to grow more rapidly in 2012 and 2013

which is expected to lead to deterioration in the current account from 6.3% of GDP in

2011 to 8.6% and 8.4% in 2012 and 2013 respectively.

17

Figure 6: Imports and exports of Ethiopia

-20000

-15000

-10000

-5000

0

5000

10000

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

In m

illi

on

US

Do

lla

rs

Imports

Exports

Trade Balance

Source: IMF Country report 2012, Ethiopia

In 2010/11, Europe emerged as the largest market for Ethiopia’s exports. It accounted

for 50 percent of the total merchandise exports of the nation. Meanwhile, about 26.5

percent of the total Ethiopia’s exports were shipped to Asian countries, especially China.

African nations accounted for about 18 percent of Ethiopia’s total exports in the same

period while American markets accounted for 5.1 percent.

Regarding Ethiopia’s imports by countries of origin, about 67 percent of its imports in

2010/11 were originated from Asia, 21.3 percent from Europe, 5.5 percent from

America and 6 percent from Africa.

Table 6: International partners of Ethiopia 2011/12

Main products Main partners Share of imports Imports Petroleum products, fertilizers,

machinery, motor vehicle Saudi Arabia 14.3% China 10.7% USA 8% India 4.7%

Main products Main partners Share of exports Exports Coffee, oilseeds, leather products,

khat, gold, flowers, live animals Germany 14.2% China 12.2% Belgium 7.8% Saudi Arabia 6.8% USA 6.3%

Source: CIA World FactBook (2013)

18

The foreign direct investment (FDI) in Ethiopia, in 2011/12, was hugely dominated by

two countries; Turkey and India (together took 58.57% of the total FDI capital

registered in the fiscal year). FDI is projected to increase gradually to a long run yearly

average of 4.5 percent of GDP from 3.1 percent in 2011/12 on account of policies to

promote large scale FDIs.

Figure 7: Foreign direct investment of Ethiopia

0

500

1000

1500

2000

2500

3000

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

In m

illi

on

US

Do

lla

rs

Foreign Direct Investment

Source: IMF Country report 2012, Ethiopia

Figure 8: Distribution of major investment project by sector in 2010/11 (in %)

Source: NBE Annual report 2010/11

The Global Enabling Trade Report 2012 published by the World Economic Forum

captures the extent to which individual economies have developed institutions, policies,

19

and services facilitating the free flow of goods over borders and to destination. Ethiopia

occupies the 106th position (out of 132 countries) from 107th in the previous report. In

this report the most problematic factors for exporting and importing are identifying the

potential markets and tariff barriers respectively.

Figure 9: Enabling trade index of Ethiopia

Source: World Economic Forum; Global enabling trade report 2012

Ethiopia is a member of the Common Market of Eastern and Southern Africa (COMESA)

and the Intergovernmental Authority for Development (IGAD), but has not yet ratified

the COMESA Free Trade Area Protocol. The ratification of the Free Trade Area (FTA)

would be significant in creating opportunities for regional trade expansion.

3.3 International Solvency and International Openness

In terms of international solvency, the foreign exchange reserve reached US$3 billion

2010/11, covering 2.8 months of imports.

Table 7: Some indicators of international trade

Figures in US$ millions 2010/11 Est. 2011/12

Imports (goods & services) 10,090 13,279

Exports (goods & services) 5,345 5,994

Foreign exchange reserve 3,044 2,114

Months of imports 2.8 1.7

GDP 33,429 41,902

Source: IMF Country report 2012, Ethiopia

20

The ratio of the Ethiopia’s total trade (sum of exports and imports) to its GDP is 45.99%

in 2011/12, indicating Ethiopia’s international openness.

3.4 Currency Exchange Rates

Ethiopia’s currency is the Ethiopian Birr (ISO code is ETB), which is supplied by the

National Bank of Ethiopia. Ethiopia operates a freely floating exchange rate system.

Table 8: Exchange rates of the birr as at 07/06/2013

USD EUR GBP JPY CNY

1 ETB 0.0535 0.0405 0.0343 5.1504 0.3283

Inverse 18.6809 24.7171 29.1518 0.1942 3.0457

Source: www.xe.com (07/06/2013)

Foreign exchange reserve sales were used for liquidity sterilization, and are likely not to

recover given the substantial imports needs to finance GTP investment. These

Substantial FX sales have led to significant decline in FX reserves. Together with a higher

inflation in 2011/12 has contributed to an appreciation of real effective exchange rate

(REER). The premium between the official and parallel market exchange rates recently

widened possibly reflecting unsatisfied demand at the official exchange rate.

Figure 10: Official and parallel exchange rate (birr per US dollar)

Source: IMF Country report 2012, Ethiopia

21

According to the IMF, buildup of foreign exchange reserves from currently projected 1.7

months of import cover at end-2011/12 to above 3 months will be required in the

coming years to provide a buffer against potential external shocks.

3.5 Monetary policy

The National Bank of Ethiopia (NBE) is responsible for implementing the monetary

policy of the country. The principal objective of the monetary policy of the National Bank

of Ethiopia is to maintain price & exchange rate stability and support sustainable

economic growth of Ethiopia.

Table 9: Interest rate structure of commercial bank

Source: NBE Annual report 2010/11

The introduction of a wide range of monetary instruments by central banks engenders

competition, efficiency and transparency and broadens financial intermediation in the

banking system;

The NBE uses open market operations (sale and purchase of government securities) as

one of its monetary policy instruments. In the absence of its own securities, certain

amount of government treasury bills needs to be allocated to NBE by the government for

its monetary policy purpose.

1) A standing central bank credit facility is another instrument used to enhance the

financial capacity of commercial banks and to promote financial intermediation

22

and efficiency. The key advantages of such standing credit facility are

transparency and predictability of accessing central banks’ resources to cover

short-term needs.

2) Reserve requirements (5% of all Birr and foreign currency deposit liabilities)

3) Setting of floor deposit interest rate

4) Direct borrowing/lending in the inter-bank money market and introducing re-

purchase agreement

5) Use of selected credit control when necessary, and

6) Moral Suasion

Tableau 10: Results of Treasury Bills Auction at June 30, 2011

Particulars 2008/09 2009/10 2010/11

Number of bidders 261 280 220

Amount demanded (in million birr)

28-day bill

91-day bill

182-day bill

46,767.2

10,441.9

29,477.7

6,847.6

51,258.0

19,760.0

27,553.8

3,944.3

55,760.0

30,635.0

22,159.9

2,965.2

Amount supplied (in million birr)

28-day bill

91-day bill

182-day bill

28,471.9

4,265.0

15,931.7

8,275.2

55,203.3

15,110.0

28,150.5

11,942.8

83,390.7

41,575.9

35,152.6

6,662.1

Amount sold (in million birr)

Banks

Non-banks

27,839.8

2,672.0

25,167.8

41,736.4

13,902.0

27,834.4

52,316.0

20,271.3

32,044.8 Source: NBE Annual report 2010/11

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3.6 Inflation

Inflation remains high (21 percent at end-2011/12).

Figure 11: CPI Inflation (year-on-year), 2008 - 2012

Source: IMF Country report 2012, Ethiopia

In the 2010/11 fiscal year (8 July – 7 July), macroeconomic management failed to reduce

inflation, which was driven mainly by escalating food prices. Both domestic and

exogenous factors were responsible for causing the resurgence in inflation. These

include a loose monetary policy, rising prices of imported inputs, malfunctioning of the

domestic market, and supply shocks. However, inflation is expected to decline notably in

2013 owing to continued macro stabilization efforts.

3.7 Budgetary Policy

The overall fiscal deficit (excluding grants) expanded from Birr 17.5 billion (4.6% of

GDP) in 2009/10 to Birr 24.7 billion (4.8% of GDP) in 2010/11. General government

budgetary operations resulted in a deficit of Birr 8.2 billion in 2010/11. More than 94

percent of the deficit was financed by net external borrowing. The remaining balance

was covered by net domestic borrowing and privatization receipts.

The external debt stock has risen rapidly and has almost quadrupled since debt relief

was granted under the Heavily Indebted Poor Countries/Multilateral Debt Relief

Initiative (HIPC/MDRI) in 2006. External public debt as at end 2010/11 amounted to

USD 7.3 billion (26.3% of GDP), representing an increase from 18.7% a year earlier.

External debt ratios are projected to increase further before declining over the medium

24

to longer term as Ethiopia’s exports continue expanding. The sharp increase in

Ethiopia’s external debt stock and the rise in debt indicators are attributed to the surge

in public enterprise borrowing mainly for infrastructure development.

Table 11: External public debt of Ethiopia

Particulars 2008/09 2009/10 2010/11 Figures in millions of USD

Debt outstanding

Multilateral

Bilateral

Commercial

2,029.1

1,020.5

254.9

2,729.1

1,389.7

1,451.0

3,480.9

1,724.5

2,113.4

Lender Total 3,304.5 5,569.8 7,318.8 Source: NBE Annual report 2010/11

The 2011 debt sustainability analysis shows that, despite the rise in the external debt

burden, Ethiopia is at low risk of debt distress after factoring in the inflow of

remittances which has increased appreciably in recent years. However, the huge off-

budget financing needs of the GTP (Growth Transforming Plan) could pose a risk to debt

sustainability in the future. This underscores the importance of monitoring closely non-

concessional borrowings of public enterprises and careful screening of public

investments. While Ethiopia’s debt-management framework is adequate, efforts to

strengthen capacity further are required.

