2010 Investment Climate Statement - Ethiopia

2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2010

Openness to Foreign Investment

The Ethiopian Government states that the private sector is an engine of growth and that private capital should play an important role in the economy. The government has eliminated most of the discriminatory tax, credit and foreign trade treatment of the private sector, simplified administrative procedures, and established a clear and consistent set of rules regulating business activities. Despite the promotion of the private sector, state-owned enterprises and ruling party-owned entities dominate the major sectors of the economy.

Though bureaucratic hurdles continue to affect implementation of projects, the Ethiopian Investment Agency (EIA), the main contact point for foreign investors, has improved its services and provides an expedited "one-stop shop" service that significantly cuts the time and cost of acquiring investment and business licenses. A foreign investor intending to buy an existing private enterprise or buy shares in an existing enterprise needs to obtain prior approval from the EIA.

A National Foreign Investment Promotion Advisory Council operates with the goal of conducting foreign investment promotion on textiles and garments, leather and leather products, fruits and vegetables, and agro-processing areas. The Council's major tasks are to collect and make available basic data regarding land allocation, utilities connection, investment opportunities, market and other relevant information.

In 2009, the Ethiopian Government shifted its agricultural policy focus towards encouraging private investment (both domestic and foreign) in larger-scale commercial farms. The Ministry of Agriculture and Rural Development (MoARD) created a new Agricultural Investment Support Directorate that is currently negotiating long-term leases (all land is owned by the government) on more than 7 million acres of land for these commercial farms. The new Directorate's goal is to boost productivity, employment, technology transfer, and foreign exchange reserves by offering incentives to private investors.

Rampant power outages forced factories and businesses to cease operations for several days per week in 2009. Power supply improved in late 2009, but demand still outpaces supply. The Ministry of Mines and Energy (MoME) is actively seeking additional investment in Ethiopia's energy sector to resolve its power crisis and even has plans to export electricity to neighboring countries. MoME is specifically interested in renewable energy sources and is finalizing a draft feed-in tariff bill which will establish the rates and conditions for independent power producers to sell electricity to the national grid.

In January 2009, the first American Chamber of Commerce (AmCham) in Ethiopia was established to enhance the bilateral trading relations between the two countries. AmCham currently has about 60 members. AmCham has been facing bureaucratic delays in renewing its license with the Ministry of Justice due to the restrictive Civil Society Organization (CSO) law that came into effect in 2009.

In June 1996, the Ethiopian Government issued a revised Investment Code which provided incentives for development-related investments, reduced capital entry requirements for joint ventures and technical consultancy services, created incentives in the education and health sectors, permitted the duty-free entry of capital goods (except computers and vehicles), opened the real estate sector to expatriate investors, extended the losses carried forward provision, cut the capital gains tax from 40 percent to 10 percent, and gave priority to investors in obtaining land for lease.

Amendments to Ethiopia's Investment Proclamation were issued in September 1998 and July 2002, further liberalizing the investment regime and removing most of the remaining restrictions. The remaining state-controlled sectors include telecommunications, postal services with the exception of courier services, and passenger air service using aircraft with more than 20 seats. Manufacturing of weapons and ammunitions and telecommunications services can only be undertaken as joint ventures with the government.

Ethiopia's investment code prohibits foreign investment in banking, insurance, and financial services. Other areas of investment reserved for Ethiopian nationals include broadcasting; air transport services; travel agency services, forwarding and shipping agencies; retail trade and brokerage; wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their locally-produced products); most import trade; export trade of raw coffee, chat, oilseeds, pulses, hides and skins bought from the market; live sheep, goats and cattle not raised or fattened by the investor; construction companies excluding those designated as grade 1; tanning of hides and skins up to crust level; hotels (excluding star-designated hotels); restaurants and bars excluding international and specialized restaurants; trade auxiliary and ticket selling services; transport services; bakery products and pastries for the domestic market; grinding mills; hair salons; clothing workshops (except by garment factories); building and vehicle maintenance; saw milling and timber production; custom clearance services; museums, theaters and cinema hall operations; and printing industries.

