Thursday, 06 Dec 2012
Overseas Business Risk - Ethiopia
Political and Economic
Ethiopia is a federal republic with ethnically based regions. The Federal Democratic Republic of Ethiopia (FDRE) consists of the Federal Government, nine States and two chartered cities, with each entity vested with legislative, executive and judicial powers. The Head of Government Prime Minister Meles Zenawi, came to power in 1991 when the coalition of rebel forces – the Ethiopian People’s Revolutionary Front (EPRDF), led by him overthrew the “Derg” regime. The president of Ethiopia has little or no executive power. In 1995 a new federal constitution was adopted by Ethiopia. EPRDF has won all the subsequent four elections conducted in 1995, 2000, 2005 and 2010. Allegations of electoral fraud by the (EPRDF led to protests and deaths in 2005.
There is insurgency activity in the Somali Region, particularly in the Ogaden, from groups fighting to establish an independent homeland.
In the Gambella and Benshangul-Gumuz Regions, ethnically heterogeneous regions without a dominant ethno-linguistic community, rivalry for power and land led to inter-tribal clashes in the past. The situation has now improved but remains unpredictable.
In 1993, Eritrea, until then part of Ethiopia, became formally independent. In the years from 1998 to 2008 the two countries fought a bloody war over the disputed border town of Badme. Despite a peace agreement after the war, tension still remains between Ethiopia and Eritrea. The border dispute, the main cause of the conflict, is not yet settled. Physical demarcation of the border has not been undertaken in line with the decision of the Eritrea-Ethiopia Boundary Commission.
Ethiopia’s broad-based high economic growth trajectory continued for the eigth year in a row in 2010/11. The economy grew at 11.4 percent in 20010/11. IMF growth figures tend to be a few percent low but this still makes Ethiopia one of the fastest growing economies in the world despite the global economic downturn. This growth performance (which is expected to continue for at least the next few years) is well in excess of the population growth rate and the 7% rate required for attaining the MDG goal of halving povery by 2015.
Although initially led by agriculture, the growth base is broadening, with increasing contributions to GDP from services (which has now overtaken agriculture as the largest component of GDP) and manufacturing. The pace of agricultural sector growth declined from 16.9% in 2003/04 to 9.0% in 2010/11, while the industrial and service sectors grew by 15 and 12.5 percent respectively in 2010/11.
With regard to share of GDP, the contribution of agriculture declined from 42 percent in 2009/10 to 41 percent in 2010/11 while the share of industry increased from 13 percent in 2009/10 to 13.4 percent 2010/11. During the same fiscal year, the share of the services increased from 45 percent in 2009/10 to 45.6 percent in 2010/11. Within the industry, the construction and manufacturing sub-sectors have registered high growth rate of 12.8 and 12.1 percent respectively. Accordingly, the share of construction and manufacturing to real GDP averaged 5.8 percent and 4.9 percent, respectively. Within the service sector; Whole Sale Trade & Hotels & Restaurants sub- sector and Real Estate Renting & Business Activities accounted for 12.8 percent and 10.7 percent of GDP in 2010/11, registering a growth rate of 5.9 percent and 22.1 percent, respectively.
Inflationary pressure wasa major challenges in 2010/11 mainly due to the sharp increase in public sector spending and the financing of such spending directly via central bank advances (or printing money). Accordingly, annual average headline inflation reached 32.5% against 25.3 percent in 2007/08 and 6.1 percent in 2004/05.
There are also other structural challenges – e.g overcoming the country’s dependence on rain fed agriculture and primary commodoties; and ensuring equity while sustaining growth and diversification of the economy.
There is strong correlation between weather conditions and Ethiopia’s economic performance. The last major shock to growth was in 2002/03 when the economy suffered a major decline in real GDP growth on account of severe drought.
