A foreign investment in Ethiopia appears attractive for more and more businessmen. Huge market, army of low-wage labour, newly improved conditions for business development and a pro-business government promise great prospects for entrepreneurs. In dies blog post we offer you a deeper look into the business environment and the opportunities for foreign investment in Ethiopia.
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.” – Jeremy Grantham, January 2020
According to the veteran investor, who predicted the dotcom bubble in 2000 and the financial crisis in 2008, the markets are steering in another big crisis “in a due time”.
Considering the above, investors and entrepreneurs are now looking for good investment opportunities outside the overpriced markets. Africa continues to offer a decent development potential and good opportunities for foreign investment with favorable conditions. Some African countries have been growing disproportionately high for over 10 years – e.g. Ethiopia, Rwanda, Mauritius etc.
A deeper look into the business environment for foreign investment in Ethiopia
Ethiopia is the African country with the second largest population – over 109 million! The majority (ca. 70%) is young, low-cost teachable labour. The growth before the Covid-19-pandemic was about 10% per year for over 10 years due to heavy government investments, mostly in the infrastructure. Lack of embedding of the privat sector diverted the intended East-Asia-Tiger-States-Model more or less to a deadlock with high internal and external dept. The new administration under PM Abiy Ahmed, started long anticipated policies of liberalisation of the economy and strengthening of the privat sector. Ethiopia is moving towards greater private sector participation and attraction of foreign investments, and has announced plans to privatize a number of enterprises and industries long-controlled by the state. Additionally, the country is revamping policy to rely more heavily on public-private partnerships (PPPs) for large infrastructure projects, and has already committed to 17 PPPs worth $7 billion. In December 2018, the Prime Minister’s administration unveiled a new initiative to improve the ease of doing business in the country, an exciting development for the private sector both in and outside of Ethiopia. Ethiopia has been ranked 159th worldwide for the ease of doing business in the World Bank’s 2020 Doing Business Report, unchanged to the previous year. Meanwhile, Ethiopia made progress in registering properties by improving the quality of its land administration system and publishing the official list of documents required for property registration (Doing Business). The highly regarded RMB Global Markets Research “Where to Invest in Africa 2020” ranks Ethiopia 9th, a five-ranks downgrading compared to 2019.
According to UNCTAD’s World Investment Report 2020, FDI (foreign direct inventions) inflows to Ethiopia decreased to USD 2,5 billion in 2019, compared to USD 3,3 billion in 2018 (-24%). In total, FDI stocks amounted to USD 25 billion in 2019. FDI has been negatively impacted by instability in some parts of the country, including regions with industrial parks. In 2019 Ethiopia still remained the largest recipient of FDI in East Africa, with investments in petroleum refining, mineral extraction, real estate, manufacturing and renewable energy. China was the largest investor in 2019, accounting for 60% of newly approved FDI projects, with significant investment in manufacturing and services. The other main investor countries are Saudi Arabia, the United States, India and Turkey. Agriculture (particularly horticulture), renting of agricultural land and leather goods are the sectors that traditionally attracted the most FDI. The country also took advantage of the crisis of the Bangladeshi textile sector to attract foreign companies to the textile industry. (Santander Bank)
Although a liberalisation of the market is on the way, some sectors are still closed to foreign investments – banking, telecommunications, transport excl. over 25 tons. The Ethiopian government has full control over the financial sector inkl. insurances and local banks. Strict and complicated foreign exchange controls, shortages in foreign currency, very high transaction costs and weakness of institutions are serious impediment for the enterprises and foreign investments in Ethiopia. That said, the government of Ethiopia has focused on the services sector, including finance and telecommunications, as potential engines of growth and seeks partners to develop world-class infrastructure, including capital markets and ICT.
Significant progress has been made in terms of transport infrastructure. Ethiopia is a landlocked country. Djibouti is the main import-export seaport accounting for 90-95% of the exports. The Addis Ababa – Djibouti railroad line has been newly renovated, but is considered expensive and under-utilised. Truck transport is still the preferred mode of transport to Djibouti despite the lack of highways. The peace treaty with Erytrea opened the way to Assab and Massaua seaports. Especially the former is considered as the natural see access of Ethiopia throughout the centuries. An EU development project secures funding for the reconstruction of the main road to Assab.
Electricity production is newly open to foreign investments, the distribution is intended to be opened in near time. Still 2/3 of the population has not access to electricity which demonstrate the opportunities of the sector. The government has recently disclosed the Access to Distributed Electrification and Lighting in Ethiopia Project (ADELE) to provide a synergetic package of investments to ensure that reliable electricity services are made available to all Ethiopians regardless of their location and economic status. The Grand Ethiopian Renaissance Dam (6,000 MW) on the Blue Nile is expected to increase the hydro-electric capacity to 37,000 MW by 2037. Increased diplomatic friction could however lead to delays. The new American administration is expected to adopt a more balanced approach than the Egypt-biased one of the previous administration.
The intended privatization of the state-owned railway, maritime, air transport, logistics, and telecommunications sectors, is expected to boost private and foreign investment, but is still an object of clarification.
Ethnic tensions, especially when resulting in instability, are one of the biggest issues for foreign investment. In Ethiopia they are deeply rooted, but were not prominent in the last decades until the introduction of the ethnic-based federal system in 1993. The liberalisation of the media within the framework of democratic reforms launched by the new PM Abiy Ahmed in 2018, had on the downside an aggravation of nationalist tendencies often used and reinforced by politicians. The Tigrayan People’s Libaration Front (TPLF), which had dominated Ethiopia for 27 years, totally lacking the will to renew with the times, could not overcome its loss of power in 2018 and henceforth systematically tried to undermine the government. This wrong track inevitably culminated in the Tigray Conflict (our insight over the causes, course and latest developments. Meanwhile normalisation is ongoing with relief help reaching the most in need. In the rest of the country, except for the area of Metekel, Benishagul-Gumuz region, it is quiet.