Ethiopia - Market ChallengesEthiopia - Market Challenges
While Ethiopia offers a number of opportunities, the market is also riddled with challenges. The government is engaged in a slow process of economic reform and liberalization, and the state remains heavily involved in most economic sectors. The Government of Ethiopia (GOE) retains control over the utilities sector, such as telecommunications, and prohibits foreign ownership of banking, insurance, and financial services. State-owned enterprises (SOEs) and ruling political party-owned entities dominate the economic landscape, reducing room for the private sector to flourish. SOEs actively encourage joint venture and equity partnerships with foreign companies.
The state-owned telecommunications company, Ethio Telecom, offers slow, expensive, and unreliable phone and internet services. In 2015, Ethio Telecom began to roll out 4G wireless service in Addis Ababa and more extensive 3G services in other parts of the country. As of 2015/16, Ethiopia had 46 million (46% of total population) mobile subscribers, 1.1 million fixed telephone lines (1% of total population), and 13.6 million (about 14% of total population) internet subscribers.
Foreign exchange shortages, largely the result of weak export performance and high demand for foreign currency, notably for GOE infrastructure priority projects, will continue to present difficulties for firms in Ethiopia. Businesses can usually expect delays in foreign exchange supply extending up to a year, and it is especially common to expect slow-downs and down-time in manufacturing.
Electricity demand continues to outpace supply as new hydropower dams struggle to produce at full capacity. Power transmission lines and distribution facilities are inadequate to the demand. The GOE is investing significantly in construction of very large-scale hydroelectric generation projects, with the objective of doubling the current near 4000 MW power supply. If successfully completed, these projects could meet domestic electricity demand and produce a significant surplus of power for export. The GOE is open to proposals for power development projects using Independent Power Purchase (IPP) agreements for the sale of renewable energy resources (geothermal, solar, wind and biomass). USAID Power Africa is supporting the development of a regulatory framework for IPP agreements. The first 1000 MW IPP geothermal power generation project agreement is being negotiated with the U.S. company, Corbetti, under a BOOT (build, own, operate and transfer) agreement.
The Ethiopian economy has made great strides over the past decade, but extreme weather and drought will drive down growth and increase inflation. In addition, there has been a decrease in the demand and price of Ethiopia’s primary export commodities due to a downturn in the global economy. This has a direct impact on Ethiopia’s export earnings.
Government procedures and paperwork are usually bureaucratic and time-consuming, although some improvements have been made in recent years. While the customs clearance process is still very slow, the GOE is committed to improving its World Bank’s Ease of Doing Business EODB ranking and has been engaged in reviewing its Commercial Code, which has remained unchanged for the past fifty years. The first draft of the Commercial Code was released for review in 2016. Areas targeted for revision include the business tax code and the registration process. The Ethiopian Investment Commission set up a Doing Business in Ethiopia review committee that started conducting commercial dialogues with foreign private companies to identify the major stumbling blocks to trade and investment in Ethiopia.
Ethiopia's judicial system is poorly staffed and inexperienced, particularly with respect to commercial disputes. The judiciary is overburdened and subject to political influence by the executive branch. Lengthy pretrial detention is common, closed court proceedings occur, and detainees are sometimes denied the constitutional right to access to legal counsel and visits from family members. A particularly egregious case in point is an American citizen detained for a commercial dispute who remains in custody after nearly two years without bail.
In 2002, the GOE established a new court system dedicated to resolving commercial disputes more efficiently. Under this new system, if a company includes an arbitration clause in its contract, it can apply for assistance from the Addis Ababa Chamber of Commerce Arbitration Institute and bypass some inefficiencies in the judicial system. The 2016 World Bank’s EODB report showed that Ethiopia has performed better than its sub-Sahara African peers in contract enforcement and dispute settlement, ranking 2nd after Uganda. Globally, Ethiopia ranked 84th out of 189 economies in this area.
Lack of access to finance is a major constraint for local businesses, especially for SMEs. Since January 2011, the National Bank of Ethiopia (NBE) has required banks to purchase five-year central bank bills, at 3% interest rate to the value of 27% of all new loans. As a result, private commercial banks’ liquidity and capacity to supply credit to the private sector have been sharply reduced, with SMEs at the bottom of the priority list.
While domestic savings has increased, it remains well below the investment target of roughly 40% of GDP, and the increasing demand for funds remains unmet. Ethiopia’s performance in ease of accessing credit is significantly below the Sub-Saharan Africa average at 167 out of 189 countries.
Globally, SMEs are believed to be the driving force of economic growth and generation of employment, especially, in the manufacturing and services’ sectors. Due to limited access to finance, difficulty in processing letters of credit (LOC) and shortage of foreign exchange, SMEs in Ethiopia have not grown as expected. The bottom line is American firms need to finance their exports and investments to compete in this market. They face the challenge of carrying the costs until their buyers can access forex to pay for purchases. SMEs do not have the legal and administrative support, nor the capital resources, to sustain the long and often bureaucratic procedures of processing goods and services through the Ethiopian customs system.
Ethiopia Trade Development and Promotion