A major challenge for Ethiopia is to sustain its current high growth rate, while ensuring that that growth is also shared. Although it is changing rapidly due to the slower growth of agriculture and the resulting fall in its share of total GDP, agriculture employs more than 85 percent of the population and contributes more than 90 percent of the export revenue. Given the mounting pressure on land, sustaining a higher rate of growth in agricultural production over the medium term will require substantial improvements in factor productivity. Consequently, transformation in the structure of production (which is mostly subsistence-based) to more commercially oriented and higher value added production, including for exports, will be key in sustaining growth.
The industrial sector of Ethiopia is small and highly import dependent. In turn, this means Ethiopia’s high growth is still vulnerable to foreign exchange shortages. Diversification towards the industrial sector is thus key to sustaining growth in the long run. This will require more private investment, in export oriented economic activities and import substituting industries. Both of these require public investment in infrastructure. In recognition of this challenge, the Ethiopian government’s current 5 years Growth and Transformation plan includes a strong policy focus on industrialization to support economic transformation.
Ethiopia also offers a wider market access opportunity to prospective investors beyond its growing domestic market. Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA), a regional trading block with 19 member countries and a combined population of 400 million, and enjoys a 10 percent preferential import duty privilege to access member country markets. Ethiopia also enjoys duty free and quota free market access to the US under the African Growth and Opportunity Act (AGOA), to the EU under the Everything but Arms (EBA) initiatives and manufactured products preferential duty access to Canada, Japan, Norway, Switzerland, USA and most EU member countries under the Generalised System of Preferences (GSP).
The Constitution of Ethiopia and the Investment Proclamation protect private property. Investors are also eligible to repatriate capital and remit dividends accrued from their legitimate business and service external loans. Ethiopia is also a member of the Multilateral Investment Guarantee Agency (MIGA), a World Bank affiliate, which issues guarantee against non-commercial risks in signatory countries. Ethiopia is also signatory to the World Bank treaty, “the International Convention on Settlement of Disputes between States and the Nationals of other States (ICSID)”. Investment Promotion and Protection (IPPA) and Double Taxation Agreement with the UK are also in place.
In Ethiopia, not all areas are open to foreign investment. Banking, insurance and microcredit and saving services, travel and shipping agency services, wholesale (except wholesale trade by foreign investors of their locally produced products) and retail trade, broadcasting services and air transport services using aircraft with a seating capacity of up to 20 passengers are exclusively reserved for Ethiopian nationals. The telecommunication sector is also a public monopoly.
Trade and investment between UK and Ethiopia is growing strongly from a low base. A number of British firms have invested in mining, food and drink, the leather industry and pharmaceuticals. Trade between UK and Ethiopia is also growing. UK imports of goods from Ethiopia have grown by 36 percent from £61m in 2010 to £83m in 2011. In the same period UK exports to Ethiopia have also grown by a staggering 77 percent from £80 million to £142 million. Major UK export items to Ethiopia were power generating machinery and transport equipment while major UK imports from Ethiopia were leather goods, vegetables and fruits.
Ethiopia has ratified the two key International Labour Organisation (ILO) conventions that guarantee freedom of association and the right to organise and bargain collectively. However, under the 2003 Labour Proclamation, civil servants, the military and the police are denied these rights.
The right to strike is protected by law, but rigid and complicated procedures make it difficult for workers to engage in strike action in practice. In effect, lawful industrial actions are literally unknown in Ethiopia under these regulations.
The Global Gender Gap Index, a framework for capturing the magnitude and scope of gender-based disparities and tracking progress, ranks Ethiopia 116 out of 135 countries in 2011, a small improvement from the ranking of 121 in 2010. One notable factor for this improvement is the increase in the number of women in Parliament, which rose from 21% to 28%. However, the country comes last in the Index in terms of literacy rates.
