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THE STUDY LEGAL ASPECTS OF TRADE IN ETHIOPIA

NITA K. SOLANKI JIGNESH N. VIDANI

(COURSE CO-ORDINATOR - MANAGEMENT) (ASSISTANT PROFESSOR- MANAGEMENT)

RAI UNIVERSITY, RAI UNIVERSITY,
SARODA, AHMEDABAD, GUJARAT SARODA, AHMEDABAD, GUJARAT

ABSTRACT

Ethiopia has adopted a free market economic policy in 1992, and in line with this has
promoted private investment. With the introduction of market economy, Ethiopia has
implemented a number of reforms including the privatization of state owned enterprises,
liberalization of foreign trade, deregulation of domestic prices, and devaluation of the
exchange rate. The Birr has been fairly stable undergoing a gradual devaluation from 6.8 Birr
per U.S. Dollar. Ethiopia's exchange rate has remained fairly stable due to the government's
appropriate monetary policies and considerable foreign exchange reserves.

With its enormous resources, the country has untapped investment opportunities, huge market
access and low cost of doing business. The country has excellent climate, fertile soil and huge
domestic raw material base. Its location is strategic that makes it close to the lucrative
markets of the Middle East, Asia and Europe.

KEY WORDS: Ethiopia, Economic, policy, privatization, Birr, US Dollar.

INTRODUCTION TO TRADE AND INVESTMENT IN ETHIOPIA

Ethiopia's current road density is 30% per thousand kilometers with a plan to further the road
density by 41% between 2002 and 2007. This in effect brings about significant quality
improvement in import-export routes and other all-weather roads on major national routes.
The air transport and the shipping line are also providing efficient services. Air transport cost
for general cargo export is about USD 4.26/kg and USD 5.26/kg to Europe and USD 8.35/kg
to North America, whereas, for general cargo import the fare is USD 5.25/kg from Europe
and USD 16.73/kg from North America.

The pre capita power production is 28 KWh and the government is planning to increase
hydropower capacity of the country. The current tariff on electric power ranges between
0.41-0.57. Hydropower generation of electricity has also recently been opened up to private
foreign investors. The state-owned telecommunication service envisages increasing the
number of telephone lines over 760,000 with the aim of raising the lines to 12 lines per 1,000
persons.

The political situation of the country is stabilized. In Ethiopia, the labor force is estimated at
40 million, and labor remains readily available and inexpensive. The cost of labor is very low

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in Ethiopia with a wage of USD 1 a day for unskilled labor and average monthly salary of
USD 90 for a fresh graduate. Ethiopia has enacted a liberal investment law and the Ethiopian
Investment Commission has been established, which is making every effort in creating an
enabling environment for investment. The conducive economic environment encouraged
foreign direct investment. The data indicate that for the period between 1992 and 2005 a total
of 13,125 investors with an aggregate capital of 151.5 billion Birr have been licensed; out of
which 1,358 are foreigners with an aggregate capital of 38.9 billion Birr.

The country has currently reformed its investment code by broadening the sector coverage for
foreign participation. Accordingly, the newly included sectors are telecommunication, power
and air services. Thus, almost all sectors are open for foreign investors.

Nowadays, investors are no more expected to go to various government offices to get their
applications approved. The Ethiopian Investment Commission (EIC) is now serving as one
stop-shop facilitator, issuing investment permit, work permit, residence permit and allocation
of land for investment.

INVESTMENT INCENTIVES PROVIDED IN ETHIOPIA

Investors are eligible for investment incentives. Special incentive sectors and sub-sectors
include agricultural development and agro-processing, agricultural production, manufacturing
of equipment and machinery, spare parts, components and supplies, vehicle bodies, other
products and assembly plants, and publishing of printed goods; large-scale road and building
construction and other related works. Rural transportation facilities; and the purchase of
spraying machinery, trucks fitted with refrigeration facilities, or other equipment for support
services are also eligible for special incentive facilities.

An investor in one of these specified areas who meets the conditions for a qualifying
investment certificate, and who produces evidence showing the exact amount of the capital
invested within 30 days of commencement of operation, may qualify for incentives.

Incentives include:

 Exemption from payment of income tax for the period between 2 to 7 years depending
on the area of investment, volume of exporting and the location of investment; 100%
exemption from payment of import custom duties on all investment goods;
 Duty-free imports of spare parts up to 15% of the value of capital goods imported;
 Capital goods imported without the payment of import duties and other import taxes
may be transferred to another investor enjoying similar privileges;
 Exemption from custom duties or other import taxes are granted on raw materials that
are required in the production of export goods. Taxes and duties paid on raw materials are
drawn back at the time of export of finished products. The duty drawback scheme applies to
all taxed at the time of import, as well as those paid on local purchases.
 Exemption from any export taxes and other taxes levied on exports for Ethiopian
products and services destined for export;
 Carrying forward of losses during a tax exemption period for half of the tax holiday
period after the expiry of the tax holiday;
 Export products from Ethiopia to the European Union are entitled to duty reductions
or exemptions and are free from all quota restrictions under the Lome Convention. Trade

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preferences include duty-free entry of all industrial products and a wide range of agricultural
products including fruits, vegetables, pulses and oil seeds. Under the Generalized system of
Preference (GSP), a wide range of Ethiopia's manufactured products are entitled to
preferential duty treatment in the USA, Canada, Switzerland, Norway, Sweden, Finland,
Austria and Japan, as well as most European Union countries. Furthermore, no quantitative
restrictions are applicable to Ethiopian exports on any of the 3,000-plus items currently
eligible for Act (AGOA) & Everything But Arms (EBA) are the respective US and Europe
export market opportunities open for exports from Ethiopia. The country has also access to
23 African countries through COMESA.

