Ethiopia

埃塞俄比亚

Ethiopia: Market Profile

Picture: Ethiopia factsheet
Picture: Ethiopia factsheet

1. Overview

Ethiopia’s location gives it strategic dominance as a jumping off point in the Horn of Africa, close to the Middle East and its markets. Landlocked, it borders Eritrea, Somalia, Kenya, South Sudan, and Sudan - its tiny neighbour, Djibouti, is also its main port. Ethiopia’s huge population of about 102 million (2016) makes it the second most populous nation in Africa, after Nigeria. Although it is the fastest growing economy in the region, it is also one of the poorest, with a per capita income of USD783. Ethiopia’s government aims to reach lower-middle-income status by 2025. Its economy experienced strong, broad-based growth averaging 10.3% a year from 2005/06 to 2015/16, compared to a regional average of 5.4%. According to official statistics, Ethiopia’s gross domestic product (GDP) is estimated to have rebounded to 10.9% in FY2017. The expansion of agriculture, construction and services accounted for most of this, with modest manufacturing growth. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role. The government is implementing the second phase of its Growth and Transformation Plan (GTP II). GTP II, which will run to 2019/20, aims to continue work on physical infrastructure through public investment projects, and to transform Ethiopia into a manufacturing hub. Growth targets are an annual average GDP growth of 11%; in line with manufacturing strategy, it also hopes the industrial sector will grow by an average of 20%, creating jobs. Ethiopia’s main challenges are sustaining its positive economic growth and accelerating poverty reduction. Important measures were taken to address persistent birr overvaluation, large external imbalances, foreign exchange shortages, and rising external debt. Inflation remained in single digits on average in FY2017, but accelerated to 15.6% by February 2018.

Sources: World Bank, BMI Research

2. Major Economic/Political Events and Upcoming Elections

May 2015
Ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) won an overwhelming victory in general election.

Janruary 2016
Millions of people have faced dire food shortages after Ethiopia suffers its worst drought in decades.

September 2016
Britain, the EU and the World Bank announced a project to create 100,000 jobs in Ethiopia. A third of the jobs were for Eritrean refugees to whom the Ethiopian government granted full employment rights.

October 2016
Government declared a six-month state of emergency.

December 2016
Economic growth declined to 8% from a previous annual average of 10%.

June 2017
Government again temporarily blocked internet to prevent national exam papers leaking online, have done so in 2016.

February 2018
Prime Minister Desalegn resigned, state of emergency declared.

April 2018
Abiy Ahmed, leader of the Oromo ethnic group party in the ruling Ethiopian People Revolutionary Democratic Front, took over as prime minister.

Source: BBC country profile – Timeline

3. Major Economic Indicators

Graph: Ethiopia real GDP and inflation
Graph: Ethiopia real GDP and inflation
Graph: Ethiopia GDP by sector (2016)
Graph: Ethiopia GDP by sector (2016)
Graph: Ethiopia unemployment rate
Graph: Ethiopia unemployment rate
Graph: Ethiopia current account balance
Graph: Ethiopia current account balance

e = estimate, f = forecast
Sources: IMF, World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Ethiopia merchandise trade
Graph: Ethiopia merchandise trade
Graph: Ethiopia major export commodities (2016)
Graph: Ethiopia major export commodities (2016)
Graph: Ethiopia major export markets (2016)
Graph: Ethiopia major export markets (2016)
Graph: Ethiopia major import commodities (2016)
Graph: Ethiopia major import commodities (2016)
Graph: Ethiopia major import markets (2016)
Graph: Ethiopia major import markets (2016)

Sources: WTO, Trade Map, BMI Research

4.2 Trade in Services

Graph: Ethiopia trade in services
Graph: Ethiopia trade in services

Source: WTO

5. Trade Policies

  • The Ethiopian government maintains control of key sectors, particularly services. There have been some success stories in the services sector - most notably Ethiopian Airlines, which, despite being state-owned, is responsible for generating most of the country's foreign exchange earnings. The National Bank of Ethiopia (NBE) administers a strict foreign currency control regime, and the Ethiopian birr is not freely convertible. As a result, while larger firms, state-owned enterprises (SOEs) and enterprises owned by the ruling party are less likely to face major problems in obtaining foreign exchange, less well-connected and smaller importers often face delays in arranging trade-related payments.

  • Import tariffs: Ethiopia's average import tariff rate of 10% is the third highest in the East Africa region. The Ethiopian government has traditionally applied high tariffs on imports to protect certain local industries such as textiles and leather, as well as to generate revenue.