3.8 Poverty profile of Ethiopia

According to the 2010/11 HICES1, the proportion of poor people (poverty head count

index) in the country is estimated to be 29.6% in 2010/11. In 2010/11, while the

proportion of the population below the poverty line stood at 30.4% in rural areas, it is

estimated to be 25.7% in urban areas. The poverty gap index is estimated to be 7.8%

while it is 8.0% for rural areas and 6.9% for urban areas. Similarly, the national level

poverty severity index stood at 0.031 with rural poverty severity index (0.032) being

slightly higher than that of urban areas (0.027).

1 HICES: Household Income and Consumption Expenditure Survey

25

Table 12: Poverty headcount indices and inequality in 2010/11

Total poverty Food poverty Gini coefficient

(inequality)

Urban 0.257 0.279 0.371

Rural 0.304 0.347 0.274

Total 0.296 0.336 0.298 Source: Ministry of Finance and Economic Development

The incidence of poverty declined markedly between 2004/05 and 2010/11. The

headcount poverty rate fell from 38.7 % in 2004/05 to 29.6 % in 2010/11. This implies

that Ethiopia is on the right track to achieving the MDG target of reducing poverty by

half. Over the same period, poverty gap is also reduced, but not the severity of poverty.

Headcount poverty fell in all regions of the country.

3.9 Informal sector

According to Ethiopia’s Ministry of Labor and Social Affairs, in urban areas of the

country out of the total employed population 34.1 percent were engaged in the informal

sector (2009/10). Most of them have very low level of productivity and income. They

tend to have little or no access to organized markets, to credit institutions, to modern

technology, to formal training and to many public services and amenities.

3.10 Banking Sector

Banks, insurance companies and microfinance institutions are the major financial

institutions in Ethiopia. At the end of September 2012, there were 18 banks, 15

insurance companies and 31 micro-finance institutions operating in the country. Of the

18 banks, 15 were privately owned. The ratio of total population to total bank branch

went down to 58,139.5 revealing improvement in financial service outreach.

26

Table 13: Registered banks in Ethiopia

Name of bank Establishment date Number of branches

1 Awash International Bank 1994 80

2 Commercial Bank of Ethiopia* 1963 644

3 Development Bank of Ethiopia* 1901 32

4 Construction and Business Bank* 1975 32

5 Dashen Bank 1995 55

6 Wegagen Bank 1997 50

7 Bank of Abyssinia 1996 47

8 United Bank 1998 41

9 Nib International Bank 1999 45

10 Cooperative Bank of Oromia 2004 38

11 Lion International Bank 2006 20

12 Zemen Bank 2008 1

13 Oromia International Bank 2008 25

14 Bunna International Bank 2009 8

15 Berhan International Bank 2009

16 Abbay Bank 2010

17 Addis International S.C 2011

18 Debub Global Bank 2012

19 Enat Bank 2012

* Represents public banks, those without “* “are private banks Source: National Bank of Ethiopia

The total capital of the banking system reached Birr 20.2 billion at the end of the first

quarter of 2012 of which private banks altogether took 46.9 percent share. Commercial

Bank of Ethiopia alone accounted for 37.5 percent of the total capital of the banking

system.

27

Table 14: Key figures of banking sector in Ethiopia

2008/09 2009/10 2010/11 Figures in Birr billions

Deposits

Demand

Savings

Time

Total

37,267.3

37,153.3

3,731.4

78,152.0

46,149.0

48,049.9

4,434.4

98,633.3

70,842.4

64,528.7

5,160.6

140,531.8

Borrowings

Local

Foreign

Total

2,399.4

647.3

3,046.7

4,665.6

978.7

5,644.2

8,666.5

1,019.4

9,686.0 Source: NBE Annual report 2010/11

As for deposits collected as at end of September 2012, private banks collected 40%

while public banks collected the remaining balance (about 60%). Total disbursement of

fresh loans by the banking system reached Birr 9.9 billion at the end of September 2012.

Of the total amount of loans disbursed, 55.3% was disbursed by public banks and 44.7%

by the private sector.

Table 15: Sectoral distribution of fresh loans (2012)

Banking industry32%

Agriculture26%

Domestic trade16%

International trade14%

Housing and construction

12%

Source: National Bank of Ethiopia, quarterly bulletin

28

According to Economic Outlook 2012, the financial sector is shallow, with a limited

range of services. The vast majority of small entrepreneurs lack the collateral necessary

to obtain a bank loan. By June 2011 the private credit to GDP ratio for Ethiopia was

around 9% compared with the average of 30% for sub- Saharan Africa. According to the

World Economic Forum’s Global Competitiveness Report 2011-12, Ethiopia ranked 125

out of 142 countries with respect to financial-market development.

Further, the banking sector remains closed to foreign participation and capital markets

are non-existent. This has limited progress in innovation and dynamism in the sector.

The government has recently taken further steps to strengthen the financial sector. In

2011 the National Bank of Ethiopia (NBE) launched a modern payment system and set

up a centralized clearing system which will speed up the time for settlement of cheques.

Figure 12: How Ethiopia and comparator economies rank on the ease of getting credit

Source: Doing Business 2013 by World Bank

29

4. TAX REGIME OF ETHIOPIA

The principal types of taxes are customs duty, value added tax (VAT), excise tax, profit

tax on business, income tax from employment, income tax from dividends and royalty

tax. The Ethiopian Revenues and Customs Authority (ERCA) is the body responsible for

collecting revenue from customs duties and domestic taxes.

4.1 Business Income Tax

According to Proclamation No.286/2002, taxable business income shall be determined

per tax period on the basis of the profit and loss account or income statement which

shall be drawn in compliance with the generally accepted accounting standards

provisions of directives issued by ERCA.

a) Corporate Income Tax

Corporate income tax or profit tax payable by business organizations or companies is

30% of their taxable income.

b) Income Tax on Individual Entities /Unincorporated Business

Annual taxable income (Birr) Income tax payable

Up to 1,800 Exempt

1,801 – 7,800 10%

7,801 – 16,800 15%

16,801 – 28,200 20%

28,201 – 42,600 25%

42,601 – 60,000 30%

Over 60,000 35% Source: Ethiopian Investment Agency, Factor Cost (2012)

30

c) Rental Income Tax

This regards income derived from renting of houses or office buildings, manufacturing

plants, materials and goods, etc.

Tableau 16: Rental tax rates by income category

Annual taxable income (Birr) Income tax payable

Up to 1,800 Exempt

1,801 – 7,800 10%

7,801 – 16,800 15%

16,801 – 28,200 20%

28,201 – 42,600 25%

42,601 – 60,000 30%

Over 60,000 35% Source: Ethiopian Investment Agency, Factor Cost (2012)

4.2 Personal Income Tax

Any income derived from employment, including any payments or gains in cash or in

kind is taxable in accordance with the following schedule.

Table 17: Personal income tax rates by income category

Employment monthly income (Birr) Tax rate

The first 150 Exempt threshold

151 – 650 10%

651 - 1,400 15%

1,401 - 2,350 20%

2,351 - 3,550 25%

3,551 – 5,000 30%

Over 5,000 35% Source: Ethiopian Investment Agency, Factor Cost (2012)

4.3 Value Added Tax (VAT)

VAT is paid at a rate of 15% of the value of every taxable transaction by a registered

person and all imports of goods and services other than those exempted.

4.4 Turnover Tax

In Ethiopia turnover tax is paid by those who are not registered for VAT and whose

value of annual taxable transaction is less than 500 thousand Birr. The turnover tax

rates are:

31

2% on goods sold and services rendered locally;

2% on contractors, grain mills, tractors and combine harvesters;

10% on others.

Note: By its directives, the ministry of Finance and Economic Development has

exempted bread and milk; medicine, medical supplies and medical services from

turnover and value added tax.

4.5 Excise Tax

Excise Tax Proclamation No. 286/2002 indicates that, excise tax is levied on selected

items when produced locally or imported. The tax rate ranges from 10% to 100%

depending on the nature of the goods. List of all goods currently liable to excise tax along

with their tax rates is shown below:

32

Table 18: Excise tax rates by types of goods

No. Items Excise tax

1 Any type of sugar in solid form excluding molasses 33%

2 Drinks

Soft drinks and powder soft drinks

Bottled or canned water

Beer, Stout, wine and whisky

Other alcoholic drinks

40%

30%

50%

100%

3 All types of pure alcohol 75%

4 Tobacco and tobacco products

Tobacco leaf

Cigarettes, cigar, cigarillos, pipe tobacco, snuff and other products

20%

75%

5 Salt 30%

6 Motor fuels and motor spirits 30%

7 Perfumes 100%

8 Textile products 10%

9 Dish washing machines of a kind for domestic use 80%

10 Washing machine of a kind for domestic purposes 30%

11 Video decks, television or video cameras 40%

12 Television broadcast receiver, radio or sound receivers 10%

14 Motor passenger cars, Station Wagons, and other vehicles

Up to 1300 c.c

From 1301 c.c to 1800 c.c

Above 1800 c.c

30%

60%

100%

15 Carpets 30%

16 Asbestos and asbestos products 20%

17 Clocks and watches 20%

18 Dolls and toys 20% Source: Ethiopian Investment Agency, Factor Cost (2012)

4.6 Mining Income Tax

According to the Mining Tax Proclamation No. 23/1996 (Amendment), a holder of large-

scale or small-scale mining license shall pay 35% income tax on taxable income.

