Best Practices

Newsletter 8

Increased Flow of FDI

The United Nations Conference on Trade and Investment (UNCTAD), in its latest report has put Ethiopia amongst the high-ranking Foreign Direct Investment (FDI) reciepment countries in the region. The flow of FDI has shown marked growth especially in the past two years.

The announcement was made by the Financial Times Business Limited in its recent publication. According to the magazine, Ethiopia ranked first among African Countries in cost effectiveness of Foreign Direct Investment. This can be attributed to the persistent promotion activities conducted in the Middle East and

 European Countries and the successful implementation of the civil service    reform program and the improvement in efficiency of service delivery. investment environment, a number of foreign companies are gaining firm foothold in Ethiopia. Various companies are also speeding up implementing their projects in different sectors.

Ethiopia, which is characterized by successive wars, severe famine and abject poverty, in recent years has become destination for foreign and a domestic investors owing to its conducive working environment. Specially, since the fall of the military junta the government has implemented a series of measures to attract investors.

If we look in to archives with all ample opportunities Ethiopia is endowed with, the investment sector was not given due attention in the Emperial administration.

There was very little modern economic structure during the reign of Hailesilase. As Richard Pankhrust put it " with only a very small proportion of the population engaged in the money economy, trade was largely characterized by barter; wage labor was limited, foreign trade was negligible."

Between 1950 and 1974, the government enacted several pieces of legislation to encourage both foreign and domestic investment. The Investment Committee composed of Ministers of Agriculture, Commerce and Industry and Finance, the Governor of National Bank of Ethiopia, and the General Secretary of Planning Board was set up to lead the sector.

Regardless of the attempt by the government to attract investment the outcome was minimal with the exception of some commercial farms and manufacturers such as metal HVA, Addis Tyre and Akaki Metal factories. The impact was not encouraging.

When the military Junta seized of power, all private properties were nationalized and made state property. The state controlled all means of production under its command economy.

Foreign and local investment has come to almost a standstill.

After the collapse of the military regime in 1991, key priority of the Transitional Government was transforming the command economy to free market. In doing so the government has implemented economic reform programs to encourage the participation of the private sector. This reform among others includes:

·    Privatization of public enterprises

·      Enhancing private sector development and private - public partnership through creating forum for consultation between the private sector and the government

·    Promulgation of the liberal investment law

 As a result of this reform a great deal has been achieved with in a short period of time. Particularly, the economy has shown improvement of annual average growth rate of 6.4% in the past several years. 

According to Persy S. misty and Meils e. Olesen, "policy & administration barriers, limited information promotion, human and social constraints are setbacks to investment in the least developed countries." Like all developing countries Ethiopia had to tackle the drawbacks in the sector to unleash its potentials. Cognizant of the bottlenecks, the government set up the Ethiopian Investment Commission in 1992 entrusted with all the responsibility to execute the investment policy and promote investment in the country. Regional Investment Offices have also been established to promote and facilitate local investment in their respective regions. In addition, a strong linkage was forged between EIC and Regional Offices with respect to technical assistance, the exchange of information and provision of investment facilities.

 In the first few years of the liberalization of the economy and the private sector, the country's economy has which was in the doldrums has shown dramatic changes.  Since the launching of the private investment program in 1992, 4,026 projects with an outlay of nearly 39 billion Birr have been approved.

In order to increase the number of investors considerably by providing a one-stop-shop service, the government has amended the investment code several times. As a result, domestic and foreign investment increased both in number and the amount of capital invested.

According to EIC, in the previous fiscal year, 2180 projects were launched with more than 21 billion birr aggregate capital. The projects have created job opportunities for 292,170 people.

With regard to project status, out of the total approved domestic and foreign investment 207 projects have become operational.  

With the sectarian distribution of projects approved, the manufacturing and agricultural sectors take the lions share respectively. What remains open for question is what accelerated the qualitative and quantitative growth of both domestic and foreign investment besides the above stated catalysts? 

First, substantially changed (many investor- friendly) economic, financial and trade polices were instrumental in improving investment. The stabile and peaceful political and economic environment has boosted investor confidence.

  For most investors, the day-to-day problem of dealing with the public officials is a daunting task. These barriers affect all investors. But foreign investors are affected more because of their inclination to comply with local rules and regulations, to respect due process while the domestic ones are somehow more tolerant to the local bureaucracy. The government to over come these bottlenecks has implemented reforms aimed at overvaluing service delivery. 

It goes without saying that development of infrastructural is one of the major factors in the minds of investors. Infrastructures constraints  could be cited as major implements for investment. Having taken into account their vitality, the development of infrastructure facilities and service provisions is given due priority by the government. The government's on-going development effort in power, telecommunications and road sector to provide quality services is a case in point. 

Attractive local and large international market due to its proximity to the Middle, East Europe and the hinterland of Africa is one advantage of investing in Ethiopia.  

Many agree that there are ample opportunities to tap in various sectors. For instance, investing in agriculture, the bedrock of the economy with vast area of arable land and mosaic ecosystem can be an asset for investors. The sector contributes about 45-50% of GDP and 62 % of the total export. Besides, 97 % of the crop and 98 % of coffee production is from small-scale farm lands.  

 While the total land of Ethiopia is more than 111 million hectares 73 .6 million hectares is suitable for agriculture. Nevertheless, only 22% of the total arable land is so far used for the production of crops.  

Ethiopia is believed to be the "water tower" of Africa. Despite the abundance of water, Ethiopia's agricultural production is rain-fed.   The amount of annual underground water flow is over 123 million cubic meters and therefore scarcity of water won't be the major concern.  

Even though Ethiopia is one of the leading countries in Africa in livestock population, it's underutilized compared with other African Countries. Hence, investors are encouraged to engage in this hugely profitable sector. 

Other areas such as bee keeping, utilizing aquatic life and commercial crops like cotton, coffee are some of the investment options for both local and foreign investors. 

As part of the government effort to re-invigorate and revitalize the manufacturing sector, a new Industry Development Strategy has been adopted. From all what is known the manufacturing sector in Ethiopia is at its earliest stage.

It only covers only about 145 state owned and 643 private manufacturing industries of all sizes. Therefore, there are attractive potential benefits to possible investors in food and beverage, textile, tannery, leather goods and articles. Manufacturing of basic chemicals, glass and ceramics can also serve as area of investment for both local and foreign investors.

 Other development areas including tourism and mining.

Taken together, all these suggest that there are many reasons to label Ethiopia as an investors' destination in the region. The gate is open for every one to take advantage from investing in Ethiopia, nation with untapped opportunities.