Overview
Ethiopia has succeeded in becoming one of the fastest-growing economies in the region. Ethiopia’s robust growth rate continues a sustained trend over the last decade, during which the nation’s economy expanded at an average annual rate of nearly 10 percent, ranking among the highest globally. Ethiopia recorded an average real GDP growth rate of 7.2 percent in 2022/2023. It is anticipated that comprehensive reforms, external debt treatment, resumption of external financing, and greater domestic stability will raise growth towards 7.5-8 percent in the coming years. Foreign Direct Investment (FDI) is expected to settle at around 3 percent of GDP.
The Ethiopian economy is largely based on agriculture which in 2023 was estimated to account for 32 percent of the GDP, 90 percent of foreign currency earnings, and 62.79 percent of employment in 2022. The areas with the most promising potential for investment in the country are agro-processing, textile and metal industries in the manufacturing sector, horticulture, and mining among others. Ethiopia’s low-cost, easily trainable and abundant labour, privileged access to high-income markets and growing domestic and regional markets add to its attraction as an FDI host country.
Investor Protections
Ethiopia comprehensively offers a set of fiscal and non-fiscal incentives to encourage investment in priority areas.
- Income tax and customs duty exemptions are provided as fiscal investment incentives for specific areas of investment and investments in specified less developed regions of the country.
- Business enterprises that suffer losses during the income tax exemption period can carry forward such losses following the expiry of the income tax exemption period for half of the tax exemption period.
- Any investor eligible for customs duty exemption is entitled to import duty-free capital goods and construction materials necessary for new enterprise establishment or the expansion or upgrading of an existing enterprise. The investor is also allowed to import spare parts, the value of which is not greater than 15 percent of the total value of the capital goods, within five years from the date of commissioning of his project.
- An investor who expands or upgrades its existing enterprise and increases in volume the attainable production or service rendering capacity of the existing enterprise by at least 50 percent during the year after the date the expansion was completed is entitled to income tax and customs duty exemptions.
- Investors exporting 60 percent of their product or services or supplying the same to an exporter as production input will be exempted from the payment of income tax for two additional years.
- Investors who produce export products can import machinery and equipment necessary for their investment projects through suppliers’ credit.
- Investors leasing land for investment purposes are given priority and the Ethiopian Investment Commission (EIC) is mandated to facilitate land allocation for investment projects throughout the country.
- Foreign investors who reinvest profits or dividends or buy the entirety of an existing enterprise owned by a foreign investor or the shares therein are exempt from minimum capital requirements.
- An investor who invests within an industrial park and exports 80 percent or above of the product from its manufacturing industry supplies as production input to an investor who exports its products, is entitled to an additional exemption from income tax for 2 years. The development of industry parks has recently been opened to private investors and these investors are also exempt from income tax for 10-15 years depending on the location of investment.
- The law extends a guarantee against nationalization or expropriation of the assets of investors except when the public interest requires it, in compliance with the law and upon payment of adequate compensation corresponding to the prevailing market value. Assets may only be seized, impounded or disposed by court order.
- The investment law also guarantees foreign investors to repatriate in convertible foreign currency at the prevailing exchange rate on the date of transfer, their profit, dividends, principal and interest payments related to technology transfer and collaboration agreement, proceeds from the transfer of shares or conferral of partial or total ownership of an enterprise proceeds from the sale, capital reduction or liquidation of an enterprise, and compensation paid to an investor in case of expropriation.
- Expats employed for investments, whose permanent residence is outside of Ethiopia can also remit salaries from their employment.
Ethiopia has also signed Bilateral Investment Treaties and Double Taxation Avoidance treaties with various countries that would afford investor protection. Ethiopia is a signatory of 29 bilateral investment treaties and 6 multilateral investment agreements that protect private property rights, the principle of national treatment and most favored nations treatment, repatriation of capital and profit, and access to international dispute settlement.
Foreign Tax Credit for Business Income (Foreign Tax Relief)
If a resident taxpayer has a foreign loss for a tax year the amount of the loss shall be carried forward to the following tax year and allowed as a deduction in that year against the taxpayer’s foreign income taxable under Ethiopian law.
Foreign Business Losses
If resident taxpayers with foreign business income taxable under Ethiopian law in which they have paid foreign income tax, the taxpayer shall be allowed a foreign tax credit of an amount equal to the lesser of the foreign income tax paid, or the business income tax payable under.
