Embassy of the United States Addis Ababa, Ethiopia

Market Challenges

The Ethiopian economy is going through a slow process of economic reform and liberalization; however, the Government of Ethiopia (GOE) remains heavily involved in most economic sectors.  The government retains control over the utilities sector, as well as telecoms, and prohibits foreign ownership of banking, insurance, and financial services companies.  State-owned enterprises and political ruling-party owned entities dominate the economic landscape, reducing room for the private sector to flourish, although many of the subsidiaries of these entities themselves seek joint venture and equity partners.  The state-owned telecommunications company, Ethio Telecom (ET), offers slow, expensive, and unreliable phone and Internet services.  As of June 2011, there were 10.5 million mobile phone subscribers and 128,000 Internet subscribers.  Residential and commercial ADSL (broadband) services were announced in April 2011 and introduced in Q3 2011.  The prohibition on foreign financial services institutions from operating in Ethiopia and the undeveloped regulatory environment have resulted in a limited and weak financial sector.  All land is owned by the state and cannot be purchased or sold, but can be leased on a long-term basis of up to 99 years.  A land-lease regulation passed in late 2011 places limits on duration of construction projects, allows for revaluation of leases at a government-set benchmark rate, places previously owned land (“old possessions”) under leasehold, and restricts transfer of leasehold rights.  Intermittent power outages used to force factories to cease operations during peak periods in 2010, but such critical shortages have been largely resolved in 2011.  The GOE is currently making significant investments in big hydroelectric project construction (using both external loans and its own resources).  Ethiopia's judicial system is poorly staffed and inexperienced, particularly with respect to commercial disputes.  The GOE recently 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 services from the Addis Ababa Chamber of Commerce Arbitration Institute and bypass some inefficiencies of the judicial system.  Lack of access to finance is a hindrance for local businesses.  Lending caps placed on commercial banks were lifted in April 2011 (ostensibly to control money supply expansion and inflation).  However, this legislation was replaced with a much more stringent directive that forces banks to purchase central bank bills to the tune of 27% of their loans and advances at an interest of 3% (lower than the cost of funds at 5%) and bill maturity of five years.  As a result, bank liquidity and capacity to supply credit is seriously threatened.  The central bank recently reduced reserve and liquidity requirements of banks from 15% and 25% to 10% and 20%, respectively.  However, the business and finance community widely acknowledges that this measure alone cannot improve the situation dramatically 'apart from short term liquidity shortage relief'.  The GOE's de facto requirement that imports be transported by state-owned Ethiopian Shipping Lines (ESL) has caused severe delivery delays and high transportation costs for importers.  ESL also requires payment in foreign exchange for services.  In January 2011, the GOE announced price controls for 18 commodities/consumables based on allegations of price gouging by major traders.  In June 2011, the GOE lifted these price controls.

Market Opportunities

However, Ethiopia is endowed with abundant agricultural resources and has diverse ecological zones.  In 2009, the GOE shifted its agricultural policy focus towards encouraging private investment (both domestic and foreign) in larger-scale commercial farms.  The Ministry of Agriculture (MoA) created a new Agricultural Investment Support Directorate that is currently negotiating long-term leases on over seven million acres of land for these commercial farms.  GOE also seeks to attract investors through incentives for priority export sectors - textiles/garments, leather, horticulture/floriculture and agro-processing.  Many Ethiopian goods are eligible for duty-free access to the U.S. market under the African Growth and Opportunity Act (AGOA).  The GOE has also made a recent push towards encouraging the local manufacturing of goods as a means of import substitution and eventual reduction of its trade deficit.   Leading non-agricultural sectors for U.S. trade and investment include: renewable energy, information technology and communications (ICT), construction, tourism and aviation.  Main U.S. exports to Ethiopia include: aircraft, trucks/vehicles, spare car parts, medical equipment, and pharmaceuticals.  The GOE has developed a list of approximately 200 eServices or electronic services needed to be developed in the next several years.  Nearly all tenders issued by the GOE's Privatization and Public Enterprises Supervising Agency (PPESA) are open to foreign participation.  Most of the 310 public enterprises sold since 1994 have been small enterprises in the trade and service sectors.  There are several examples of big privatized enterprises such as four breweries which were acquired by foreign enterprises including Heineken (Holland) and Diageo (UK).  About 50 public enterprises remain under PPESA control.