  • Export taxes or restrictions: The Ethiopian government has banned exports of raw cotton due to a rise in demand from local textile and garment manufacturers. Domestic demand for the product is expected to surpass supply, and without a ban, domestic cotton producers would be forced to import cotton, increasing their business costs.

  • Capital controls: The NBE has repeatedly intervened in devaluing the Ethiopian birr since the end of 2008. Ethiopia, therefore, has a shortage of foreign exchange, and importers encounter difficulty in acquiring foreign capital, particularly those that import goods to be sold domestically. The NBE must approve all foreign currency transactions, and importers need to apply for an import permit and obtain a letter of credit for the total value of the imports before orders can be made.

  • Ethiopia is currently not a member of any customs unions, but it is scheduled to join the World Trade Organization (WTO) in November 2018 after it agreed to open up its economy in phases according to the agreement. Ethiopia is also a member of the Common Market for Eastern and Southern Africa (COMESA), and is in the final negotiation stages to join COMESA's Free Trade Area.

Sources: WTO – Trade Policy Review, BMI Research

6. Trade Agreement

6.1 Trade Updates

In March 2018, 44 out of 54 African countries (including Ethiopia) signed a framework establishing the African Continental Free Trade Area, with the goal of creating a single continental market for goods and services, with free movement of business persons and investments. However, signing the agreement is only the first step as a minimum of 22 countries must ratify it. National legislative bodies must approve and sanction the framework formally, showing full commitment to its implementation.

6.2 Multinational Trade Agreements

Active

  • Ethiopia-Sudan Free Trade Agreement: Trade with Sudan accounts for a small share of Ethiopia's total trade.

Under Negotiation

  • COMESA: Provides investors a guarantee with regard to the standard of goods. It also provides more market opportunities for domestic industries and access to less expensive regional products. Ethiopia played a significant role in establishing COMESA, but it is still not part of its FTA.

  • Ethiopia–Egypt Free Trade Agreement: A removal of trade barriers would benefit investors to some extent.

Signed but not ratified

  • Africa Free Trade Zone: COMESA-EAC-SADC: Better market access creates economies of scale, which is a boon for Africa’s small producers, particularly in the agriculture space. Combined with appropriate industrial policies, this contributes to a diversified industrial sector, with stronger industrial linkages and growth in value addition. The African Continental FTA would ease access to markets within the FTA zone and end problems due to several of the member countries in the FTA belonging to multiple regional groups. Signing the agreement is only the first step, as a minimum of 22 countries must ratify it. National legislative bodies must approve and sanction the framework formally, showing full commitment to its implementation.

Sources: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Ethiopia FDI stock
Graph: Ethiopia FDI stock
Graph: Ethiopia FDI flow
Graph: Ethiopia FDI flow

Source: UNCTAD

7.2 Foreign Direct Investment Policy

  1. Attracting foreign investment is a key objective for the Ethiopian government, embedded within its current (2016-2020) five-year Growth and Transformation Plan. The government is seeking to attract investment in the high-priority sectors of heavy and light manufacturing, agribusiness, textiles, sugar, chemicals, pharmaceuticals, and mineral and metals processing. The government is taking steps to streamline the investment process by developing a more efficient 'one-stop-shop' facility for foreign investors.

  2. Industrial parks will be particularly beneficial to the manufacturing sector, with tax and duty incentives set by the government to accompany investments in the textile and garment industry, leather and leather products, sugar and sugar-related products, cement, metal and engineering, chemicals, pharmaceuticals and agro-processing. Incentives for developers include a tax holiday of as long as 15 years and duty-free privileges, with further advantages for building done outside the capital. Incentives for manufacturers include tax exemptions of 10 years if they export all their products from a site not in Addis Ababa.

  3. SOEs dominate major sectors of the economy and preference is given to them for investment, access to credit, foreign exchange, land, procurement contracts and import duties.

    Traditionally, very few SOEs release detailed financial statements, which makes it difficult to scrutinise their financial data. Corporate governance of SOEs is monitored by a board of directors composed of senior government officials and politically connected individuals.

    There is an inadequate level of transparency in the structure of SOEs. That said, the Ministry of Public Enterprises has begun streamlining governance and financial management of SOEs, as well as improving transparency.