If a resident taxpayer is not able to wholly deduct a foreign loss, the amount not deducted shall be carried forward to the following tax year, and so on until the loss is fully deducted, but a taxpayer shall not carry a foreign loss forward for more than five tax years after the end of the year in which the loss was incurred.
Agriculture
The agricultural sector constitutes approximately 32.7 percent of GDP and approximately 72.7 percent of total employment. Ethiopia’s main crops are coffee, pulses, oilseeds, cereals, sugarcane, potatoes and vegetables. Horticulture and forticulture are popular areas for foreign direct investment.
Ethiopia is Africa’s leading producer and exporter of coffee Arabica and ranka 5th in the world. It is known as the birthplace of coffee. The nation is also the second largest flower-exporting country in Africa. Ethiopia is also a regional leader in livestock resources and among the top 10 in the world and is a continental leader in honey and beeswax production.
With the Homegrown Economic Reform Agenda, the Ethiopian Government has been focusing on encouraging investment in the agricultural sector. Increasing market-driven agricultural production and enhancing value addition and access to domestic and international markets are key targets to be implemented in collaboration with the private sector, smallholder farmers, and cooperatives.
The Ministry of Agriculture is responsible for supporting private investors in agriculture. The support ranges from providing land above 5000 hectares, to providing information, technical support, and facilitation for other public services.
Banking and Financial Services
The Council of Ministers made a historic decision in early September 2022 by adopting a policy document allowing foreign banks to enter the Ethiopian banking industry for the first time since the overthrow of the imperial regime.
The National Bank of Ethiopia (NBE) is currently drafting an amendment to the Banking Business Proclamation, to serve as a basis for implementing the policy opening the banking sector to foreign investors. Its main objective is to give directions and outline the next phases to allow foreign investors to engage in the banking sector.
In February 2023, the Ethiopian parliament approved the amendment to the National Payment Systems Proclamation that paves the way for the participation of foreign investors in the financial technology sector. In late July 2024, NBE released a new foreign exchange directive that transitioned the exchange rate to a floating system, marking a significant shift in the exchange regime. This move to a market-driven exchange system now permits banks to engage in buying and selling foreign currencies with clients and among themselves at rates that are freely negotiated.
Another key change brought about by this directive is the elimination of the priority list system for foreign currency allocation, which previously prioritized essential goods. With this change, foreign exchange is now available on demand. The directive also modified the Surrender Requirement, allowing exporters to surrender only 50 percent of their export proceeds to the bank at a negotiated rate, while the remaining 50 percent can be kept in their Retention Account. Moreover, the restrictions on importing certain products due to foreign exchange shortages have been lifted as a result of this directive.
The directive also extended foreign exchange privileges to companies operating within SEZs and industrial parks. As a result, companies in SEZs can now receive payments in foreign currency and retain 100 percent of their foreign exchange earnings. Furthermore, investors can buy or sell raw materials or inputs in foreign currency, whether sourced from another investor within the same industrial park or from a different one. As part of the exchange reform in August 2024 the Ministry of Finance broadened the scope of import payments under the Franco Valuta permit, enabling traders to directly pay import costs in foreign currencies like dollars or euros, moving away from the traditional letter of credit system that relied on local currency.
A capital market proclamation has been enacted in July 2021 and a capital market authority has been established. The stock market is expected to be operational in the coming months. In August 2024 the Ethiopian Capital Market Regulatory Sandbox where FinTechs, SMEs, startups, and other innovative enterprises can test and reefing new capital market products and services; before they can offer them to the mass public. The Sandbox is currently open for applications.
Education
Ethiopia is the second-most populous country in Africa with an estimated population of over 110 million. Despite Ethiopia’s booming economy, the country’s education system remains underdeveloped and plagued by low participation rates and quality problems. Nevertheless, Ethiopia has made tangible progress in the education sector. The system has expanded from 10 million learners a decade ago to more than 25 million. To bolster this upward trend, Ethiopia developed a sector plan for 2020/21 to 2024/25.
The Education Sector Development Program VI (ESDP VI) is guided by the vision to maintain the momentum of expanding equitable access to quality general education, establish technical and vocational education and training institutes in all woredas, strengthen tertiary education institutions and provide lifelong learningopportunitiessothatallcancontributeandbenefitfromrapidgrow and economic change in Ethiopia. Schools use a national curriculum framework that includes textbooks developed by the General Education Curriculum Framework Development Department of the Federal Ministry of Education. (MOE).