INVESTMENT PROTECTION AND GUARANTEE IN ETHIOPIA

The Government encourages foreign investors to invest in a broad range of industries which
allows foreigners to hold up to 100% equity ownership. According to the investment
Proclamation, investors are legally protected against the expropriation and nationalization of
assets. In addition to this, Ethiopia has ratified the convention establishing the Multilateral
Investment Guarantee Agency (MIGA) of the World Bank Group. It has also signed bilateral
investment promotion agreements with a number of OECD (Organization for Economic
Cooperation and Development) countries.

The investment proclamation allows all foreign investors, whether they receive incentives or
not, to freely remit 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.

INVESTMENT LAWS IN ETHIOPIA

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

Land for investment purposes is obtained on lease and with prices set by periodic auctions.
Land leasehold regulations vary in form and practice from region to region. Nonetheless, they
all are best in attracting investments. Land could be obtained by paying nominal or fair
charges. In some priority investment areas, land could be availed even free of charges. There
are also industrial zones with adequate infrastructure facilities.

Ethiopia works hard to combat corruption through a combination of social pressure, cultural
norms, and legal restrictions. Although corruption exists, it is not a significant hindrance to
investment or trade in Ethiopia.

LABOUR LAWS IN ETHIOPIA

Ethiopia enjoys labor peace. The right to form labor associations and to engage in collective
bargaining is granted by law. Workers who provide critical services like health care are not
permitted to strike. The labour law has been revised to provide for strong work culture,
discipline and efficiency while safeguarding basic labour rights.

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PARTNERSHIP LAWS IN ETHIOPIA

Foreign firms are welcome to invest in privatization efforts of the Ethiopian

government.Since Ethiopia has launched the new market-oriented Economic Policy in 1992,
it has embarked upon the privatization of state-owned enterprises as an integral part of the
broader macro-economic reform.

Domestic and Foreign investors are encouraged to participate in the privatization process. In
order to accomplish the privatization process, the former Ethiopian Privatization Agency is
fused with the Public Enterprises Supervising Authority and has been re-established as
Privation and Public Enterprises Supervising Authority (PPESA) since August 2004. Under
PPESA there are well over 110 public enterprises for partnership and privatization in almost
all sectors of the economy.

PPESA is also working towards attracting foreign private partners for joint venture,
management contract and lease arrangements with public enterprises. This is in addition to
sale option for public enterprises.

PPESA is looking for domestic/foreign public/private partners for most of the public
enterprises it is supervising. In this regard, textile and garment, leather & leather products,
food processing, construction and agro-industries are given priority for partnership. Those
who are capable, experienced and committed investors are seriously looked for partnership. It
is believed that working with the existing enterprises would reduce investment requirement
and risks to new partners. There is also huge profit potential to be earned by proper utilization
of time and resources. Of course, there is a challenge to be overcome.

ETHIOPIAN TANNERY

Privatization of public enterprises through competitive bidding and transparent negotiated

sales are options available. Due considerations are given to expedite the process of
privatization with ensuring transparency, fairness and public accountability. The sale option
could be full or partial sale of shares as the case may be (see the annexed list of public
enterprises for partnership and/or complete sale out options for shopping).

ETHIOPIA’S COMPANY LAW

Company law is crucial in market economies; it sets the legal environment for the creation
and continuing operation of privately owned businesses. Good company law is especially
critical in transition-economy countries. It can encourage new investment—and provide
investor protection—by setting forth clear and objective rules for a company’s ongoing
internal governance; it can encourage entrepreneurship by making it easy to start up and
register a company; and it can encourage businesses to come out of the underground
economy into the publicly registered, taxpaying economy.

Ethiopia’s current company law is part of its Commercial Code, which has remained
unchanged since its enactment in Imperial times (1960). It is patterned after the French
Commercial Code as it was in effect in 1960. The company law was effectively suspended
during the Communist Derg period (1975–1991), when formation of new limited liability

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companies was not permitted. The company law was restored to full effect under the present
Government.

Although the current company law has been basically adequate for conditions to date, it
needs to be updated. The present Government recognizes this and appointed a committee
under the Department of Justice, which has been working on an updated version for more
than 2 years with completion said to be hoped for by early 2007. The committee currently has
a working draft but that draft is not publicly available.

One distinct issue involving company law is that of startup and registration of new
companies. Although that has been a problem in the past, it is no longer so according to all
persons who were interviewed, including practicing lawyers and accounting firm
professionals, company officials, registry officials, and donors. That is due to implementation
with donor help of revised and streamlined company registration procedures and forms in the
Ministry of Trade and Industry.

ETHIOPIA’S COMPETITION LAW AND POLICY

In recent years, Ethiopia has taken steps toward opening several sectors of the economy to
competition and to encourage and facilitate new entrants into those sectors. The Ethiopian
business community has responded very positively to these openings, as demonstrated by the
number of new Ethiopian entrants into the banking, textiles and floriculture sectors, for
example. The process of introducing free competition into the economy, however, is far from
complete. Despite new entry, important sectors are still overwhelmingly dominated by State-
owned enterprises, and the retail sector and financial services are, for the most part, closed to
competition from foreign firms. Government monopolies also continue to exist in energy and
other sectors.

Even in those sectors where economic liberalization has taken place through reducing barriers
to foreign competition and privatization of industry and services, expected economic benefits
can be short-circuited by private cartels, barriers created by dominant firms and by public
regulations. On April 17, 2003, to safeguard against private and public impediments to free
competition taking place, and as part of the move to introduce free market forces into the
Ethiopian economy, the Ethiopian Parliament passed the Trade Practices Proclamation No.
329/2003 (―TPP‖). This legislation states that the Government is committed to ―[establishing]
a system that is conducive for the promotion of a competitive environment, by regulating
anti-competitive practices in order to maximize economic efficiency and social welfare.‖ It
prohibits anticompetitive behavior and unfair or deceptive conduct by one competitor against
another; authorizes regulation of prices for basic goods and services in times of shortage; and
requires disclosure on labels of basic consumer information such as weights and measures.
The law also provides for the creation of two implementing institutions, the Trade Practices
Commission and the Trade Practices Secretariat.

