Ethiopia Country Review - January 2016

ETHIOPIA COUNTRY REVIEW

2016

AnalystsSean Keough

Graham Parrott

Graham

Stamp

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CONTENTS

1. COUNTRY OVERVIEW

2. POLITICAL OVERVIEW

3. ECONOMIC OVERVIEW

4. SOCIAL OVERVIEW

5. ENVIRONMENTAL OVERVIEW

6. INVESTMENT OVERVIEW

7. AUTHORS

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Figure 1 - Regional map 5Figure 2 - Country map 6Figure 3 - Average annual temperatures throughout Ethiopia (Celsius) 7Figure 4 - Rainfall throughout Ethiopia (millimetres per year) 7Figure 5 - Timeline of key events in the history of Ethiopia 12Figure 6 - Modernising of the Ethiopian Economy (% of GDP growth) 19Figure 7 - Population of Ethiopia (# in millions) 20Figure 8 - Population pyramid for 2015 (# in thousands) 21Figure 9 - GDP per Capita ($) 22Figure 10 - Historical GDP and Average Real Growth ($ in billions, %) 23Figure 11 - Inflation in Ethiopia, consumer prices (annual %) 23Figure 12 - Private and public spend (year-end, $ in billions) 24Figure 13 - Real interest rates (year end, %) 25Figure 14 - Employment by sector 25Figure 15 - Export data for 2014 (year-end, $ in millions) 27Figure 16 - Import data for 2014 (year-end, $ in millions) 27Figure 17 - Ethiopia trade balance (year-end, $ in billions) 28Figure 18 - Foreign exchange reserves (year-end, $ in billions) 29Figure 19 - Inflation YoY (%) 30Figure 20 - Exchange rate (year average, ETB/USD) 30Figure 21 - Millionaires in Africa (# and percentage increase) 31Figure 22 - Largest countries in Africa by population (# in millions) 32Figure 23 - Urban population in Ethiopia (%) 33Figure 24 - Healthcare spending (% of total GDP) 35Figure 25 - Adult prevalence of HIV (% in ages 15-49) 36Figure 26 - Incidence of tuberculosis (# per 100,000 people) 36Figure 27 - Life expectancy born in 2013 (years) 37Figure 28 - EPI Rankings for Ethiopia 39Figure 29 - FDI into Ethiopia ($ in millions) 42Figure 30 - Disclosed deal activity from 2009 to 2014 ($ in millions) 43Figure 31 - Doing business ranks for Ethiopia vs. regional peers 44Figure 32 - Stamp duty rates 47Figure 33 - Excise tax costs 47Figure 34 - Areas and periods of tax exemption 49Figure 35 - Risks and mitigations 55

FIGURES

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1. COUNTRY OVERVIEW Introduction

Ethiopia, located in East Africa, is the continent's oldest independent nation. It is the second largest country in Africa with a population of close to 97 million in 2014. Ethiopia’s capital city, Addis Ababa, is home to the headquarters of the African Union and is considered the political capital of Africa. Ethiopia also features 9 UNESCO World Heritage sites, the most in Africa, including the famous rock-hewn churches of Lalibela.

Apart from a five-year occupation by Italy in 1936-1941, Ethiopia has never been colonized. In 1974, a military regime, the Derg, deposed Emperor Haile Selassie (who had ruled since 1930) and established a socialist state. The regime was finally toppled in 1991 by a coalition of rebel forces, the Ethiopian People's Revolutionary Democratic Front (EPRDF). A constitution was adopted in 1994, and Ethiopia's first multiparty elections were held in 1995. A border war with Eritrea in the late 1990s ended with a peace treaty in December 2000, but border tensions between the two countries persist.

Ethiopia’s non-resource-based economy has demonstrated resilience over the past 10 years growing at an average of 10.9% between 2004 and 2014, despite volatility in both Western economies and commodity markets. Ethiopia’s GDP more than doubled to close to $55 billion over the same 10-year time period. The economy will continue to benefit from reform efforts such as an increased movement of subsistence farmers into the commercial economy, which has been helped by the ongoing expansion of road, power and market networks. Ethiopia plans to become a lower middle income country by 2025.

Well known for its coffee production, Ethiopia’s historically agricultural based economy has successfully expanded into industry and services in recent years. However, the economy remains vulnerable to climatic shocks, particularly droughts, and to world commodity price fluctuations. Ethiopia has experienced strong, diversified growth over the past 10 years thanks to the implementation of sound economic policies by the Ethiopian government and investment by the international community.

Currently, the Ethiopian Government has finalised the performance of the prior five-year development plan, Growth and Transformation Plan (GTP), and has recently announced the second GTP for the next five years from 2015-2020. The Government will continue to direct public funds towards health and education, transport and energy infrastructure, urban development and the creation of industrial clusters.

COUNTRY OVERVIEW1

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Geography

The major portion of Ethiopia lies on the “Horn of Africa”, which is the easternmost part of the African landmass. The country is strategically located at the crossroads between Africa, the Middle East, and Asia. With a land area of 1,140,331 sq km Ethiopia measures five times the size of Britain or about twice the size of Texas. Ethiopia is bordered by Djibouti and Somalia to the east, Eritrea to the north, Sudan and South Sudan to the west and Kenya to the south.

Figure 1 - Regional map1

Ethiopia’s topography is remarkably diverse, ranging from 20 mountains peaking above 4,000m to one of the lowest points on the Earth’s surface, the Danakil Depression, which lies almost 120m below sea level.

Two principal geographical zones can be found in the country: the cool highlands and the hot lowlands that surround them. Ethiopia’s main topographical feature is the vast central plateau (the Ethiopian highlands)

1 Google Maps

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with an average elevation between 1,800m and 2,400m. It’s here that the country’s major peaks are found including Ras Dashen at 4,543m, Ethiopia’s highest mountain and Africa’s tenth.

The mountains are also the source of four large river systems, the most famous of which is the Blue Nile. Starting from Lake Tana and joined later by the White Nile in Sudan, it forms part of Egypt’s fertile Nile Valley. The other principal rivers are the Awash, Omo and Wabe Shebele.

Figure 2 - Country map2

Southern Ethiopia is bisected diagonally by the Rift Valley, which averages around 50km wide and runs all the way to Mozambique. The valley floor has several lakes, including the well-known chain south of Addis Ababa.

The northern end of the East African Rift Valley opens into the Danakil Depression, one of the hottest places on Earth.

Climate

The Ethiopian climate varies according to the two principal geographical zones mentioned above. The highlands (home to the capital city and the majority of the population) have a moderate climate with minimal seasonal temperature variation. The mean minimum during the coldest season is 6° C, while the mean maximum rarely exceeds 26° C. Temperature variations in the lowlands are much greater, and the heat in the desert and Red Sea coastal areas is extreme, with occasional highs of 60° C.

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Figure 3 - Average annual temperatures throughout Ethiopia (Celsius)3

Heavy rainfall occurs in most of the country during June, July, and August. The High Plateau also experiences a second, though much milder, rainy season between December and February. Average annual precipitation on the central plateau is roughly 122 cm. The northern provinces receive less rainfall, and the average annual precipitation in these areas is less than 10 cm. The westernmost region of Ethiopia receives an annual rainfall of nearly 200 cm. Severe droughts affected the country in 1982–84, 1987–88, and 1991.

Figure 4 - Rainfall throughout Ethiopia (millimetres per year)4

3 Nationalparks worldwide 4 Nationalparks worldwide

10.3 - 15 15.1 - 20 20.1 - 25 25.1 - 30 30.1 - 35 35.1 - 40

94 - 250 251 - 500 501 - 750 751 - 1,000 1,001 - 1,250 1,251 - 1,500

1,501 - 1,750 1,751 - 2,000

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History

Cradle of humanity

Ethiopia is often referred to as the “Cradle of Humanity” due to important discoveries that indicate it was the site of the emergence of anatomically modern humans. In particular, on 30 November 1974 in northeast Ethiopia, scientists found the most complete hominid skeleton to date, which they named “Lucy”. She dates back to 3.2 million years ago and Lucy’s bipedal (upright walking) anatomy changed previous theories that hypothesised humans’ ancestors only started walking upright after evolving larger brains. Another important find in Ethiopia was the 1992 discovery of the 4.4 million year-old A. Ramidus, whose foot bones hinted at bipedism, and is considered by some to be the oldest-known hominid.

Land of Punt

Ethiopia and Eritrea are believed to have formed part of the ancient Land of Punt, an area that attracted the trading ships of the Egyptian Pharaohs for millennia. Many valuable commodities such as gold, myrrh, ivory and slaves were issued from the interior of the region and were exported from the coast. The northern coastal region saw much migration from surrounding areas, and by 2000 BC it had established strong contacts with the inhabitants of southern Arabia.

Pre-Aksumite civilisation

One consequence of these interactions was the emergence of a number of Afro-Asiatic languages, including Ge’ez which laid the foundation for modern Amharic (much like Latin did for Italian). Today, Ge’ez script, still read by many Christian priests in Ethiopia and Eritrea, is one of the oldest alphabets in use in the world.

A more significant outcome was the rise of civilisation in Africa’s Horn in 1500 BC. It thrived through specialist crafts, skills and technologies previously unknown in the area. Many scholars believe that the civilisation was spawned by Arabian settlers and not Africans.

Kingdom of Aksum

The Aksumite kingdom was the next civilisation to rise in present-day Ethiopia. The first written evidence of its existence was from the 1st century AD.

The capital city of Aksum owed its significance to its strategic location at an important commercial crossroads that resulted in a flourishing trade industry. To the northwest lay Egypt, and to the west, near the present-day Sudanese border, were the rich, gold-producing lowlands. To the northeast, in present-day Eritrea, was the Aksumite port of Adulis, positioned at the crux of an extensive trading route.

Exports included frankincense, grain, animal skins, rhino horns, apes and particularly ivory. Imports of dyed cloaks, cheap unlined coats, glassware, and iron for making spears, swords and axes flowed in from Egypt, Arabia and India. Syrian and Italian wine and olive oil were also imported.

The Ethiopian Middle Ages

Culturally, the period was important for the significant output of Ge’ez literature, including the Kebra Negast. It was also at this time that contacts with European Christendom began to increase. Ethiopians began to travel to Europe, particularly to Rome, where many joined churches already established there.

Rise and fall of Gonder

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In 1636, Emperor Fasiladas founded the capital at Gonder, today located approximately 500 km north of Addis Ababa. Gonder flourished for well over a century, and its magnificent palaces and court pageantry attracted visitors from around the world. Its thriving market drew rich merchants of varying religious backgrounds from across the country.

Emperor Tewodros

After Gonder, Ethiopia existed as a cluster of separate fiefdoms until the mid-19th century when Kassa Haylu crowned himself Emperor Tewodros.

The new monarch established a national army a modern road network, implemented a major programme of land reform, promoted Amharic in place of the classical written language, Ge’ez, and attempted to abolish the slave trade.

Emperor Yohannes

Following Tewodros’ death, in 1871 Kassa Mercha of Tigray defeated the newly crowned Emperor Tekla Giorgis. After proclaiming himself Emperor Yohannes the following year, Kassa reigned for the next 17 years. His resounding victories in 1875 and 1876 over Egyptian forces both ended any Egyptian designs on the territory, and brought much captured weaponry, turning his army into the first well-equipped force in Ethiopian history.

The opening of the Suez Canal in 1869 greatly increased the strategic value of the Red Sea, which again became a passageway to the East and beyond. In 1885 the Italians arrived in Massawa (in present-day Eritrea), and soon blockaded arms to Yohannes despite counter efforts by the British. In fact, Britain privately welcomed the Italians, both to counter French influence on the Somali coast (in present-day Djibouti), and to deter any Turkish ambitions.

Emperor Menelik

Menelik, King of Shoa since 1865, was Emperor from 1889 until 1913.

During his rule, electricity and telephones were introduced; bridges, roads, schools and hospitals were built; a central taxation system was implemented; banks and industrial enterprises were established; and Addis Ababa, which would become the capital, was founded. The greatest technological achievement of the time was the construction of Ethiopia’s railway, which eventually linked Addis Ababa to Djibouti in 1915. A brief conflict with Italy in 1895-1896 ended when Menelik defeated the Italians in the Battle of Adwa, one of the biggest and most significant battles in African history. It is among the very few occasions when a colonial power was defeated by a native force.

Iyasu

After Menelik’s death in 1913, his grandson, Iyasu, continued with Menelik’s reforms. After upsetting the allied powers with his dealings with Germany, Austria and the Ottoman Empire, the prince was deposed in 1921. Zewditu, Menelik’s daughter, was proclaimed empress, and Ras Tafari (the son of Menelik’s cousin) was proclaimed the prince regent.

Ras Tafari

Prince Ras Tafari made progress in the field of foreign affairs. In an attempt to improve the country’s international image, he succeeded in abolishing the Ethiopian slave trade. In 1923 Tafari managed to get Ethiopia granted entry into the League of Nations.

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In 1636, Emperor Fasiladas founded the capital at Gonder, today located approximately 500 km north of Addis Ababa. Gonder flourished for well over a century, and its magnificent palaces and court pageantry attracted visitors from around the world. Its thriving market drew rich merchants of varying religious backgrounds from across the country.

Emperor Tewodros

After Gonder, Ethiopia existed as a cluster of separate fiefdoms until the mid-19th century when Kassa Haylu crowned himself Emperor Tewodros.

The new monarch established a national army a modern road network, implemented a major programme of land reform, promoted Amharic in place of the classical written language, Ge’ez, and attempted to abolish the slave trade.

Emperor Yohannes

Following Tewodros’ death, in 1871 Kassa Mercha of Tigray defeated the newly crowned Emperor Tekla Giorgis. After proclaiming himself Emperor Yohannes the following year, Kassa reigned for the next 17 years. His resounding victories in 1875 and 1876 over Egyptian forces both ended any Egyptian designs on the territory, and brought much captured weaponry, turning his army into the first well-equipped force in Ethiopian history.

The opening of the Suez Canal in 1869 greatly increased the strategic value of the Red Sea, which again became a passageway to the East and beyond. In 1885 the Italians arrived in Massawa (in present-day Eritrea), and soon blockaded arms to Yohannes despite counter efforts by the British. In fact, Britain privately welcomed the Italians, both to counter French influence on the Somali coast (in present-day Djibouti), and to deter any Turkish ambitions.

Emperor Menelik

Menelik, King of Shoa since 1865, was Emperor from 1889 until 1913.

During his rule, electricity and telephones were introduced; bridges, roads, schools and hospitals were built; a central taxation system was implemented; banks and industrial enterprises were established; and Addis Ababa, which would become the capital, was founded. The greatest technological achievement of the time was the construction of Ethiopia’s railway, which eventually linked Addis Ababa to Djibouti in 1915. A brief conflict with Italy in 1895-1896 ended when Menelik defeated the Italians in the Battle of Adwa, one of the biggest and most significant battles in African history. It is among the very few occasions when a colonial power was defeated by a native force.