33

4.7 Other Income Taxes

Table 19: Incomes tax rates by type of income

Annual income (Birr) Tax rate

Royalties 5%

Income from technical services rendered outside Ethiopia 10%

Income (except less than Birr 100) from games or chance 15%

Dividends 10%

Income from rental of property (land, buildings, or moveable asset

not related to business

15%

Interest income 5%

Gains from the transfer of property

On business building, factories and offices

On shares of companies

15%

30% Source: Ethiopian Investment Agency, Factor Cost (2012)

4.8 Stamp duty

The stamp duty charges are either fixed or depend on the values of the right or

obligation executed by means of the instrument. The list of instruments liable to stamp

duty and their corresponding rates are presented below

34

Tableau 20: Stamp duty charges by types of instruments

Instruments Basis of

valuation

Stamp duty

Charges

Memorandum and articles of association of any business

organization or any associations

Upon first execution

Upon any subsequent execution

Flat

Flat

350 Birr

100 Birr

Memorandum and articles of cooperatives

Upon first execution

Upon subsequent execution

Flat

Flat

35 Birr

10 Birr

Award On Value

Bonds and warehouse bonds On Value 1 % of value

Contracts, agreements and memoranda thereof Flat 5 Birr

Security deeds Flat 1% of value

Collective agreement

Upon first execution

Upon subsequent execution

Flat

Flat

350 Birr

100 Birr

Contract of employment Salary 1 % of salary

Lease including sub-lease and transfer thereof On Value 0.5% of value

Material act Flat 5 Birr

Power of attorney Flat 35 Birr

Register title to property On Value 2% of value Source: Ethiopian Investment Agency, Factor Cost (2012)

4.9 Customs duty

Custom duties, which currently range from 0-35%, are payable on imports by all

persons and entities which have no duty-free privileges. Customs duty rates of some

selected goods are shown in the following table:

35

Tableau 21: Custom duty rates of some selected goods

The rates are not actual but they are averages of various products under one title.

Source: Ethiopian Investment Agency, Factor Cost (2012)

4.10 Withholding tax

Withholding taxes are deductions from dividends, salaries, wages and other incomes.

They are levied at the point of disbursement or incomes and are passed on to the

government by the entities collecting them. In Ethiopia, the withholding tax rates are:

a) 3% of the total value of CIF prices of imported goods;

b) 2% on the cost of supplying goods involving more than Birr 10,000 in any one

transaction or a contract or service involving more than Birr 500 in one

transaction.

4.11 Ease of paying taxes

According to Doing Business 2013, on average, firms make 31 tax payments a year,

spend 306 hours a year filing, preparing and paying taxes and pay total taxes amounting

to 33.3% of profit in Ethiopia. Ethiopia thus stands at 103 in the ranking of 185

economies on the ease of paying taxes.

36

Figure 13: How Ethiopia and comparator economies rank on the ease of paying taxes

Source: Doing Business 2013 by World Bank

37

5. INVESTMENT REGIME OF ETHIOPIA

5.1 Investment guarantee and protection

a) Guarantee against expropriation

The Constitution of the Federal Democratic Republic of Ethiopia protects private

property. The Investment Proclamation also provides investment guarantee against

measures of expropriation and nationalization that may only occur for public interest

and in compliance with the requirement of the law. Where such expropriations are

made, the Government provides adequate compensation corresponding to the prevailing

market value of property and such payment is effected in advance.

Ethiopia is a member of the World Bank-affiliated Multilateral Investment Guarantee

Agency which issues guarantees against non-commercial risks to enterprises that invest

in signatory countries. The country has also concluded bilateral investment promotion

and protection agreements with a number of developed and developing countries.

b) Remittance of funds

Foreign investors are guaranteed to make the following remittances out of Ethiopia in

convertible foreign currency at the prevailing exchange rate on the time of remittance:

Profits and dividends accruing from investment;

Principal and interest payments of external loans;

Payments related to technology transfer agreements;

Proceeds from the sale or liquidation of an enterprise;

Proceeds from the transfer of shares or of partial ownership of an enterprise to a

domestic investor

Expatriates employed in an enterprise may remit, in convertible foreign currency,

salaries and other payments accruing from their employment in accordance with the

foreign exchange regulations or directives of the country.

38

5.2 Areas of investment

a) Areas reserved exclusively for the government

Postal services with the exception of courier services;

Transmission and supply of electrical energy through the integrated national grid

system; and

Passenger air transport services using aircraft with seating capacity of more than

20 passengers.

b) Areas reserved for Ethiopian nationals

Banking, insurance and micro credit and saving services;

Travel and shipping agency services;

Broadcasting services; and

Air transport services using aircraft with a seating capacity of up to 20

passengers

c) Areas reserved for domestic investors

Retail trade and brokerage;

Wholesale trade (excluding supply of petroleum and its by-products as well as

wholesale by foreign investors of their products locally produced);

Import trade (excluding LPG, bitumen and up on the approval from the Council of

Ministers, material inputs for export products);

Export trade of raw coffee, chat, oil seeds, pulses, hides and skins bought from the

market and live sheep, goats and cattle not raised or fattened by the investor;

Construction companies excluding those designated as grade 1;

Tanning of hides and skins up to crust level;

Hotels(excluding star-designated hotels), motels, pensions, tea rooms, coffee

shops, bars, night clubs and restaurants excluding international and specialized

restaurants;

Travel agency, trade auxiliary and ticket selling services;

Car-hire and taxi-cabs transport services;

Commercial road transport and inland water transport services;

Bakery products and pastries for the domestic market;

39

Grinding mills;

Barber shops, beauty salons, and provision of smith workshops and tailoring

services except by garment factories;

Building maintenance and repair and maintenance of vehicles;

Saw milling and timber making;

Customs clearance services;

Museums, theaters and cinema hall operations;

Printing industries.

5.3 Capital requirement

Under the Investment Proclamation No.280/2002 (as amended), a foreign investor, who

invests on his own, except in consultancy services and publishing, is required to invest

not less than US$ 100,000 in cash and/or in kind for a single project. However, if he

invests in partnership with domestic investor(s), the minimum capital required of him is

US$ 60,000. The minimum capital required of a wholly foreign investor investing in

consultancy services or publishing is US$ 50,000, which may be in cash and/or in kind.

But this capital amount is lowered to US$ 25,000 if he invests in partnership with

domestic investor(s). A foreign investor reinvesting his profit or dividends, or exporting

at least 75% of his outputs, however, is not required to allocate a minimum capital.

5.7 Major investment incentives

To encourage private investment and promote the inflow of foreign capital and

technology into Ethiopia, the following incentives are granted to both domestic and

foreign investors engaged in areas eligible for investment incentives:

a) Exemption from import customs duty

One hundred per cent exemption from the payment of import customs duties and other

taxes levied on imports is granted to an investor to import all investment capital goods,

such as plant, machinery and equipment, construction materials, as well as spare parts

worth up to 15% of the value of the imported investment capital goods. However, the

following investment areas are not eligible for exemption from import customs duty:

Hotels(excluding star-designated hotels), motels, tearooms, coffee shops, bars,

night clubs and restaurants, which do not have international standards;

40

Wholesale, retail and import trade;

Maintenance services;

Commercial road transport and car-hire services;

Postal and courier services;

Real estate development;

Business and management consultancy services;

Advertisement services;

Cinematography and similar activities;

Radio and television broadcasting services;

Theatre and cinema hall operations;

Customs clearance services;

Laundry services;

Travel agency, trade auxiliary and ticket selling services; and

Lottery and games of similar nature.

Investment capital goods imported without the payment of import customs duties and

other taxes levied on imports may be transferred to another investor enjoying similar

privileges.

In accordance with the Revised Export Trade Duty Incentive Scheme Establishing

Proclamation No. 543/2007, three export incentive schemes are also available for

exporters. They are Duty Draw-Back Scheme, Voucher Scheme and Bonded

Manufacturing Warehouse Scheme.

In addition, all Ethiopian products, with the exception of few products (e.g. semi-

processed hides and skins), destined for export are exempted from the payment of any

export tax and other taxes levied on exports.

b) Exemption from the payment of income tax

Any income derived from an approved investment in new manufacturing, agro-industry

and information and communication technology (ICT) development or agriculture is

exempted from the payment of income tax for the periods as shown in the following

table, depending upon the volume of export and the location in which the investment is

made.

41

Profit tax holiday is granted subject to Council of Ministers Regulation No.84/2003 (as

amended) issued pursuant to the Investment Proclamation No. 280/2002 (as amended).

Table 22: Exemption from payment of income tax

Conditions for eligibility Income tax

exemption

Income tax exemption for

investments made in relatively

underdeveloped regions

An investor engaged in a new manufacturing, agro-industry, ICT or agriculture :

Exports at least 50% of his

products or services

5 years 6 years

Supplies at least 75% of his

products or services, to an

exporter, as a production or

service input

under special circumstance

the Board may grant

5 years

Up to 7 years

6 years

Up to 8 years

Exports less than 50% of his

products or services, or

supplies his products or

services only to the domestic

market

under special circumstance

the Board may grant

2 years

Up to 5 years

3 years

Up to 6 years

Exports at least 50% of his

products or services and

increases, in value his

production or services by over

25% through the expansion or

upgrading of an existing

enterprise

Source: Ethiopian Investment Agency

c) Carry forward losses

Business enterprises that suffer losses during the tax holiday period can carry forward

such losses for half of the income tax exemption period following the expiry of the

exemption period.

42

6. BUSINESS CREATION REQUIREMENTS

As a one-stop shop office, Ethiopian Investment Agency (EIA) renders services

necessary for the licensing and registration of a business. These services are rendered to

the following categories of investment;

Investment made by a foreign investor

Investment made by a foreign national permanently residing in Ethiopia and

taken for a domestic investor

Joint investment between domestic and foreign investors

Investment made by public enterprises.

The services include the following:

1) Issuance of investment permit

An investment permit is issued to an investor to establish a new enterprise or to expand

or upgrade one that already exists. This investment permit is necessary get incentives

and to invest in Ethiopia. The permit can be obtained in one of the following forms;

Sole proprietorship;

Business organization incorporated in Ethiopia or abroad;

Public enterprises; and

Cooperative societies.

