Investment Policy and Market Environment of Ethiopia

1. Policy

Ethiopia's market-oriented economic development strategy embraces a wide range of reforms with inducements to both domestic and foreign private investments. The private sector is encouraged to invest in almost all areas of the economy.

A foreign investor can invest on his own or jointly with domestic investor(s).

1.1 Wholly Foreign Owned Investments

A foreign investor, who intends to invest on his own, except in consultancy services and publishing, is required to invest not less than USD 100,000 in cash and/or in kind as an initial investment capital per project. The minimum capital required of a wholly foreign investor investing in consultancy services or publishing is USD 50,000 which may be in cash and/or in kind. A foreign investor reinvesting his profit or dividends, or exporting 75 per cent of his outputs, however, is not required to allocate a minimum capital.

A foreign investor is allowed to invest in all areas of investment except those reserved for government, Ethiopian nationals and other domestic investors. (Please see schedule one).

1.2 Joint Ventures

A foreign investor may team up with a domestic investor or company for a joint investment, usually in the form of a partnership, or private limited company or Share Company. Under the Investment Proclamation No. 280/2002, a minimum capital of USD 60,000, except in consultancy services and publishing, is required from a foreign investor who enters into a joint venture partnership with a domestic investor. There is no restriction at all in proportion of share ownership in a joint venture. A foreign investor who wishes to invest in partnership with domestic investor/s in areas of engineering, architecture, accounting and auditing services, project studies or business and management consultancy services or publishing is required to invest only USD 25,000 per project. The foreign partner can satisfy this minimum equity capital either in cash and/or in kind.

1.3 Guarantees to Investors

Ethiopia provides the following guarantees to foreign investors:

1.3.1 Repatriation of Capital and Profits

Capital repatriation and remittance of dividends and interest is guaranteed to foreign investors under the Investment Proclamation. Any foreign investor has the right, in respect of an approved investment, to make the following remittances out of Ethiopia in convertible currency at the prevailing exchange rate on the date of remittance:

¡¤ Profits and dividends accruing from an investment;
¡¤ Principal and interest payments on external loans;
¡¤ payments related to technology transfer or management agreements;
¡¤ proceeds from sale or liquidation of an enterprise;
¡¤ proceeds from the sale or transfer of shares or of partial ownership of an enterprise to a domestic investor;
¡¤ Compensation paid to a foreign investor;
¡¤ Expatriates employed in an enterprise may remit, in convertible foreign currency, salaries and other payments accruing from their employment in accordance with foreign exchange regulations or directives of the country.

1.3.2 Guarantee against Exploration

The constitution of the Federal Democratic Republic of Ethiopia protects private property. The Investment proclamation also provides for 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 guarantees to provide adequate compensation corresponding to the prevailing market value of property and such payment shall be effected promptly.

1.3.3 Other Guarantees

Ethiopia is a member of the World Bank-affiliated Multilateral Investment Guarantee Agency (MIGA) which issues guarantees against non-commercial risks to enterprises that invest in signatory countries. It is currently concluding bilateral investment promotion and protection agreements with a number of developed and developing countries, and it is ready to conclude such treaties with any country at any time. It has also signed the world bank treaty, "the International Convention on Settlement of Investment Disputes between States and Nationals of other States (ICSID)".

2. Labour

Ethiopia has abundant, hard-working inexpensive, disciplined and easily trainable workforce. The minimum wage in government institutions is birr 200 (about USD 23) a month. Wages and salaries in the private sector however, are determined by the market. Wages for unskilled labour vary from region to region and over time. The generally range from birr 6 to Birr 10 (about USD 1) a day. In any case, the cost of labour is very low by any standards.

Universities, engineering colleges and technical and vocational training schools annually produce trained personnel in business, management, economics, accounting, law, engineering and technical disciplines in fairly large numbers. The Government has recently increased the intake capacity of colleges and universities tremendously at both undergraduate and graduate levels. The number of private colleges and universities is also going up. The skilled labour forces in Ethiopia speak and write English.

The salaries of fresh graduates normally range from Birr 700 (about USD 83) to 895 (about USD 106) per month, depending on the level of education. Generally, the salary paid to skilled labour is determined by contract entered into by the employer and the employee. The new labour law of Ethiopia, prepared in conformity with recognized international labour norms and standards, provides adequate provisions to employ/recruit and terminate employment with safeguards that do not allow infringing the rights of investors.