Aspects of the law and institutions, however, make it difficult to use them as effective tools
for enhancing consumer welfare. First, the law has disparate goals—prohibiting
anticompetitive conduct, regulating unfair and deceptive conduct between individual
competitors, prohibiting importation of goods at prices that are below wholesale in the
country of production, regulating prices for basic goods and services, and regulating product
labeling—that divert enforcement from the most harmful anticompetitive conduct and dilute
limited enforcement resources. Second, the Trade Practices Commission that has

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responsibility for addressing abusive conduct by dominant players, many of whom are
Government-owned and controlled enterprises, is itself part of the Government’s Ministry of
Industry and Trade. Its members are high-level officials of other Government agencies such
as the National Bank. Third, the Commission has no staff of its own and virtually no budget.
The Trade Practices Secretariat does have a small staff of approximately five, but it has a
clerical, non-investigative, and non-prosecutorial function. Fourth, legal and economic
training in competition policy and law enforcement at the university level does not exist.

ETHIOPIAN TRADE LAW

Introduction to the law

Ethiopia’s trade regime contains the key provisions that support economic development,
although much of the supporting legal and institutional architecture to promote trade remains
underdeveloped. The structural adjustment program of the 1990s resulted in a streamlined
tariff structure with six bands, a maximum tariff of 35%, and a trade-weight average tariff
level of 17.5%. Despite the reforms to the trade regime in the 1990s and early 2000s,
however, additional reforms are needed before the regime is up to international standards of
―good governance‖; additional reforms are needed particularly in the areas of transparency,
due process, trade facilitation, and pro-poor strategy. Moreover, interviewees noted that
trade-supporting institutions, such as Chambers of Commerce, the courts, and trade-related
Government bodies, remain hampered by a lack of political latitude to reform their own
institutions and their inability to retain quality personnel.

The Government of Ethiopia’s decisions to apply for membership in the WTO and to sign a
bilateral partnership agreement with the EU both present excellent opportunities to further
modify the trade regime to ensure that Ethiopia’s trade policies make a maximum
contribution to the country’s development and to promote domestic and foreign investment.
Until Ethiopia submits to the WTO its memorandum on its foreign trade regime, however, the
WTO accession process will not begin in earnest, to the detriment of the economy as a whole.
Substantial work to revise legislation in the customs, intellectual property, and investment
laws will mark significant improvements to the trade regime and be supportive of increased
international trade.

LEGAL FRAMEWORK OF THE LAW

Overall Legal Framework

Ethiopia’s basic laws governing international trade are generallysound. Regarding

international trade, there are a number of legal, regulatory, and proceduralhurdles that, on one
hand, have the potential to stymie growth, but on the other hand, can befixed with relative
ease. According to private sector actors who engage in trade, the laws andregulations that
currently have the most restrictive impact on international trade transactionsinclude the
foreign exchange regulations administered by the NBE, the monopoly power of the State in
service areas (including shipping, financial services, and telecommunications), and the lack
of formal trade facilitative legal infrastructure such as transparency and due process
provisions.

The basic trade regime with regard to goods is, in general, non-discriminatory. Imported
goods appear to be treated no less favourably than domestic goods with respect to internal

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taxes and regulations. Except for the preferences noted in this section’s discussion of bilateral
regional trade agreements and duty exemptions provided in the investment regime, there is no
Discrimination on the basis of origin of imports. As noted earlier, trade in services is
restricted in certain areas. Interviewees, especially those from Government offices, expressed
serious concern over the potential loss of domestic service providers if the country proceeded
with full-scale liberalization in this area. With the upcoming accession process to the WTO,
the trade regime will be subject to rigorous examination, with this area being of particular
interest to the country’s trading partners.

Customs and Tariff Regime

Since 1993, the Ethiopian Government has implemented a series of customs tariff measures
that, by 2003, had resulted in Ethiopia having a six-band tariff structure, with a maximum
tariff of 35% and minimum of 0%. The 2002 version of theharmonized system has been in
place since January 1, 2003. Import tariffs are ad valorem (i.e., proportional to the value of
the product) and all export taxes have been abolished except the export tax on coffee, which
has been suspended since 2003. Quantitative import restrictions in the form of import bans
are applied only to five categories of imports: used clothing, certain drugs, seeds with
terminator gene technology, organic fertilizer, and soil and ethyl and denatured alcohols. In
addition, preferences are provided for in the Common Market for Eastern and Southern
Africa (COMESA) agreement and in Ethiopia’s bilateral trade agreement with Sudan, and the
second schedule of the tariff book contains a Schedule A, which addresses conditional
exemptions at reduced or zero rates, and a Schedule B, which covers general exemptions for
importation by or on behalf of privileged organizations, privileged persons, public bodies,
and institutions.

The laws governing customs and the customs clearance process are scattered through several
proclamations. At the request of ECuA, however, a Customs expert working with the USAID
Doha Project for WTO Accession and Participation–Ethiopia prepared a comprehensive draft
customs law that is fully consistent with WTO and World Customs Organization
requirements. A Customs Authority team has revised this draft and has circulated it to
stakeholders for comment.
Although international experts who have reviewed the draft have suggested changes to the
Customs Authority’s draft to make it fully compatible with WTO rules, the important point is
that the ECuA is seeking to have in the near future a revised Customs Law that will allow
ethiopia to have, by the time it joins the WTO, a law that is fully consistent with WTO rules,
with requirements of the World Customs Organization, and with the draft COMESA Customs
Management Act. This new law will address gaps in the areas of customs valuation, rules of
Origin and Customs’ authority to administer modern inspection techniques, such as post-
release audits. In light of the advanced state of this legislation, this Report does not address
existing Customs legislation.