Table 23: Business creation requirements

Category of investors Documents required Fee

(Birr)

Delivery

time

Individual investor Application form filled by investor/agent

Photocopies of relevant pages of valid

passport

Photocopy of power of attorney (in case

application is made by agent)

Three passport sized photo

600 4 hours

Business organization

that is entirely foreign-

Application form filled by manager/agent

Each Photocopies of relevant pages of

600 4 hours

43

owned

valid passport of each shareholder

Photocopies of memorandum and article

of associations

Photocopy of power of attorney (in case

application is made by agent)

Three passport sized photo of manager

Joint investment

between domestic and

foreign investors

Application form filled by agent

Photocopy of power of attorney

Each Photocopies of relevant pages of

valid passport of each shareholder

Photocopies of memorandum and article

of associations

Three passport sized photo of manager

600 4 hours

If the business

organization emanates

from mother company

or is a branch of a

business organization,

the following

documents are added;

Photocopies of memorandum and article

of associations of parent company

A photocopy of a document ascertaining

the legal personality of the business

organization (e.g. registration certificate)

Minutes of the parent company

authorizing the establishment of a

company in Ethiopia, authenticated by

public notary

A photocopy of an authenticated power of

attorney of the representative of the

company

Photocopies of the pages of the

representative’s valid passport

600 4 hours

Public enterprise Application form filled by manager of the

enterprise

A photocopy of the law under which the

enterprise is established or photocopies

of its memorandum and articles of

associations

600 4 hours

A cooperative society Application form filled by manager of the

society

A photocopy of its articles of association

and/or certificate of registration

Photocopy of power of attorney (in case

application is made by agent)

600 4 hours

Expansion or upgrade

of existing enterprises

Application form filled by investor/agent

Photocopy of power of attorney (in case

300 4 hours

44

application is made by agent)

Photocopy of a valid business license of

the existing enterprise

Photocopies of memorandum and article

of associations

Three passport sized photo of manager Source: Ethiopia Investment Agency

2) Issuance of commercial registration certificate

According to the Commercial Registration and Business Licensing Proclamation No.

67/1997, an investor is not allowed to engage in any commercial activity unless

registered in a commercial register. Such registration is made only once even if an

investor engages in different commercial activities in various regions. An investor is

expected to perform summary registration when he/she wants to establish branches

other than the place where it is principally registered. The registration service is

simultaneously provided when an investor applies for an investment permit.

The delivery of the procedure is estimated to be 4 hours and the principal registration

and summary registration is 80 Birr and 10 Birr respectively.

3) Notarization of memorandum and articles of association

If an investment is to be made by a business organization, either share company or

private limited company, which is to be incorporated in Ethiopia, a memorandum and

articles of associations are required. The Agency notarizes the memorandum and

articles of associations at the time of the formation of the company. The notarization

service is simultaneously provided when an investor applies for an investment permit.

Any amendment to either memorandum or articles of association is done by the

competent government body.

The delivery time of the procedure is estimated to be 4 hours and the fee is fixed at 600

Birr, with an additional 50 Birr for each extra copy.

4) Issuance of work permit to expatriate employees

As per the Investment Proclamation No. 280/2002 (as amended), an investor may

employ qualified expatriate experts required for the operation of his business. However,

he is required to train Ethiopians and replace the expatriate personnel within a limited

45

period of time. The Agency issues work permit to expatriate staff of investment projects

which are under implementation. Once the project is operational, the investor should

apply directly to the Ministry of Labor and Social Affairs to obtain work permits for

expatriate employees.

The delivery time of the procedure is estimated to be 4 hours and the fee is fixed at 600

Birr.

5) Issuance of business license

According to the Commercial Registration and Business Licensing Proclamation No.

67/1997, an investor is not allowed to commence commercial activity without obtaining

a valid business license. The Agency issues business licenses to investors. Any

amendment, renewal or replacement is made by the Ministry of Trade and Industry.

The delivery time of the procedure is estimated to be 1 hours and the fee is fixed at 80

Birr.

6) Grading of construction contracting companies

A foreign investor who wants to invest in a construction contracting business should

fulfill the requirements for a ‘Grade One’ construction contracting company as set out by

the Ministry of Works and Urban Development as well as the Ministry of Water

Resources. Grading of construction contracting companies is done when an investor

applies for business (operating) license. A duly filled and signed application form

designed for such purpose is required.

The delivery time of the procedure is estimated to be 2 hours with no fee or cost

involved.

7) Issuance of domestic status certificate

A foreign national, permanently residing in Ethiopia, other than an Ethiopian by birth,

may apply and register for a domestic investor status. Once a foreign national is

registered as a domestic investor, rights and privileges as well as restrictions solely

relating to foreign investors will no longer be applicable. A foreign national who wishes

to register as a domestic investor is required to declare his intentions by completing a

form designed for this purpose.

46

The delivery time of the procedure is estimated to be 1 hours and the fee is fixed at 100

Birr.

8) Registration of technology transfer agreement

A technology recipient who concludes a technology transfer agreement related to his

investment should submit the agreement to the Agency for registration. Any such

agreement that is not registered by the Agency has no legal effect. The agreement may

also be renewed as per the request of the technology recipient by submitting the

renewed agreement to the Agency.

The delivery time of the procedure is estimated to be 2 hours and the fee is fixed at 200

Birr.

Ease of Starting Business in Ethiopia

Globally, Ethiopia stands at 53 in the ranking of 185 economies on the ease of starting a

business according to Doing Business 2013. Starting a business there requires 9

procedures, takes 15 days, costs 135.3% of income per capita and requires paid-in

minimum capital of 249.1% of income per capita.

Figure 14: Ease of starting business in Ethiopia compared to other economies

Source: Doing Business 2013 by World Bank

47

7. INFRASTRUCTURE OF ETHIOPIA

6.1 Ports and shipping

In order to ensure efficient, cost effective and reliable import and export movement of

cargo to and from the sea ports of neighboring countries, the government has

established the Dry Port Service Enterprise. The Enterprise is currently operating two

dry ports which are located at Modjo, in the Oromiya Regional State, and at Semera, in

Afar Regional State.

Addis Ababa, the capital city, is linked by road to the port of Djibouti, at the Gulf of Aden.

The port of Barbara in Somaliland and Port Sudan are other external trade routes that

provide services for export-import trades of the country. Another potential port

accessible to Ethiopia is Mombassa in Kenya.

6.2 Roads

Road plays a vital role in transporting people and goods in Ethiopia. Cognizant of its

cardinal role, the Government has identified the road sector as top priority for public

investment and remarkable progress has been made in the expansion of the road

network in the country.

Addis Ababa, the capital city, is an important regional and international transport hub.

The road network radiates from Addis Ababa to regions linking it with important cities,

towns, and other economically active centers of the country. International highways also

link Addis Ababa and other cities and towns with neighboring countries such as Kenya,

Djibouti, Eritrea, Somalia, the Sudan and South Sudan.

In 2008/09, the total road network, excluding community roads, reached 46,812 km, out

of which 45 percent are Federal roads and the remaining 55 percent are rural roads

with annual growth rate of 5.5 percent.

48

Based on the classification of the road network, about 21,172 km are in the Federal

network, asphalt road constituted 33 percent and gravel road 67 percent.

All-weather rural road grew by 7.1 percent per annum constituting 25,640 km of the

total road net work in 2008/09. In the same year, the community road, non-engineered

road, was 85,767 km.

6.3 Airports and Airlines

Air transport is an important part of Ethiopia’s transport network. Ethiopian Airline,

Africa’s World Class Airline, which has gained a very good reputation internationally in

its 68 years of active services, provides both domestic and international air transport

services. It has an outstanding safety records and is one of the few profitable African

airlines.

Ethiopian services include both passenger and cargo transport in its international flights

and domestic routes. It also provides training and maintenance services to more than a

dozen other African and Middle Eastern airlines. Domestic flight services are provided

through 17 destinations across the country.

Ethiopian links the country with over 63 destinations worldwide including Brussels,

Frankfurt, London, Paris, Rome, Stockholm, Washington DC, Bahrain, Bangkok, Beijing,

Beirut, Dubai, Guangzhou, Hong Kong, Jeddah, Kuwait, Mumbai, Delhi, Riyadh, Sana’a,

Tel Aviv, Johannesburg, Nairobi, Lagos, Lusaka, Accra, Dakar and many more big cities in

Africa. It is also expanding its international services.

Regarding Ethiopian cargo services, it operates over 40 cargo destinations spread across

Africa, Europe, Asia and the Middle East via its hub – Addis Ababa, and another cargo

hub at Liege.

In addition to Ethiopian, other airlines have flight schedules from and to Addis Ababa

and these include such airlines as Emirates, KLM, Lufthansa, Kenyan and others. The

passenger terminal at Bole International Airport in Addis Ababa has new and modern

facilities providing efficient services to passengers. Ultra-modern cargo terminal

catering to fresh products and a maintenance hangar have also become operational

since 2006. This new and modern terminal has the capacity to handle 350,000 tons of

49

cargo per annum. Anticipating the future growth of perishable cargo, Ethiopian has

proactively launched an expansion project to construct a new perishable cargo terminal

that will be operational within the foreseeable future.

The Ethiopian Government has taken the policy initiatives for the development of the

aviation sector in the country. The most significant initiative undertaken by the

government is the opening up of air cargo service to foreign investors without any

capacity limit and allowing Ethiopian nationals to provide chartered services using

aircrafts with a seating capacity of up to 20 passengers.

6.4 Railways

A limited rail service stretching 780 km links Addis Ababa with the port of Djibouti via

the eastern Ethiopian city of Dire Dawa. Currently, Ethiopia uses Djibouti for its import-

export trade. The shift from Asab in Eritrea to Djibouti appears to have occurred

smoothly, without negative effect on Ethiopia's trade.

