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Country Commercial Guides for FY 2000: Ethiopia Report prepared by U.S. Embassy Addis Ababa, released July, 1999 Note*

CHAPTER VII. INVESTMENT CLIMATE

A.1. OPENNESS TO FOREIGN INVESTMENT:

The Government of the Federal Democratic Republic of Ethiopia (GFDRE) is committed to ensuring that private capital plays a significant role in the economy. To this end, it has eliminated discriminatory tax, credit, and foreign trade treatment of the private sector, simplified administrative procedures, and established a clear and consistent set of rules regulating business activities.

In June 1996, the Ethiopian government issued a revised investment code which, inter alia, provides incentives for development-related investments, reduces capital entry requirements for joint ventures and technical consultancy services, creates incentives in the education and health sectors, permits the duty free entry of capital goods (except computers and vehicles), opens the real estate sector to expatriate investors, extends the losses carried forward provision, cuts the capital gains tax from 40 to 10 percent, and gives priority to investors in obtaining land for lease.

The investment code prohibits foreign firm participation in the domestic banking or insurance services. Other areas of investment reserved for Ethiopian nationals include air transport services for more than 20 passengers or for cargo above 2700 kilograms, forwarding and shipping agency services, rail transport services, and non-courier postal services. Professional service providers must be licensed by the government to practice in Ethiopia.

Amendments to Ethiopia's investment proclamation issued in September 1998 allow Ethiopian expatriates and permanent residents to participate in areas formerly reserved for Ethiopian nationals. These areas include radio and television broadcasting services; retail and wholesale trade (except for locally produced goods); import trade; export of raw coffee, oil seeds, pulses, hides and skins, and live sheep, goats, and cattle not raised or fattened on the investor's farm; small and medium-scale construction; tanning of hides and skins up to "crust" level; non-rated hotels, pension houses, bars, nightclubs, tea rooms, coffee houses, and restaurants, excluding international and specialized restaurants; tour operation, travel agency, commission agency, and ticket offices; car hire and taxi transport services; commercial road transport and inland water transport services; bakery products and pastries for the domestic market; grinding mills for grains; barber shops, beauty salons, goldsmith shops, and tailoring services, excluding garment factories; building maintenance services; repair and maintenance of vehicles; saw milling, processing of logs, and the manufacturing of wood products for the domestic market; customs clearance services; museums, theaters, and cinema hall operation; and printing industries.

Although the investment code amendments maintained the exclusion on foreign participation in financial services (banking and insurance) and the other services noted above, they opened several formerly prohibited sectors to foreign investment: telecommunications, hydro-electric power generation (below 25 megawatts), and defense. Investment in telecommunications and defense, however, must be "in partnership with the Ethiopian government." Another provision expands the list of services open to foreign investment to include engineering, architecture, accounting, auditing, and business consultancies.

The Ethiopian government reviews investment proposals in a non-discriminatory manner; the screening process is not regarded as an impediment to investment, a limit to competition, or a means of protecting domestic interests.

Foreign firms are welcome to invest in privatization efforts of the Ethiopian government, although in some instances the government promotes joint ventures with Ethiopian private concerns rather than outright sales. Foreign firms participate through consultancy services preparatory to privatization or through tendering on advertised privatization opportunities. Ethiopia is progressing slowly toward its stated goal of relinquishing most, if not all, of its state-owned firms. To date, Ethiopia has privatized approximately 180 properties, mostly small enterprises in trade and other service sectors. In November 1998, the Ethiopian privatization agency published a list of 114 other firms to be divested in the near future, including breweries, hotels, textile and garment factories, construction and building materials industries, food factories, tanneries, and cotton, tea, and cereal farms. None of Ethiopia's utilities have been privatized to date, though the government is looking for foreign investor partners in telecommunications.

There are no discriminatory or excessively onerous visa, residence, or work permit requirements regarding foreign investors. Foreign investors do not face unfavorable tax treatment, denial of licenses, discriminatory import or export policies, or inequitable tariff and non-tariff barriers.