The ESDP VI aligns with the goals set out in the Education and Training Roadmap. Significant reforms have been introduced across various sectors, departing from previous approaches. One notable focus is the investment in digital technology integration at all levels. This effort is part of the broader development vision, which extends beyond education and includes cross-sectoral initiatives aimed at achieving middle-income status by 2025.
Healthcare
The Ethiopian health sector is a largely untapped market. Ethiopia has a population of more than 110 million people. However, the healthcare facilities and health posts are around 29, 000. This indicates the high demand for healthcare in Ethiopia.
Ethiopia is expected to become a middle-income country by 2025 with an average economic growth of 10 percent per year resulting in the disposable income of the population. This increase in disposable income is expected to influence spending on healthcare and pharma products. With plans to expand healthcare coverage to its large rural population, the Ethiopian government is undertaking a Health Extension Program. This program is a community-based strategy that aims to deliver health promotion and awareness creation among the public. A social health insurance scheme has been introduced to the public aiming to increase access to health care.
All other healthcare institutions are open to foreign investors except for primary and middle-level health services. Moreover, foreign investors are allowed to invest in specialty clinics, centers, and hospitals. One of the strategic pillars of the recently adopted ten-year path to prosperity development plan is producing quality and competitive pharmaceutical products.
Energy
Approximately 90 percent of Ethiopia’s electricity is produced through hydropower. Apart from using water and wood and wood for electricity production, the Ministry of Water and Energy is seeking investment in the energy sector to promote energy development in the country.
The Ministry is particularly interested in renewable energy sources and a draft feed-in tariff Bill, establishing rates and conditions for private entities to supply power to the national grid, is being finalized. Ethiopia is currently exporting electricity to Sudan, Kenya and Djibouti. Ethiopia’s renewable and non-renewable energy resources potential is promising, with the economically feasible hydropower potential estimated at 45, 000 MW. It also has a large potential for geothermal energy generation. The private sector can participate in electricity generation from any source and without any capacity limit. However, electricity transmission and supply through the national grid is reserved to the Government. Private investors are, however, allowed to operate an off-grid transmission and distribution and distribution of electric power.
Manufacturing
The Growth and Transformation Plan (GTP) intends to transform the economy towards an industrialized economy and increase the per capita income of its citizens by 2025. In the last ten years. The manufacturing sector has contributed approximately USD 357 Million from exports.
It has been showing rapid gains mostly due to favorable policies, expansion of industrial parks and increased competitiveness of products like apparel in the international market. Leather products contribute the largest to earnings from the manufacturing sector.
Some of the main objectives of the ten-year plan (Home Grown Economic Reform Agenda) include the establishment of a base for domestic industrialization, value addition through enhanced inter-sectoral linkages, and enhancement of productivity through private sector leadership. The plan intends to increase the manufacturing sector’s contribution to the country’s GDP by enhancing private sector engagement.
Mining and Petroleum
Private investors can conduct mining operations, including exploration, mining, processing and export. Investors may acquire a three-year exclusive exploration license with possible two-time renewals and further extension periods depending on circumstances during the exploration period.
They are also eligible for a year-exclusive mining license. The right to sell minerals in Ethiopia and abroad is guaranteed. Minerals not originally specified may be added to the license and there is an exemption from customs duties and taxes on importing equipment, machinery, vehicles and spare parts necessary for mining operations. Construction and industrial minerals include marble, granite, limestone, clay, gypsum, gemstone, iron ore, copper, silica, and diatomite. Geothermal energy resources are also abundant. Regarding fossil energy resources, there are significant opportunities for oil and natural gas exploration and development in the major sedimentary basins.
Telecommunications
The telecom sector is currently under a comprehensive reform program. In August 2019, the communication Services Proclamation was enacted liberalizing the sector and promoting foreign participation.
This has seen an additional telecom license being provided to Safaricom Ethiopia. A request for qualifications for a second new telecommunications license was issued in July 2023. The government plans to partially privatize Ethio-Telecom through the capital market. The telephone system in Ethiopia has been described as ‘inadequate’ and the combined fixed and mobile-cellular tele-density is comparatively low. There are approximately 22.74 million internet users and approximately 45.6 million customers as of 2020.
Tourism
Tourism is said to be a good area for potential investors due to moderate dry climate, historical and religious sites and ecological beauty. Expansion of tourism destinations in the country such as Koysha, Wenchi and Gorgora is expected to bring a wealth of opportunities through direct investments or joint ventures with Ethiopians. Grade 1 tour operations service is allowed for foreign investors. Opportunities also exist in the construction of star-designated hotels and resort hotels.