WTO Accession

Ethiopia’s decision in January 2003 to start the WTO accession process came after the
country had held observer status for about 6 years. The Government established a steering
committee to oversee the process and a technical committee to undertake the technical work.
The technical committee, with representatives drawn from the relevant Government
institutions that regulate aspects of international trade, prepared the draft Memorandum on

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the Foreign Trade Regime, which is awaiting approval by the Council of Ministers. More
than one interviewee noted that this body still lacks substantial and necessary oversight
capacity given its important role in joining the WTO and in harmonizing Ethiopia’s trade
regime. To address the concerns of the private sector and other stakeholders, the Government
needs to establish a mechanism for meaningful and timely consultations with these groups
during the WTO accession process and for the negotiation of other trade agreements. This is
an area of particular concern to traders who view (rightly or wrongly) Government officials
as relatively less informed of the implications of the policies that they set.

Before the decision to join the WTO was made, the Government conducted an
impactassessment study during the country’s observer status period to assess the implications
of accession on national economic policies and strategies. The study found that most of
Ethiopia’s trade-related laws, rules, and regulations were consistent with the WTO
agreements. Since applying, Ethiopia has also undertaken, with donor assistance, impact
assessment studies on: (a) agriculture, non-agricultural products, and a few services sectors
with funding from the EU and (b) with UNDP funding, the agreements on (i) Sanitary and
Phyto-sanitary Measures, (ii) Technical Barriers to Trade, (iii) Trade Related Investment
Measures, and (iv) Customs Valuation. The World Bank is funding ongoing impact
assessment studies on the telecommunication and financial services. Ethiopian leaders have
been particularly eager to learn from the experiences of other countries that have acceded to
the WTO.

Given that Ethiopia is still early in the WTO accession process, the extent to which the
process will result in changes to Ethiopian laws and regulations is difficult to predict.
However, one can expect that the trade regime will have to become much more transparent.
Although proclamations and Council of Ministers–issued regulations must be published in
the Ethiopian Federal NegariGazetat, the official gazettes, directives issued by ministries and
agencies do not have to be published, and many are not. Further, some ministries and
agencies do not have websites, and even those that do have websites do not always include on
them the consolidated updated versions of their laws, regulations, and directives. Two
agencies whose regulations have a direct impact on international trade, the ECuA and the
NBE, do have websites that post a number of their regulations; these websites, however,
could be made more user-friendly.

The impact assessment studies and interviews with key stakeholders suggest that, in addition
to the need for a more transparent trade regime with more complete advance publication of
laws, regulations, and directives affecting trade, Ethiopia must strengthen its standards-
setting regime.
This regulatory reform is necessary to ensure effective oversight of the way agencies impose
new mandatory standards; to strengthen the ability of agencies to help exporters satisfy both
mandatory and voluntary foreign health, safety, and quality standards; and to ensure the most
efficient use of Government resources.

Bilateral Trade Agreements

Ethiopia has signed nearly 100 bilateral trade and trade-relatedagreements. Many of these
agreements provide for most favoured nation (MFN) tariff treatment with countries that are
already WTO members or are acceding countries. A number of agreements with
neighbouring countries deal with transportation-related matters, such as road transport. The

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2002 preferential trade agreement between Sudan and Ethiopia provides for duty free trade
between the two countries. Imports from Djibouti of salt, fish and fish products, an bottled or
canned water are also exempt from duty.

Developed countries are Ethiopia’s most important trading partners. For this reason, the
preferential access that Ethiopia enjoys in developed country markets under programs such as
the EU Everything But Arms and the U.S. African Growth and Opportunity Act is important
to Ethiopia. About 28% of Ethiopia’s exports go to the EU, 7% to Japan, and 4% to the
United States. These flows are often volatile, however, reflecting in large part the degree to
which Ethiopia’s economy is tied to rain-fed agriculture.

Regional Trade

Ethiopia is a founding member of COMESA and as part of its commitment to regional

integration applies tariffs on imports from COMESA countries that are 10% below the MFN
tariff. Ethiopia has not, however, joined the COMESA Free Trade Area, which provides for
elimination of duties on trade between COMESA members. Ethiopia has signed a regional
agreement on economic integration with the Inter-Government Authority on Development
(IGAD), which is composed of Djibouti, Eritrea, Ethiopia, Kenya, Somalia, Sudan, and
Uganda. Ethiopia is also a member of the African Caribbean and Pacific European Union
(ACP–EU) Economic Partnership Agreement and participates in negotiations to establish an
Economic Partnership Agreement with the EU.

However, regional trade does not account for a large percentage of Ethiopia’s total trade.
Because of chat exports, Djibouti accounts for 22% of Ethiopia’s exports, but aside from
chat, Ethiopia’s recorded trade with its neighbors is relatively insignificant.

State Trading

Ethiopia still has a number of State enterprises engaged in the production

andcommercialization activities of goods and services. Ethiopian law provides that certain
Stateenterprises or agencies have the exclusive right to import specified products. For
example, the Petroleum Enterprise has the monopoly to import and distribute petroleum
products; the Ethiopian Telecommunication Corporation has the exclusive right to import
communications apparatus; the National Lottery Administration has the exclusive right to
import gaming machines, lottery tickets, and games; the Ministry of Defense alone may
import armaments, dynamite, and fire guns; and only the Ethiopian Tobacco and Cigarette
Enterprise may import cigarettes.