Another important change made in the 2002 amendment was the reduction in the minimum capital requirement of foreign investors from USD $500,000 to USD $100,000 per project for wholly-owned foreign investments and from USD $300,000 to USD $60,000 for joint investments with domestic investors. The minimum capital required of foreign investors in the areas of engineering, architectural, accounting and auditing services; business and management consultancy services; and publishing was reduced from USD $100,000 to USD $50,000 for wholly-owned foreign investment; and to USD $25,000 for joint ventures undertaken with domestic partners. A foreign investor reinvesting profits or dividends or exporting at least 75 percent of the output will not be required to meet minimum capital requirements or the 27 percent equity requirement of local partners in joint ventures.

The Ethiopian Government established a Trade Practices Commission in April 2003 as an investigative commission accountable to the Ministry of Trade and Industry. This Commission was designed to promote a competitive business environment by regulating anti-competitive, unethical, and unfair trade practices to enhance economic efficiency and social welfare. Some of the Commission's powers include investigating complaints by aggravated parties; compelling witnesses to appear and testify at hearings; and searching the premises of accused parties.

Nearly all tenders issued by the Ethiopian Government's Privatization and Public Enterprises Supervising Agency (PPESA) are open to foreign participation. In some instances, the government prefers to engage in joint ventures with private companies rather than sell an entire entity. The government has sold approximately 260 public enterprises since 1994. Most of these enterprises were small enterprises in the trade and service sectors. Ten of these enterprises were privatized in 2009, and 93 public enterprises remain under PPESA control.

Foreign investors have complained about the abrupt cancellation of some government tenders, a perception of favoritism toward Chinese vendors, and a general lack of transparency in the procurement system. In September 2009, Proclamation No. 649/2009 established a new public procurement and property administration agency. This agency is going to be an autonomous government organ, have its own judicial arm, and be accountable to the Ministry of Finance and Economic Development. The government established this new agency in order to achieve better transparency, efficiency, fairness, and impartiality in public procurement processes and to ensure that the government achieves the maximum benefit from public property use.

Foreign investors do not face unfavorable tax treatment, denial of licenses, discriminatory import or export policies, or inequitable tariff and non-tariff barriers. However, some U.S. investors have experienced difficulties obtaining title deeds to properties purchased. Although government officials have at times intervened to resolve these problems, a lasting solution requires policy level changes.

Ethiopia's World Trade Organization (WTO) accession process has been underway since 2003. Ethiopia submitted a Memorandum of Foreign Trade Regime to the WTO Secretariat in December 2006, sent replies to the first round of WTO member questions in January 2007, and held its first working party meeting in May 2008. In March 2009, Ethiopia submitted its replies to a second round of questions. The scheduling of the second working party meeting has been subject to extensive procedural delay, but is expected to be held in 2010.

The Ethiopian Government cites 2008/09 (fiscal year ending July 7, 2009) Gross Domestic Product (GDP) growth at 10.1 percent while the International Monetary Fund (IMF) and the World Bank estimate it at 6.5 percent. According to the government, Ethiopia's economy has grown at an average of 11.5 percent during the past five years.

Ethiopia is enduring a severe foreign exchange crisis. Reserves dropped to USD $700 million in December 2008, but have only slightly recovered to USD $1.8 billion. Reserves have not stabilized due to Ethiopia's widening trade deficit. Ethiopia's total imports were USD $7.7 billion for the 2008/09 fiscal year due to a reliance on imported petroleum and machinery products. Ethiopia's exports totaled only USD $1.4 billion in the same year.