A.2. CONVERSION AND TRANSFER POLICIES:

The investment proclamation allows all foreign investors, whether or not they receive incentives, to freely remit profits and dividends, principal and interest on foreign loans, and fees related to technology transfer. Foreign investors may also remit proceeds from the sale of liquidation of assets, from the transfer of shares or of partial ownership of an enterprise, and funds required for debt service or other international payments. The right of expatriate employees to remit their salaries is granted in accordance with the foreign exchange regulations of the National Bank of Ethiopia. U.S. businesses represented in Ethiopia do not encounter difficulties in the repatriation of dividends.

Ethiopia issued several proclamations in September 1998, that further liberalized the country's foreign exchange market. Under the new policy, the national bank sells foreign currency to commercial banks (one state-owned and five private banks) and other large corporations at a weekly auction. The commercial banks are free to establish their own exchange rates. Companies with an import license may obtain foreign currency directly from the commercial banks. Ethiopia's new laws also relaxed restrictions on individuals obtaining foreign currency for educational, medical, business, or holiday travel.

The birr has been fairly stable during the last twelve months, undergoing a gradual devaluation from 6.8 birr per U.S. dollar to the current 8.12 birr per dollar. Over this period, the differential between the auction-determined rate of exchange and the parallel (or "black-market" rate) has been nearly eliminated. Ethiopia's exchange rate has remained fairly stable due to the government's conservative monetary policies and considerable foreign exchange reserves, though the government's recent military expenditures as a result of the border dispute with Eritrea have increased the budget deficit and reduced Ethiopia's foreign currency reserves.

A.3. EXPROPRIATION AND COMPENSATION:

Per Ethiopia's 1996 investment proclamation, no assets of a domestic investor or a foreign investor, enterprise, or expansion may be nationalized wholly or partly, except in accordance with the regulations of the government and upon payment of adequate compensation. Such assets may not be seized, impounded, or disposed of except in accordance with a court order. No acts of expropriation have occurred under either the transitional government of Ethiopia (1991-95) or the federal democratic republic of Ethiopia, which assumed power in mid-1995. Given the Ethiopian government's commitment to its structural adjustment program, its interest in attracting foreign capital, and its privatization efforts, the threat of nationalization appears minimal. Following the eruption of the Ethio-Eritrean border conflict in May, 1998, however, the Ethiopian government deported tens of thousands of people identified as Eritrean nationals and in many cases confiscated their property to pay for outstanding loans. Some of these cases will likely result in eventual court cases. A.4. DISPUTE SETTLEMENT:

According to the investment proclamation, disputes arising out of foreign investment, which involve a foreign investor or the state, may be settled by means agreeable to both parties. A dispute which cannot be settled amicably may be submitted to a competent Ethiopian court or to international arbitration within the framework of any bilateral or multilateral agreement to which the government and the investor's state of origin are contracting parties. No such investment disputes are known to have occurred in recent years.

Ethiopia's judicial system remains underdeveloped, although efforts are underway to strengthen its capacity. While property and contractual rights are recognized, and there are written commercial and bankruptcy laws, there is thus far no experience by which to judge the level of acceptance of foreign court rulings.

A.5. PERFORMANCE REQUIREMENT/INCENTIVES:

Investors in specific areas may be eligible for investment incentives. These include agricultural development and agro-processing; agricultural production; manufacturing of equipment, machinery, spare parts, components and supplies, vehicle bodies, other products and assembly plants, and publishing or printed goods; large-scale capital road and building construction and other related works; rural transportation facilities; and the purchase of spraying machinery, trucks fitted with refrigeration facilities, or other equipment for support services.

An investor in one of these specified areas who meets the conditions for a qualifying investment certificate, and who produces evidence showing the exact amount of the capital invested within 30 days of commencement of operation, may qualify for incentives. Subject to the approval of the board of investment, the initial capital required for investment in areas of priority or in technology may be lowered as an investment incentive. Under revisions in Ethiopia's investment code, the education and health sectors are now eligible for incentives.

The specific incentives for domestic and foreign investors as well as incentives in existing enterprises include exemption from import duties and taxes for imports of capital goods and equipment, exemption from taxes for the import of spare parts up to 15 percent of the value of the capital invested; exemption from export duties and taxes for Ethiopian products or services that are destined for export, if approved by the board of investment; and exemption from tax on any remittance from any proceeds from the sale or transfer of shares in part or all of an enterprise by a domestic investor. Investors in relatively under-developed regions of Ethiopia are also eligible for exemption from income tax for up to five years at the discretion of the board of investment.