Competition Policy and Trade Remedies Legislation

The Trade Practice Proclamation (Proclamation No. 329/2003) lists anti-competitive

practices as ―price fixing, collusive tendering, and consumer segmentation, allocation of
quotas of production and sales, and refusal to deal or sell.‖ Although the Commercial Code of
Ethiopia contains articles on competition issues, such as Articles 130–134; the Commercial
Code focuses more on preservation of the good will of a competitor. The new proclamation is
relatively comprehensive and seeks to address competition problems arising between
business competitors and between businesses and consumers. Competition policy issues are
fully discussed in the section on Competition Law and Policy.

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The Trade Practices Proclamation identifies dumping as an anti-competitive practice, but the
Proclamation does not require investigations to follow the procedures established by WTO
rules. Ethiopia currently has no other trade remedies legislation.

INSTITUTIONS HELPING IN IMPLEMENTING THE LAW

Under the Ethiopian Constitution, the House of People’s Representatives is the highest
authority of the Federal Democratic Republic of Ethiopia (FDRE) and its authority includes
the power to enact specific laws on inter-state commerce and foreign trade. The highest
executive power is vested in the Prime Minister and the Council of Ministers. The Council
ensures the implementation of laws and decisions adopted by the House of People’s
Representatives, and is also responsible for formulating and implementing economic and
foreign policies.

The Ministry of Trade and Industry (MoTI) has lead authority for implementing trade
policies. Article 35 of the Commercial Registration and Business Licensing Proclamation No.
67/ 1997 provides that State institutions are to consult with MoTI before making policy
decisions that may affect commercial activities, and MoTI may propose policies to promote
trade and to coordinate trade policy. In addition to MoTI, the Ministry of Agriculture and
Rural Development, the Ministry of Revenues, and the Ministry of Foreign Affairs are also
responsible for implementing laws related to foreign trade. The Investment Authority,
Quality and Standards Authority, and Export Promotion Agency also have roles in
international trade, and are accountable to MoTI. Monetary policy, including policies on the
availability of foreign exchange for international trade activities, are initiated by the Ministry
of Finance and Economic Development, in cooperation with the NBE and related
organizations. The Ministry of Revenues is the principal entity for initiating and
implementing policies with respect to customs and duties, and the ECuA is accountable to the
Ministry of Revenues.

INSTITUTIONS SUPPORTING THE LAW OF TRADE

This Report’s section on Trade in Goods and Services details the institutions that support the
implementation of trade policies in Ethiopia. Of particular note is the role of donors in
supporting Ethiopia WTO accession. Donors, in consultation with the WTO Affairs
Department of MoTI, have developed a WTO Accession Roadmap that identifies the
activities that donors are planning to support WTO accession.

The formulation of effective trade policies requires meaningful consultations with the private
sector and other stakeholders. Although there are some public/private sector consultation
mechanisms in place, a more comprehensive and more elaborate system is probably needed
to ensure effective and meaningful consultations. Fortunately, donors are supporting the
strengthening of private sector institutions, such as the national and city Chambers of
Commerce and other associations (e.g., Ethiopian Women Exporters Association), and this
support should enable private sector associations to provide more meaningful contributions to
the policy formulation process.

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SOCIAL DYNAMICS RELATING TO THE LAW OF TRADE

The Government of Ethiopia places a high priority on the promotion of Ethiopian exports.
Although supply-side constraints such as the transportation infrastructure and
competitiveness of producers pose the biggest challenges to achieving the Government’s
export promotion goals, improving the policy environment for trade can make a positive
contribution. WTO accession and the Economic Partnership Agreement (EPA) negotiations
with the EU both offer the Government major opportunities for obtaining and focusing donor
support on efforts to improve the trade policy environment. Both the private sector and the
Government are becoming increasingly aware of the importance of these two negotiations.
Fortunately for Ethiopia, the reforms and policy changes that Ethiopia needs to undertake to
join the WTO are the same reforms it needs to undertake to succeed in, and benefit from, the
EPA negotiations.

FOREIGN DIRECT INVESTMENT

Introduction to the Law

Too many sectors of Ethiopia’s economy are closed to foreign investment. Although
international corporations do not normally operate in some of these sectors, the
restrictionsproject a generally negative image to potential foreign investors in Ethiopia. In
some of theclosed sectors, in particular air transport, travel operations, and financial services,
the financial and trading skills of foreign investors would likely be a positive influence on
domestic investors and stimulate domestic investment activity. In addition, the Government
should review and reduce or eliminate its current minimum investment requirements.
Moreover, although the Ethiopia Investment Agency (EIA) has taken many positive steps
toward encouraging private investment, it lacks resources in terms of the necessary scale and
content of its investment promotion activities; its staffing, equipment, and information
resources; and its access to and status with other Government departments and agencies. To
undertake effective promotional work, the EIA should be strengthened.

LEGAL FRAMEWORK OF THE LAW

National policies on investment are critical for encouraging and facilitating foreign
investment and maximizing the benefits from it. Ethiopia’s current regulatory regime,
governing both foreign and domestic investment, has undergone significant changes as part
of the reform process started in 1992–1993. The investment regime in Ethiopia is based on a
series of investment proclamations issued between 1996 and 2003.In combination, these laws
specify the economic sectors that are open both to domestic and foreign direct investment
(FDI); the financial limits and requirements for FDI; the monitoring and reporting
requirements; and the financial incentives that are available.

FDI Admission under Ethiopian Investment Law

Unlike many other transition countries, Ethiopia does not have a separate law for FDI.
Rather, its various investment proclamations govern both domestic investment and FDI.
There are significant distinctions, however, among the type of investments foreigners and
domestic investors may make.

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Sectors open to FDI:-Foreign investorsare permitted to invest in all economic sectors except
those reserved for domestic private sector or State investment. The domestic private investor
category includes foreign nationals who are permanent residents19 in Ethiopia and who have
requested domestic investor status. Moreover, foreign nationals of Ethiopian originwill be
considered as domestic investors pursuant to Proclamation 270/2002, even when they are not
permanent residents of Ethiopia, so long as they have an Ethiopian identification card
attesting to their Ethiopian origin.