Ethiopia has been battling high inflation in recent years. Year-on-year inflation peaked at 64 percent in July 2008-- the second highest in Sub-Saharan Africa after Zimbabwe--but it has declined to 0.6 percent in November 2009. In efforts to combat inflation, the Ethiopian Government enacted various measures beginning in late 2008, including capping the lending limits of banks; reducing government borrowing from domestic banks; eliminating the domestic fuel price subsidy; depreciating the local currency; importing wheat and selling at subsidized prices; and lifting import duties on food imports.

Ethiopia's ranking on various indices:

Indicator Year Index/Ranking
Transparency Int'l Corruption Index
2.7; 120 out of 180 countries
Heritage Economic Freedom
53.0/+0.5; 135 out of 179 countries
World Bank Doing Business
107 out of 183 countries

Millennium Challenge Corporation (MCC) Scorecard:
MCC Government Effectiveness
0.37 (84%); Median 0.00
MCC Rules of Law
0.29 (66%); Median 0.00
MCC Control of Corruption
0.12 (63%); Median 0.00
MCC Fiscal Policy
-3.5 (22%); Median -1.4
MCC Trade Policy
61.9 (23%); Median 67.9
MCC Regulatory Quality
-0.23 (37%); Median 0.00
MCC Business Start up
0.975 (86%); Median 0.918
MCC Land Rights Access
0.731 (82%); Median 0.612
MCC Natural Resources Mgmt
53.22 (31%); Median 61.61

Conversion and Transfer Policies

Ethiopia's central bank, the National Bank of Ethiopia (NBE), retains a monopoly on all foreign currency transactions. The NBE supervises all payments or remittances made abroad. The local currency (Birr) is not freely convertible. In 2004, the NBE issued a directive that allows non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin to establish and operate foreign currency accounts up to USD $50,000.

Ethiopia's Investment Proclamation allows all foreign investors whether or not they receive incentives, to remit freely profits and dividends, principal and interest on foreign loans, and fees related to technology transfer. Foreign investors may also remit proceeds from the sale or liquidation of assets from the transfer of shares or of partial ownership of an enterprise, and funds required for debt service or other international payments. The right of expatriate employees to remit their salaries is granted in accordance with the foreign exchange regulations of the National Bank of Ethiopia (NBE). While these transfers are legally allowed, foreign companies face significant delay in the repatriation of profits as the NBE does not have enough hard currency to allocate to this process. Banks started rationing foreign currency during 2008 on a priority basis given preference to the state-driven growth in construction, transport and communication as well as domestic food and agricultural subsidization programs. Many foreign investors face delays in importing equipment and spare parts and businesses must apply for foreign exchange for imports at least six-to-nine months in advance of their intended need. This lack of foreign exchange has reportedly forced some companies to buy hard currency in the illegal parallel market or to pay bribes to move up on banks' priority lists.

In 2008, amendments to the Monetary and Banking Proclamation No. 83/1994 and the Banking Business Proclamation No. 84/1994 became effective (the amendments were Proclamation Numbers 591/2008 and 592/2008, respectively). These laws assigned more authority to NBE to license and rigorously supervise financial institutions.

The Ethiopian Government depreciated the Birr more than 30 percent against the U.S. Dollar between 2004 and 2009. In January 2010, the Birr traded at 12.7 per U.S. Dollar. The rate offered in the illegal parallel market made a marked divergence from the official rate starting in 2005, but the spread between the rates narrowed after the government significantly depreciated the Birr in 2009 and enforced a crackdown on illegal currency dealers. The parallel market exchange rate was approximately 13.5 Birr per U.S. Dollar in January 2010.

Effective November 14, 2006, the NBE ordered that all bank processes concerning items for export to China shall be undertaken and overseen by the state-owned Commercial Bank of Ethiopia (CBE).

In December 2009, the Proclamation on Prevention and Suppression of Money Laundering and the Financing of Terrorism became effective. This legislation calls for the establishment of a national financial intelligence unit.