6.5 Electricity Supply

Ethiopia has enormous potential for hydropower and geothermal energy generation.

Several studies have so far been carried out to identify Ethiopia’s energy potential and to

develop short, medium and long-term investment plans for the power sector.

The country’s hydropower potential is estimated at 45,000 MW and the potential for

generating electricity from geothermal is about 5,000 MW. The country is also endowed

with enormous potentials of other renewable energy sources like solar and wind,

particularly in rural areas. Despite such huge resources, the country has so far managed

to utilize merely 1,113 MW of its power generating potential and only about 33% of the

population has access to electricity. Since the formulation of the last comprehensive

power system expansion master plan, the fundamental and unprecedented structural

change that have taken place in the economy are now finding their driving force in the

power sector.

Ethiopia has around 1,562.2 MW of installed power generating capacity, out of which

1,382.6 MW is generated from hydropower plants. The remaining 179.6 MW comes from

50

diesel and thermal power plants. The construction of new hydropower plants including,

Grand Ethiopian Renaissance Dam, will enhance its generating capacity.

Table 24: Energy tariff rates by different user category

Source: Ethiopian Investment Agency, Factor Cost (2012)

6.6 Water Supply

Ethiopia has huge run-off and ground water potential. However, it utilizes a small

portion of these resources. Access to safe potable water in urban areas was 88.6 percent

in 2008/09. Access to safe potable water in rural areas was about 61.5 percent in the

same year. The overall national average of access to potable water supply was to 66.2

percent.

A huge project deemed to satisfy safe water demand in the towns and rural areas was

launched by the country’s first five year development plan and presently it is in final

year of implementation.

51

Table 25: charges by monthly water consumption

No. Water consumption

(m3)

Fee

(Birr/m3)

1 0 – 7 1.75

2 8 – 20 3.80

3 21 – 40 4.75

4 41 – 100 5.95

5 101 – 300 7.45

6 301 – 500 9.30

7 Over 501 11.60 Source: Ethiopian Investment Agency, Factor Cost (2012)

Table 26: monthly counter rent by water counter

No. Size of the water meter

(in inches)

Counter rent

(Birr)

1 0.5 1.35

2 0.75 1.50

3 1 2.25

4 1.25 2.85

5 1.5 4.05

6 2 6.25

7 2.5 7.65

8 3 9.05

9 4 10.75

10 5 12.45

11 6 14.05 Note: Domestic customer shall be subject to progressive tariff depending on the amount of consumption. Non-

domestic customers are manufacturing industries and others. They shall pay the amount computed at

a flat rate on the category level the consumption is reached. For Example:-100 m3X5.95=595 Birr

must be paid

Source: Ethiopian Investment Agency, Factor Cost (2012)

52

6.7 Telecommunications

The Ethiopian Telecommunications Corporation (ETC), which is state owned, is the sole

telecom service provider in the country. The Corporation provides national and

international telecommunications services using satellite, micro-wave digital radio multi

access system (DRMAS), VSAT, UHF, VHF, Long Line and HF Radio.

The number of fixed and mobile telephone subscribers has increased by 2 percent and

107.3 percent, respectively, in the last few years. At present, the provision of SIM cards

has been leased to private businesses in order to ease accessibility for subscribers.

Similarly, internet subscription also grew by 118.6 percent. All regional cities and towns

are connected by direct microwave links, and have automatic telephone and cellular

phone services. International links are maintained via satellite earth stations and fiber

optics, providing telephone, telex, fax, internet, television, digital data transmission, pre-

and post-paid cellular phones and coin box services.

Furthermore, the Corporation is currently engaged in a major transformation work

including utilization of a wireless technology to benefit all rural “kebeles” (small and

lowest administrative units); improvement of public phone services in both urban and

rural areas; and establishment of a swift and reliable customer care and billing center as

well as a national network operation centre.

Table 27: Fixed line tariffs

Type of fee Charges

Subscription fee 242.00

Monthly rent 17.00

Peak Off peak

Intra urban 0.2 Birr per six minutes 0.2 Birr per six minutes

Inter urban 0.4 Birr per minute 0.25 Birr per minute

Across zone 0.72 Birr per minute 0.30 Birr per minute

All tariffs are exclusive of VAT Source: Ethio Telecom

53

Table 28: Fax tariffs

Service type Charges

Subscription fee (VAT inclusive) 242.00

Adding fax on the existing line (VAT inclusive) 17.00

Payment in birr/minute

Fax within town 0.20

Fax between different town of the same tariff zone 0.40

Fax between different tariff zones 1.20

Fax to Djibouti 7.0

Fax to the rest of the world 10.0 Source: Ethio Telecom

Table 29: Mobile service enterprise tariff, post paid

Type of fee Post paid mobile (VAT inclusive)

Initial Subscription 30.00 Birr

Reconnection (without SIM card) 15.00 Birr

Reconnection (with SIM card) 30.00 Birr

SIM Card Replacement 15.00 Birr

Monthly Rent 28.75 Birr

Change from post paid to prepaid 30.00 Birr

Change from prepaid to post paid Free

Peak Off peak

Usage charge (full mobility) 0.72 Birr per minute 0.30 Birr per minute

International call 8.63 – 10.29 Birr per minute

Local SMS 0.30 Birr per SMS

International SMS 3.80 – 5.30 Birr per SMS Source: Ethio Telecom

54

Table 30: Internet tariffs

Source: Ethio Telecom

55

NB: Ethiopia’s public monopoly of the communication sector and a vertically

integrated market structure determine access to and use of ICT in the country.

Despite pressures from international financial institutions, Ethiopia’s

telecommunications market structure has continued to be state-owned. Close

observation also shows that it is unlikely that liberalization will take place in the

short term for two reasons;

Telecommunications is viewed as a strategic asset for the economy and

national security in the horn of Africa.

The state has interest in recouping the massive investment it made in recent

years and repaying the US$1.5 billion loan.

Source: Ethiopia ICT sector performance review by researchICTafrica.net

6.8 Global competitiveness of Ethiopia in terms of Infrastructure

Infrastructure has been measured by the World Economic Forum’s Global

Competitiveness Report 2011/12. Their measure takes into account the quality and

availability of modes of transport, quality of electricity supply and telecommunication

accessibility. The table and figure below shows the quality Ethiopia’s infrastructure as

compared to other chosen economies.

Table 31: Infrastructure measure of Ethiopia and comparator economies

Indicators Country Score

(1 – 7)

Rank

(out of 142)

Infrastructure

Ethiopia 2.6 120

South Africa 4.0 62

Kenya 3.1 103

Nigeria 2.2 135

Egypt 3.8 75

Source: World Economic Forum, 2011/12

56

Figure 15: Infrastructure measure of Ethiopia and comparator economies

0 1 2 3 4 5

Kenya

South Africa

Ethiopia

Nigeria

Egypt

Score (1 - 7)

Source: World Economic Forum, 2011/12

57

8. AVAILABILITY OF SKILLED LABOR

8.1 Key features of the Ethiopian labor market

The latest population census carried out in 2007 indicated a population of about 73.8

million inhabitants in Ethiopia. Out of that, the proportion of Ethiopia’s working-age (15

years and over) population that engaged actively in the labor market, either by working

or looking for work (i.e. labor participation rate) was 74.4%, as indicates the labor

market report (2009/10).

Figure 16: Key indicators of labor market in Ethiopia

1994 1999 2005 2007

Labor participation rate 77,90% 80,50% 84,50% 74,40%

Employment rate 75,50% 73,80% 79,90% 71,50%

Unemployment rate 3,10% 8,20% 5,40% 3,70%

Inactivity rate 21,90% 22,50% 15,30% 25,60%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

Source: Ministry of Labor and Social Affairs (2009/10)

According to 2007 population and housing census, employment status is classified as

paid employees (Government employees, NGO’s employees and domestic employees)

and other employees (Self employed, unpaid family workers, Apprentice, members of

cooperatives and others).

58

Table 32: Employed persons status

Employment status Total %

Pa

id E

mp

loy

ee

s

Government 1,105,638 3.7

Government parastatals 265,725 0.9

Private 925,206 3.1

NGO/INTL Employees 86,117 0.3

Domestic workers 631,404 2.1

Other employees 111,793 0.4

Self employed 18,718,711 62.2

Total 21,844,594 72.6

Oth

er

Em

plo

ye

d

pe

rso

ns

Unpaid family workers 6,248,960 20.8

Apprentices 73,255 0.2

Cooperatives 40,060 0.1

Employers 84,960 0.3

Other 1,805,435 6.0

Total 8,252,670 27.4

Grand total 30,097,264 100

Source: Ministry of Labor and Social Affairs (2009/10)

8.1 Illiteracy

The table below presents the percentage distribution of illiterate population by age

group;

Table 33: illiteracy of population aged 15 years and over, 2009/10

Age group Illiteracy rate

Male Female Total

Youth (15 – 24) 37.0% 53.0% 45.0%

Young adult (25-29) 48.0% 72.3% 61.0%

Adult (30+) 62.0% 84.9% 73.3%

Total (15+) 50.9% 71.1% 61.0% Source: Ministry of Labor and Social Affairs (2009/10)

The data shows that there were considerable disparities in the illiteracy status by age.

That is, the illiteracy rates increase as age increases (i.e. from youth to Adult) for both

sexes. In general the illiteracy rate for the country was reported 61.0 percent during the

2007 population and housing census.