Sectors open only to the State:-Sectors exclusively reserved for investment by the State
currently include: transmission and supply of electrical energy through the Integrated
National Grid System and postal services, with the exception of courier services and air
transport services using aircraft with a seating capacity of more than 20
passengers.Manufacturing of weapons and ammunition as well as the provision of
telecommunication services are open to foreign and domestic investors only when they invest
in a joint venture with the State. Investment in generation of electricity (though not its
transmission) from hydropower is allowed for both foreign and domestic investors, without
any limitation on generation capacity.

Sectors open to domestic investors:-A number of sectors are currently reserved for domestic
investors, including wholesale trade and distribution (excluding fuel and the domestic sale of
locally produced goods from FDI plants); importing (except material inputs for export
production); exports of raw coffee, oil seeds, pulses, hides and skins (if bought from the
market), and live sheep, goats, and cattle (if not fattened by the investor). Foreign investors
are also excluded from the following services and manufacturing activities: construction
companies (excluding grade-one contractors) and building maintenance; tanning hides and
skins up to crust level; hotels other than those ―star-designated‖; motels, tearooms, coffee
shops, bars, nightclubs, and restaurants, excluding international and specialized restaurants;
tour and travel operators; car-hire, taxis, and commercial road and water transport; grain
mills; barber and beauty shops; goldsmiths; non-export tailoring; saw milling and non-export
forest products; customs clearance services, museums, and theaters operation; and the
printing sector.

Sectors open to Ethiopian nationals:-Investment in sectors that the Ethiopian Government

considers strategic is reserved to Ethiopian nationals; that is, foreign nationals permanently
residing in Ethiopia and foreign nationals of Ethiopian origin, even if they are considered
domestic investors, cannot invest in these sectors. The sectors, which are open only to
Ethiopian nationals, include banking, insurance, broadcasting, air transport with seating
capacity of up to 20 passengers, and forwarding and shipping agency services.

Ownership Limitations and Requirements

Under Article 11 of Proclamation 280/2002, any foreign investor who is allowed to invest
pursuant to the proclamation must allocate a minimum amount of investment capital. The
proclamation defines ―capital‖ broadly to cover local or foreign currency, negotiable
instruments, machinery or equipment, buildings, initial working capital, property rights,
patent rights, or other business assets. The Ethiopian Government has relaxed the minimum
capital required for foreign investors in its series of Investment Amendments. Pursuant to
Proclamation 280/2002, a minimum investment capital is required for wholly-owned

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operations and joint ventures. For wholly-owned FDI in the open sectors, an initial
investment of US$100,000 is required. For joint ventures with Ethiopian investors, the
foreign investor is expected to contribute a minimum equity of US$60,000, either in cash or
capital equipment. In the areas of engineering, architectural, accounting and audit services,
project studies, and management consultancy services, US$50,000 is required if the
investment is wholly owned by the foreign investor, and US$25,000 if it is made jointly with
a domestic investor. This minimum capital requirement is not applicable for a project that
reinvests its profits or dividends or exports 75% of its production. The potential investor who
intends to export 75% of his or her production should specify the same in the articles of
association when the company is registered to benefit from the waiver of the minimum
capitalization requirement. Other than the minimum capitalization requirement, there is no
requirement for a minimum level of domestic equity participation under Ethiopian investment
law. Once an investment project is established and operational, it is clearly left to a
company’s managers to make all key decisions without Government authorization or
interference.

Investment Incentives
Ethiopia offers a number of incentives to investors. First, they are fully exempted from
customs duties and import tariffs on all capital equipment and up to 15% on spare parts and
from export taxes. Income tax holidays are given, varying from 1 to 5 years (depending on
the sector and region within Ethiopia). In addition, investors can carry forward initial
operating losses and are free to use any depreciation method in their financial statement.
Investment guarantees for FDI include full repatriation of capital and profits. The term
―capital and profits‖ encompasses profits, dividends, interest payments on foreign loans, asset
sale proceeds, and technology transfer payments. With regard to investment protection,
Investment Proclamation 280/2002 provides protection against expropriation or
nationalization. It states that no private investment may be nationalized or expropriated
except when dictated by public need, and then only in accordance with the law.
In the event of nationalization or expropriation, the constitution guarantees advance payment
ofadequate compensation corresponding to the prevailing market value of the investment.
There has been no instance of expropriation since the assumption of power by the current
Governmentin 1991.

Because Ethiopia does not distinguish domestic investment from FDI, the country’s
incentivessystem is the same for both. This is a sound, non-discriminatory policy, and it is
also the directionpursued by some countries that started with the two-policy strategy. The
only possible―discrimination‖ occurs in the pre-admission subsector restrictions discussed
earlier in thissection.

Post-Admission Restrictions: Performance Requirements

Ethiopian FDI policy does notexplicitly require foreign firms to meet specific performance
goals or guidelines, such as exportlimitations, foreign exchange restrictions for imports,
minimum local content levels inmanufactured goods, or employment limits on expatriate
staff. In some countries, once a foreigninvestor is permitted to enter the host state, restrictions
can still be imposed on the ownership oroperation of the foreign investment. The most
common forms of post-admission restrictions are performance requirements, which are used
to optimize the impact of FDI. Performance requirements are stipulations, imposed on
investors, requiring investors to meet certain specifiedgoals with respect to their operations in

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the host country. Broadly speaking, Ethiopianinvestment laws do not have any significant
post-admission restrictions.