A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT:

Both foreign and domestic private entities have the right to establish, acquire, own, and dispose of most forms of business enterprises. State-owned enterprises have considerable de facto advantages over private firms, particularly in the realm of Ethiopia's regulatory and bureaucratic environment, and including ease of access to credit and speedier customs clearance.

A.7. PROTECTION OF PROPERTY RIGHTS:

Secured interests in property are protected and enforced, although all land ownership remains in the hands of the state. One pending issue is the return of properties seized, "lawfully" or "unlawfully" during the Mengistu Haile-Mariam regime (1974-91). The government's position is that property seized "lawfully," that is, by court order or through gazetting, remains the property of the state. The state may choose to sell such property if deemed appropriate. In most cases, property seized by oral order or other informal means is gradually being returned to lawful owners or their heirs through a lengthy judicial appeal process.

Land for investment purposes is obtained by lease, with prices set by periodic auctions with established market floors. Land leasehold regulations, however, vary in form and practice by region. The investment proclamation charges the investment authority with locating and facilitating the leasing of property by licensed investors.

There are currently no means of protecting intellectual property rights, patents, and/or copyrights in Ethiopia. Firms generally place notices in local newspapers to effect registration of their trademarks with the Ministry of Trade and Industry. In some cases, U.S. firms have been reluctant to sell products or franchise use of technology because of the lack of protection for intellectual property rights. Recognizing the need to redress this legal shortcoming, the Ethiopian Ministry of Information and Culture formulated a copyright law in June 1999 and called a meeting to discuss the draft legislation.

A.8. TRANSPARENCY OF THE REGULATORY SYSTEM:

Ethiopia's regulatory system is considered fair and honest, but not necessarily open to outside examination. There are instances in which burdensome regulatory or licensing requirements have prevented the local sale of U.S. exports, particularly personal hygiene and health care products.

A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT:

While credit is available to investors on market terms, the 100 percent collateral requirement of the Commercial Bank of Ethiopia (CBE), by far Ethiopia's largest bank, limits the ability of some investors to capitalize upon business opportunities. Foreign banking is not permitted in Ethiopia. Most of the commercial banks have correspondent relations with the Citibank office in Nairobi.

The Ethiopian government allowed loan interest rates to float in early 1998 (which previously had a ceiling of 10.5%) and established a minimum deposit interest rate of 7%. The government offers a limited number of 3-month T-bills but prohibits the interest rate from exceeding the savings deposit rate. In September 1998, Ethiopia reduced the minimum denomination of treasury bills to 5,000 birr ($700). The National Bank governor promised further modifications in the auction system to allow the interest rate on t-bills to be market determined.

There are no laws or regulations authorizing private firms to adopt articles of incorporation or association which limit or prohibit foreign investment, participation, or control. There are no private sector or government efforts to restrict foreign participation in industry standards-setting consortia or organizations. There are no known instances of private firms attempting to restrict foreign investment, participation, or control of domestic enterprises.

Ethiopia does not have a securities market, although a private sector initiative to establish a mechanism for buying and selling company shares is expected to begin by the year 2000. There are no "cross-shareholding" or "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers or acquisitions.

A.10. POLITICAL VIOLENCE:

In recent years there have been no incidents of political violence involving investment projects and/or installations. The recent eruption of hostilities with Eritrea could lead to accidental and/or predetermined damage to investments, particularly in northern Ethiopia.

A.11. CORRUPTION:

Ethiopia works hard to combat corruption through a combination of social pressure, cultural norms, and legal restrictions. Although corruption exists, it is not, in post's opinion, a significant barrier or hindrance to investment or trade in Ethiopia. A number of Ethiopian government officials have been removed from office and prosecuted for corruption over the past two years. Giving and receiving bribes are considered criminal acts, and bribes are not tax deductible. To our knowledge, no investors have ever been charged with corruption. The ministry of justice is the government entity with the primary responsibility to combat corruption.

B. BILATERAL INVESTMENT AGREEMENTS:

To date, Ethiopia has bilateral investment protection agreements and treaties with Italy, Greece, Israel, Switzerland, China, Qatar, Japan, Tunisia, United Kingdom, India, and Germany. The Investment Authority recently expressed an interest in discussing a bilateral investment treaty with the United States.