59

Table 34: Graduates from Ethiopian schools

2007/08 2008/09 2009/10 2010/11 2011/12

Schools

Kindergarten

Primary

Secondary

Teachers Education

TVET2

Higher Education

2,740

23,354

1,087

24

458

61

2,893

25,212

1,197

26

458

72

3,318

26,951

1,335

29

460

70

3,418

28,349

1,517

32

505

74

3,580

29,643

1,170

32

505

91

Pupil – teacher ratio 57 54 51 51 50 Source: Ethiopian Federal Ministry of Education, 2011/12

8.2 Education and Training

The academic year 2011/12 recorded 84,306 graduates from all three degree streams

(i.e. Bachelors Degree, Masters Degree and PHD), of these, 78,144 were from

undergraduate, 6,092 were from postgraduate masters and 70 were from PhD degree

program.

Table 35: Distribution of graduates, 2011/12

Program

Grand total

Male Female Total

Undergraduate/Degree 58,385 19,759 78,144

Postgraduate – Masters 5,025 792 6,092

Postgraduate – PHD 63 7 70

Total 63,473 20,558 84,306 Source: Ethiopian Federal Ministry of Education, 2011/12

There are a total of 78,144 graduates in undergraduate program of which 19,759 are

females which account for 25.3%. In addition, there are 6,162 postgraduate graduate

students of which 1.1% of the total postgraduate graduates are PhD program graduates.

2 TVET : Technical and vocational education and training

60

Tableau 36: Graduates from Ethiopian schools

2007/08 2008/09 2009/10 2010/11 2011/12

Higher Education 50,643 59,027 71,723 76,358 83,651

Undergraduate 47,979 55,770 66,999 70,317 78,144

Postgraduate 2,664 3,257 4,724 6,041 6,162 Source: Ethiopian Federal Ministry of Education, 2011/12

It is worth mentioning that the total number of the graduates of higher education

institutions has revealed a 13.4% average increase from 2007/08 to 2011/12. In the

same period, an average of around 68,000 students graduates from the universities

annually with diplomas, first degrees and advanced degrees.

In 2011/12, the government regular program undergraduate intake ratio of Science &

Technology to Social & Humanities Sciences (S&T to SHS), taking the year I enrolment as

new admission, is 75:25.

The chart below indicates that the greatest portion (31%) of students that completed

the undergraduate program was constituted of those in Business and Economics;

followed by those in Social Science & Humanities (27%).

Table 37: Students graduated in undergraduate program by field, 2011/12

4 777

12 736

5 107

9 188

23 157

20 674

Engineering & Technology

Natural & Computational Science

Medecine & Health

Agriculture & Life Science

Business & Economics

Social Science & Humanities

No. of Graduates

Source: Ethiopian Federal Ministry of Education, 2011/12

61

8.3 Global competitiveness of Ethiopia in terms of skilled labor

In sum, labor market efficiency; and higher education and training are indicators that

measure how well the workers are allocated to their most efficient use in the economy;

and how well educated the workers are, respectively. Using data from the global

competitiveness report, we can compare Ethiopia to four other African economies with

respect to these indicators.

Table 38: Skilled labor measure of Ethiopia and comparator economies, 2011/12

Indicators Country Score

(1 – 7)

Rank

(out of 142)

Higher education and training

Ethiopia 2.7 132

South Africa 4.0 73

Kenya 3.7 94

Nigeria 3.2 114

Egypt 3.4 107

Labor market efficiency

Ethiopia 4.4 69

South Africa 4.1 95

Kenya 4.7 37

Nigeria 4.4 70

Egypt 3.2 141

Source: World Economic Forum, 2011/12

Figure 17: Skilled labor measure of Ethiopia and comparator economies

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Ethiopia South Africa Kenya Nigeria Egypt

Sco

re (

1 -

7)

Higer education and training

Labor market efficiency

Source: World Economic Forum, 2011/12

62

9. LABOR COST IN ETHIOPIA

9.1 Wages and Salaries at Enterprise Level

Wages and salaries vary depending on the size of the enterprise, type of profession and

level of skill required. They are determined by agreement between the employer and the

employee. Generally, private sectors monthly salaries for university graduates range

from 2,000 Birr to 3,000 Birr and daily unskilled labor wages range from 25 Birr to 50

Birr.

9.2 Salaries of Civil Service Employees

The government of Ethiopia also set minimum wage for civil service employees, which is

320 Birr per month for low skilled labor. The base salary scale for the civil service

employees ranges from 420 Birr to 4343 Birr.

Source: Ethiopian Investment Agency, Factor Cost (2012)

63

10. LAND COST IN ETHIOPIA

Under the constitution of the Federal Democratic Republic of Ethiopia, land is the

property of the State and the peoples of Ethiopia. Urban and rural land is available for

investment on lease-hold and rental basis respectively.

10.1 Urban Land

In conformity with a master plan or guidelines of a city, urban land is permitted to be

held on lease by auction. Minimum price of urban land will be determined by auction.

Lease-hold title deed will be conferred on a person to whom urban land is permitted.

The minimum lease and rental prices of urban land in some regions of the country are

presented below:

64

Tableau 39: lease prices in urban areas

Regions Zone Lease price range with

respect to grade

Addis Ababa Central business zone 894 – 1686 Birr/m2

Transitional business zone 555 – 1035 Birr/m2

Expansion zone 191 – 355 Birr/m2

Tigray Regional State Industry 0.40 – 0.80 Birr/m2/year

Real estate 0.10 – 0.60 Birr/m2/year

Oromiya Regional State Industry 4.50 – 6.50 Birr/m2/year

Trade & similar services 8.5 – 14.45 Birr/m2/year

Real estate 4.11 – 12.00 Birr/m2/year

Amhara Regional State Industry 6.83 – 54.45 Birr/m2/year

Trade & similar services 9.16 – 68.56 Birr/m2/year

Residence 2.27 – 18.15 Birr/m2/year

SNNP Regional State Industry 0.30 – 1.33 Birr/m2/year

Trade & similar services 0.88 – 3.82 Birr/m2/year

Residence 0.22 – 1.07 Birr/m2/year

Dire Dawa City Central business zone 33.74 – 52.31 Birr/m2/year

Transitional business zone 2.85 – 17.09 Birr/m2/year

Expansion zone 0.5 – 1.64 Birr/m2/year

Gambella Regional State Industry 0.02 – 0.07 Birr/m2/year

Somali Regional State Up to 500 m2 0.06 – 0.12 Birr/m2/year

2001 – 3000 m2 0.16 – 0.22 Birr/m2/year

Above 4000 m2 0.24 – 0.30 Birr/m2/year

Source: Ethiopian Investment Agency, Factor Cost (2012)

Table 40: rental prices of urban areas

Regions Zone Lease price range with

respect to grade

Oromiya Regional State Industry 0.18 – 2.13 Birr/m2/year

Trade & similar services 0.40 – 3.40 Birr/m2/year

Real estate 0.12 – 1.60 Birr/m2/year

Amhara Regional State Industry 0.30 – 0.75 Birr/m2/year

Trade & similar services 0.05 – 0.25 Birr/m2/year

Residential houses 0.01 – 0.17 Birr/m2/year

SNNP Regional State Industry 0.18 – 1.05 Birr/m2/year

Trade & similar services 0.25 – 1.95 Birr/m2/year

Residential houses 0.12 – 0.55 Birr/m2/year

Source: Ethiopian Investment Agency, Factor Cost (2012)

65

Table 41: Periods of payment of urban land lease prices by region and activity

Source: Ethiopian Investment Agency, Factor Cost (2012)

10.2 Rural Land

Generally, the rental value and the lease period of rural land are determined and fixed by

land use regulations of each region. Accordingly, the prices of rural land for some

regions are shown below.

66

Tableau 42: rental prices in rural areas

Regions Zone Lease price range with respect

to grade

Duration of rent

Tigray Regional State Agriculture 30 – 40 Birr/hectare/year

Rental price can be revised every

5 years

Oromiya Regional State Agriculture 70.4 – 135.0 Birr/hectare/year 20 – 45 years based on the type,

magnitude and location of project Industry 0.03 – 0.34 Birr/m2/year

Amhara Regional State Rain fed agriculture 111 – 281 Birr/hectare/year 5 – 25 years based on the type,

magnitude and location of project

Irrigated agriculture 158 – 498 Birr/hectare/year 8 – 25 years based on the type,

magnitude and location of project

SNNP Regional State Agriculture 30 – 117 Birr/hectare/year 25 – 45 years based on the type,

magnitude and location of project Industry 0.05 – 0.15 Birr/m2/year

Benshagul Gumz Regional State Agriculture 50 – 70 Birr/hectare/year

20 – 40 years based on the type,

magnitude and location of project

Somali Regional State Agriculture 12 – 45 Birr/hectare/year

Source: Ethiopian Investment Agency, Factor Cost (2012)

67

10.3 Ease of registering property and dealing with construction permits in Ethiopia

Effective administration of land is part of ensuring formal property rights. The World

Bank’s DoingBusiness measures how complicated, timely and costly the transfer of

property of different countries is. The figure below shows Ethiopia’s performance as

compared to other economies in this field.

Figure 18: How Ethiopia and comparator economies rank on the ease of registering property

Source: Doing Business 2013 by World Bank

Globally, Ethiopia stands at 112 in the ranking of 185 economies on the ease of

registering property, according to Doing Business 2013. Their report determined that

Ethiopia averaged 10 procedures, 41 days and 2.1% of property value as cost for the

transfer of property.

As for the ease of dealing with construction permits, Doing Business measured the

procedures, time and cost for a business to obtain the necessary approval to build a

commercial warehouse, connect it to basic utilities and register it. The figure below

shows Ethiopia’s performance as compared to other economies in this field.

68

Figure 19: How Ethiopia and comparator economies rank on the ease of construction permits

Source: Doing Business 2013 by World Bank

Globally, Ethiopia stands at 53 in the ranking of 185 economies on the ease of dealing

with construction permits. Ethiopia averaged 9 procedures, 128 days and 275.6% of

income per capita as cost for dealing with construction permit.