Iyasu

After Menelik’s death in 1913, his grandson, Iyasu, continued with Menelik’s reforms. After upsetting the allied powers with his dealings with Germany, Austria and the Ottoman Empire, the prince was deposed in 1921. Zewditu, Menelik’s daughter, was proclaimed empress, and Ras Tafari (the son of Menelik’s cousin) was proclaimed the prince regent.

Ras Tafari

Prince Ras Tafari made progress in the field of foreign affairs. In an attempt to improve the country’s international image, he succeeded in abolishing the Ethiopian slave trade. In 1923 Tafari managed to get Ethiopia granted entry into the League of Nations.

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Continuing the tradition begun by Menelik, Tafari was an advocate of reform - a modern printing press was established as well as several secondary schools and an air force. In addition, Tafari defeated the last rebellious noble in 1930 and soon assumed the throne following Empress Zewditu’s death.

Emperor Haile Selassie

On 2 November 1930 Tafari was crowned Emperor Haile Selassie. The following year, Ethiopia’s first written constitution was introduced. The two-house parliament consisted of a senate, which was nominated by the emperor from among his nobles; and a chamber of deputies, which was elected from the landholders.

Italian occupation

By the early 20th century Ethiopia was the only state in Africa to have not been colonised. However, given Ethiopia’s position between the two Italian colonies of Eritrea and Somalia, any Italian attempt to link its two colonies would require expansion into Ethiopia. In October 1935, Prime Minister Mussolini’s Italian forces invaded Ethiopia from Eritrea and successfully took over the northern towns of Aksum and Mekele. Emperor Haile Selassie then fled Ethiopia, and in June 1936, made a famous speech to the League of Nations in Geneva. While the league responded by lifting the sanctions against Italy later that year, the Soviet Union, US, Haiti, Mexico and New Zealand refused to recognise Italy’s conquest.

Occupation and resistance

Soon Ethiopia, Eritrea and Somalia were merged to become the colonial territory of “Africa Orientale Italiana”. Italy invested heavily in their new colony and from 1936 sent nearly 60,000 Italians to work on Ethiopia’s infrastructure. On 5 May 1941, Ethiopian patriots, together with British forces, successfully liberated Ethiopia when the emperor and his men entered Addis Ababa.

Postliberation and the Derg

The 1940s and ’50s saw much post-war reconstruction, including the establishment of a new government bank, a national currency, and the country’s first national airline, Ethiopian Airlines. New schools were developed and, in 1950, the country’s first institution of higher education was established, the University College of Addis Ababa (now Addis Ababa University).

In 1955 the revised Ethiopian Constitution was introduced. Although for the first time the legislature included an elected chamber of deputies, the government remained autocratic and the emperor continued to hold all power.

In 1958, Addis Ababa became the headquarters of the UN Economic Commission for Africa (ECA) and in 1962, of the Organisation of African Unity (OAU).

In September 1974, Haile Selassie’s reign came to an end when he was deposed by a Soviet-backed military junta known as the Derg, led by Mengitsu Haile Mariam.

The Derg

On 20 December 1974 a socialist state was declared. Under the adage “Ityopya Tikdem,” or “Ethiopia First”, banks, businesses and factories were nationalised as was the rural and urban land. Over 30,000 peasant associations were also set up. In raising the status of Ethiopian peasants, the campaign initially received much international praise, particularly by UNESCO.

In the meantime, the external threats posed by Somalia and secessionist Eritrea increased. In July 1977 Somalia invaded Ethiopia but was eventually defeated, largely due to the Soviet Union providing state-of-

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Italian occupation









The Derg



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Italian occupation









The Derg



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the-art weaponry to Ethiopia. In Eritrea, however, the secessionists continued to frustrate Ethiopian offensives.

In 1977 the Red Terror campaign, under Mengitsu, was launched to suppress all political opponents. At a conservative estimate, 100,000 people were killed and several thousand more fled abroad.

From 1983–85, a widespread famine hit Ethiopia in which thousands of people died and drew international attention from aid organizations.

The demise of the Derg

Numerous opposition groups united to form the Ethiopian People’s Revolutionary Democratic Front (EPRDF), which in 1989 began its military campaign towards Addis Ababa. Confronted by the EPRDF in Ethiopia and the Eritrean People’s Liberation Front (EPLF) in Eritrea, Mengistu fled the country on 21 May 1991. A week later, the EPRDF entered Addis Ababa and drove out the Derg.

The road to democracy

In July 1991 a transitional charter was endorsed, which gave the EPRDF-dominated legislature a four-year, interim rule under the executive of the Tigrayan Peoples’ Liberation Front (TPLF) leader, Meles Zenawi. Independence was granted to Eritrea and in 1992 extensive economic reforms began. In 1995 the country was divided into new linguistic-ethnic based regions.

In August 1995 the Federal Democratic Republic of Ethiopia (FDRE) was proclaimed, and Meles Zenawi formed a new government following a series of elections and the inauguration of a constitution of the second republic.

The Ethiopia-Eritrea war

In November 1997, Eritrea introduced the nakfa currency to replace the Ethiopian birr, which resulted in disputes over Eritrea’s exchange-rate system. In May 1998 Eritrea began to occupy the border town of Badme and in February 1999 the situation escalated to a full-scale military conflict.

In December 2000 a formal peace settlement was signed in Algiers. In April 2001 a 25km-deep demilitarised strip, which ran the length of the internationally recognised border on the Eritrean side, was set up under supervision of the UN Mission in Ethiopia and Eritrea (UNMEE).

Today’s Ethiopia

In the elections of 2010, the incumbent EPRDF party retained its control over opposition parties and held its majority position.

After the death of Prime Minister Meles Zenawi in August 2012, the EPRDF appointed Hailemariam Desalegn as the acting prime minster. The following month, he was officially elected as Ethiopia’s new prime minister.

In 2015, another parliamentary election was held. Several opposition parties claimed that the National Election Board had implemented complicated procedures for registration that prevented the elections from being a fully participatory process. Nonetheless, Hailemariam Desalegn was re-elected to serve a five-year term.

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Today’s Ethiopia




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Today’s Ethiopia




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Figure 5 - Timeline of key events in the history of Ethiopia5

Date Key event

3.2 million years ago Human life walks on the plains of the Ethiopian highlands.

3500 – 2000 BC As part of the Land of the Punt, natural resources and slaves are obtained from Ethiopia’s interior and shipped abroad.

1500 – 400 BC An Arabian-influenced civilisation rises in northern Ethiopia; the country’s first capital, Yeha, is founded.

400 BC – 200 AD The Aksumite kingdom is formed along Red Sea.

200 – 500 The Aksumite kingdom reaches its apex.

300 – 325 Aksum’s Great Stele collapses.

615 Prophet Mohammed’s daughter flees persecution in Arabia and eventually introduces Islam to Ethiopia at Negash.

1137 – 1270 Rock-churches of Lalibela created.

1270 Yekuno Amlak establishes the “Solomonic dynasty” and Ethiopia enters its Middle Ages.

1636 Emperor Fasiladas founds Gonder, the first permanent capital since Lalibela.

1855 Kassa Haylu becomes Emperor Tewodros and unites Ethiopia.

1872 Kassa Mercha rises as Emperor Yohannes.

1896 Emperor Menelik defeats the Italian army in the Battle of Adwa.

1915 The Djibouti-Addis Ababa rail line is completed, expanding Ethiopian trade and helping rapid development of Addis Ababa.

1930 Ras Tafari is crowned as Emperor Haile Selassie and dubbed the “Chosen One of God”.

1935 Italy invades Ethiopia prior to World War II.

1941 British and Ethiopian forces liberate Ethiopia from Italian occupation.

1962 Haile Selassie unilaterally annexes Eritrea.

1963 The Organization of African Unity is officially founded in Addis Ababa by Emperor Haile Selassie.

1974 The Derg depose Emperor Haile Selassie and established a socialist state on 20 December.

1974 Scientists find the earliest known fossil evidence of human beings from 3.2 million years ago, named “Lucy”.

1991 The Derg regime is toppled by a coalition of rebel forces, the Ethiopian People's Revolutionary Democratic Front (EPRDF).

1995 The Federal Democratic Republic of Ethiopia is proclaimed and the first fair elections are held.

5 Entoto Advisors analysis

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Date Key event

1998 Ethiopia-Eritrea war.

2005 After controversial 15 May elections, mass protests turn violent when government troops combat demonstrators.

2012 Hailemariam Desalegn is sworn in as Prime Minister.

2. POLITICAL OVERVIEW Overview

The Ethiopian Government consists of a federation of regional states that are governed by two assemblies: the 548-member Council of Peoples’ Representatives (CPR), which is the legislative arm of the federation, and the smaller 108-member Federal Council (FC), which serves as the senate, with a merely supervisory role. The president has a mainly ceremonial role.

The prime minister is the head of state and appoints the 18-member cabinet. Under the new republic’s principle of “ethnic federalism”, the old provinces were divided into 11 new regions, including the city-state of Harar and the metropolitan regions of Addis Ababa and Dire Dawa. Each has its own autonomous council and holds its own elections. The regions are demarked largely along linguistic lines, and five of Ethiopia’s largest ethnic groups (the Oromo, Amhara, Tigrayan, Somali and Afar) now have their own regional states.

Political conditions

Ethiopia’s big push for economic development has had costs that cast doubt on its sustainability. Although the government labels itself a “democratic development state”, the political and economic order that the ruling EPRDF follows resembles those of Asian models, which delivered rapid economic growth in an authoritarian environment.

Yet unlike nations such as Singapore and China, whose economic transformation occurred within a closed political system, the EPRDF operates in what is formally a liberal democracy. This ideological entanglement has created structural tension, evident in the restrictions on political and civil rights that are, in theory, enshrined in the Constitution.

Growing economic equality also threatens to undermine the political stability and popular legitimacy that a developmental state needs. Who benefits from economic growth is a much-contested issue in modern Ethiopia. Although the government argues that the suffering caused by rapidly rising living costs is a transient phenomenon inherent in developing economies, the emergence of new economic stars has exacerbated the relative deprivation, particularly among urban poor people.

Political stability

With the EPRDF in power since 1991, the country’s political stability has been subject to scrutiny at various points in time. Elections are claimed not to be free and fair, though parliaments are elected every five years. The government structure, as elaborated above, has a number of stakeholders in its system that enable it to carry out the duties assigned under the Constitution. However, these structures and other entities both in government and non-government schemes are said to be unstable and do not function as effectively as they would in a truly democratic society.

The implementation of the FDRE Constitution, by itself, is also asserted by some to have set a dangerous track whereby the federal government and the constituent regions are run by different political parties. Regional states are not as independent in exercising their powers as outlined in the Constitution, namely because the federal government at all levels may intervene whenever its demands require. But this arrangement can be kept as long as the political party in charge of both the federal government and the

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Date Key event

1998 Ethiopia-Eritrea war.

2005 After controversial 15 May elections, mass protests turn violent when government troops combat demonstrators.

2012 Hailemariam Desalegn is sworn in as Prime Minister.

2. POLITICAL OVERVIEW Overview

The Ethiopian Government consists of a federation of regional states that are governed by two assemblies: the 548-member Council of Peoples’ Representatives (CPR), which is the legislative arm of the federation, and the smaller 108-member Federal Council (FC), which serves as the senate, with a merely supervisory role. The president has a mainly ceremonial role.

The prime minister is the head of state and appoints the 18-member cabinet. Under the new republic’s principle of “ethnic federalism”, the old provinces were divided into 11 new regions, including the city-state of Harar and the metropolitan regions of Addis Ababa and Dire Dawa. Each has its own autonomous council and holds its own elections. The regions are demarked largely along linguistic lines, and five of Ethiopia’s largest ethnic groups (the Oromo, Amhara, Tigrayan, Somali and Afar) now have their own regional states.

Political conditions

Ethiopia’s big push for economic development has had costs that cast doubt on its sustainability. Although the government labels itself a “democratic development state”, the political and economic order that the ruling EPRDF follows resembles those of Asian models, which delivered rapid economic growth in an authoritarian environment.

Yet unlike nations such as Singapore and China, whose economic transformation occurred within a closed political system, the EPRDF operates in what is formally a liberal democracy. This ideological entanglement has created structural tension, evident in the restrictions on political and civil rights that are, in theory, enshrined in the Constitution.

Growing economic equality also threatens to undermine the political stability and popular legitimacy that a developmental state needs. Who benefits from economic growth is a much-contested issue in modern Ethiopia. Although the government argues that the suffering caused by rapidly rising living costs is a transient phenomenon inherent in developing economies, the emergence of new economic stars has exacerbated the relative deprivation, particularly among urban poor people.

Political stability

With the EPRDF in power since 1991, the country’s political stability has been subject to scrutiny at various points in time. Elections are claimed not to be free and fair, though parliaments are elected every five years. The government structure, as elaborated above, has a number of stakeholders in its system that enable it to carry out the duties assigned under the Constitution. However, these structures and other entities both in government and non-government schemes are said to be unstable and do not function as effectively as they would in a truly democratic society.

The implementation of the FDRE Constitution, by itself, is also asserted by some to have set a dangerous track whereby the federal government and the constituent regions are run by different political parties. Regional states are not as independent in exercising their powers as outlined in the Constitution, namely because the federal government at all levels may intervene whenever its demands require. But this arrangement can be kept as long as the political party in charge of both the federal government and the

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State members are the same. Local, regional and national parliaments and councils have limited tasks and can operate as long as they maintain the dominant party line of the ruling EPRDF.

A recent incident that provoked political instability took place during and after the 2005 elections. After consecutive wins by the EPRDF in the 1995 and 2000 general elections, the opposition decided to cooperate and establish the CUD (Coalition for Unity and Democracy) Party. The party was a coalition of four urban parties and was mainly comprised of intellectuals. The party gained countrywide popularity amongst intellectuals, business elites and the Diaspora and introduced a number of new systems to the election system. While many assumed the CUD would defeat the EPRDF, CUD did win all seats in Addis Ababa but not in other regions. The CUD contested the results and soon student demonstrations and violent police intervention followed. A majority of the CUD leaders were sent to prison on criminal charges including treason. The EPRDF defended its power and claimed that the CUD owed its success to dubious alliances and a misleading presentation of its position.

Another potential source of political instability is the Constitution’s inclusion of right to secession. For a country that endured a number of wars during the period of Emperor Menelik II, the authorization for a region or groups of people to break away from the entire country is considered by many as a source of future political chaos for the country. The referendum which led to the secession of Eritrea is feared to likely cause instability if other regions or nationalities make use of the provision. The government, on the other hand, has indicated that this right strengthens the political stability of the country by assuring citizens and regions that their stay in the union (country) is based on their willingness, unlike former regimes that forcibly imposed people in the regions to stay in Ethiopia.