  4. Ethiopia's foreign equity ownership restrictions are above average for the region, particularly in the service industries. A comparatively large number of sectors are dominated by government monopolies, including telecommunications, defence, financial services, media, transportation, and retail. Notable additional sectors dominated by publicly owned enterprises include the electricity and airport operation industries. Those monopolies, together with a perceived difficulty of obtaining required operating licenses (or a sector being entirely closed off), make it difficult for foreign companies to invest.

  5. Ethiopia is experiencing FX shortages as heavy government infrastructure requires FX for associated imports.
  • While the birr usually operates on a managed float regime, weakening against the dollar by around 5%-6% a year, it has long been highlighted that the currency was relatively overvalued.

  • All foreign currency transactions must be approved by the NBE.

  • Businesses are likely to experience delays in foreign exchange supply for up to a year, and it is especially common to expect slowdowns and down-time in the manufacturing sector.

  • Investments are affected by the shortages as this causes manufacturing to slow down; growth potential to decrease; maintenance and spare parts replacements to become challenging; and raw material availability for the textile and construction industries to become affected.

Sources: WTO - Trade Policy Review, The International Trade Administration (ITA), US Department of Commerce, BMI Research

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
State-owned special economic zones (SEZs) in operation include Bole-Lemi I and Addis Industrial Park, located near Addis Ababa, as well as Hawassa Industrial Park in the south, Kombolcha and MekelleBenefits for apparel industry, including tax exemptions, duty-free privileges and fewer bureaucratic procedures
SEZs under construction across the country and due to open operations during the course of 2018-19 include Bole Lemi II, Kilinto, Dire Dawa, Adama, Bahir Dar, Jimma, Areti, Debre Birhan and Air Lines Logistics ParkBenefits for the textile, leather, sugar, cement, metal, chemical, pharmaceutical and agro-processing industries, including tax exemptions, duty-free privileges and fewer bureaucratic procedures
Private industrial zones include Dukem, Sendafa, Ayka Addis, Hujian Industrial Zone, George ShoeIncentives for the manufacturing sector

Sources: US Department of Commerce, BMI Research

8. Taxation – 2018

  • Value Added Tax: 15%
  • Corporate Income Tax: 30%

Source: PwC Taxes at a Glance 2018

8.1 Important Updates to Taxation Information

  • The government has introduced exemptions for export oriented agribusiness and manufacturing activities.
Type of TaxTax Rate and Base
Resident company: Corporate Income Tax30% on profits
Turnover Tax2% and 10% on goods and services
Excise Tax35-100% on specified goods manufactured in Ethiopia and on imports
Customs Duties0-35% on imports
Social Security Contributions (all employers)11% on gross salaries
VAT/GST (standard)
15% on sale of goods and services

9. Foreign Worker Requirements

9.1 Localisation Requirements

Companies encounter few barriers when hiring expatriate workers. All foreigners wishing to engage in employment in Ethiopia are required to obtain a work permit, which will be granted if the employer can prove the job cannot be performed by a local recruit.

9.2 Foreign Worker Permits

Workers can apply for a permit from within Ethiopia or their country of residence and must obtain clearance before starting work. With regard to family members, spouses and children are entitled to stay in the country on special passes, the validity of which depends on the corresponding work permit.

9.3 Visa/Travel Restrictions

Only citizens of Djibouti and Kenya can travel visa-free to Ethiopia. 40 countries that include South Africa, the US, Canada, Australia, India and China are issued a visa on arrival that is valid for up to three months. Most other African, Middle Eastern and Latin American countries require visas before arrival.

9.4 Religious/Cultural Barriers

The constitution and most laws protect religious freedom; however, there have been reports of societal abuses and discrimination based on religious affiliation. Most of the population (44%) practices Ethiopian Orthodoxy, while 34% are Sunni Muslim and 19% belong to Christian Evangelical and Pentecostal groups. Ethiopia's female labour force participation rate, at 78% of the female population aged 15 and older, is comparatively higher than the majority of the East African nations. Thus foreign women employed in Ethiopia should not experience any barriers or discrimination in the workplace.

Sources: Government websites, BMI Research

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
B1 (Stable)23/02/2018
Standard & Poor'sB (Stable)09/05/2014
FitchB (Stable)21/12/2017

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
159/189159/190161/190
Ease of Paying Taxes Index
113/18990/189133/190
Logistics Performance Index
126/160N/AN/A
Corruption Perception Index
108/176107/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank129/202
Short-Term Economic Risk Score39.041.342.3
Long-Term Economic Risk Score42.745.747.0
Political Risk Index Rank181/202
Short-Term Political Risk Score47.547.546.3
Long-Term Political Risk Score38.738.741.7
Operational Risk Index Rank161/201
Operational Risk Score37.934.434.9

Source: BMI Research

10.4 BMI Risk Summary

ECONOMIC RISK
The ruling Ethiopian People's Revolutionary Democratic Front will maintain control in the wake of its 2015 landslide general election victory, therefore, ensuring broad-based policy continuity. However, political risks will remain heightened, with increasing social tensions raising the prospect of an uptick in domestic unrest, while a behind-closed-doors power struggle among the political elite could threaten policy-making.