69

11. AVAILABILITY OF ARABLE LAND

Table 43: Land use in Ethiopia

Description Area Percentage of

total area

Total area 1,104,300 km2

Land area 1,000,000 km2 90.6%

Water surface 104,300 km2 9.4%

Agricultural land 350,770 km2 31.8%

Arable land 140,380 km2 12.7%

Forest area 127,180 km2 11.5%

Other land 522,050 km2 47.3% Source: Worldstat

The Agricultural Investment Support Directorate was established in 2009 to identify

land for investors, carry out land transfers and provide various types of support to

investors. It has identified over 3 million hectares of land that can be made available to

investors.

The directorate is also charged with attempting to link small farmers with commercial

agriculture. It has renegotiated a number of lease agreements so as to reduce the land

areas, increase rental rates and standardize their terms.

Supplementary information as regards the cost of land for agricultural projects can be

found in “Land Cost” section above.

70

12. LEGAL FRAMEWORK OF ETHIOPIA

12.1 Investment Law

The Investment Proclamation of 2002, as amended in 2003, and the Regulations on

Investment Incentives and Investment Areas Reserved for Domestic Investors of 2003,

as amended in 2008, constitutes the main legal framework for both foreign and

domestic investment in Ethiopia.

The Ethiopian Investment Agency (EIA) is the government institution responsible for

implementing the investment laws or the most part. This agency is autonomous and

accountable to the Investment Board chaired by the Minister of Industry.

More information on the investment laws of Ethiopia could be found in the “Investment

Regime of Ethiopia” section above.

12.1 Commercial Law

Companies can be classified into numerous forms based on different criteria such as

basis of incorporation, liability, number of members, control, ownership and origin.

Ethiopian law recognizes six different kinds of business entities. In other words, in

Ethiopia, business can be carried out in one of the following six different forms, namely;

Ordinary Partnership, General Partnerships, Limited Partnerships, Share Companies,

Private Limited Companies, and Joint Ventures. However, the code leaves room for

special provisions that would be applicable to cooperative organizations.

Forms of business

entities

Required number of

members

Minimum capital

required

Extent of liability

Ordinary Partnership

General Partnership Unlimited

Limited Partnership Limited

Private limited company From 2 to 50 15 000 Birr Limited

Joint venture 60 000 Birr for

foreign investor

Limited

Share company At least 5 50 000 Birr Limited

71

12.2 Competition law

As part of its market liberalization program, Ethiopia has adopted a specific law dealing

with competition in 2003 entitled, “The Trade Practices Proclamation”. This

proclamation has two stated objectives;

Securing a fair competitive process through the prevention and elimination of

anticompetitive and unfair trade practices (UTPs)

Safeguarding the interests of consumers through the prevention and elimination

of restraints on the efficient supply and distribution of goods and services

12.3 Land regulations

In Ethiopia, land is public property. Both rural and urban lands are made available to

investors on a lease hold basis. Leaseholders have the right of use over urban land for

periods ranging from 50 to 99 years. With respect to rural land, the rental value and the

lease period are fixed by land lease regulations of each regional state. Lease right over

land can be transferred with on-built facilities.

On the other hand, according to Urban Land Lease Holding Proclamation No. 80/1993,

the Government may grant freely or without public tendering urban land which is to be

utilized for investment that the government encourages.

The EIA, in cooperation with the concerned regional government organs, facilitates and

follows up the allocation of land for approved foreign investment.

12.4 Labor laws

Ethiopia's labor regulations have been considerably modernized and brought into line

with international practice in recent years, including the right of employers to hire and

fire.

Normal working hours are limited to 8 hours a day or 48 hours a week. A worker is

entitled to 14 working days of annual leave for the first year of service plus one working

day for every additional year of service. A weekly rest period of 24 hours is required by

law. All public holidays (13 altogether) are paid holidays.

72

There are no restrictions under the Ethiopian law regarding the employment of women

workers. Male and female workers are subject to the same working hours. It is

prohibited; however, to employ women in jobs that are arduous or harmful to their

health. A pregnant woman cannot be assigned to night work. Maternity leave, which has

to be paid, is for a total of 90 days.

According to the Investment Code, employment of expatriates is permitted without any

restriction for key management posts of an investment project, including those of

general manager, finance controller, technical manager and marketing manager.

Expatriates may also be employed for non-management positions. However, before

employing the expatriates, the employer must ascertain, by way of making a proper

announcement, that Ethiopians with comparable qualifications are not available. In case

of planned employment of expatriates, a statement on the time schedule for their

replacement by Ethiopians and the training program designed for such replacement

should be submitted to the EIA for approval.

12.5 Intellectual property law

There is an established legal regime for the protection of intellectual property rights in

Ethiopia. The country is also member of the World Intellectual Property Organization.

The existing laws in Ethiopia in the field of Intellectual Property are; the patent

proclamation and implementing regulations, the copyright and related rights

proclamation and the trademark registration directive.

The proclamation concerning inventions, minor inventions and industrial designs issued

in 1995 offers four forms of protection: patents, patents of introduction, utility model

certificates and certificates of registration of industrial designs.

The copyright and related rights proclamation issued in 2004 give protection to literary,

artistic and scientific works. This protection goes to works of authors who are nationals

or have their habitual residence in Ethiopia, works first published in Ethiopia or within,

audiovisual works whose producers are nationals or have their habitual residence in

Ethiopia, works of architecture erected in Ethiopia, and other artistic works

incorporated in a structure located in Ethiopia.

73

The trademark directive issued in 1986 gives protection to local and foreign enterprises.

This protection is granted after publication of cautionary notice.

The government established the Ethiopian Intellectual Property Office in 2003 to, among

others, facilitate the provision of adequate legal protection for and exploitation of

intellectual property in the country.

Ethiopia assumes membership of different International Intellectual Property

Conventions and of Regional or Bilateral Arrangements including;

World Intellectual Property Organization (WIPO) since 1998

Nairobi Treaty on the Protection of the Olympic Symbol since 1998

Treaty establishing the Common Market for Eastern and Southern Africa

(COMESA) since 1994

Partnership Agreement between members of the African, Caribbean and Pacific

(ACP) Group of states and the European Union (EU)

Applied to become a member of the World Trade Organization (WTO)

12.6 Mining Law

Ethiopia has come a long way from opening private investment in the mineral sector in

1991 to a revised mining law that came into effect on 4 August 2010 called Mining

proclamation No. 678/2010.

This new legal framework supports the modern and global approach of the utilization

and administration of the natural resources for sustainable mining development. It

provides:

Non-exclusive reconnaissance license rights (for a maximum period of 18

months)

Initial three-year exclusive exploration licenses to be renewed each year

Mining licenses for 10–20 years for small-scale and large-scale mining with

unlimited renewals of 5 or 10- year periods

Guarantee for the licensee to sell the minerals locally or abroad

Favorable financial packages, e.g. tax exemptions on equipment, foreign currency

accounts, loss carry forward for 10 years

74

Settlement of disputes through negotiations and international arbitration

In sum, the new mining proclamation requires Plans for health and safety as well as

environmental protection, Social impact assessment and community development

program. It equally levies royalties of only 3% on construction materials and 8% on

precious stones and minerals.

12.7 Global competitiveness of Ethiopia in terms of legal framework

Institutional environment, which constitutes the legal and administrative framework,

has been measured by the World Economic Forum’s Global Competitiveness Report

2011/12. The table and figure below shows the quality Ethiopia’s institutions as

compared to other chosen economies.

Table 44: Legal framework measure of Ethiopia and comparator economies

Indicators Country Score

(1 – 7)

Rank

(out of 142)

Institutions

Ethiopia 4.0 58

South Africa 4.4 46

Kenya 3.3 114

Nigeria 3.3 111

Egypt 3.8 74

Source: World Economic Forum, 2011/12

Figure 20: Legal framework measure of Ethiopia and comparator economies

0 1 2 3 4 5

Kenya

South Africa

Ethiopia

Nigeria

Egypt

Score (1 - 7)

Source: World Economic Forum, 2011/12

75

13. NATIONAL DEVELOPMENT PLAN

The Ministry of Finance and Economic Development drafted a document that describes

Ethiopia’s Growth and Transformation Plan (GTP), a medium term strategic framework for

the five-year period (2010/11-2014/15).

Ethiopia’s long term vision is “to become a country where democratic rule, good-

governance and social justice reigns, upon the involvement and free will of its peoples; and

once extricating itself from poverty and becomes a middle-income economy.”

It’s vision in the economic sector is “to build an economy which has a modern and

productive agricultural sector with enhanced technology and an industrial sector that

plays a leading role in the economy; to sustain economic development and secure social

justice; and, increase per capita income of citizens so that it reaches at the level of those in

middle-income countries.”

1) Sustaining faster and equitable economic growth

2) Maintaining agriculture as a major source of economic growth

3) Creating favorable conditions for the industry to play key role in the economy

4) Enhancing expansion and quality of infrastructure development

5) Enhancing expansion and quality of social development

6) Building capacity and deepen good governance

7) Promote women and youth empowerment and equitable benefit

1/ Sustaining faster and equitable economic growth

The agricultural sector continues to be the major source of economic growth. Industrial

growth will be given particular focus. Industrial expansion will be promoted based on

both export oriented and import substituting industries. It is expected to grow at a faster

rate than other sectors. Thus, the Government’s endeavor of poverty eradication and

employment expansion will pursue by sustaining rapid and broad based economic

growth in a more coordinated and structured manner.

76

2/ Maintaining agriculture as a major source of economic growth

Fundamentals of the strategy include the shift to produce high value crops, a special

focus on high-potential areas, facilitating the commercialization of agriculture,

supporting the development of large-scale commercial agriculture where it is feasible.