The EPRDF government has been blamed for focusing on rapid economic growth and political stability rather than important values of democracy such as “political participation”. Ethiopia’s economic ambition has come at a cost for sections of its huge rural population. The country’s five-year Growth & Transformation Plan (GTP), begun in 2010, includes tapping into the “abundant extensive land” in the lowlands for large-scale commercial agriculture.

These peripheral areas, such as South Omo and the Afar region, are where ethnic minorities with a weaker political voice live. The government’s policy of urging these communities to shift away from livelihoods such as pastoralism to sedentary farming, whilst encouraging foreign investment in the same areas, raises human rights issues, such as the right to choose a lifestyle and livelihood which are included in the country’s Constitution. These are particularly controversial in Ethiopia’s new federal political order, which claims to ensure ethno-cultural justice.

Whether Ethiopia will attain its ambitious goal of becoming a middle-income country in the next decade depends on how it manages the transition from public investment-driven growth to a dynamic private sector-heavy model. It will also hinge upon its attempts to mitigate the many political and social costs of the transition.

Corruption rankings

Ethiopia does comparatively well on indicators of corruption. However, since construction is an activity which is characteristically associated with corruption and Ethiopia is constructing more than ever, it is reasonable to assume that challenges of corruption are rising.

According to Transparency International, Ethiopia currently ranks at 110 out of 175 countries (20 out of 47 in Sub Saharan Africa) on the Corruption Perceptions Index, which ranks countries/territories based on how corrupt a country’s public sector is perceived to be. It is a composite index, drawing on corruption-related data from expert and business surveys carried out by a variety of independent and reputable institutions.6

6 Transparency.org

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Government structure

The Constitution proclaims under Article 1 the establishment of “a Federal and Democratic State Structure.” The Ethiopian State shall also be known as The Federal Democratic Republic of Ethiopia and operate according to a parliamentarian form of government. The Constitution stipulates that States shall be delimited on the basis of the settlement patterns, language, identity and consent of the people concerned. Nine of the member States that are identified by the Constitution are: Tigray, Afar, Amhara, Oromia, Somali, Benshangul/Gumuz, Southern Nations, Nationalities and Peoples, Gambela and Harari. Still, the possibility for nations, nationalities and peoples within the present States are provided with the right to establish their own States at any time.

In addition to the nine regional States, the government is structured with two city administrations: Addis Ababa and Dire Dawa. The two city administrations are run under the Federal government structure though the special interests of States, which emanate from the location of the city administrations, are to be recognised. The Constitution, in consideration of this situation, stipulates that “the special interest of Oromia in Addis Ababa, regarding the provision of social services or the utilization of natural resources and other similar matters as well as joint administrative matters arising from the location of Addis Ababa within the State of Oromia shall be respected”. The Constitution doesn’t make references to Dire Dawa, even though there have been practical incidents where the State of Oromia and State of Somali had issues in regards to the administration of Dire Dawa.

With a federal structure in place, both the States and the Federal government are provided with legislative, executive and judicial powers. The Federal government has a bicameral parliamentary administration with two houses, the House of Peoples’ Representatives (HPR) and the House of Federation (HOF). Members of the HPR and HOF are elected every five years. The HPR, which is the highest authority in the Federal government structure, is given the power to legislate in all matters assigned by the Constitution to the federal jurisdiction. In addition to enacting laws on federal matters, the house determines the organization of national defense, public security and national police force; ratifies international agreements; levies taxes and duties on revenue sources reserved for the Federal government; proclaims state of war; questions the Prime Minister and other Federal officials and investigates the executive’s conduct and even discharges them from their responsibilities, when necessary. The second house, the HOF, on the other hand, being constituted by representatives of each nations, nationalities and peoples, is the only organ empowered to interpret the Constitution. Whenever disputes arise or a claim is raised regarding the violation or misinterpretation of the Constitution’s provisions, the HOF is in charge of settling the matter.

In addition to the two houses, the government is structured with an executive, whose highest power is vested in the Prime Minister and the Council of Ministers. The number of Ministers joining the council has varied in the past 20 years with the restructuring of new Ministerial posts in the government. The Council as well as the Prime Minister are responsible to the House of Peoples’ Representatives in all their activities and are expected to report back on the performance of the executive.

The third horizontal layer of the government is the judiciary, which is comprised of appointment of the President and Vice President of the Supreme Court, as well as Federal judges by the HPR after a nomination by the Prime Minister. The States also have their own legislative council, i.e. the State Council and executives, to undertake the powers envisaged in their territories. The structure of the State Council and its members is similar to that of the Federal government. The powers and duties in each State are specified in the States’ Constitutions. The judiciaries of the regional States are also selected in a similar manner to that of the Federal structure. In both the Federal and regional State structures, the powers and responsibilities of the legislative, executive and judiciary system are designed to provide a check and balance scheme amongst one another.

The government’s administrative structures provide for most of the public services in the country, though the operation is lacking in many ways. In all the regions and two city administrations, local councils (Kebeles) are expected to control the administration of all public and government services. The city

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administrations are even provided with a system whereby Addis Ababa and Dire Dawa are divided into sub cities. The Kebeles are responsible and accountable to the sub cities, and the sub cities are responsible for their respective city administrations. The Kebeles, sub cities and city administrations are run within the bigger circle of the Federal government. The States, on the other hand, have a similar structure within the supervision of the regional government administrations.

Elections

The FDRE government upholds a democratic system manifested from the Constitution. Regarding elections, the Constitution has designated the right of all Ethiopian nationals to participate in elections whether as chosen representatives or as voters. The Constitution clearly states all nationals have the right to vote and be elected at periodic elections at any level of government. Elections are undertaken considering universal and equal suffrage, for which the election must be held by a secret ballot, thus guaranteeing the free expression of the will of the electors. The elections are also constitutionally required to be conducted in a free and fair manner.

In addition to the constitutional provisions upholding such rights to participate in elections and carry out political conduct freely, the government has enacted proclamations for the proper implementation of rights affiliated with the process. A Proclamation that amended the previously enacted Electoral Law in Ethiopia was promulgated in 2007, with more detailed provisions on the manner to undertake elections and rights associated with it. This Amended Proclamation established the National Electoral Board of Ethiopia, which is accountable to the House of Peoples’ Representatives. The amended electoral law states that a candidate with more votes than other candidates within a constituency is declared the winner. The proclamation also echoes the principles of universal suffrage and secret ballot manifested in the Constitution, allowing all Ethiopians no legal restrictions to their right, but not obligation, to elect and be elected. The law also requires a minimum age of 18 for a person to elect and 21 as the minimum age to be elected.

The maximum number of candidates running in a constituency is legally restricted to 12. In the case where more than 12 candidates have registered to run for one constituency, priority is given to no more than 6 political parties that received the highest number of votes in the previous elections and the remaining are determined based on a lot. This specific provision has been subject to controversy, particularly in the last election, as it prohibited newly emerging political parties with no previous experience from getting prior consideration. Voting and the mechanism to count votes cast, as well as the system on settling issues, have been delicately adopted in the Proclamation. Nevertheless, the government faced criticism from political parties and international institutions regarding the methods used in the June 2015 elections.

Even before the enactment of the amended electoral law, general elections were regularly conducted on the national level. Five elections were held in 1995, 2000, 2005, 2010 and 2015. The procedures in place during the 2005 elections were applauded for showing a political will to bring change in the country, both in the government as well as the opposition. The aftermath, however, was unexpected and left a scar on the political history of the present government. During the 2010 and 2015 elections, in spite of a small number of opposition groups in the parliament, the incumbent received 99.6% and 100% of votes respectively. The campaigning for the 2010 elections were marred by harassments, intimidation and arrests, with reports of killing opposition candidates and supporters. The ruling government, on the other hand, was accused of mobilizing millions of supporters by providing rewards. Elections for the regional state councils were also claimed to have faced similar challenges.

The government continues to emphasize its concerted efforts to guarantee a strong and enhanced system of elections as well as political participation which is denied by many.

Human rights

The EPRDF government, upon its adoption of the FDRE Constitution, has incorporated crucial human rights provisions. Even before the EPRDF government, Ethiopia had signed and ratified international human rights instruments, mainly the International Bill of Rights. The Constitution includes respect for

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human and democratic rights as one of its core pillars and emphasizes the inviolability and inalienability nature of human rights. The Constitution dedicates a chapter to the fundamental rights and freedoms of people whereby a responsibility to respect and enforce the constitutional provisions on human rights is imposed on the three horizontal layers of government at both the federal and state structures.

Furthermore, whenever the need for a legal interpretation of the provisions in this Chapter arises, the Constitution requires it to be done in a manner conforming to the principles envisaged in international human rights instruments adopted by Ethiopia. The Constitution has therefore highlighted the inclusion of international human rights principles into Ethiopia’s human rights framework. In addition to addressing the promotion, protection and respect of human rights, the government has also continued to be a signatory for a number of international and regional instruments. The coming into power of the current government has greatly increased the adoption of such legal instruments and even incorporated provisions within the supreme law of the land.

However, Ethiopia has been condemned by various human rights advocacy institutions for its violations of fundamental human rights. The government has been decried for issuing laws that trespass the human and democratic rights that are stipulated under the FDRE Constitution. For example, the Anti-Terrorism Proclamation and the Charities and Societies Proclamation are two widely condemned documents that were issued by the government as retaliation for the 2005 elections.

Human rights advocacy organizations such as Amnesty International have contended that a number of prisoners are kept in jail for exercising their freedom of speech and that improper treatment of these prisoners is the responsibility of the government. On that other hand, the Ethiopian government states that the enactment of these and other laws are meant to protect its citizens from threats to peace, freedom and security as well as improper use of public resources by charities and societies. The government has also been emphasizing the adaptation of laws from legally developed nations such as the US and Europe. The Ethiopian government at different times has vowed to increase its efforts to protect and respect human rights across all its government structures.

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3. ECONOMIC OVERVIEW Overview

Ethiopia’s developmental state approach has led to its economy experiencing strong broad-based growth over the past decade, making Ethiopia one of the fastest growing economies in the world. After a significant drought-related contraction in 2002 and 2003, economic growth rebounded strongly with GDP expanding considerably compared to the East African Community regional average.

The growth is led primarily by the expansion of the services and agricultural sectors, whilst the contribution of the manufacturing sector has been relatively modest. In addition, demand side growth has been led by both private consumption and public investment, with the latter assuming an increasingly important role in recent years.

Since 2004, the sectoral drivers of growth have shifted further towards services and, lately, industry. The recent rise of industry is due to a construction boom and not a rise in the manufacturing sector which remains very small at about 4% of GDP.

Figure 6 - Modernising of the Ethiopian Economy (% of GDP growth)7

Since late 2008, the Ethiopian government has implemented macroeconomic adjustment measures, including tightening fiscal and monetary policies and enhancing exchange rate flexibility. These policies have reduced inflationary pressures and rebuilt international reserves.

Ethiopia is expected to remain one of the fastest growing economies in Africa during 2015 and 2016. The federal budget for fiscal year 2015/16 plans to raise total expenditure by 20% year on year to almost $11 billion: allocating around 70% of the budget to health and education, agriculture, power and transport infrastructure (including expansion of road networks, water services and rural electrification projects) and urban development.

7 World Bank Group; Ministry of Finance (National Accounts Department)

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ECONOMIC OVERVIEW3

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Increasing private sector investment in commercial agriculture, light manufacturing and services will support growth in the economy. Low global oil prices are adding to the positive economic outlook as the import bill for fuel products is trimmed, cutting costs for many businesses and households.

Population and GDP per capita

Ethiopia is the second most populous country in Africa with a population close to 100 million and it could see its population increase to an estimated 111m by 2020 and 138m by 2030. The labour force will grow rapidly as the working-age population (15-65 years) rises to around 83m in 2030 (from an estimated 52m in 2014).

The expansion of the labour force (including greater levels of participation by women) could help to maintain a cost advantage for Ethiopia and secure FDI in sectors such as agro-processing and low-cost manufacturing, although skills shortages will be a problem for some businesses and require extensive training programmes.

Figure 7 - Population of Ethiopia (# in millions)8

Population growth and rapid urbanisation will help create much larger and more lucrative consumer markets, as well as create significant challenges and opportunities in terms of urban infrastructure (including more housing, utilities and public services) and job creation.

The Ethiopian population skews to the younger side. According to UNICEF, the median age in Ethiopia is 17.9 years.9 The youth population in Ethiopia, defined as members between the ages of 18 and 35, is 28 million large and represents a portion of the population that by itself is larger than the entire population of many other countries (such as Ghana).

8 World Bank World Development Indicators 9 United Nations – World Population Prospects

76.6 78.7 80.9 83.1 85.3 87.6 89.9 92.2 94.6 97.0

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76.6 78.7 80.9 83.1 85.3 87.6 89.9 92.2 94.6 97.0

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Figure 8 - Population pyramid for 2015 (# in thousands)10

Ethiopia’s wealth creation primarily relies upon the agriculture, manufacturing and service sectors, rather than the extraction and export of hydrocarbons and solid minerals. The country has an abundant and largely under-exploited natural resource endowment, including possible oil and gas reserves, hydroelectric capacity and rich farmland, which are attracting the attention of foreign investors.

While GDP growth in Africa’s ninth largest economy has remained high, per capita income is among the lowest in the world. At $565, Ethiopia's per capita income is lower than the Sub-Saharan African average of $1,774 in 2015. In 2012, the International Monetary Fund noted that the Ethiopian economy has continued to grow at a robust pace while poverty has continued to drop.

Wealth will continue to rise at a steady pace into the longer term, driven by the country’s industrial policy and supported by FDI. Stronger and more sophisticated urban markets are likely to be a feature of Ethiopia’s long-term growth path, as is a growing divide between rural and urban incomes.

10 UN World Population Prospects: The 2015 Revision

-8,000 -6,000 -4,000 -2,000 0 2,000 4,000 6,000 8,0000-4

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Figure 9 - GDP per Capita ($)11

Real GDP and inflation

After economic contraction in 2002 and 2003 due to the severe drought, real GDP growth rebounded strongly from 2004 to 2009. The impact of the global economic crisis has been modest, and Ethiopia's economy still grew strongly from 2010 to 2012. Today, at around $53 billion, Ethiopia’s GDP is one of the largest in Sub-Saharan Africa, similar to Kenya’s and Ghana’s.