An investor who wants to recruit expatraiate employees for top management positions of an enterprise, of which he/she/it is the sole or major owner or shareholder, has the right to do so after obtaining of prior consent from the Ethiopian Investment Commission.

3. Major Investment Incentives

To encourage private investment and promote the inflow of foreign capital and technology the following incentives are granted to both domestic and foreign investors engaged in areas eligible for investment incentives:

3.1 Customs Import 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 per cent of the value of the imported investment capital goods, provided that the goods are not produced locally in comparable quantity, quality and price.
¡¤ 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.
¡¤ Exemptions from customs duties or other taxes levied on imports are granted for raw materials necessary for the production of export goods. In accordance with the proclamation No. 249/2001, three duty incentive schemes are available for exporters. They are Duty Draw-Back Scheme, Voucher Scheme and Bonded Manufacturing Warehouse Scheme. Taxes and duties paid on raw materials are drawn back at the time of export of finished products. The duty draw back scheme applies to all taxes at the time of importation, and those paid on local purchases.
3.2 Exemption from Payment of Export Customs Duties

Ethiopian products and services destined for export are exempted from the payment of any export tax and other taxes levied on exports.

3.3 Income Tax Holiday

¡¤ Any income derived from an approved incensement shall be exempted from the payment of income tax for the periods deplicted in the following table, depending upon the area of investment, the volume of export, and location.
¡¤ Profit tax holiday is granted subject to Council of Ministers Regulations No. 84/2003 issued on the basis of the Investment Proclamation No. 280/2002 as follows:

Table on Income Tax Holidays

*Board of investment

The period of exemption from profit tax begins from the date of the commencement of production or provision of services, as the case may be.

3.4 Loss Carried Forward

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.

4. Domestic and Foreign Market Prospects

4.1. Domestic Market

With a population of about 70 million (2003), Ethiopia provides a steady and growing domestic market, which is one of the largest in Africa.

4.2. Regional Market

Ethiopia is a member of the common Market for Easter and Southern Africa (COMESA) agreement embracing 23 countries in Eastern and Southern Africa with a population approximately 380 million. Exports and imports with member countries enjoy preferential tariff rates.
4.3. Everything - But - Arms of the European Union (EBA)

Ethiopia is a beneficiary of Everything - But - Arms (EBA) of the European Union. Hence, all Ethiopian export products, except arms, can enter the European Union market free of duty and without quota restriction.

4.4. African Growth and opportunity ACT (AGOA) and the Generalized System of Preference (GSP)

Under the African Growth and Opportunity Act (AGOA) program, Ethiopia is entitled to duty-free and quota-free US market access. Ethiopia has already been eligible for duty and quota free treatment for its wide range of manufactured products in many counties including the U.S., Canada, Finland, Japan, Australia, Norway, Sweden and most European Union countries under the Generalized System of Preference (GSP) program. Under the African Growth and Opportunity Act (AGOA), however, essentially all export products of Ethiopia are eligible for duty-free and quota-free U.S. market access.

Schedule
Areas of Investment Reserved for Domestic Investors

1. The following areas are exclusively reserved for domestic investors:

1. Retail trade and brokerage;
2. Wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their products locally produced);
3. Import trade (excluding LPG, bitumen and upon approval from the Council of Ministers, material inputs for export products);
4. 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;
5. Construction companies excluding those designated as grade 1;
6. Tanning of hides and skins up to crust level;
7. Hotels (excluding star-designated hotels), motels, pensions, tea rooms, coffee shops, bars, night clubs and restaurants excluding international and specialized restaurants;
8. Travel agency; trade auxiliary and ticket selling services;
9. Car-hire and taxi-cabs transport services;
10. Commercial road transport and inland water transport services;
11. Bakery products and pastries for the domestic market;
12. Grinding mills;
13. Barber shops, beauty saloons, and provision of smith workshops and tailoring services except by garment factories;
14. Building maintenance and repair and maintenance of vehicles;
15. Saw milling and timber making;
16. Customs clearance services;
17. Museums, theaters and cinema hall operations;
18. Printing industries;

2. Notwithstanding the provision of paragraph 1 of this schedule, the following areas of investment are exclusively reserved for Ethiopian nationals;

1. Banking, insurance and micro credit and saving services;
2. Forwarding and shipping agency services;
3. Broadcasting services; and
4. Air transport services using aircraft with a seating capacity of up to 20 passengers.