Expropriation and Compensation

Per Ethiopia's 1996 Investment Proclamation and subsequent amendments, assets of a domestic investor or a foreign investor, enterprise or expansion cannot be nationalized wholly or partly, except when required by public interest and in compliance with the laws and payment of adequate compensation. Such assets may not be seized, impounded, or disposed of except under a court order.

Ethiopia's Privatization and Public Enterprises Supervising Agency (PPESA) stopped accepting requests from owners of formerly expropriated properties in July 2008. The Derg military regime nationalized many properties in the 1970s. U.S. citizens are still involved in negotiating the return of some of these properties seized by the Derg with the Ethiopian Government.

In recent years, U.S. citizens have reported threatened or actual property expropriation by the government and are involved in ongoing contractual investment disputes with the government. There are also complaints against the government by U.S. companies of unlawful contract termination and non-transparent tender award processes.

In early 2009, the Ethiopian Government revoked licenses of six major coffee exporters and seized the coffee warehouses of more than 80 firms as it accused them of "hoarding" coffee in hopes of selling it later for a higher price. The global price of coffee was historically low during this time period. The government blamed these exporters for the decline in coffee exports while exporters blamed domestic issues such as new coffee marketing and control legislation as well as the capacity constraints of the new Ethiopia Commodity Exchange (ECX).

Dispute Settlement

According to the Investment Proclamation, disputes arising out of foreign investment that involve a foreign investor or the state may be settled by means agreeable to both parties. A dispute that cannot be settled amicably may be submitted to a competent Ethiopian court or to international arbitration within the framework of any bilateral or multilateral agreement to which the government and the investor's state of origin are contracting parties.

Investors involved in disputes have expressed a lack of confidence in the judiciary to objectively assess and resolve disputes. Ethiopia's judicial system is weak, overburdened, poorly staffed and inexperienced although efforts are underway to strengthen its capacity. While property and contractual rights are recognized and there are commercial and bankruptcy laws, judges often lack understanding of commercial matters and case scheduling suffers from extended delays. There is significant government influence and intervention into legal proceedings, particularly those related to government entities or officials. There is no guarantee that the award of an international arbitral tribunal will be fully accepted and implemented by Ethiopian authorities. Ethiopia has signed, but never ratified, the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

Performance Requirements and Incentives

The 2003 amendment to the Investment Proclamation outlines the investment incentives for investors in specific areas. New investors engaged in manufacturing, agro-industrial activities or the production of certain agricultural products and who export at least 50 percent of their products or supply at least 75 percent of their product to an exporter as production input are exempt from income tax for five years. An investor who exports less than 50 percent of his product or supplies his product only to the domestic market is income tax exempt for two years. Investors who expand or upgrade existing enterprises and export at least 50 percent of their output or increase production by 25 percent are eligible for income tax exemption for two years. An investor who invests in the relatively underdeveloped regions of Gambella, Benishangul and Gumuz, South Omo, Afar or Somali Region will be eligible for an additional one-year income tax exemption.

The government has established a special loan fund through the Development Bank of Ethiopia (DBE) and made available land at low lease rates for priority export areas such as floriculture, leather goods, textiles and garments, and agro-processing related products. An investor can borrow up to 70 percent of the cost of the project from this special fund without collateral upon presenting a viable business plan and 30 percent personal equity.

An investor who exports hides and skins after processing only up to crust level will not be entitled to the income tax incentive. In 2008, a bill imposing an export duty on raw and semi processed hides and skins ranging from 5 percent to 150 percent was passed in efforts to shift the leather sector to only export finished goods.

Investors are allowed to import duty-free capital goods and construction materials necessary for the establishment of a new enterprise or for the expansion of an existing enterprise. In addition, spare parts worth 15 percent of the value of the capital goods can be imported duty-free. This privilege may not be granted if comparable capital goods or construction materials are locally produced and have competitive prices, quality, and quantity. Imported duty-free capital goods can no longer be used as loan collateral.