OPERATIONAL RISK
Ethiopia is one of the most attractive markets in East Africa on account of its promising economic outlook driven by infrastructure-led investments, a large pool of available labour and abundant natural resources. However, the country remains exposed to regional insecurity in the Horn of Africa and aggressive rebel factions. Investors also face risks stemming from Ethiopia's internal crime and security environment, which reflects elevated crime rates and the low police force capability.

Graph: Ethiopia short term political risk index
Graph: Ethiopia short term political risk index
Graph: Ethiopia long term political risk index
Graph: Ethiopia long term political risk index
Graph: Ethiopia short term economic risk index
Graph: Ethiopia short term economic risk index
Graph: Ethiopia long term economic risk index
Graph: Ethiopia long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: BMI Research

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Ethiopia Score34.943.930.435.529.9
East Africa Average32.240.733.231.123.7
East Africa Position (out of 11)54634
SSA Average34.638.335.332.532.3
SSA Position (out of 48)2112331427
Global Average49.749.749.949.249.8
Global Position (out of 201)161140173149166

100 = Lowest risk, 0 = Highest risk
Source: BMI Operational Risk Index

Graph: Ethiopia vs global and regional averages
Graph: Ethiopia vs global and regional averages
Country
Operational Risk IndexLabour Market Risk Index
Trade and Investment Risk IndexLogistics Risk Index
Crime and Secruity Risk Index
Rwanda50.051.456.541.650.7
Kenya40.744.245.449.024.1
Tanzania37.442.938.133.235.3
Uganda35.346.739.330.524.5
Ethiopia34.943.930.435.529.9
Djibouti34.937.441.528.931.9
Burundi28.042.025.727.117.1
Sudan25.832.324.730.315.8
Eritrea25.136.719.524.519.4
Somalia21.936.022.722.07.0
South Sudan19.934.421.219.34.6
Regional Averages32.240.733.231.123.7
Emerging Markets Averages46.848.047.545.846.1
Global Markets Averages49.849.850.049.349.9

Higher score = Lower risk
Source: BMI Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Ethiopia


2017
Growth rate (%)
Number of Ethiopian residents visiting Hong Kong896
23.9
Number of Ethiopians residing in Hong KongN/AN/A

Sources: Hong Kong Tourism Board, BMI Research


2017Growth rate (%)
Number of African residents visiting Hong Kong142,512
-11.6

Sources: Hong Kong Tourism Board, BMI Research

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Ethiopian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

Source: Hong Kong Census & Statistics Department

11.3 Treaties and Agreements between Hong Kong and Ethiopia

China-Ethiopia Bilateral Investment Treatie (BIT)

Source: UNCTAD

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Ethiopian Consulate in Hong Kong
Address: Unit 24, 3/F, Block B, Focal Industrial Center, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong
Hours of Business: Monday to Friday 10:00 a.m. - 5:00 p.m.
Honorary Consul: Dr. Dennis Ng Wang-pun, BBS, MH
Tel: (852) 2363 0200
Fax: (852) 2363 2776

11.5 Visa Requirements for Hong Kong Residents

Holders of Hong Kong SAR, BN(O) and Macao SAR passports may obtain tourist visa valid for up to 3 months on arrival at Addis Ababa (Bole) International airport, at a cost of approximately USD52 for 1 month and USDS72 for 3 months (euros, US dollars and Ethiopian birr are all accepted). To get a visa on arrival, travellers need to also have two passport photographs. Furthermore, in June 2018, Ethiopia launched an 'e-visa'. This allows Hong Kong Residents to easily apply for (currently, with more visa catergories set to follow) tourist visas. For single entry with validity up to 30 days, the fee for the e-visa is USD52 and for single entry with validity up to 90 days, the fee is USD72. All other categories of visitors must get either a visa from the Ethiopian Embassy closest to their place of legal residence before travelling.

Source: Main Department for Immigration and Nationality Affairs, Ethiopia