Over the last couple of years, human rights groups have expressed concern that communities in Ethiopia have been forcefully moved from their land, sometimes in connection with potential commercial investments. Many of these allegations are focused on Ethiopia’s outer/peripheral regions. Separately, but related to the land issue, is the Ethiopian government’s “villigisation” programme, where communities are given the option of moving to new areas to improve their access to key services, such as health and education. If you or your company are thinking of investing in Ethiopia, you should ensure that a full social and environmental impact assessment is undertaken before you commit to any land-related investment
Bribery and Corruption
Businessman working at a computer
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
One area where corruption still continues unabated in Ethiopia is land allocation. In Ethiopia land is public property. Individuals, companies and other organisations have only the right to use the land. The increase in the value of land in Addis Ababa, ambiguities between the rules and regulations for leasing land and lack of efficient land administration system have increased the incentive for corruption, created loopholes for corrupt officials and made it difficult to ensure transparent and accountablle land administraion.
There have been frequent reports by the Federal Ethics and Anti-corruption Commission (FEAC) of corruption cases being pursued against land developers. Land registration and recording have also started on a pilot basis in Addis Ababa last year and will be extended to other regions this year to fight corruption.
Other major reported cases of corruption includes bribing government employees to evade taxes, win public procurement contracts and establish and run illegal internet telephone services an area where the public company- Ethiopian Telecom , has the exclusive right to provide these services.
One area where Ethiopia stands out among LDCs is in the near absence of corruption to perform routine tasks- such as issuing licences or clearing customs. Bureaucratic delays certainly do exist, but they are not devices by which officials strive to line their pockets (UNCTAD, An Investment Guide to Ethiopia, 2004).
The registration of the assets and financial interests of federal officials began in December 2010 in accordance with the 2009 Proclamation for the Disclosure and Registration of Assets of government officials, employees and constituencies. Though the particulars of the registration and how the process will pan out are yet to be seen, many believed it is a step in the right direction to prevent and control corruption.
Businessman reading newspaper
The greatest terror threat to Ethiopia is Al-Shabaab which is linked to Al-Qaeda, and which operates primarily in Somalia.from the lawless nation Somalia. Although Ethiopian government officials claim that Al-Shabab has not reached a level to pose a direct security threat to Ethiopia, the group has shown its ability to conduct suicide bombings in neighbouring
Security is occasionally increased around major hotels, key government offices and major Western Embassies reflecting spikes in the threat. Visitors should remain vigilant at all times, especially in crowded areas and places frequented by foreigners, including hotels, restaurants and bars.
Protective Security Advice
The legal and institutional framework for the protection of intellectual property rights in Ethiopia is adequate although the record on implementation and enforcement of the rules and regulation is still very poor. The Ethiopian Intellectual Property Office (EIPO) was established in 2003. Intellectual property legislation in Ethiopia includes the Patent Proclamation and Implementing Regulations, issued in 1995 which covers Patents, Utility Models and industrial designs, the Trademarks Registration Directive issued in 1986 and the Copyright and Related Rights Proclamation issued in 2004. Ethiopia has also ratified the WIPO Convention since 1998, and is a signatory of the Nairobi Treaty [Olympic Symbol] since 1982.
It is no secret that some prominent international hotel names are being used by local business people in Ethiopia with the trademark infringement either condoned or ignored by EIPO. Illegal copying of artistic works and software is also widespread with intermittent and often inadequate measures taken by the government and EIPO to prosecute and punish offenders.
Ethiopia has applied to join the WTO. Accession will require amendments to the existing intellectual property rules and regulations to bring them in to conformity with the WTO Trade Related Intellectual Property (TRIPS) agreement. Once a WTO member, Ethiopia is also expected to tighten its currently lax intellectual property right enforcement regime in line with WTO standards.
The Bole international airport, in Addis Ababa, Ethiopia, is one of the key entry points for illicit drugs into East Africa, due to frequent commercial flights from Asia and the Middle East.
The Ethiopian government in collaboration with the United Nations Office on Drugs and Crime (UNODC) is implementing a project against trafficking in the airport of Addis Ababa and capacity building training programmes for police, customs and immigration officers to improve law enforcement to counter organized crime.
A series of measures has also been taken by the government of Ethiopia to prevent and control money laundering. The Ethiopian criminal code has been amended to criminalize money laundering, the Prevention and Suppression of Money Laundering and Financing of Terrorism Proclamation was enacted by Parliament and the Ethiopian Financial intelligence Agency has been established.