The Ministry of Agriculture and Rural Development's (MoARD) new Agricultural Investment Support Directorate offers grace periods of up to seven years on land rents.

Ethiopia does not have discriminatory or excessively onerous visa, residence, or work permit requirements for foreign investors.

Right to Private Ownership and Establishment

Both foreign and domestic private entities have the right to establish, acquire, own and dispose of most forms of business enterprises.

There is no right of private ownership of land. All land is owned by the state and can be leased for up to 99 years.

Protection of Property Rights

Secured interests in property are protected and enforced although all land ownership remains in the hands of the state. Certain residents have been relocated (and usually compensated) when the government decides that the land they are living on should be used for a road or other public use. Many ongoing property disputes date back to properties seized by the Derg military regime (1974-91). The current government's position is that property seized "lawfully" by the Derg (i.e., by court order or government proclamation published in the official gazette) remains the property of the state. In most cases, property seized by oral order or other informal means is gradually being returned to lawful owners or their heirs through a lengthy bureaucratic process. Claimants are required to pay for improvements made by the government during the time of its control over the property.

Land leasehold regulations vary in form and practice by region. Land has been made readily available by the authorities to foreign investors in the manufacturing and agriculture sectors, but less so for real estate developers. Some investors, including foreign investors, reportedly have had their land and all assets forcibly taken by Sudanese authorities without recourse or response from the Ethiopian Government.

Mortgages are uncommon as loan terms are generally quite short. There is no system of recording security interests.

Ethiopia has yet to sign a number of major international intellectual property rights (IPR) treaties, such as: the Paris Convention for the Protection of Industrial Property; the World Intellectual Property Organization (WIPO) copyright treaty; the Berne Convention for Literary and Artistic Works; and the Patent Cooperation Treaty. The Ethiopian Intellectual Property Rights Office (EIPO) has been tasked only to protect Ethiopian copyrighted materials and pirated software; foreign works are not considered part of their purview. Generally, EIPO has weak capacity in terms of manpower and law enforcement. In addition, a number of businesses, particularly in the tourism and service industries, operate in Ethiopia are freely using well-known trademarked names or symbols without permission.

Transparency of Regulatory System

Ethiopia's regulatory system is generally considered fair, though there are instances in which burdensome regulatory or licensing requirements have prevented the local sale of U.S. exports, particularly personal hygiene and health care products. Government ministries often pass decisions and associated paperwork to various other ministries before any decision is finalized. In many cases, this paperwork gets stuck in one ministry and no decision is made.

Investment, business, and other licenses for foreign investors can now be obtained from the Ethiopian Investment Agency in a matter of hours.

Proposed national laws are generally circulated for public comment prior to enactment.

Efficient Capital Markets and Portfolio Investment

Access to finance is an impediment to increased private investment. While credit is available to investors on market terms, the 100 percent collateral requirement limits the ability of some investors to take advantage of business opportunities. In addition, due to current inflationary concerns, the National Bank of Ethiopia (NBE) (central bank) does not allow commercial banks to lend above their current limits. Export-oriented investors can borrow from a special fund at the Development Bank of Ethiopia without collateral for up to 70 percent of the project cost.

Ethiopia currently has fifteen banks--three state-owned and 12 privately-owned. Two more private banks are under formation but not yet licensed. Foreign banks are not permitted to provide financial services in Ethiopia. The state-owned Commercial Bank of Ethiopia owns approximately two-thirds of the $11.6 billion in total assets of the banking sector (as of mid-2008 using exchange rate of 9.62 Birr/U.S. Dollar). Due to the NBE's recently-imposed stringent supervision, the commercial banks' non-performing loan ratio is declining and below 15 percent.

Ethiopia does not have a securities market although a private sector initiative to establish a mechanism for buying and selling company shares is under discussion.