Ethiopia has the potential to sustain long-term annual growth of 6-8%, facilitated by the government's commitment to an industrial strategy that seeks to achieve middle-income status by 2025. A number of foreign firms have taken up positions in the hope of advancing Ethiopia's long-term potential as an emerging consumer market, while others have identified Ethiopia as a low-cost manufacturing base to feed growing national and regional markets, as well as global value chains.

11 World Bank World Development Indicators

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Figure 10 - Historical GDP and Average Real Growth ($ in billions, %)12

Greater liberalisation and more private sector involvement in currently protected areas of the economy (including financial services and telecommunications) are anticipated in the longer term as the transition to a market-based economy continues.

The country's biggest challenge in recent years has been rising inflation, which reached 33.2% in 2011. Excessive monetary growth has been largely to blame for the surge. High inflation, combined with restrictions on private bank lending and a more difficult business environment, led to lower growth in 2011 and 2012.


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Figure 11 - Inflation in Ethiopia, consumer prices (annual %)13

In 2013, inflation still remained an issue when the country's inflation rate stood at 8.1%. Consumer price inflation has risen steadily since September 2014 and was last recorded at 11.6% year on year in August, despite attempts by the National Bank of Ethiopia to contain domestic price pressure.

Strong public spending and weakness of the Ethiopian birr are expected to keep annual consumer price inflation high (in double digits) over the next twelve months. Consumer price inflation can escalate rapidly, as highlighted by the rise to around 40% year on year in the second half of 2011, and can pose a serious risk to economic stability.

Government spending and taxation

Following the cessation of hostilities with Eritrea in 2000, Ethiopia embarked on an IMF-supported PRGF (Poverty Reduction and Growth Facility) program which helped restore macroeconomic stability.

Donor assistance rose rapidly, and Ethiopia reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in April 2004. It then qualified for debt relief under the Multilateral Debt Relief Initiative (MDRI) in December 2005. Since 2004, Ethiopia has enjoyed strong economic growth, largely due to government-led development policies with an emphasis on public investment, commercialization of agriculture, and non-farm private sector development.

Ethiopia's economy continues on its state-led Growth and Transformation Plan under the new collective leadership that followed Prime Minister Meles Zenawi’s death in 2012. The five-year economic plan has achieved high single-digit growth rates through government-led infrastructure expansion and commercial agriculture development.


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Figure 12 - Private and public spend (year-end, $ in billions)14

The government’s investments, the main engine of growth, extended from building a road network to expanding basic social services and making a big push in the energy sector. The Grand Ethiopian Renaissance Dam on the Blue Nile, a self-funded $5 billion hydropower project, will be the biggest in the continent upon its completion in 2017. Gross capital formation (formerly gross domestic investment) as a share of GDP in Ethiopia is sixth highest in the world while outstanding public debt remains stable at 23% of GDP.

Power and transport infrastructure development, coupled with a construction boom in Addis Ababa (including office blocks, housing and hotels), is boosting demand for contractors, consultants, machinery, equipment and building materials. Cement production facilities have been boosted significantly during 2015, including the opening of Africa’s largest cement plant in mid-2015 by Dangote Group.

Money supply, interest rates and employment

The minimum deposit rate, regulated by the National Bank of Ethiopia, has remained constant for the past five years at 5.0%. The lending rate is fully liberalized, but has been relatively unchanged over the same period with minimum and maximum observed lending rates unchanged at 7.5 and 16.25%, respectively.

Moreover, the spread between the minimum deposit rate and the observed maximum lending rate has been constant at around 11%. As a result, changes in real interest rates have exclusively been a product of changes in inflation.

14 CIA World Fact Book

1.2 1.1 1.4 1.5 2.0 2.0 2.3 2.43.3

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Figure 13 - Real interest rates (year end, %)15

As a result of low real interest rates, domestic credit as a share of the economy has declined over time.

Figure 14 - Employment by sector16

Employment by sector (000s)

Employment by sector (% of total)

Annual growth (%)

Sector 1999 2005 2013 1999 2005 2013 1999 2005 2013

Agriculture 19,869 25,208 30,381 79.8 80.2 77.3 4.0 2.5 3.2

Mining 16 82 195 0.1 0.3 0.5 31.8 11.5 19.8

Manufacturing 1,107 1,529 1,882 4.4 4.9 4.7 5.5 2.6 3.9

Utilities 28 33 90 0.1 0.1 0.2 2.7 13.4 8.7

Construction 229 446 825 0.9 1.4 2.1 11.8 8.0 9.6

Commerce 2,342 2,406 2,845 9.4 7.7 7.1 0.5 2.1 1.4

Transport 123 146 378 0.5 0.5 0.9 3.0 12.6 8.4

Finance 20 38 134 0.1 0.1 0.3 11.6 17.1 14.7

Public services 578 729 1,212 2.3 2.3 3.0 3.9 6.6 5.4

Other services 585 818 1,492 2.4 2.6 3.7 5.7 7.8 6.9

Total 24,897 31,435 39,874 100 100 100 4.0 3.0 3.4

Around 80% of the workforce is engaged in agriculture, much of which is informal. Formal employment is limited and concentrated in the public sector. The structure of output has shifted from agriculture towards

15 World Bank – 4th Ethiopia Economic Update 16 Martins (2015)

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services while the corresponding employment shift was modest. The output share of agriculture declined from 79.8% in 1999 to 77.3% percent in 2013.

Credit rating

Ethiopia received sovereign credit ratings from the three main rating agencies in May 2014, which aided in the issuance of a $1 billion debut Eurobond in early December 2014 at an issuance yield of 6.625%.

The International Monetary Fund has continued to advise the Ethiopian authorities to seek concessional external financing for its infrastructure investments and to adjust the level of public investment if scaled-up external financing on manageable terms is not forthcoming.

The IMF has also said that there is scope for improving the function of the foreign exchange market and that greater exchange-rate flexibility would help to clear the foreign exchange market and promote the traded-goods sector’s competiveness.

Trade balance and exchange rate

Agricultural products (including coffee, fruit, vegetables, meat and livestock) are Ethiopia's main exports. Clothing, textiles and footwear are an increasing presence in Ethiopia's export profile, while gold is also a major export. Electricity exports are poised to grow briskly over the next three to five years, facilitated by investment in national productive capacity and cross-border distribution systems.

Ethiopia’s export markets are diverse. China has grown in importance in recent years, whilst traditional partners such as Germany, the US and Belgium remain top export destinations. Belgium is the hub of Ethiopian flower sales, while Saudi Arabia dominates the meat and live animal trade.

Figure 15 - Export data for 2014 (year-end, $ in millions)17

Ethiopia depends on imports for an array of goods including capital items, consumer goods and petroleum. According to official statistics from the Ethiopian Revenue and Customs, after petroleum, capital goods are a major import category, driven by high demand for machinery and transport equipment used in infrastructure projects. The share of fuel varies according to global oil prices.

17 Ethiopian Revenue and Customs data; Entoto Advisors analysis

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Trade with China has substantially increased in response to growing commercial links and the success of Chinese businesses in winning infrastructure contracts, catapulting China to the top of the import supplier list, alongside Saudi Arabia, the main source of oil.

Figure 16 - Import data for 2014 (year-end, $ in millions)18

Ethiopia’s fuel bill has dropped as a result of lower oil prices, but a strong demand for imported consumer goods as well as machinery, equipment and building materials (to support infrastructure and industrial development) acts as a drag on the current account and a drain on foreign exchange reserves.

Figure 17 - Ethiopia trade balance (year-end, $ in billions)19

18 Ethiopian Revenue and Customs data; Entoto Advisors analysis 19 Ethiopian Revenue and Customs data; Entoto Advisors analysis

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Consequently, businesses can often suffer from foreign exchange shortages and delays in accessing funds to settle invoices on time. The currency is widely regarded as being over-valued in real terms (possibly by as much as 10%) and the government is encouraging a steady depreciation to help international competitiveness and hedge against softer demand in major export markets (particularly China).

Foreign exchange shortages are common in economies operating under a fixed or managed exchange rate regime, especially if they are also running a current-account deficit, as is the case with Ethiopia. Estimates show that the trade deficit in 2014 widened to $11.7 billion, or 22.6% of GDP, with the current account shortfall also widening to $3.5 billion, or 6.6% of GDP.

Figure 18 - Foreign exchange reserves (year-end, $ in billions)20

Similarly, the downtrend in consumer price inflation to single-digit rates (albeit still high) has bolstered confidence in holding domestic currency, but a return to double-digit inflation and/or an extended shortage of foreign exchange in the economy could force the Ethiopian authorities to devalue the birr again.

20 World Bank – 4th Ethiopia Economic Update

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Figure 19 - Inflation YoY (%)21

Although devaluations have brought the birr closer in line with its real value and boosted Ethiopia's trade accounts in its immediate aftermath, the cycle of the birr becoming overvalued in real terms in recent years as a result of Ethiopia's comparatively high inflation has yet to be convincingly broken. The government appears intent on keeping the currency stable, but this aim is complicated by inflation remaining considerably high, which is again making the currency overvalued in real terms.

Figure 20 - Exchange rate (year average, ETB/USD)22

Further, the birr is managed closely by the central bank, which maintains a policy of gradual depreciation interspersed with sharp downward adjustments. The government uses the exchange rate as a policy tool:

21 World Bank – 4th Ethiopia Economic Update 22 Oanda.com

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seeking to mitigate the impact of imported inflation and to devalue the birr in an attempt to maintain export competitiveness and to help drive economic growth.

African millionaire’s index

More millionaires are being made in Ethiopia than in anywhere else in Africa. Although Ethiopia is admittedly starting from a much lower base than most of the other countries on the list, this reflects the fact that the Ethiopian economy continues to grow at a blistering pace and that many of the benefits are flowing back to local citizens in a big way.

Figure 21 - Millionaires in Africa (# and percentage increase)23

23 The Economist Intelligence Unit

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4. SOCIAL OVERVIEW As of 2014, there were 97 million people living in Ethiopia, making it the second most populous nation in the African continent, and the largest in East Africa. The population is extremely diverse, with a mixture of tribes, languages and ethnic groups contributing to a varied population mix.

Figure 22 - Largest countries in Africa by population (# in millions)24

Urban Ethiopia versus rural Ethiopia

Ethiopia is a very large country, and at 1.1 million square km it is geographically the size of California and Texas combined. In terms of its population, 84% live in rural areas and compared to those in urban areas, typically have much more limited access to government services, infrastructure and internet connectivity.

Ethiopia is experiencing an interesting generational shift in which many people growing up in rural families are moving to the cities in order to take advantage of better opportunities. By 2022, over 22% of the country’s population is expected to be living in urban areas.

24 World Bank

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4. SOCIAL OVERVIEW As of 2014, there were 97 million people living in Ethiopia, making it the second most populous nation in the African continent, and the largest in East Africa. The population is extremely diverse, with a mixture of tribes, languages and ethnic groups contributing to a varied population mix.

Figure 22 - Largest countries in Africa by population (# in millions)24

Urban Ethiopia versus rural Ethiopia

Ethiopia is a very large country, and at 1.1 million square km it is geographically the size of California and Texas combined. In terms of its population, 84% live in rural areas and compared to those in urban areas, typically have much more limited access to government services, infrastructure and internet connectivity.

Ethiopia is experiencing an interesting generational shift in which many people growing up in rural families are moving to the cities in order to take advantage of better opportunities. By 2022, over 22% of the country’s population is expected to be living in urban areas.

24 World Bank

177.5

97.082.0 74.9

54.0 51.8 44.9 39.4 38.9 37.8 33.9

020406080

100120140160180200

SOCIAL OVERVIEW4

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Figure 23 - Urban population in Ethiopia (%)25

Cultural make-up

The Ethiopian population comprises over 70 distinct ethnic groups with Amharic the official language of Ethiopia, while English, French, Italian and Arabic are also widely spoken, especially in business and academic circles.

Religion and an intense pride in their country’s past resonate loudly with most Ethiopians. To them, Ethiopia has stood out from all African nations and proven itself to be a unique world of its own – home to its own culture, language, script, calendar and history. However, some of the younger Ethiopians who’ve grown up in the midst of high-profile international aid efforts lack the patriotism seen in older generations.

The highlands have been dominated by a distinct form of Christianity since the 4th century. Although undeniably devout and keen to dispense centuries worth of Orthodox legends and tales dating back to Aksum and the Ark of the Covenant, Christians nonetheless still cling to a surprising amount of magic and superstition.

Although 83 languages and 200 dialects are spoken in Ethiopia, the population can be broken down into eight primary groups, which are detailed below.

The Oromo

Although most of the Oromo in the past were nomadic pastoralists, it was skilled Oromo warrior horsemen that put fear into Ethiopians when they migrated north from present-day Kenya in the mid-16th century. It was the Oromo who inspired Harar’s leaders to build a wall around the city and even led Ethiopian emperors to accept Catholicism in order to gain Portugal’s military support.

Today, most are sedentary, making a living as farmers or cattle breeders. The Oromo are Muslim, Christian and animist in religion, and are known for their egalitarian society, which is based on the gada (age-group system). A man’s life is divided into age-sets of eight years. In the fourth set (between the ages of 24 and 32), men assume the right to govern their people.

25 Ethiopia Central Statistics Agency

18.2% 18.6% 19.0% 19.4% 19.8% 20.2% 20.7% 21.2% 21.7% 22.1% 22.6%

0%

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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34Page 30 of 53

They are the largest ethnic group in the country, making up 40% of its population. Over 85% of the massive 350,000 sq km Oromia region’s population are Oromo.

The Amharas

As great warriors, skilful governors and astute administrators, the Amhara have dominated the country’s history, politics and society since 1270, and have imposed their own language and culture on the country.

In the past this was resented by other tribal groups, who saw it as little more than a kind of colonialism. Amhara tend to be devoutly Christian, although there are some Muslim Amhara. They’re also dedicated to their land and 90% of them are traditional farmers, producing some of the nation’s best teff (endemic cereal grain used for the national staple, injera). Making up 21% of Ethiopia’s population, they’re the second-largest ethnic group. Over 90% of Amharaland region’s people are Amhara.

The Tigrayans

Much like the Amharas, the Tigrayans are fiercely independent and attached to their land. Most live in the Tigray region in northern Ethiopia, where both Christianity and Islam were introduced to Ethiopia. Amazingly 95% of Tigrayans are Orthodox Christian, and most devout followers. Tigrayans are Ethiopia’s third-largest ethnic group, comprising 11% of the population.

As a result of the Tigrayan People’s Liberation Front (TPLF) playing the major role in bringing down the Derg, many Tigrayans hold high positions in Ethiopia’s government, including late Prime Minister Meles Zenawi.

The Sidama

The Sidama, a heterogeneous people, originate from the Southwest, and can be divided into five different groups: the Sidama proper, the Derasa, Hadiya, Kambata and Alaba. Most Sidama are farmers who cultivate cereals, tobacco, enset (false-banana tree found in much of southern Ethiopia, used to produce a breadlike staple also known as enset) and coffee.