C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS:

The Overseas Private Investment Corporation (OPIC) is prepared to offer risk insurance and loans to U.S. investors in Ethiopia. OPIC provided political risk insurance in 1995 for a $48 million project by a U.S. firm to construct a sugar refinery. OPIC also provided risk insurance to a U.S. firm involved in a road design project and is participating in several other U.S. investment projects. The government is considering adoption of a revised OPIC bilateral treaty for Ethiopia. Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA).

D. LABOR

In Ethiopia, the labor force is estimated at 35 million, of which 85% are employed in agriculture, mostly as peasant farmers. The government and armed forces are the most important sources of employment outside agriculture, providing work for almost 3 million people. The number of permanent and temporary workers employed in public sector manufacturing increased from 78,000 in 1978 to over 250,000 in 1997. Approximately 40% of the urban workforce is unemployed. The high urban underemployment is partially offset by the informal economy.

Labor remains readily available and inexpensive in Ethiopia. Skilled manpower, however, is scarce in many fields. Only about 300,000 workers are members of unions. Civil sector employees are not allowed to form unions. Most ILO core labor standards have been enacted into law, though Ethiopia continues to debate whether to sign the ILO's international program to eliminate child labor (IPEC). Child labor is not a pressing issue in the formal economy, but it is common in rural areas and in the informal economy in urban areas. Employees are statutorily prohibited from hiring youngsters under the age of 14. There are strict labor laws defining what sectors may hire "young workers," ages 14 to 18, but these are not always enforced.

Ethiopia enjoys labor peace, despite growing union anxiety over the pace of the government's privatization and structural adjustment campaigns. Although union leaders acknowledge that privatization is key to Ethiopia's ability to compete in the global market, they worry about possible job losses during the transition. The government recertified the Confederation of Ethiopian Trade Unions (CETU) in April 1997. Since its recertification, CETU has focused on fundamental workers' concerns such as job security, pay increases, and health and retirement benefits. The right to form labor associations and to engage in collective bargaining is granted in the constitution. Workers who perform essential services are not permitted to strike.

Tripartitism emerged in May 1998 when the government licensed the Ethiopian Employers' Association (EEA). The EEA is dedicated to maintaining labor peace and works in harmony with the ILO, CETU and the Ministry of Labor and Social Affairs. Its leadership supports the adoption of all ILO core labor standards. In general, entrepreneurs believe that cooperating with labor is in their self-interest.

E. FOREIGN TRADE ZONES/FREE PORTS:

There are no areas designated as foreign trade zones and/or free ports in Ethiopia. The Ethiopian government used to benefit from access to the Eritrean free port of Assab. As a result of the Ethio-Eritrean border dispute, Ethiopian exports and imports through Assab are now prohibited. Ethiopia is diverting almost all of its trade through the port of Djibouti. Despite Ethiopia's efforts to clamp down on small-scale trade of contraband, unregulated exports of coffee, live animals, chat (a mildly narcotic leaf), fruit, and vegetables, and imports of cigarettes, alcohol, textiles, electronics, and other consumer goods continues.

F. FOREIGN DIRECT INVESTMENT STATISTICS:

From its inception in July 1992 through August 1998, the Ethiopian Investment Authority has approved 163 foreign investment projects with total projected capital investment of 9.0 billion birr ($1.2 billion). Of these projects, 90 are wholly foreign-owned and 73 are joint ventures with local partners. U.S. investors are responsible for 11 of these new projects, with a total future expected investment of 244 million birr ($30 million). Current U.S. direct investment in Ethiopia is estimated at about $9 million. Ethiopia's major foreign investors include Saudi Arabia, South Korea, Kuwait, and Italy.

U.S. companies with the most significant presence and participation in Ethiopia's economy include Mobil Oil, Cargil, Sheraton Hotel, Lucent Technologies, Crown Cork & Seal, Coca-Cola, Pepsi-Cola, F.C. Schaffer, Pioneer Hi-Bred Seeds, DHL International, Federal Express, United Parcel Service, Caterpillar, Mack Truck, General Motors, Xerox, John Deere, and Navistar.