The Ethiopian Government partially controls interest rates. The government cannot affect interest rates through market actions and retains the right to set interest rates. The NBE determines the bank deposit rate floor, which now stands at 4 percent while loan interest rates are allowed to float. Real interest rates have been negative in recent years mainly driven by high inflation. The government offers a limited number of 28 days, 3-month, and 6-month Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate. The yields on these T-bills are very low, 0.68 percent for 28 days, 0.90 percent for 91 days, and 0.70 percent for 182-days bill as of October 2009. This market remains unattractive to the private sector, and more than 95 percent of the T-bills are held by the state-owned Commercial Bank of Ethiopia.

The Ethiopia Commodity Exchange (ECX) was launched in 2008, and currently offers trades of commodities such as coffee, sesame seeds, corn, and wheat. The government launched ECX to increase transparency in commodity pricing, alleviate food shortages, and encourage the commercialization of agriculture. Both buyers and sellers have complained of ECX inefficiency and ineffectiveness since its establishment; however, the exchange continues to make improvements in attempts to address these concerns.

There are no laws or regulations authorizing private firms to adopt articles of incorporation/association that limit or prohibit foreign investment, participation or control. There are no private sector or government efforts to restrict foreign participation in industry standards setting consortia or organizations. There are no known instances of private firms attempting to restrict foreign investment, participation, or control of domestic enterprises. There are no "cross-shareholding" or "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers or acquisitions.

Competition from State-Owned Enterprises

Despite the Ethiopian Government's promotion of the private sector, state-owned enterprises and ruling party-owned entities dominate the major sectors of the economy. There is state monopoly or state-run dominance in sectors such as telecommunications, power, banking, and insurance. Ruling party-affiliated "endowment" companies have a strong presence in the fertilizer, textile, and transport sectors.

State-owned enterprises have considerable advantages over private firms, particularly in the realm of Ethiopia's regulatory and bureaucratic environment, including ease of access to credit and speedier customs clearance. Local businessmen as well as foreign investors complain of the lack of a level playing field when it comes to state-owned and party-owned businesses. While there is no report of credit advancement to these entities, there are indications that they receive incentives such as priority foreign exchange allocation, preferences in government tenders, and marketing assistance.

Corporate governance of state-owned enterprises is structured and monitored by a board of directors composed of senior government officials and politically-affiliated individuals. Ethiopia's published national budget does not include the financial activity of these enterprises.

The World Bank Investment Climate Competitiveness Surveys in recent years concluded that government preferences play an important role in distorting competition in Ethiopia. Types of government preferences identified in the report included ownership of enterprises, directed credit, and reduced barriers to entry.

Corporate Social Responsibility

Some larger international companies have introduced corporate social responsibility (CSR) programs; however, most local companies do not practice CSR. There is a movement to develop CSR programs by the Ministry of Trade and Industry in collaboration with the World Bank, U.S. Agency for International Development, and others. The Ethiopian Chamber of Commerce, in cooperation with regional chambers, is also creating awareness on the generally accepted CSR principles.

Political Violence

While Ethiopia has been relatively stable and secure for investors, cases of ethnic or religious violence have become more frequent and political tensions are high. Cases of small localized bombings have occurred, particularly in and around Addis Ababa, in recent years. While investors are not normally affected, insurgents operating in the Somali Region of Ethiopia have warned investors against exploring oil or natural gas resources in this area. In April 2007, the Ogaden National Liberation Front (ONLF) attacked Chinese and Ethiopian workers at an oil exploration site which was surrounded by military forces. More than 70 workers were killed in this attack. Political tensions exist along many of Ethiopia's border areas with Sudan, Eritrea, and Somalia.

There was political unrest, violent protests and numerous arrests following the disputed May 2005 elections. Ethiopian Government forces killed more than 200 Ethiopians during these protests. While the unrest had largely subsided by 2007, national elections in May 2010 have potential to trigger renewed political unrest. There have been numerous claims of voter intimidation and coercion of opposition party candidates and members in recent months.