The majority are animists and many ancient beliefs persist, including a belief in the reverence of spirits. Pythons are believed to be reincarnations of ancestors and are sometimes kept as house pets. The Sidama social organisation, like the Oromo’s gada system, is based on an age-group system. The Sidama comprise about 9% of Ethiopia’s population and most live in the Southern Nations, Nationalities and People’s region.

The Somali

The arid lowlands of the Southeast dictate a nomadic or seminomadic existence for the Somali. Somali society is 99% Muslim, strongly hierarchical, tightly knit and based on the clan system, which requires intense loyalty from its members.

In the harsh environment in which they live, competition for the resources leads to frequent and sometimes violent disputes over grazing grounds and sources of water. The Somali make up 95% of the Somali region’s people, and 6% of Ethiopia’s population.

The Afar

The Afar, formerly also known as the Danakils, inhabit the famous region of Dankalia, which stretches across Ethiopia’s east, Djibouti’s west and into Eritrea’s southeast. It’s considered one of earth’s most inhospitable environments. The Afar comprise 4% of Ethiopia’s population.

The Gurage

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The Amharas



The Tigrayans



The Sidama



The Somali



The Afar


The Gurage

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35Page 31 of 53

Semitic in origin, the Gurage practise herding or farming, and the enset plant is their favoured crop. Known as great workers, clever improvisers and skilled craftspeople, the Gurage apply themselves to any task. Many work as seasonal labourers for the highlanders.

Their faith is Christian, Muslim or animist, depending on the area from which they originate. They comprise only 2% of Ethiopia’s population, but make up more than 10% of the population in the Southern Nations, Nationalities and People’s region.

The Harari

Also Semitic in origin are the Harari people (sometimes known as Adare), who have long inhabited the walled Muslim city of Harar in the East. The people are particularly known for their two-storey houses called gegar, and for the colourful traditional costumes still worn by many Harari women today. In the past, the Harari were known as great craftspeople for their weavings, baskets and book bindings. They’re also renowned Islamic scholars.

Status of women

Legally, women in Ethiopia enjoy a relatively equitable position compared to those in some other African countries. They can own property, vote and are represented in government, though there are still some cases where women’s rights are impeded.

Health data

With a population that is large and spread out across an extremely large geographic area, the Ethiopian government understands that it must work hard to provide its citizens with a high level of health services to help combat the most pressing issues facing the population.

Ethiopia spends a smaller portion of its GDP on health services compared to its regional neighbours, spending 5.1% of GDP (below the regional average of 7.3%).

Figure 24 - Healthcare spending (% of total GDP)26

26 World Bank

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Ethiopia Rwanda Uganda Djibouti Tanzania Sudan Kenya Eritrea

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Semitic in origin, the Gurage practise herding or farming, and the enset plant is their favoured crop. Known as great workers, clever improvisers and skilled craftspeople, the Gurage apply themselves to any task. Many work as seasonal labourers for the highlanders.

Their faith is Christian, Muslim or animist, depending on the area from which they originate. They comprise only 2% of Ethiopia’s population, but make up more than 10% of the population in the Southern Nations, Nationalities and People’s region.

The Harari

Also Semitic in origin are the Harari people (sometimes known as Adare), who have long inhabited the walled Muslim city of Harar in the East. The people are particularly known for their two-storey houses called gegar, and for the colourful traditional costumes still worn by many Harari women today. In the past, the Harari were known as great craftspeople for their weavings, baskets and book bindings. They’re also renowned Islamic scholars.

Status of women

Legally, women in Ethiopia enjoy a relatively equitable position compared to those in some other African countries. They can own property, vote and are represented in government, though there are still some cases where women’s rights are impeded.

Health data

With a population that is large and spread out across an extremely large geographic area, the Ethiopian government understands that it must work hard to provide its citizens with a high level of health services to help combat the most pressing issues facing the population.

Ethiopia spends a smaller portion of its GDP on health services compared to its regional neighbours, spending 5.1% of GDP (below the regional average of 7.3%).

Figure 24 - Healthcare spending (% of total GDP)26

26 World Bank

5.1

11.1

9.88.9

7.36.5

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Ethiopia Rwanda Uganda Djibouti Tanzania Sudan Kenya Eritrea

Social Overview

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The Amharas



The Tigrayans



The Sidama



The Somali



The Afar


The Gurage

36Page 32 of 53

Two of the largest health issues facing the Ethiopian population are HIV and tuberculosis. The Ethiopian government has worked to manage HIV and the adult prevalence rate is down to 1.2% across the country. Rates are higher in areas where government reach is not as strong.

Figure 25 - Adult prevalence of HIV (% in ages 15-49)27

In addition to HIV, Ethiopia is impacted by tuberculosis, which affects the Ethiopian population at a rate that is slightly higher than that of its regional neighbours.

Figure 26 - Incidence of tuberculosis (# per 100,000 people)28

27 World Bank 28 World Bank

1.2

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37Page 33 of 53

All things being equal, an Ethiopian born in 2013 can, on average, expect to live up to 64 years. This is more than 2 years above the regional average of 61.9 years.

Figure 27 - Life expectancy born in 2013 (years)29

29 World Bank

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Ethiopia Rwanda Eritrea Kenya Djibouti Sudan Tanzania Uganda

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5. ENVIRONMENTAL OVERVIEW Environmental issues

About 95% of Ethiopia’s original forest is believed to have been lost to agriculture and human settlement. Despite civil wars taking their toll on the environment, the main contributor has been Ethiopia’s rapidly growing population.

Ethiopia’s population has almost quintupled in the last 70 years and continues to grow at 2.5%, meaning that the pressures for living space, firewood, building materials, agricultural land, livestock grazing and food will only further reduce natural resources and eliminate larger areas of wildlife habitat.

The deforestation has resulted in soil erosion, a serious threat to Ethiopia since it exacerbates the threat of famine. Although hunting and poaching over the centuries has decimated the country’s once large herds of elephant and rhino, deforestation has also played a role.

Wildlife and forests were both victims of the most recent civil war, where whole forests were torched by the Derg to smoke out rebel forces. Additionally, large armies, hungry and with inadequate provisions, turned their sights on the land’s natural resources and much wildlife was wiped out.

Until recently, armed conflict between tribes in the Omo and Mago National Parks continued to impede wildlife conservation efforts. Today, things are more under control as hunting is managed by the government and may even provide the most realistic and pragmatic means of ensuring the future survival of Ethiopia’s large mammals. Poaching, however, continues to pose a serious threat to some animals.

Green middle income country by 2025

Ethiopia has recognized that it is susceptible to the effects of climate change and has adopted the goal of becoming a green middle-income economy (with zero net emissions) by 2025. The country’s plan, the Climate-Resilient Green Economy (CRGE), is a four-pronged approach:

• Improve crop and livestock production practices to increase food yields, hence food security and farmer income, while reducing emissions;

• Protect and re-establish forests for their economic and ecosystem services, including as carbon stocks;

• Expand electric power generation from renewable sources of energy fivefold over the next five years for markets at home and in neighbouring countries; and

• Leapfrog to modern and energy-efficient technologies in transport, industry, and buildings.

Led by the Prime Minister’s Office, the Environmental Protection Authority (EPA), the Ethiopian Development Research Institute (EDRI), six ministries, and several other government agencies, the government has dedicated significant resources and has organised a robust and participatory process to put the green economy initiative into practice effectively. The Ministerial Steering Committee, comprised of State Ministers and senior officials from the participating institutions, is the most senior body in the CRGE strategy development effort and has decided on the overall direction and sector-specific initiatives.30

30Federal Democratic Republic of Ethiopia (Environmental Protection Authority)

Page 34 of 53

5. ENVIRONMENTAL OVERVIEW Environmental issues

About 95% of Ethiopia’s original forest is believed to have been lost to agriculture and human settlement. Despite civil wars taking their toll on the environment, the main contributor has been Ethiopia’s rapidly growing population.

Ethiopia’s population has almost quintupled in the last 70 years and continues to grow at 2.5%, meaning that the pressures for living space, firewood, building materials, agricultural land, livestock grazing and food will only further reduce natural resources and eliminate larger areas of wildlife habitat.

The deforestation has resulted in soil erosion, a serious threat to Ethiopia since it exacerbates the threat of famine. Although hunting and poaching over the centuries has decimated the country’s once large herds of elephant and rhino, deforestation has also played a role.

Wildlife and forests were both victims of the most recent civil war, where whole forests were torched by the Derg to smoke out rebel forces. Additionally, large armies, hungry and with inadequate provisions, turned their sights on the land’s natural resources and much wildlife was wiped out.

Until recently, armed conflict between tribes in the Omo and Mago National Parks continued to impede wildlife conservation efforts. Today, things are more under control as hunting is managed by the government and may even provide the most realistic and pragmatic means of ensuring the future survival of Ethiopia’s large mammals. Poaching, however, continues to pose a serious threat to some animals.

Green middle income country by 2025

Ethiopia has recognized that it is susceptible to the effects of climate change and has adopted the goal of becoming a green middle-income economy (with zero net emissions) by 2025. The country’s plan, the Climate-Resilient Green Economy (CRGE), is a four-pronged approach:

• Improve crop and livestock production practices to increase food yields, hence food security and farmer income, while reducing emissions;

• Protect and re-establish forests for their economic and ecosystem services, including as carbon stocks;

• Expand electric power generation from renewable sources of energy fivefold over the next five years for markets at home and in neighbouring countries; and

• Leapfrog to modern and energy-efficient technologies in transport, industry, and buildings.

Led by the Prime Minister’s Office, the Environmental Protection Authority (EPA), the Ethiopian Development Research Institute (EDRI), six ministries, and several other government agencies, the government has dedicated significant resources and has organised a robust and participatory process to put the green economy initiative into practice effectively. The Ministerial Steering Committee, comprised of State Ministers and senior officials from the participating institutions, is the most senior body in the CRGE strategy development effort and has decided on the overall direction and sector-specific initiatives.30

30Federal Democratic Republic of Ethiopia (Environmental Protection Authority)

ENVIRONMENTAL OVERVIEW5

Environmental Overview

39Page 35 of 53

Key issues on the environmental front

Environmental sustainability is an increasingly important issue in all countries but has historically been a difficult concept to measure. The Environmental Performance Measurement Project aims to shift environmental decision-making to firmer analytic foundations using environmental indicators and statistics.

In collaboration with the Centre for International Earth Science Information Network (CIESIN) at Columbia University, Yale University, and the World Economic Forum, the project produces a periodically updated Environmental Performance Index (EPI; previously the Environmental Sustainability Index, ESI). The EPI is a composite index tracking a diverse set of socioeconomic, environmental, and institutional indicators that characterize and influence environmental sustainability at the national scale.31 The EPI ranks countries on 22 performance indicators spanning ten policy categories. The primary categories that are relevant for Ethiopia are:

Figure 28 - EPI Rankings for Ethiopia

Category Ethiopia Ranking (out of 178)

Health Impacts 144 / 178

Air Quality 159 / 178

Water and Sanitation 172 / 178

Water Resources 145 / 178

Agriculture 113 / 178

Forests 57 / 178

Biodiversity and Habitat 41 / 178

Overall ranking 131 / 178

Descriptions of each of the categories are listed below:

1. Health impacts (Ethiopia ranking: 144/178) • Child mortality – represents the probability of death between a child’s first and fifth birthdays.

In this period, causes of death are strongly influenced by environmental factors, including household air pollution and lack of access to clean drinking water.

2. Air quality (Ethiopia ranking: 159/178)

• Household air quality – measures the percentage of the population burning solid fuel (biomass such as wood, crop residues, dung, charcoal and coal) for cooking.

• Air pollution – average exposure to PM2.5 – represents population-weighted exposure to PM2.5 (Particulate Matter) in micrograms per cubic meter (µg/m3).

• Air pollution – PM2.5 exceedance – represents average of the percentage of the population exposed to PM2.5 levels at 10 µg/m3, 15 µg/m3, 25 µg/m3 and 35 µg/m3.

3. Water and sanitation (Ethiopia ranking: 172/178)

• Access to drinking water – measures the proportion of a country’s total population with access to an “improved drinking water source” as a main source of drinking water.

31 epi.yale.edu/epi/data-explorer Page 35 of 53

Key issues on the environmental front

Environmental sustainability is an increasingly important issue in all countries but has historically been a difficult concept to measure. The Environmental Performance Measurement Project aims to shift environmental decision-making to firmer analytic foundations using environmental indicators and statistics.

In collaboration with the Centre for International Earth Science Information Network (CIESIN) at Columbia University, Yale University, and the World Economic Forum, the project produces a periodically updated Environmental Performance Index (EPI; previously the Environmental Sustainability Index, ESI). The EPI is a composite index tracking a diverse set of socioeconomic, environmental, and institutional indicators that characterize and influence environmental sustainability at the national scale.31 The EPI ranks countries on 22 performance indicators spanning ten policy categories. The primary categories that are relevant for Ethiopia are:

Figure 28 - EPI Rankings for Ethiopia

Category Ethiopia Ranking (out of 178)

Health Impacts 144 / 178

Air Quality 159 / 178

Water and Sanitation 172 / 178

Water Resources 145 / 178

Agriculture 113 / 178

Forests 57 / 178

Biodiversity and Habitat 41 / 178

Overall ranking 131 / 178

Descriptions of each of the categories are listed below:

1. Health impacts (Ethiopia ranking: 144/178) • Child mortality – represents the probability of death between a child’s first and fifth birthdays.

In this period, causes of death are strongly influenced by environmental factors, including household air pollution and lack of access to clean drinking water.

2. Air quality (Ethiopia ranking: 159/178)

• Household air quality – measures the percentage of the population burning solid fuel (biomass such as wood, crop residues, dung, charcoal and coal) for cooking.

• Air pollution – average exposure to PM2.5 – represents population-weighted exposure to PM2.5 (Particulate Matter) in micrograms per cubic meter (µg/m3).

• Air pollution – PM2.5 exceedance – represents average of the percentage of the population exposed to PM2.5 levels at 10 µg/m3, 15 µg/m3, 25 µg/m3 and 35 µg/m3.

3. Water and sanitation (Ethiopia ranking: 172/178)

• Access to drinking water – measures the proportion of a country’s total population with access to an “improved drinking water source” as a main source of drinking water.

31 epi.yale.edu/epi/data-explorer


40Page 36 of 53

• Access to sanitation – measures the percentage of a country’s population that has access to an improved source of sanitation. “Improved” sanitation sources include connection to a public sewer, connection to a septic system, pour-flush latrine, simple pit latrine, or ventilated pit latrine. The system is considered “improved” if it hygienically separates human excreta from human contact and is not public, meaning that it can either be private or shared.