Selected Ethiopia Economic Highlights

• Ethiopia ranks 111th out of 183 countries in the World Bank's Ease of Doing Business report 2012.
• Ethiopia's population of approximately 84 million makes it one of the largest markets in Africa.  Gross Domestic Product (GDP) per capita was about $376 in the fiscal year (FY) 2010/2011 (Ethiopia's fiscal year ends on July 7), but overall GDP growth for the past five years has averaged 11% annually, according to Ethiopian Government figures.  The World Bank and the International Monetary Fund estimated FY 2010/2011's growth at 7.5%, while GOE stated it was 11.4%.
• Nominal GDP was $31.7 billion in FY 2010/11.  Agriculture accounted for 41% of GDP and employed over 80% of the population.  Approximately 85% of Ethiopia's population lives in rural areas.
• Year-on-year inflation peaked at 64% in July 2008, declined to the single digits in 2009 and 2010, but crept upwards to 14.5% in December 2010, 17.7% in January 2011, 38.15% in June 2011 and peaked at 40.6% in August 2011, driven mainly by a sharp increase in food prices.  Year-on-year inflation declined to 39.3% in November 2011 and 32% in January 2012.   
• Real interest rates are negative, as the minimum bank deposit rate of 5%, bond yield of 5.5%, treasury bills yield of less than 2%, and simple average rate of 12.25% are far lower than inflation.
• The GOE depreciated the Birr by over 90% against the U.S. Dollar since November 2007.  As of February 2012, the Birr traded at 17.31 per U.S. Dollar.  Prime Minister Meles Zenawi announced in February 2011 that no major currency devaluations would take place in the next five years.
• Ethiopia suffers from a continual significant trade deficit, though a declining trend appeared last year.  In FY 2010/2011, exports totaled $2.75 billion, while imports stood at $8.25 billion, leading to a trade deficit of $5.5 billion, which is very high but significantly lower than the $6.4 billion of last fiscal year.
• Ethiopia's major exports include coffee, oil seeds, gold, chat, flowers, pulses, and live animals.  Coffee is the leading export, constituting 30.6%% of total exports by value in FY 2010/11 followed by gold, which comprised 17% of total exports.
• The country's main imports include petroleum products, machinery, metal products, agricultural and industrial chemicals, fertilizers, medical and pharmaceutical products, and food grains.
• The major sources of Ethiopian imports in FY 2010/11 were: China (15.6%), Saudi Arabia (9%), India (7.2%), UAE (7%), Japan (5.4%), Italy (4.5%), Turkey (3.5%), and United States (3.4%).  The U.S. was the eighth largest import source, providing mainly grain and aircraft to Ethiopia.
• Ethiopia's top five export destinations in FY 2010/11 were: Switzerland (17%), Germany (11.5%), China (9.1%), Somalia (8.2%), and the Netherlands (6%).  The U.S. was Ethiopia's eight largest export destination (4.4%), mainly through purchases of coffee, oil seeds, and textiles/garments.
• For calendar year 2011, Ethiopia's imports from the United States totaled $690 million, with Boeing aircraft accounting for nearly two-thirds of the total.  Ethiopian exports to the United States in 2011 totaled $144.4 million, implying a $545.5 million deficit.
• U.S. businesses in Ethiopia are primarily involved in the following industries: soft drinks, aircraft sales, construction equipment, equity investments, real estate, agricultural machinery, farming, and engineering services.
• Chinese companies are active in Ethiopia's infrastructure sectors, while Indian and Saudi Arabian firms are mainly involved in the agricultural sectors.  Dutch companies play a prominent role in the floriculture sector.
• National elections were held in May 2010 with a landslide victory by the incumbent ruling party that has been in power since 1991.
• Since its' inception in late 2010, GOE is implementing the  five-year Growth and Transformation Plan (GTP) which envisages 11% annual average GDP growth as a base case scenario and 14.9% annual GDP growth as a high case growth scenario.  This has been widely labeled (including the International Monetary Fund and the World Bank) as ambitious, with large uncovered financial needs.