In 2009, the Ethiopian Government passed an Antiterrorism Proclamation granting executive branch-controlled security services virtually unlimited authority to take unilateral action to disrupt suspected terrorist activities. Terrorist activities are broadly defined in the legislation and could be used to define political activities. The proclamation does not require judicial review of such activities, but does give the courts the option, ex-post, to review past events. The Proclamation authorizes hearsay testimony as adequate in judicial proceedings.

A Civil Society Organizations (CSO) law, adopted in February 2009, prohibits CSOs that receive more than 10 percent of their funding from foreign sources from engaging in activities that promote human rights and democracy; the rights of children and the disabled; equality among nations, nationalities, people, gender and religion; or conflict resolution or reconciliation. The Ethiopian Government has stated the law aims to increase the transparency and accountability of CSOs to stakeholders and restrict foreign involvement in purely domestic advocacy, but critics of the law have expressed concern that it will prevent the capacity development of civil society and undermine CSOs' watchdog role.


Ethiopia ratified the United Nations (UN) Anticorruption Convention in 2007.

The UN Investment Guide to Ethiopia (2004) asserted that routine bureaucratic corruption is virtually non-existent in Ethiopia. The guide added that bureaucratic delays certainly exist, but are not devices by which officials seek bribes.

According to Transparency International's Corruption Perception Index, Ethiopia's rating has declined in the past two years after spiking in the aftermath of the 2005 elections. Ethiopia ranked 120th out of 180 countries rated in 2009. There are suspicions that the frequent cancellation of telecommunications, power lottery, and other infrastructure tenders may be a result of corruption.

The Ministry of Justice and the Federal Ethics and Anti-Corruption Commission (FEACC) are charged with combating corruption. Since its establishment, the Commission has arrested many officials on charges of corruption, including managers of the Privatization Agency, Ethiopian Telecommunications Corporation, National Bank of Ethiopia, Ethiopian Geological Survey, the state-owned Commercial Bank of Ethiopia, and private businessmen. The Commission reported that it arrested and conducted investigations on 203 corruption suspects from August 2008 to January 2009. In 2009, there were also several arrests of businessmen for alleged tax evasion.

It is a criminal offense to give or receive bribes, and bribes are not tax deductible.

Bilateral Investment Agreements

Ethiopia has bilateral investment and protection agreements with China, Denmark, Italy, Kuwait, Malaysia, Netherlands, Russia, Sudan, Switzerland, Tunisia, Turkey, Yemen, Spain, Algeria, Austria, UK, Belgium/Luxemburg, Libya, Egypt, Germany, Finland, India, and Equatorial Guinea and a protection of investment and property acquisition agreement with Djibouti. A Treaty of Amity and Economic Relations, which entered into force in 1953, governs economic and consular relations with the United States. Ethiopia also has double taxation treaties with thirteen countries, including Italy, Kuwait, Romania, Russia, Tunisia, Yemen, Israel, South Africa and Sudan. There is no double taxation treaty between the U.S. and Ethiopia.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has offered risk insurance and loans to U.S. investors in Ethiopia in the past, but has not originated any investment in Ethiopia in recent years. In 2007, OPIC established the Enterprise Development Network (EDN)--an alliance between OPIC and the private sector--to help source and process small business deals. The International Executive Service Corps (IESC), a non-profit economic development organization, became involved in this alliance as a loan originator.

Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA).


Ethiopia's labor force is estimated at 35 million, of which 80 percent are employed in subsistence agriculture, mostly as farmers. The Ethiopian Government and armed forces are the most important sectors of employment outside of agriculture and provide work for almost 3 million people. Approximately 40 percent of the urban workforce is unemployed. The high urban underemployment is partially offset by an informal economy. According to a May 2006 International Labor Organization (ILO) survey, the informal sector constitutes 70 to 80 percent of the workforce. The economy is growing, but does not generate enough jobs for the 600,000 new entrants per year.