4. Water resources (Ethiopia ranking: 145/178)

• Wastewater treatment – The proportion of collected wastewater that is treated.

5. Agriculture (Ethiopia ranking: 113/178) • Agricultural subsidies – is a proxy measure for the degree of environmental pressure exerted

by subsidizing agricultural inputs. • Pesticide regulation – assesses the status of countries’ legislation regarding the use of

chemicals listed under the Stockholm Convention on Persistent Organic Pollutants (POPs).

6. Forests (Ethiopia ranking: 57/178) • Change in forest cover – measures the percent change in forest cover between 2000 and 2012

in areas with greater than 50 percent tree cover. It factors in areas of deforestation (forest loss), reforestation (forest restoration or replanting) and afforestation (conversion of bare or cultivated land into forest).

7. Biodiversity (Ethiopia ranking: 41/178)

• Terrestrial protected areas (National Biome Weights) – assesses the protection of biomes weighted by the proportion of a country’s territory the biome occupies.

• Terrestrial protected areas (Global Biome Weights) – reflects the protection of biomes weighted by their globally proportional abundance.

• Critical habitat protection – measures the percent of sites identified by the Alliance for Zero Extinction (AZE) that have partial or complete protection.

Other positive developments

The electricity produced by the Grand Ethiopian Renaissance Dam, which will be completed in 2017, will be sold in Ethiopia and to neighboring countries including Sudan and possibly Egypt. Selling the electricity from the dam would require the construction of massive transmission lines into major consumption centers such as Ethiopia’s capital, Addis Ababa, and Sudan’s capital, Khartoum, both located more than 400 km from the dam. These sales would be incremental to electricity that is expected to be sold from other large hydropower plants under construction in Ethiopia, such as Gilgel Gibe III. As a result, Ethiopia is set to become a key producer and exporter of power, potentially transforming Africa’s power sector, particularly through the construction of hydroelectric generating stations.

In addition, a new railway network is under construction that will link landlocked Ethiopia to its neighbors. The Addis Ababa-Djibouti Railway is nearly completed and a 400 km long rail is being developed from Awash to Hara Gebeya. Lastly a light rail system, the first of its kind in Sub-Saharan Africa, is under commission in Addis Ababa and began operations in August 2015.32

In addition to large public infrastructure projects, smaller projects are working from the ground up. For example, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), a German government-backed international enterprise for sustainable development, partnered with Ethiopian government organizations to tackle environmental issues. One of its programs has been the Sustainable Land Management Programme (SLMP) launched in 2008.

32 Ethiopian Revenue and Customs Authority


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SLMP has sought to mitigate issues in Northern Ethiopia, where significant soil erosion and degradation drove farmers to cultivate the steepest slopes and suspend themselves by ropes. Since working to counter ecological destruction, approximately 250,000 hectares of degraded land in Ethiopia’s highland areas of Amhara, Oromia and Tigray (where over 50 percent of Ethiopia’s population lives), have been restored to productivity, and more than 100,000 households have benefited.

This success has been achieved through promoting sustainable land management practices such as the use of terracing and crop rotation systems, and improving pastureland and permanent green cover. “SLMP with its holistic approach increases water availability for agriculture and agricultural productivity and thus contributes directly and indirectly to an increased climate resilience of the rural population,” says Johannes Schoeneberger, head of GIZ’s involvement. One particular example of this approach was the introduction of improved cooking stoves, combined with newly established wood lots at farmers’ homesteads, which lowered greenhouse gas emissions and pressure on natural forests. It also reduced households’ bills for fuel wood.33

33 www.ipsnews.net


42

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6. INVESTMENT OVERVIEW Investment climate

As a result of policies and incentives implemented by Ethiopia, FDI into the country has grown significantly in the past decade, from roughly $300m in 2011 to almost $1 billion in 2014. Sectors that have attracted the most investment include agriculture, agro-processing, consumer goods and light manufacturing.

Figure 29 - FDI into Ethiopia ($ in millions)34

The state-directed development model has been effective thus far in distributing wealth, encouraging growth and improving basic human development indicators like life expectancy, health, education and access to water. The gradual opening up of the economy will create sequential waves of investment opportunity as some sectors currently remain closed to foreign investors but will become liberalised.

Ethiopia’s rapidly growing economy affords opportunities across a range of sectors, although foreign firms face a number of tariff and non-tariff barriers to trade and investment. Investments are permitted in construction, mining, agriculture, manufacturing, healthcare, waste management and tourism. Ethiopia has a fast growing, underserved and potentially large domestic market for goods and services, although average income levels are low and firms should be wary of over-estimating the current purchasing power of consumers.

The government has put in place a number of significant incentives to help investors to invest into the country. The constitution and investment code provide protections for investors that have helped to encourage the flow of FDI in recent years, reaching a peak of $1 billion in 2014.

Furthermore, with over 20 million of its citizens in schools, Ethiopia’s people are increasingly educated. There were only 2 public universities 15 years ago, whereas today there are over 30. Now, salaries for university graduates generally range from $150 to 200 per month.


288

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6. INVESTMENT OVERVIEW Investment climate

As a result of policies and incentives implemented by Ethiopia, FDI into the country has grown significantly in the past decade, from roughly $300m in 2011 to almost $1 billion in 2014. Sectors that have attracted the most investment include agriculture, agro-processing, consumer goods and light manufacturing.

Figure 29 - FDI into Ethiopia ($ in millions)34

The state-directed development model has been effective thus far in distributing wealth, encouraging growth and improving basic human development indicators like life expectancy, health, education and access to water. The gradual opening up of the economy will create sequential waves of investment opportunity as some sectors currently remain closed to foreign investors but will become liberalised.

Ethiopia’s rapidly growing economy affords opportunities across a range of sectors, although foreign firms face a number of tariff and non-tariff barriers to trade and investment. Investments are permitted in construction, mining, agriculture, manufacturing, healthcare, waste management and tourism. Ethiopia has a fast growing, underserved and potentially large domestic market for goods and services, although average income levels are low and firms should be wary of over-estimating the current purchasing power of consumers.

The government has put in place a number of significant incentives to help investors to invest into the country. The constitution and investment code provide protections for investors that have helped to encourage the flow of FDI in recent years, reaching a peak of $1 billion in 2014.

Furthermore, with over 20 million of its citizens in schools, Ethiopia’s people are increasingly educated. There were only 2 public universities 15 years ago, whereas today there are over 30. Now, salaries for university graduates generally range from $150 to 200 per month.


288

651

279

953

1,500

0

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800

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INVESTMENT OVERVIEW6

Investment Overview

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Investor sentiment

Investors interested in African frontier markets are accessing them through diversified frontier markets funds or using South Africa as a gateway in order to avoid being exposed to a number of small, illiquid markets. Sub-Saharan Africa still garners a very small proportion of global investment but FDI to the region is rising: up 5% to $56 billion in 2013. The world’s largest sovereign wealth fund joined when Norway’s $890 billion fund said it would target more of Africa’s markets in an effort to raise returns.

African mergers and acquisitions last year totalled $30 billion across 1,000 deals. More than 220 private equity managers now target Africa. The African Private Equity and Venture Capital Association says the 53 private equity deals completed last year for which it has data were worth $3.2 billion – but still lower than Africa’s peak of $4.7 billion in 2007.

Global investors have ranked Ethiopia 6th in “market opportunities” of 54 countries in Africa and 4th in Sub-Saharan Africa. They have brought significant investment to Ethiopia over the past several years, with investors targeting over $500 million in financial and strategic acquisitions in 2014 (disclosed deals only).

Figure 30 - Disclosed deal activity from 2009 to 2014 ($ in millions)35

Some large funds, in search of bigger returns that come with growing economies, are also making strides into unfamiliar markets via the frontier rather than more established economies such as Nigeria or Kenya. For example, KKR entered Ethiopia in June 2014 with a $200 million stake in an Ethiopian rose farm.

Whilst these funds might struggle with deals over $100 million, most private equity deals in Ethiopia remain small, below $10 million, and offer some of the best prospects for returns. High-up on the agenda of the largely fail-safe, cash-generating quick wins are brewing and cement. But with the rise of consumerism, education and healthcare sectors are growing, too.

Many private equity funds in Ethiopia are backed by large development finance institutions eager to boost small businesses and create jobs, pushing them into even more remote, small markets. Institutional

35 CapIQ Database

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Investor sentiment

Investors interested in African frontier markets are accessing them through diversified frontier markets funds or using South Africa as a gateway in order to avoid being exposed to a number of small, illiquid markets. Sub-Saharan Africa still garners a very small proportion of global investment but FDI to the region is rising: up 5% to $56 billion in 2013. The world’s largest sovereign wealth fund joined when Norway’s $890 billion fund said it would target more of Africa’s markets in an effort to raise returns.

African mergers and acquisitions last year totalled $30 billion across 1,000 deals. More than 220 private equity managers now target Africa. The African Private Equity and Venture Capital Association says the 53 private equity deals completed last year for which it has data were worth $3.2 billion – but still lower than Africa’s peak of $4.7 billion in 2007.

Global investors have ranked Ethiopia 6th in “market opportunities” of 54 countries in Africa and 4th in Sub-Saharan Africa. They have brought significant investment to Ethiopia over the past several years, with investors targeting over $500 million in financial and strategic acquisitions in 2014 (disclosed deals only).

Figure 30 - Disclosed deal activity from 2009 to 2014 ($ in millions)35

Some large funds, in search of bigger returns that come with growing economies, are also making strides into unfamiliar markets via the frontier rather than more established economies such as Nigeria or Kenya. For example, KKR entered Ethiopia in June 2014 with a $200 million stake in an Ethiopian rose farm.

Whilst these funds might struggle with deals over $100 million, most private equity deals in Ethiopia remain small, below $10 million, and offer some of the best prospects for returns. High-up on the agenda of the largely fail-safe, cash-generating quick wins are brewing and cement. But with the rise of consumerism, education and healthcare sectors are growing, too.

Many private equity funds in Ethiopia are backed by large development finance institutions eager to boost small businesses and create jobs, pushing them into even more remote, small markets. Institutional

35 CapIQ Database

68 89

425

321

8

542

0

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014

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investors from Europe and the US, family offices, and a growing number of African investors are also interested in exploiting the growth of the emerging middle class through debt and listed equity.

Ease of doing business

The challenges of doing business in Ethiopia are those common in most frontier markets. The government is committed to addressing those challenges and improving its standing in indices such as the World Bank’s “Doing Business” index. According to the 2015 edition of the World Bank’s Doing Business indicator, Ethiopia ranks 146 out of 189 economies.

Figure 31 - Doing business ranks for Ethiopia vs. regional peers36

Relative to its Sub-Saharan peers, Ethiopia scores low on two metrics: “Getting credit” and “Protecting investors”. Regarding the first indicator, this is of limited importance to foreign investors, as investors rarely source funding from the destination country’s capital market. Regarding the second metric, Ethiopia provides an attractive policy regime for foreign investment in terms of protection of investments and repatriation of profits. Further details on these incentives are provided below.

Overall, the business environment is challenging as a result of excessive and often unclear regulations, a lack of transparency in procurement procedures, corruption, weak transport (albeit rapidly improving) and energy infrastructure. A significant skills gap is evident in many sectors that require extensive training programmes and expatriate staffing of senior positions. On the positive side, the government is attempting to improve the business operating environment and investment climate through extensive infrastructure development and by adopting more efficient bureaucratic processes in business registration, logistics and tax administration.

Repatriation of income and capital gains

The investment law of the country (Proclamation No. 280/2002) enables remittances out of Ethiopia with the convertible foreign currency at the prevailing rate of exchange on the date of remittance. The remittances allowed for a foreign investor are the following:

36 World Bank Doing Business Indicators; Entoto Advisors analysis

0 50 100 150 200

Ease of doing business rankStarting a business

Dealing with construction permitsGetting electricity

Registering propertyGetting credit

Protecting investorsPaying taxes

Trading across bordersEnforcing contracts

Resolving insolvency

Average, selected SSA Ethiopia rank

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0 50 100 150 200








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0 50 100 150 200








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• Profits and dividends accruing from an investment; • Principal and interest payments on external loans; • Payments related to a technology transfer agreement registered as per the Investment

Proclamation; • Proceeds from sale or liquidation of an enterprise; • Proceeds from the transfer of shares of partial ownership of an enterprise to a domestic enterprise;

and • Compensation paid to an investor in case of expropriation of the investment for public interest.

The Investment legal framework, as a result, enables foreign investors to remit the above investments out of Ethiopia. As long as an audited account is presented and approved by the National Bank of Ethiopia, remittance can legally be taken out of the country.

The flexibility regarding remittances under the investment laws, however, has been practically difficult due to the lack of foreign currency in the country. Both foreign investors and local business people are expected to get into a queue for a Letter of Credit (LC), which may take months and even a year depending on the foreign currency accumulation of the country’s banks. Foreign investors may spend the planned remittances on other investments in the country instead of lining up for the queue.

Taxation

A foreign investor is required to secure an investment permit before engaging in any type of investment. The different taxes payable include the following:

1. Corporate Income Tax

In Ethiopia, the corporate income tax (tax on profit) is a 30% flat rate. This type of tax shall be paid on a yearly basis as per the assessment of the profit earned.

2. Turn Over Tax (TOT)

TOT is imposed on those with total annual transactions less than 500,000 ETB and not registered for VAT. This type of tax is particularly applicable on supply of goods, rendition of services and persons not registered for VAT. The TOT might range from 2% levied on goods sold locally and services rendered locally, contractors, grain mills, tractors and combine harvesters to 10% levied on other transactions. Tax payers are supposed to keep records of their transactions.

A foreign investor, who is expected to allocate capital ranging between $150,000-200,000 depending on the business arrangement, is presumed to earn a profit not lower than the registered capital. However, if the profit earned from the investment does not exceed 500,000 ETB and the investor would not want to register for VAT, the TOT will be applicable.

3. Customs Duties

Customs duties are levied with a purpose of reducing or preventing the import and export of goods. As a result, imports by entities that have no duty free privileges are subject to this tax regime. According to the harmonized system of classification of goods, the rate of customs duty ranges from 0 to 35%. Duty free privileges provided as incentives for investors may enable the exemption of this type of taxation.

4. Employment Income Tax

Personal income tax is payable as per proclamation No 286/2002. Accordingly, the first 150 ETB of monthly personal income is exempt from payment of income tax. From monthly income of 151 ETB and above, the tax rates range from 10 to 35%.

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Ethiopian tax laws mandate that an employee who resides in the country for at least 183 days in the previous 12 months, both continuously or intermittently, is considered a resident of Ethiopia and will pay tax on his worldwide income. Those who are not considered residents are liable to pay income tax on their Ethiopian sourced income.