Screening and Registration

Together with the application for an investment permit, a potentialinvestor must submit
supporting documents. The EIA will, upon receipt of the documents, issuea certificate of
registration evidencing the formation of a branch of an overseas company.
The operation of any business organization in Ethiopia will be governed by the 1960
Commercial Code of Ethiopia, which recognizes the following forms of business
organizations:
(a) general partnership, (b) limited partnership, (c) share company, and (d) private limited
company.

The most common of these are private limited and share companies. Any two individuals
may set up a private limited company, but a minimum of five founders is required toestablish
a share company, which is a public company. An individual investor may also invest asa sole
proprietor, with full equity ownership in most areas.
Areas open for joint-venture investment with the Government are the manufacture of
weaponsand ammunition and telecommunication services. By reducing the minimum capital
requirement, the investment proclamation encourages joint ventures with Ethiopian
individual’s andcompanies. Partially or fully foreign-owned companies may sell their shares
in accordance withthe law. However, there are no stock markets to facilitate the quick
disposal of shares.

Acquisition of Immovable Property and Access to Capital

Articles 390–393 of the Ethiopian Civil Code prohibit foreign ownership of immovable
property except by ―imperial order.‖However, Article 38 of Investment Proclamation
280/2002 gives a foreign investor the right toown a dwelling house and other immovable
property necessary for his investment. Article 38 ofProclamation 280/2002 can, therefore, be
considered an exception to the Civil Code.
Legally established foreign companies in Ethiopia have access to domestic bank loans on the
same terms as domestic investors. Exporters also have access to external loans and suppliers’
orforeign partners’ credit in keeping with the directives of the National Bank of Ethiopia
(NBE).However, foreign investors must have their investment capital, external loans, and
suppliers’ orforeign partners’ credits registered with the NBE.

Access to Land
The 1993 Urban Land Proclamation gives investors the use right of land onleasehold for
periods of up to 99 years. The land cannot be mortgaged or sold, but the lease valueof the
land and the fixed assets thereon may be mortgaged or transferred to a third party.
Stategovernments and municipal administrations are authorized to allocate rural and urban
land freeof charge or on lease, in accordance with the provisions of their laws. Investment
projects insocial services, such as hospitals and educational institutions, may acquire land
free of charge,while export-oriented investment schemes may obtain land at reduced lease
prices. All otherprojects may rent land through public auction or through negotiation with the
relevantauthorities.
Regional governments are expected to allocate land to investors within 60 days of receiving
theirapplications. Article 35 of Investment Proclamation 280/2002 provides that ―[when] a
regional government receives an application for the allocation of land for an approved

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investment, it shall deliver within 60 days, the required land to the investor.‖ However, this
does not always occur in practice because there is no sanction if a regional or local
government does not meet the 60-dayrequirement. The lease price of urban and rural land
varies according to location, type ofinvestment, and class of land. The high cost of land lease
and the lengthy bureaucratic processare considered impediments to investment inflows. This
Report’s section on Real Property discusses the adverse effects on foreign and domestic
investment of the current land laws andprocedures and makes a number of recommendations
on how they can be addressed.

Exchanging and Remitting Funds

A foreign investor has the right to take the followingremittances out of Ethiopia in
convertible foreign currency:
• Profits and dividends;
• Principals and interest payments on external loans;
• Payments related to technology agreements;
• Proceeds from the sale or liquidation of an enterprise; and
• Proceeds from the sale or transfer of shares or partial ownership of an enterprise to a
domestic investor.
Although Article 20 of Proclamation 280/2002 guarantees to foreign investors the right to
makeremittances, domestic investors who do not have the same assurance and remittances are
subjectto NBE approval. Also the trading rights of foreign investors are limited because
import andexport trade, except material inputs for export products, is reserved for domestic
investors.
Ethiopia has signed the World Bank’s convention on the settlement of Investment Disputes
andNationals of Other States. A Multilateral Investment Guarantee Agency (MIGA)
guaranteeprogram is also operational.

Exit from FDI

The Commercial Code of Ethiopia (1960) provides for the dissolution andwinding up of
legally established business organizations. The possible reasons for dissolution ofthe different
types of business organization recognized by the Commercial Code are alsoprovided.One
legitimate reason for the dissolution of a share company, for example, may be the
resolutionof an extraordinary general assembly of shareholders. Having resolved to liquidate,
the generalmeeting must appoint liquidators, if provisions are not made for such appointment
in thememorandum or articles of association. The liquidators must follow the rules and
procedures ofthe Commercial Code in liquidating the share company.

Private limited companies and joint ventures may be voluntarily liquidated according to the
provisions of their memorandum or articles of association and according to the Commercial
Code. The liquidation processes of joint ventures must also consider joint-venture
agreements.Article 218 of the Commercial Code provides for the dissolution of a business
organization ―forgood cause‖ by court order at the request of a partner. Foreign investors may
also exit by sellingor transferring their assets, shares, or enterprises. Foreign investors have
the right to remitproceeds from the sale or liquidation of an enterprise and from the transfer
of shares or partialownership of an enterprise to adomestic investor. Article 1155 of the
Commercial Code also provides that commercial business organizations may be adjudged
bankrupt.