Labor remains readily available and inexpensive in Ethiopia. Skilled manpower, however, is scarce in many fields. Ethiopia's illiteracy rate is over 60 percent.

The right to form labor associations and engage in collective bargaining is constitutionally guaranteed for many workers, but excludes managerial employees, teachers, and civil servants. Only about 300,000 workers are members of labor unions. Most ILO Core Labor Standards have been enacted into law.

Ethiopia has ratified all eight core ILO conventions. The Ethiopian Penal Code outlaws work specified as hazardous by ILO conventions. The Ethiopian Parliament ratified ILO Convention 182 on the Worst Forms of Child Labor in May 2003.

Child labor is widespread in Ethiopia. While not a pressing issue in the formal economy, child labor is common in rural agrarian areas and the informal economy in urban areas. Employers are statutorily prohibited from hiring children under the age of 14. There are strict labor laws defining what sectors may hire "young workers," defined as workers aged 14 to 18, but these laws are infrequently enforced.

Ethiopia generally enjoys labor peace. There was no formal labor strike in 2009 possibly due in part to the government's prohibition on public demonstrations. The government re-certified the Confederation of Ethiopian Trade Unions (CETU) in April 1997. Since its re-certification, CETU (with a constituent membership of 182,000) has focused on fundamental workers' concerns, such as job security, pay increases, severance pay, and health and retirement benefits. The new labor law that went into effect in February 2004 and amended in 2006 is generally considered pro-employer by labor unions. Workers who perform essential services are not permitted to strike. The Ethiopian Employers' Association (EEA) is dedicated to maintaining labor peace and works in harmony with the ILO, CETU and the Ministry of Labor and Social Affairs. Its leadership supports the adoption of all ILO Core Labor Standards. In general, entrepreneurs believe that cooperating with labor is in their self-interest.

Although the law provides for workers' rights, unions have reported that employers frequently terminate workers for union activities. Anti-union discrimination is prevalent in the workplace and workers have found it difficult to conduct strikes. The ruling party tightly controls the leadership of the Confederation of Labor Unions and often influences union elections. Unemployment is high and poses major challenges to the organization of labor. There is no national minimum wage standard, and many workers find it difficult to attain a decent standard of living.

Foreign Trade Zones/Free Trade Zones

There are no areas designated as foreign trade zones and/or free ports in Ethiopia. Because of the 1998-2000 Ethiopian-Eritrean war, Ethiopian exports and imports through the Eritrean port of Assab are prohibited. As a result, Ethiopia conducts almost all of its trade through the port of Djibouti with some trade via the Somaliland port of Berbera. Despite Ethiopia's efforts to clamp down on small-scale trade of contraband, unregulated exports of coffee, live animals, chat (a mildly narcotic amphetamine-like leaf), fruit and vegetables, and imports of cigarettes, alcohol, textiles, electronics and other consumer goods continues.

Foreign Direct Investment Statistics

Foreign direct investment (FDI) flows into Ethiopia have gradually increased in the last few years. According to estimates by the National Bank of Ethiopia, it increased from USD $150 million in 2005 to USD $880 million in 2009 (about 3 percent of GDP). Floriculture, horticulture, and leather are the sectors that have attracted the most FDI. Recently, commercial farming has attracted Indian, Saudi, European, and U.S. investors. The stock of U.S. foreign direct investment since 1992 in Ethiopia reached USD $255 million as of September 2009, which includes both projects under implementation and operation.

U.S. companies with a significant presence and participation in Ethiopia's economy include Boeing, Cargill, Sheraton Hotels, Lucent Technologies, Cisco, Coca-Cola, Pepsi-Cola, Schaffer & Associates, Pioneer Hi-Bred Seeds, Federal Express, United Parcel Service, Caterpillar, Mack Trucks, General Motors, Rank/Xerox Corporation, John Deere, Navistar, Rx for Africa, and Hughes Network.