Because Ethiopia imposes taxes based on the source, all employees hired for an investment project are expected to pay employment income tax according to a taxation rate based on amount of salary received. The employer is also in charge of withholding this amount from the salaries and wages payable to the employees.

5. Rental Tax

A tax is imposed on the income from rental of buildings. The rental tax rate is 30% on income of businesses, while tax rate on individual landlords ranges from 10 to 35% with the exemption of 1,800 ETB. Rental income tax is payable at the time an income is earned from renting a building. Depending on the type of project implemented and the arrangement in the ownership of the building constructed, the rental income tax of 30% will need to be paid.

6. Withholding Tax on imports

A tax on import of goods is set at 3% of the sum of the cost, insurance and freight (CIF cost). It is paid at the time of import of goods, where products are imported for commercial use. Investments made for businesses, other than commercializing imported goods, are to pay this type of tax.

7. Value Added Tax (VAT)

VAT is a tax levied on the added value of a good or service and is imposed on the value the business entity may add to the goods and services bought from suppliers or other firms. The registration into this system may be done voluntarily. Registering for this type of tax is obligatory only when the total taxable transaction during a one year period exceeds 500,000 ETB. However, a business with a taxable transaction less than 500,000 ETB may be registered voluntarily if 75% of the business’ goods and services to a person/business are registered for VAT.

Businesses whose annual turnover exceeds 500,000 ETB are required to collect 15% value added tax on their transactions and transfer the payment to the tax authorities. There are a number of transactions that are exempted from VAT including: the sale, transfer or lease of immovable, rendition of financial services, import of gold to be transferred to the National Bank of Ethiopia, rendition of educational services provided by education institutions, supply or import of national or foreign currency and so on.

8. Tax Treaties

Ethiopia has signed avoidance of double taxation treaties with around 10 countries, including the UK, South Africa and Russia. However, these treaties have not been made with numerous more economically powerful countries including the US, UAE and many EU countries.

9. Stamp duty

Stamp duty is the tax raised by requiring stamps sold by the government to be affixed to designated documents. The list of instruments chargeable with stamp duty together with the basis of valuation and rates are provided as follows:

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Ethiopian tax laws mandate that an employee who resides in the country for at least 183 days in the previous 12 months, both continuously or intermittently, is considered a resident of Ethiopia and will pay tax on his worldwide income. Those who are not considered residents are liable to pay income tax on their Ethiopian sourced income.

Because Ethiopia imposes taxes based on the source, all employees hired for an investment project are expected to pay employment income tax according to a taxation rate based on amount of salary received. The employer is also in charge of withholding this amount from the salaries and wages payable to the employees.

5. Rental Tax

A tax is imposed on the income from rental of buildings. The rental tax rate is 30% on income of businesses, while tax rate on individual landlords ranges from 10 to 35% with the exemption of 1,800 ETB. Rental income tax is payable at the time an income is earned from renting a building. Depending on the type of project implemented and the arrangement in the ownership of the building constructed, the rental income tax of 30% will need to be paid.

6. Withholding Tax on imports

A tax on import of goods is set at 3% of the sum of the cost, insurance and freight (CIF cost). It is paid at the time of import of goods, where products are imported for commercial use. Investments made for businesses, other than commercializing imported goods, are to pay this type of tax.

7. Value Added Tax (VAT)

VAT is a tax levied on the added value of a good or service and is imposed on the value the business entity may add to the goods and services bought from suppliers or other firms. The registration into this system may be done voluntarily. Registering for this type of tax is obligatory only when the total taxable transaction during a one year period exceeds 500,000 ETB. However, a business with a taxable transaction less than 500,000 ETB may be registered voluntarily if 75% of the business’ goods and services to a person/business are registered for VAT.

Businesses whose annual turnover exceeds 500,000 ETB are required to collect 15% value added tax on their transactions and transfer the payment to the tax authorities. There are a number of transactions that are exempted from VAT including: the sale, transfer or lease of immovable, rendition of financial services, import of gold to be transferred to the National Bank of Ethiopia, rendition of educational services provided by education institutions, supply or import of national or foreign currency and so on.

8. Tax Treaties

Ethiopia has signed avoidance of double taxation treaties with around 10 countries, including the UK, South Africa and Russia. However, these treaties have not been made with numerous more economically powerful countries including the US, UAE and many EU countries.

9. Stamp duty

Stamp duty is the tax raised by requiring stamps sold by the government to be affixed to designated documents. The list of instruments chargeable with stamp duty together with the basis of valuation and rates are provided as follows:

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Figure 32 - Stamp duty rates37

No. Chargeable instrument Basis of valuation

Rates of stamp duty

1. Memorandum and Articles of Association of any business organizations, or any association:

(a) upon 1st execution Flat 350 ETB (b) upon any subsequent execution Flat 100 ETB 2. Memorandum and Articles of

Association of cooperatives

(a) upon 1st execution Flat 35 ETB (b) upon any subsequent execution Flat 10 ETB 3. Award On value a) with determinable

value 1% b) with undeterminable value Birr 35

4. Bonds On value 1% 5. Warehouse Bond On value 1% 6. Contracts and agreements and

memoranda thereof Flat 5 ETB

7. Security Deeds On value 1% 8. Collective Agreement (a) on 1st execution Flat 350 ETB (b) on any subsequent execution Flat 100 ETB 9. Contract of Employment Salary 1% 10. Lease including sub-lease and transfer

thereof On value 0.5%

11. Notarial Act Flat 5 ETB 12. Power of Attorney Flat 35 ETB 13. Register title to property On value 2%

10. Excise Tax

Excise tax is levied on selected local or imported products, with the purpose of banning production. Excise tax is imposed on those goods which the government considers to be luxurious and basic goods which are demand inelastic, or goods which are hazardous and feared to cause social problems.

The tax rates range from 10% (such as garments and televisions) all the way to 100% (such as alcoholic drinks and vehicles above 1800 c.c.). The payment of locally produced goods occurs within 30 days of production while the payment of excise tax for imported products are done at the time goods are cleared from the customs areas.

Figure 33 - Excise tax costs38

No. Type of product Excise tax rate (%)

1. Any type of sugar (in solid form) excluding molasses 33 2. Drinks 2.1. All types of soft drinks (except fruit juices) 40

37 Stamp Duty Proclamation, FDRE Proclamation No. 110/1998 38 Excise Tax Proclamation, FDRE Proclamation No. 307/2002

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No. Type of product Excise tax rate (%)

2.2. Powder soft drinks 40 2.3. Water bottled or canned in a factory 30 2.4. Alcoholic Drinks 2.4.1. All types of beer & stout 50 2.4.2. All types of wine 50 2.4.3. Whisky 50 2.4.4. Other alcoholic drinks 100 3. All types of Pure Alcohol 75 4. Tobacco & Tobacco Products 4.1. Tobacco Leaf 20 4.2. Cigarettes, cigar, cigarillos, pipe tobacco, snuff and other

tobacco products 75

5. Salt 30 6. Fuel-Super Benzene, Regular Benzene, Petrol, Gasoline and other

Motor Spirits 30

7. Perfumes and Toilet Waters 100 8. Textile and Textile products 8.1. Textile fabrics, knitted or woven of natural silk, rayon, nylon,

wool or other similar materials 10

8.2. Textile of any type partly or wholly made from cotton, which is grey, white, dyed or printed, in pieces of any length or width (except Mosquito net and "Abudgedid") and including blankets, bed sheets, and similar articles

10

8.3. Garments 10 9. Personal adornment made of gold, silver or other materials 20 10. Dish washing machines for domestic use 80 11. Washing machines for domestic use 30 12. Video decks 40 13. Television and Video Cameras 40 14. Television broadcast receivers whether or not combined with

gramophone, radio, or sound receivers and reproducers 10

15. Motor passenger cars, station wagons, utility cars, and Land Rovers, Jeeps, similar vehicles (including motorized caravans), whether assembled, together with their appropriate initial equipment

15.1. Up to 1,300 c.c. 30 15.2. From 1,301 c.c up to 1,800 c.c 60 15.3. Above 1,800 c.c 100 16. Carpets 30 17. Asbestos and Asbestos Products 20 18. Clocks and watches 20 19. Dolls and toys 20

Greenfield manufacturing investment incentives

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

1. Customs import duty

100% 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

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materials, as well as spare parts worth up to 15% of the value of the imported investment capital goods, provided that the goods are not produced locally in comparable quantity, quality and price.

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.

These are: 1) Duty Draw-Back Scheme; 2) Voucher Scheme; and, 3) 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.

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. Income tax holiday

Any income derived from an approved new manufacturing investment shall be exempted from the payment of income tax for the periods depicted in the following table, depending upon the area of investment, the volume of export, and the location in which the investment is undertaken.

Figure 34 - Areas and periods of tax exemption39

Conditions for Profit Tax Eligibility Profit tax exemption

Profit tax exemption for investments made in

underdeveloped regions

If he exports at least 50% of its products 5 years 6 years If he supplies at least 75% of its products, to an investor, as an input for the production of export items

5 years 6 years

If it exports less than 50% of its products 2 years 3 years If the project is evaluated under a special circumstance by the Board of Investment

Up to 7 years Up to 8 years

If the production is for the local market 2 years 3 years If the production mentioned above is considered by the Board of Investment to be a special case

5 years 6 years

4. Board of investment

Moreover, the Council of Ministers may also award profit tax holiday for greater than seven years. However, the Board may issue a directive to deny income tax exemption right granted to investors producing only for local market, as may be necessary. The period of exemption from profit tax begins on the date of the commencement of production or provision of services.

5. 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.

Company structures

39 Council of Ministers Regulation No.84/2003 issued on the basis of the Investment Proclamation No. 280/2002

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The foundation of business legislation in Ethiopia was enacted in the 1960 Commercial Code.40 The code is the basis of the rules regarding business undertakings and the mechanism in administering these institutions and other legal instruments.

The code mainly makes reference to six types of business organizations under Article 212:

1. Ordinary Partnership 2. Joint Venture 3. General Partnership 4. Limited Partnership 5. Share Company 6. Private Limited Company

Among the six business organizations, Share Companies and Private Limited Companies are the two company structures under the Ethiopian legal structure with noteworthy distinctions.

In defining “business organizations,” the code states that it is an association arising out of a partnership agreement. Such partnership agreement, as described under the same code, is “a contract whereby two or more persons intending to join together and to cooperate to undertake in bringing together contributions for the purpose of carrying out activities of an economic nature and of participating in the profits and losses arising out thereof”.

All business organizations, with the exception of a joint venture, are deemed to have legal personalities with respective rights and obligations emanating from the law. The code also indicates that business organizations shall be deemed of a commercial nature when their objectives under the memorandum and articles of association carry on any of the activities specified in the code. The activities specified in order to be considered as a trader (business organization) are:

• Purchase of movables or immovables with a view to reselling them either as they are or after alteration or adaptation;

• Purchase of movables with a view to letting them for hire; • Warehousing activities as defined in Article 2806 of the Civil Code; • Exploitation of mines, including prospecting for and working of mineral oils; • Exploitation of quarries not by handicraftsmen; • Exploitation of salt pans; • Conversion and adaptation of chattels, such as foodstuffs, raw materials or semi-finished products

not by handicraftsmen; • Building, repairing, maintaining, cleaning, painting or dyeing movables not by handicraftsmen; • Embarking, levelling, trenching or draining carried out for a third party not by handicraftsmen; • Carriage of goods or persons not by handicraftsmen; • Printing and engraving and works connected with photography or cinematography not by

handicraftsmen; • Capturing, distributing and supplying water; • Producing, distributing and supplying electricity, gas, compressed air, including heating and

cooling; • Operating places of entertainment or radio or television stations; • Operating hotels, restaurants, bars, cafes, inns, hairdressing establishments not operated by

handicraftsmen and public baths; • Publishing in whatever form, and in particular by means of printing, engraving, photography or

recording;

40 Commercial Code of the Empire of Ethiopia, Proclamation No. 166 of 1960

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• Operating news and information services; • Operating travel and publicity agencies; • Operating business as an agent, broker, stock broker or commercial agent; • Operating a banking and changing money business; • Operating an insurance business.

As for Share Companies and Private Limited Companies, they are deemed to be of commercial nature regardless of their objectives. Some of the common conditions expected to be fulfilled by all business organizations include:

• For the formation of all business organizations, except joint venture, to be in writing; • Publicity notice of all types of business organizations, except for joint venture agreement, must be

made known to third parties in a procedure provided under the code; • Provision as to the giving of all profits to one partner or relieving one or more of the partners of his

shares in the losses must not be made in the partnership agreement except in the case of skill contribution; and

• When the business organization is dissolved or wound-up, the liquidators must apply for the registration of the business organization to be cancelled and for the cancellation that has been published to result in the end of the organization’s legal personality.

The discussions about each of the four commercial entities and the two companies are addressed in the Commercial Code and the recently circulated Commercial Registration and Business Licensing Proclamation.41

1. Ordinary Partnership

The code doesn’t provide a clear definition, except for providing that those organizations that don’t have characteristics making them similar to other types of business organizations covered in the code are to be considered as Ordinary Partnerships.

The contribution of each partner may be made by money, debts, other property, the use of property or skill and unless agreed otherwise, such contribution is supposed to be made equal with the nature and extent required for carrying out the purposes of the partnership.

In the case where property is contributed, the contributing partner is to carry out the duties of a seller while a contribution for the use of property is to put the contributing partner in the position of a lessor. The risks in the case of a property contribution shall pass to the partnership whereas the case of use of property leaves the contributing partner with the risks.

This type of partnership relies on the liability of the partners and the decision of individual partners rather than their contributions. Unless the partnership agreement or decision of the partnership appoints one or more of the partners or a third party to be a manager, all partners shall have the right to act as managers.

One or more managers may be assigned by the partners with a joint and several liability to the partners in case of failure to carry out their duties.

The partners have duties including: not to handle any business contrary or juridical to the partnership; paying interests for funds borrowed from the partnership; not to introduce a third party as a partner unless the other partners consent. The partners also have rights to: require from the other partners a sharing of

41 Commercial Registration and Business Licensing Proclamation, Proclamation No. 686/2010

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expenses necessary to preserve the partnership property; have entitlement for an interest when advance of funds are made to the partnership; check the books and documents of the partnership and the firm.

Unless agreed otherwise, partners shall share all profits and losses irrespective of their contribution. Creditors of the partnership may make claims against both the partnership assets and the personal property of the partners. As a result, partners are jointly and severally liable to the partnership, unless a prior agreement that the creditor knew about had already been made.

During the dissolution stage, one of the partners may request for the dissolving of the company with six months prior notice. In this case, if the other partners would like to keep the partnership, the partner may be paid the amount of his shares and the partnership will be maintained.

