#Ethiopia: Liberalization of Key Investment Sectors
The Ethiopian Investment Board has issued Directive No. 1001/2024 ("Directive") allowing foreign investors to enter sectors previously reserved for domestic investors. The Directive is a significant policy shift from what has defined Ethiopian investment policy since the early 1970s. This brief explores the key elements of the Directive and the anticipated changes.
Permitted Sectors for Foreign Investment
Under the Ethiopian Investment Regulation No. 474/2020 ("Regulation"), 32 investment sectors are exclusively reserved for domestic investors. Among the key sectors included in this list (with exceptions applying) are banking & insurance services, wholesale trade, retail trade, import trade, export trade of selected commodities, hospitality services, transport services, legal services, etc. With the new Directive, Ethiopia has taken a step toward liberalizing a few of these protected sectors as described below.
Export Trade
Ethiopia's export trade, which includes key commodities such as raw coffee, khat, oil seeds, pulses, hides, skins, forest products, poultry, and livestock, is the primary source of export revenue generating up to USD 3 billion annually. Consecutive investment laws have reserved the sector for domestic investors. The Directive now opens export trade to foreign participation, subject to the following preconditions and export thresholds:
- To engage in coffee export, the investor must have been procuring coffee from Ethiopia at an average of USD 10,000,000 annually for three consecutive years.
- The exporter is undertaking to export USD 10 Million worth of coffee in the year of obtaining the export permit.
Similarly, to export commodities like khat, oil seeds, pulses, hides, skins, poultry, and forest products, investors must meet minimum thresholds ranging from USD 500,000 to USD 1 million. The Directive further stipulates that new investors without a prior history of procuring these commodities from Ethiopia may participate in the export business if they demonstrate an established market presence and secure purchase orders. These orders must meet the following amounts: USD 12.5 million for coffee, USD 7.5 million for oil seeds, USD 1.5 million for khat and pulses, and USD 750,000 for hides, skins, poultry, and forest products.
Import Trade
The Directive allows foreign investors to import and sell products without restrictions, except fertilizer and petroleum imports. Manufacturers and their agents are permitted to import products they manufacture abroad. Meanwhile, investors who are neither manufacturers nor agents must enter into a contractual obligation with the Ethiopian Investment Commission to import a minimum of USD 10 million worth of commodities. Failure to meet this threshold will result in suspending or revoking their investment license.
Wholesale and Retail Trade
Under the Investment Regulation, foreign investors were only permitted to wholesale petroleum and petroleum products and goods they have manufactured in Ethiopia. The Directive now permits foreign investors to engage in wholesale trade, without restriction, both as importers and purchasers from local manufacturers.
Similarly, retail trade was prohibited to foreign investors under the Regulation. The Directive has changed the rules to allow foreign investors to engage in retail trade, albeit with preconditions. Large-scale retail outlets, such as supermarkets, hypermarkets, and malls, may retail their products subject to prior agreement with the regulator that includes the following commitments:
- Lease at least 2,000 square meters of land and establish five supermarkets within three years.
- Lease at least 5,000 square meters of land and establish two hypermarkets within three years
- Lease at least 10,000 square meters of land and complete construction before starting retail operations
Regulatory Oversight
The Directive assigns responsibilities to various regulatory bodies to ensure smooth and proper implementation. Relevant public agencies regulating the export sector are tasked with ensuring fair market competition and a level playing field in both the export and import sectors. Responsibilities include:
- Periodic review of export destination market prices
- Minimum price-setting scheme
- Pre and post-export price control system.
- Consumer protection measures
On the other hand, the Ethiopian Investment Commission, fulfilling its overarching mandate, will handle the registration and licensing of foreign investments and execute the required contractual arrangements.
Conclusion
The liberalization introduced by the Directive marks a fundamental policy shift that has historically shielded sectors like export, import, retail, and wholesale trade from foreign involvement. Presently, the Directive represents a cautious approach to liberalization, stipulating numerous preconditions and eligibility criteria for potential investors. These include a prior import history from Ethiopia, minimum financial thresholds, and mandatory contractual commitments with regulators. These conditions are intended to attract large-scale strategic investors with the potential to generate significant revenues and introduce transformative changes to the economy.
In outlining the rationale behind its enactment, the Directive points out that previous investment policies, which focused on domestic growth and integration into the global value chain, have failed to yield expected results and have faced issues with unfair competition and unlawful practices. While aiming to correct these challenges, the Directive suggests further liberalization to follow.
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