To complement this, the commercialization of smallholder farming will continue to be

the major source of agricultural growth. Investment in marketing infrastructure will also

be increased. During the plan period, agriculture will be transformed to high growth

path in order to ensure the food security challenge of the country and to curb

inflationary pressure as well as broadening the export base of the country.

3/ Creating favorable conditions for the industry to play key role in the economy

In the plan period, the industry sector will receive utmost emphasis by way of

encouraging export based and import substituting industries. Vertical and horizontal

linkages between agriculture and industrial sector will be promoted. The Government’s

program will also further focus on strengthening the small-scale manufacturing

enterprises, as they are the foundation for the establishment and intensification of

medium and large scale industries.

4/ Enhancing Expansion and Quality of Infrastructure Development

In the upcoming plan period, infrastructure development will be further intensified with

due focus on the quality of services. Infrastructure development will create the

opportunity for diversified industrial growth and reduce dependence on foreign

currency through substituting imports of materials and services by domestic suppliers.

Telecommunication, railway, road, energy and irrigation development will receive

sustained support during the plan period.

5/ Enhancing expansion and quality of social development

The main ingredients of this pillar are higher education and adult education, better

primary health care, better and closer access to safe water and sanitation facilities,

halting the spread of HIV/AIDS and other infectious diseases, better food security and

nutrition, and housing conditions.

77

6/ Building Capacity and Deepen Good Governance

The Government has designed national programs, policies, and strategies to strengthen

and sustain the country's implementation capacity, which is a key to build on the on-

going democratization process. Accordingly, the implementation of Civil Service Reform

Program and Good Governance packages will be further enhanced ensuring efficiency,

effectiveness, transparency and accountability at all level. In this regard, enhancing

capability of the civil servant will be further strengthened. Concerted efforts on

information and communication technology development will be made to provide

effective support to the overall socioeconomic transformation process.

7/ Promote Gender and Youth Empowerment and Equitable Benefits

Over the last several years major efforts were made to increase girls’ enrollments in

school, expand female health extension worker coverage, and increase extension service

to the women farmers in rural areas including legislative and institutional reforms to

protect the right of women and open opportunities. The government is committed to

speeding up these changes both through education and by increasing the role of women

in public life and also strengthens their membership based organization.

78

Table 45: Selected GTP indicators

Sector/ indicator

Baseline

2009/10

Plan Target

2014/15

Macro economy

Real GDP growth rate (%)

Total consumption of expenditure as % of GDP

Gross domestic savings as % of GDP

Export of goods and non-factor services as % of GDP

Import of goods and non-factor services as % of GDP

Capital expenditure as % of GDP

Domestic revenue as % of GDP

External (Net) as % of GDP

11

90.6

9.4

10.5

27.3

10

12.9

0.8

11.2

85.0

15.0

31.2

45.7

13

17.3

0.6

Poverty and Welfare

Poverty headcount (%)

Food poverty headcount (%)

29.2

28.2

22.2

21.2

Agriculture

Agriculture value added (in billion Birr)

Coffee export (ton)

Meat export (000 metric ton)

58.4

319,647

10

86.2

600,970

111

Industry

Sugar product (000 product)

Textile and garment industry export (in million Birr)

Total capacity to produce cement (in million tons)

Metal consumption per capita (Kg)

17,712

21.8

2.7

12

42,516

100

27

34.7

Infrastructure development

Road network

Road density (Km/1000 population)

Railway network

Power generating capacity (MW)

Potable water coverage (%)

Fixed telephone subscribers (in millions)

Mobile telephone subscribers (in millions)

Internet service subscribers (in millions)

49,000

0.64

-

2000

68.5

1.2

7.6

0.20

136,000

1.54

2000

8000

98.5

8.6

64.4

7.17

Education

Adult literacy rate (%)

Gross primary enrollment ratio (%)

Government higher institution intake capacity

36

94.2

185,788

95

100

467,000

Health

Primary health service coverage (%)

Under 5 mortality rate (per 1000)

89

101

100

67 Source: Ministry of Finance and Economic Development, 2010

79

SWOT ANALYSIS OF ETHIOPIA

Strengths Weaknesses

Progress in economic diversification is

making Ethiopia a broad-based economy

Public investment in infrastructures (transport, energy and communication)

Strong and relatively cheap labor force

High energy potential especially hydroelectric energy

Vulnerable to volatility of raw

materials prices

High level of corruption and difficult business environment

Very high level of inflation

Insufficient infrastructure compared to the dimension of the country

High degree of poverty

Financial market is shallow

Opportunities Threats

Support from international donors

Ethiopia has a geostrategic position since it is centrally located in global economy

Border conflicts with Eritrea and

Sudan

Introduction of Islamic extremism in the country

Prone to weather variations that could result in food insecurity

80

LIST OF FIGURES

Figure 1: Map of Ethiopia ............................................................................................................................. 3

Figure 2: Country Risk of Ethiopia ......................................................................................................... 12

Figure 3: Real GDP Growth ....................................................................................................................... 14

Figure 4: GDP Contribution by Sector .................................................................................................. 15

Figure 5: Current account of Ethiopia .................................................................................................. 16

Figure 6: Imports and exports of Ethiopia .......................................................................................... 17

Figure 7: Foreign direct investment of Ethiopia .............................................................................. 18

Figure 8: Distribution of major investment project by sector in 2010/11 (in %) .............. 18

Figure 9: Enabling trade index of Ethiopia ......................................................................................... 19

Figure 10: Official and parallel exchange rate (birr per US dollar) ........................................... 20

Figure 11: CPI Inflation (year-on-year), 2008 - 2012 .................................................................... 23

Figure 12: How Ethiopia and comparator economies rank on the ease of getting credit 28

Figure 13: How Ethiopia and comparator economies rank on the ease of paying taxes .. 36

Figure 14: Ease of starting business in Ethiopia compared to other economies ................. 46

Figure 15: Infrastructure measure of Ethiopia and comparator economies ........................ 56

Figure 16: Key indicators of labor market in Ethiopia ................................................................... 57

Figure 17: Skilled labor measure of Ethiopia and comparator economies ............................ 61

Figure 18: How Ethiopia and comparator economies rank on the ease of registering

property ........................................................................................................................................................... 67

81

Figure 19: How Ethiopia and comparator economies rank on the ease of construction

permits.............................................................................................................................................................. 68

Figure 20: Legal framework measure of Ethiopia and comparator economies ................... 74

82

LIST OF TABLES

Table 1: Key Facts of Ethiopia .................................................................................................................... 4

Table 2: Timeline of Ethiopia ...................................................................................................................... 5

Table 3: Democracy Index of Ethiopia in 2011 .................................................................................... 8

Table 4: Governance indicators of Ethiopia in 2011 ...................................................................... 11

Table 5: Ethiopia’s distance to G7 and BRICS economies ............................................................. 13

Table 6: International partners of Ethiopia 2011/12 .................................................................... 17

Table 7: Some indicators of international trade ............................................................................... 19

Table 8: Exchange rates of the birr as at 07/06/2013................................................................... 20

Table 9: Interest rate structure of commercial bank ...................................................................... 21

Tableau 10: Results of Treasury Bills Auction at June 30, 2011 ................................................ 22

Table 11: External public debt of Ethiopia ......................................................................................... 24

Table 12: Poverty headcount indices and inequality in 2010/11 ............................................. 25

Table 13: Registered banks in Ethiopia ............................................................................................... 26

Table 14: Key figures of banking sector in Ethiopia ....................................................................... 27

Table 15: Sectoral distribution of fresh loans (2012) .................................................................... 27

Tableau 16: Rental tax rates by income category ............................................................................ 30

Table 17: Personal income tax rates by income category ............................................................ 30

Table 18: Excise tax rates by types of goods ...................................................................................... 32

Table 19: Incomes tax rates by type of income ................................................................................. 33

83

Tableau 20: Stamp duty charges by types of instruments ........................................................... 34

Tableau 21: Custom duty rates of some selected goods ................................................................ 35

Table 22: Exemption from payment of income tax ......................................................................... 41

Table 23: Business creation requirements ......................................................................................... 42

Table 24: Energy tariff rates by different user category ............................................................... 50

Table 25: charges by monthly water consumption ......................................................................... 51

Table 26: monthly counter rent by water counter .......................................................................... 51

Table 27: Fixed line tariffs ........................................................................................................................ 52

Table 28: Fax tariffs ..................................................................................................................................... 53

Table 29: Mobile service enterprise tariff, post paid ...................................................................... 53

Table 30: Internet tariffs............................................................................................................................ 54

Table 31: Infrastructure measure of Ethiopia and comparator economies .......................... 55

Table 32: Employed persons status ...................................................................................................... 58

Table 33: illiteracy of population aged 15 years and over, 2009/10 ....................................... 58

Table 34: Graduates from Ethiopian schools ..................................................................................... 59

Table 35: Distribution of graduates, 2011/12 .................................................................................. 59

Tableau 36: Graduates from Ethiopian schools ................................................................................ 60

Table 37: Students graduated in undergraduate program by field, 2011/12 ...................... 60

Table 38: Skilled labor measure of Ethiopia and comparator economies, 2011/12 ......... 61

Tableau 39: lease prices in urban areas .............................................................................................. 64

Table 40: rental prices of urban areas.................................................................................................. 64

Table 41: Periods of payment of urban land lease prices by region and activity ................ 65

84

Tableau 42: rental prices in rural areas ............................................................................................... 66

Table 43: Land use in Ethiopia ................................................................................................................ 69

Table 44: Legal framework measure of Ethiopia and comparator economies .................... 74

Table 45: Selected GTP indicators ......................................................................................................... 78