The partnership may also be dissolved due to a death of the partners, incapacity or bankruptcy. A partner may also be expelled from the partnership for a just cause not resulting from the dissolution of the company.

If the company is dissolved, the liquidators will make sure that the debts on the partnership are paid and will settle the remaining profits or losses depending on the surplus. Liquidators are previously appointed by the partnership agreement, not by the partners or the court.

2. Joint Venture

The code defines this type of business organization as an agreement between partners on terms mutually agreed and subject to the general rules relating to partnerships. One distinction is that this organization is not supposed to be made known to third parties and is not subject to registration or formality procedures. As a result, the code doesn’t attach any kind of legal personality to this business organization. A joint venture will not have a firm name, cannot enjoy ownership right over the capital, may not incur liabilities, will not have a head office, can’t sue or be sued in its firm name, or cannot be declared bankrupt. In the case where the joint venture is known to third parties, it should be deemed as an actual partnership, in so far as the third parties are concerned.

The contribution made by the partners is owned individually by each partner. In regards to the management, the code indicates that a manager, who needs not to be a partner, can manage the JV, or all the partners are going to have the status of managers if no manager is appointed. Unlike the general business structure of JV, the law provides for the General Manger to be known to third parties. The manager also has the duty to be accountable to the partners. The JV may be dissolved for reasons including the expiry of the term, completion of the venture, failure of the purpose aimed to be achieved, a decision of all partners to dissolve, decision for dissolution by one partner, dissolution by the court for a good cause, acquisition of all the shares by one partner.

3. General Partnership

The third type of business organization identified by the code is General Partnership. This type of partnership consists of persons with personal, joint, several and full liability between themselves and to the partnership for the partnership firm’s undertakings. The partners are not allowed to agree otherwise as it is required by the code for them to take such responsibility. The partnership, unlike joint venture, is expected to carry a firm name with at least two of the partners’ names and followed by the words “General Partnership” The firm name is not supposed to carry the names of a person who is not a partner. In a situation where the name of a person who is not a partner is being used, such person is liable as a full partner.

A general partnership assumes a legal personality upon registration where it acquires rights and liabilities and can sue or be sued under the firm’s name. The code also states that assigning or transferring shares by partners is determined by agreement of all partners. The administration of general partnership, unlike ordinary partnership or a joint venture, shall be undertaken by one or more managers who may not be partners. If no managers are appointed, each partner is to serve as a manager. The partnership is liable for third parties who act in good faith even if the manager acted for his own profit in the name of the firm.

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expenses necessary to preserve the partnership property; have entitlement for an interest when advance of funds are made to the partnership; check the books and documents of the partnership and the firm.

Unless agreed otherwise, partners shall share all profits and losses irrespective of their contribution. Creditors of the partnership may make claims against both the partnership assets and the personal property of the partners. As a result, partners are jointly and severally liable to the partnership, unless a prior agreement that the creditor knew about had already been made.

During the dissolution stage, one of the partners may request for the dissolving of the company with six months prior notice. In this case, if the other partners would like to keep the partnership, the partner may be paid the amount of his shares and the partnership will be maintained.

The partnership may also be dissolved due to a death of the partners, incapacity or bankruptcy. A partner may also be expelled from the partnership for a just cause not resulting from the dissolution of the company.

If the company is dissolved, the liquidators will make sure that the debts on the partnership are paid and will settle the remaining profits or losses depending on the surplus. Liquidators are previously appointed by the partnership agreement, not by the partners or the court.

2. Joint Venture

The code defines this type of business organization as an agreement between partners on terms mutually agreed and subject to the general rules relating to partnerships. One distinction is that this organization is not supposed to be made known to third parties and is not subject to registration or formality procedures. As a result, the code doesn’t attach any kind of legal personality to this business organization. A joint venture will not have a firm name, cannot enjoy ownership right over the capital, may not incur liabilities, will not have a head office, can’t sue or be sued in its firm name, or cannot be declared bankrupt. In the case where the joint venture is known to third parties, it should be deemed as an actual partnership, in so far as the third parties are concerned.

The contribution made by the partners is owned individually by each partner. In regards to the management, the code indicates that a manager, who needs not to be a partner, can manage the JV, or all the partners are going to have the status of managers if no manager is appointed. Unlike the general business structure of JV, the law provides for the General Manger to be known to third parties. The manager also has the duty to be accountable to the partners. The JV may be dissolved for reasons including the expiry of the term, completion of the venture, failure of the purpose aimed to be achieved, a decision of all partners to dissolve, decision for dissolution by one partner, dissolution by the court for a good cause, acquisition of all the shares by one partner.

3. General Partnership

The third type of business organization identified by the code is General Partnership. This type of partnership consists of persons with personal, joint, several and full liability between themselves and to the partnership for the partnership firm’s undertakings. The partners are not allowed to agree otherwise as it is required by the code for them to take such responsibility. The partnership, unlike joint venture, is expected to carry a firm name with at least two of the partners’ names and followed by the words “General Partnership” The firm name is not supposed to carry the names of a person who is not a partner. In a situation where the name of a person who is not a partner is being used, such person is liable as a full partner.

A general partnership assumes a legal personality upon registration where it acquires rights and liabilities and can sue or be sued under the firm’s name. The code also states that assigning or transferring shares by partners is determined by agreement of all partners. The administration of general partnership, unlike ordinary partnership or a joint venture, shall be undertaken by one or more managers who may not be partners. If no managers are appointed, each partner is to serve as a manager. The partnership is liable for third parties who act in good faith even if the manager acted for his own profit in the name of the firm.

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The partners are not allowed to carry out transactions on behalf of a third party or on his behalf for a business related to that carried out by his firm. Partners are also prohibited from being a partner with joint and several liabilities in the management of a firm carrying out similar business. With all these responsibilities on the partners, no individual partner is held responsible for debts due by the partnership until after payment has been demanded from the partnership. Nevertheless, an action for the repayment of dividends may be brought directly against individual partners.

4. Limited Partnership

The nature of a Limited Partnership as described under the code comprises two types of partners: 1) general partners that have full liability personally, jointly and severally and 2) limited partners who are only liable to the extent of their contributions. Just like in the case of general partnership, limited partnership requires the need for a firm name composed of the names of the general partners followed by the words “Limited Partnership”. A limited partner who allows the inclusion of his name in the firm name is considered a general partner as long as those third parties acted in good faith and consider the partner as a general partner.

The general partners in a limited partnership have the same rights and obligations as partners in a general partnership and only they may be appointed managers. Limited partners may not act as managers even under a power of attorney but if found contravening this rule, they are held jointly and severally liable for any liabilities arising from his activities and the undertakings of the firm. However, this doesn’t bar the limited partners from being employed by the firm. The assignment of shares may not be done unless agreed upon by the managers and the majority of the limited partners.

5. Private Limited Companies

Private Limited Company (PLC) as defined under the commercial code is a company with members whose liability is based on the extent of their contributions. Any PLC is required to have a minimum of two and a maximum of 50 members. The minimum capital requisite in the formation of a PLC is 15,000 ETB and a minimum share amount of 10 ETB. All shares are supposed to be of equal value and one member is allowed to hold more than one share. As mentioned in the case of the limited and general partnerships, the firm name should be followed with the words “PLC”. Additionally, the firm name as well as the amount of capital must appear in all company documents, invoices, publications and other papers.

A PLC is prohibited from undertaking banking, insurance or any business of similar nature but is allowed to carry out other commercial undertakings. A PLC is instituted when the memorandum of association is signed by all members and authenticated. This type of business entity is most commonly used in Ethiopia, particularly among local traders.

The shares in a PLC must be registered and the managers of the PLC must sign a list that contains the names of the members, the value of the contributions made by the members, transfer of shares, and any other amendments to the particulars. This practice ensures that the PLC is composed of the original shares and shareholders. Shares are transferable in a PLC but for shares transferred outside the company, an approval by a majority of the members representing at least 3/4th of the capital is required. A shareholder may also leave his shares to his heirs.

A PLC is expected to be managed by one or more managers and if more than 20 members, must also appoint auditors. The law requires three auditors to be appointed and an individual, joint and several liability on the auditors for offences they commit in exercising their duties. A manager for one PLC is not allowed to serve as a manager of another company during the same period. Managers may be assigned from the members or can be non-members as per the decision of the members, who may also choose to dismiss the same on grounds including misappropriation of power and any other reason that the majority of shareholders decide.

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Managers are individually or jointly and severally liable to the company as well as third parties for any breach of duties. A general meeting on a predetermined date is required, with a decision made by a majority of members representing more than half of the capital.

Every year, one-twentieth of the profits are required to be transferred to the legal reserve fund until the fund amounts to one-tenth of the capital. A fixed interest payment to members may be provided in the memorandum of association, even when there are no profits. In regards to the dissolution of a PLC, similar conditions to that of the other types of partnerships prevail. Nevertheless, the individual failures of members into bankruptcy will not result in the dissolution of the company, as the existence and personality of the members and the PLC are separate. The dissolution of a PLC may also occur when 3/4th of the capital is lost and after the managers consult with members.

6. Share Companies

A Share Company is the last type of business organization that is regulated under the commercial code. There has not been any kind of corporate governance rule in Ethiopia, except for the commercial code provisions regarding Share Companies. Because the commercial code provisions are deemed inadequate to address specific corporate governance issues, a new draft commercial law is being prepared.

The code defines Share Company as a company that has a minimum of five members and whose capital is fixed in advance and divided into shares. Liabilities are met only by the assets of the company, and the liability of shareholders is commensurate with their shares. A minimum of 50,000 ETB is required as a capital to establish a share company, with the par value of each share not less than 10 ETB. The capital must be fully subscribed and the Ministry of Trade requires that at least one quarter of the par value of the shares be paid and deposited in a bank under the name and account of the company.

Shares are registered in the name of the shareholder or to the bearer as required by the shareholder. Shares may not be issued at a price lower than their par value. If shares are issued at a price greater than their par value as provided by the memorandum and articles of association, the difference between the par value and the price at which shares are issued is known as the Premium.

A company cannot make grant advances on its own shares, nor make loans to enable third parties in acquiring shares. The code also differentiates between class of shares and preference of shares. All shares of the same class shall have the same par value. Some shares enjoy preference over other shares as a preferred right of subscription in the event of future issues or rights of priority over shares. In regards to the legal reserve, no less than one-twentieth of the net profits shall be transferred each year to the legal reserve fund until it amounts to one-fifth of the capital.

Presently, a number of share companies are being developed throughout Ethiopia within different sectors. However, since the rules for share companies are not strong enough given economic and political developments in Ethiopia and around the world, questions are arising on the administration of these entities in the country. There have also been numerous share companies that fell under scrutiny due to the mismanagement of companies’ assets.

In addition to the above six types of business organizations, commercial entities regarded in the Commercial Registration Proclamation are commercial representative offices, branch offices and project offices. These three entities have more recently been utilized by many foreign companies looking to open offices in Ethiopia.

Summary risks and mitigations

Ethiopia remains a promising destination for foreign investment, despite challenges associated with it being a developing country. The continuance of robust economic growth in the medium term will be dependent on a number factors. Below summaries the key risks and mitigations for investors looking to invest into Ethiopia.

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Figure 35 - Risks and mitigations

Risk Mitigation(s)

Short-term economic risks 1. Government's positive industrial policy is

aligned only to specific sectors, particularly commercial agriculture, light manufacturing and tourism.

• Consider incentives and other first mover benefits in these strategic growth sectors.

2. Ethiopia's large infrastructure investment programme and a construction bubble in Addis Ababa will burst.

• Expect public sector spending to increase steadily over the next few years.

• Anticipate strong demand for building materials and construction services.

Long-term economic risks 3. Business sector deficiencies, such as skills

shortages and excessive state interference, will persist and create barriers for some foreign firms.

• Consider Ethiopia as a low-cost production base for key overseas consumer markets.

• Anticipate deeper economic integration with other African countries and economic communities will spur intra-regional trade and investment opportunities.

Market potential risks 4. Consumer markets are growing quickly but

average incomes are very low and investors should be cautious in their estimates of consumer spending power.

• Expect larger consumer markets but be cautious in estimating consumer spending power.

5. Tariff barriers are relatively high compared to regional peers and non-tariff barriers can be a significant obstacle to market entry and expansion plans.

• Anticipate high import tariffs and non-tariff barriers over the next few years.

6. FDI and ownership is restricted in a range of sectors.

• Restrictions on the private sector could ease over time and create opportunities in banking, telecoms, retailing and transport sectors (among others).

• Analyze opportunities in firms acting as suppliers and contractors to restricted sectors.

• Assess the impact of new and on-going trade deals on proposed investments.

Foreign exchange risks 7. Foreign exchange shortages often occur

and undermine the ability of local counterparts to settle invoices on time.

• Assess the impact of occasional foreign exchange shortages on bill settlement.

• Consider natural hedging strategies to ease foreign exchange related payment delays.

• Consider supportive financing options for key local counterparts.

8. Currency transactions can experience frequent and lengthy delays as a result of restricted access to foreign exchange, banking sector inefficiencies and a lax payment culture.

• Anticipate delays in securing foreign exchange for bill settlement and profit repatriation.

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Risk Mitigation(s)

• Source inputs locally and build strategic partnerships with export oriented firms to help mitigate payment delays linked to foreign exchange shortages.

9. The birr depreciated steadily over the past twelve months and this trend is set to continue during late 2015 and 2016, prompted by government policy.

• Expect managed depreciation of the birr to continue during 2016.

Business environment risks 10. Excessive bureaucracy can pose a

significant barrier to setting up and operating businesses, or to realising investments in Ethiopia.

• Establish local investment team and cultivate relationships with Ethiopian nationals to help overcome difficult operating conditions and to facilitate market entry and expansion.

• Monitor business regulations closely as they are subject to change.

11. Foreign firms can encounter corruption in public office which impacts business operations and costs.

• Establish guidelines for dealing with corrupt practices and demands for unofficial payments.

• Build close relationships with all levels of government to help overcome potential obstacles.

Business continuity risks 12. Supply disruptions are common due to

transport infrastructure weaknesses, regular power outages, and bureaucratic and procedural delays.

• Expect power supplies to improve considerably over the next three years.

• Explore new transport options to reduce transit times and transaction costs.

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7. Authors Graham Parrott | ENTOTO ADVISORS

Ethiopia: +251.941.212.140 UK: +44.7919.990.001 E: [email protected]

Sean C. Keough | ENTOTO ADVISORS

Ethiopia: +251.920.723.117 US: +1.646.761.2389 E: [email protected]

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AUTHORS7

Authors

Graham

Stamp

Investor Relations

Ethiopia Country Review - January 2016