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Dispute resolution
The legal system in Ethiopia follows theContinental legal tradition, andmost disputes—
investment andothers—are resolved throughlitigation in court, althougharbitration and
alternative disputeresolution are becomingincreasingly popular. Some legislation, such as the
employment law, expressly encourages the mechanisms of mediation and negotiation

IMPLEMENTING INSTITUTIONS OF FDI LAWS

The Ethiopian Investment Agency is the principal government organ responsible

forpromoting, coordinating, and facilitating foreign investment in Ethiopia. It is accountable
to theBoard of Investment chaired by the Minister of Trade and Industry.
The EIA has been restructured recently with a view to promoting more FDI and to improving
theservices provided to investors. It is now organized into four functional departments:
• Investment Promotion and Public Relations;

Stages in Implementing an FDI Project in Ethiopia

1. Application to the EIA
2. Investments permit within 4 hours (EIA)
3. Business registration within 6 hours (EIA)
4. Registration of technology transfer agreement, if any, in 2
hours (EIA)
5. Approval of duty-free capital goods within 1 day (Ministry of
Revenue)
6. Approval for opening foreign currency account within 1 hour
(National Bank of Ethiopia)
7. Registration and approval of foreign investors
8. Loan/supplier’s credit in 7 days (National Bank of Ethiopia
9. Registration of investment capital within 2 days (National
Bank of Ethiopia)
10. Tax registration within 1 hour (Inland Revenue Authority)
11. Work permit for expatriates in 1 hour (EIA)
12. Business license in 6 hours (EIA)
13. Start of operations
Source: Ethiopian Investment Agency Client Charter
• Investment Facilitation and Aftercare;
• Planning and Research; and
• Licensing and Registration.
• With respect to foreign and domestic investment, the EIA is responsible for the
following tasks:
• Issuing investment permits, work permits, trade registration certificates, and business
• licenses as part of its one-stop-shop service;
• Promoting and facilitating FDI, including the registration of technology
transferagreements and export-oriented non-equity-based collaborations with foreign
enterprises;
• Monitoring the implementation progress of licensed investment projects;
• Negotiating and, upon Government approval, signing bilateral investment promotion
andprotection treaties with other countries; and

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• Advising the Government on policy measures needed to create an attractive

investmentclimate for investors.
The EIA is always trying to improve its service delivery. However, some of the
peopleinterviewed said that the EIA has limited capacity to promote and facilitate investment.
Inparticular, there are constraints in terms of providing adequate information on
investmentopportunities and sources of capital, and in advising the Government in how to
improve the
internal policy environment.

FDI SUPPORTING INSTITUTIONS

Ethiopia has a number of private sector institutions involved with trade and investment.
These include the Ethiopian Chamber of Commerce and Sectorial Association; the
AACCSA; and the Ethiopian Coffee Exporters Association.

Ethiopian Chamber of Commerce and Sectorial Association

Established in 1947, theEthiopian Chamber of Commerce is an umbrella organization
consisting of 12 city chambers, including the AACCSA. Its main activities include
coordinating the activities of the 12 citychambers; finding foreign markets for exportable
commodities; organizing exhibitions, seminars,and trade fairs; and preparing commercial
journals and conducting studies.
The services of the Ethiopian Chamber of Commerce and Sectoral Association, as well as
thoseof all the other city chambers, are limited as a result of financial constraints, lack of
sufficientoffice space, and, especially, the absence of a coherent policy framework. In
general, thechambers lack competent staff as well as modern communication facilities such
as fax, telephones, and computers. To improve the service of the chambers, staff must be
trained in anumber of areas, including assessment of markets and research.

Addis Ababa Chamber of Commerce and Sectorial Association

The AACCSA is by far thelargest, oldest, and most influential organization of its kind in the
country. Its functions includeproviding technical and advocacy services to the business
community; organizing trade fairs andoverseas trade missions; providing business skills
training; publishing business directories andadvisory leaflets; and conducting specific studies.
Most important, it serves as a bridge betweenthe Government and the business community in
Addis Ababa. It is the only representative bodythat speaks with authority on behalf of the
business community. The AACCSA advocates for andrepresents the business community
through reports and regular meetings with Governmentofficials as well as through the press
and media.
The AACCSA disseminates information not only on business developments in Addis Ababa,
butalso on the economy as a whole. Such information includes information on national
economic and social indicators, trade regulations and procedures, country profiles, business
opportunitiesin other countries, technology information, and a list of international
conferences, seminars, andexhibitions. Additional information is disseminated through its
two bimonthly newspapers, Trade and Development (in Amharic) and Addis Business (in
English). In addition, the AACCSA publishes the Addis Ababa Business Directory every 2
years.

Ethiopian Coffee Exporters Association

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The main objectives of the Ethiopian Coffee exporters Association (ECEA) include
improving the quantity and quality of coffee productionand export; standardizing and
streamlining coffee trading among and between members andcoffee traders; establishing and
ensuring a just, fair, and honest commercial code of conduct; andadvocating the views and
opinions of the ECEA to the Government and other concernedagencies on measures
regarding the production, quality, and trading of coffee. ECEA providesmarket information
and training to its members. It also participates in trade fairs and trademissions. The effective
delivery of its services is limited, however, due to financial constraints, including lack of
sufficient staff members.

CONCLUSION
Ethiopia has great potential to be regarded as a promising country in which to invest. The
potential size of the domestic market is one of its attractions. Because most of the private
sectorviews the economy as moving in the right direction, even if it is doing so at a pace
much slowerthan it would prefer, the market potential is regarded as a strong plus, although
the population of 77 million is poor even by African standards. Ethiopia’s long history is
another unusual feature, which contributes to its stability as a state andgives it an asset with
commercial value, if it can be properly exploited, to attract tourism.

Although the country is marked by a great variety of regions, languages, and ethnic groups, it
isfree of tensions between its two major religions, Christianity and Islam, and notably free of
Crime and corruption. The absence of what might be called routine grand corruption is
perhaps the most notable featureof the Ethiopian business environment. This is unusual not
only compared to other Africancountries, but also compared to the developing world as a
whole. As elsewhere in developingcountries, investors complain in Ethiopia about
bureaucratic hassles and delays, but unlike inmost other developing countries, in Ethiopia
being asked to make ―unofficial‖ payments are rare.

Although routine bureaucratic corruption is largely absent in Ethiopia, the Government has
reacted to some actual or suspected cases of corruption with strong anti-corruption measures,
which some investors view as an overreaction that has unhappy and unintended
consequences.

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