Trade and entrepreneurship in Ethiopia

Ethiopia at a glance

Ethiopia is officially known as the Federal Democratic Republic of Ethiopia (FDRE) and is situated in the Horn of Africa. It is bordered by Eritrea to the north, Kenya to the south, Djibouti and Somalia to the east and Sudan to the west.  It occupies a total area of 1,100,000 sq.km with an estimated population of 91,73 million.

With regard to Ethiopia’s political conditions, Ethiopia was ruled, for much of the 20^th century, by highly centralized governments but it transformed to federal system in 1995 when the Ethiopian state adopted a new constitution that established the Federal Democratic Republic of Ethiopia. Meles Zenawi led Ethiopia’s government since 1991 with the Ethiopian People’s Revolutionary Democratic Font (EPRDF) until he died in August 2012. After Zenawi’s death, his successor, Hailemariam Desalegn, was sworn in as prime minister of Ethiopia in September 2012 pointing a new era for the Ethiopia and its political system.

Likewise, Ethiopia has made a lot of progress in the economic sector where it has experienced a robust growth of 6.9% in 2012 which made it one of the fastest and best performing economies of Africa. As a result of this, economic growth’s increase contributed in reducing poverty: 38.7% of Ethiopians lived in extreme poverty in 2004-2005, five years later this was 29.6%, which is a decrease of 9.1 percentage points as measured by the national poverty line, of less than US$0.6 per day.

Macroeconomic policy and trade

Within the context of Ethiopia’s trading system, merchandise exports account for 3.2 billion US dollars. Ethiopia’s economy is based mainly on agriculture which accounts for about 40% of the country’s GDP, 85% of exports, and 85% of total employment. Ethiopia’s main exports are coffee, leather and leather products, chat, pulses, gold, live animals and processed meat, oilseed cake, fruits and vegetables. Coffee is the leading export and accounts for 26% of GDP, while gold became the second important export the last two years and accounts for 19% followed by oil seeds 15%, khat 8% and live animals 7%. Manufacturing exports which are food, beverages, textiles, clothing, and leather, all of which are also related to the agricultural sector, range around 8% but are continuously increasing.

Concerning the country’s imports, petroleum products, civil aircraft, vehicles, spare parts, construction equipment, medical and pharmaceutical products, industrial equipment and machinery, both agricultural and industrial chemicals, agricultural machinery, hybrid seed, fertilizers, irrigation equipment, and durable and non-durable consumer goods contributed to the increase of the value of imports that jumped to 11.1 billion US dollars in 2011-2012 from about 8.3 billion US dollars the previous year. As a result of the above, the trade deficit went up from 5.5 billion US dollars in 2010 to 7.9 billion US dollars in 2011-2012.

Main trading partners of Ethiopia are China (18% of total imports and 8% of exports) and Saudi Arabia (13% of imports and 7% of exports).

The unit of currency in Ethiopia is the birr (ETB). As of November 2000, the exchange rate is 8.23 birr to 1 US dollar.

Table 1: Trade

Source: World Bank, Development Economics LDB database, 17 March 2013

Trade and regional integration

Ethiopia is a member of regional groupings such as the Common Market for Eastern and Southern Africa (COMESA) and the Inter-Governmental Authority on Development (IGAD) and has signed all regional integration protocols, except the COMESA Free Trade Area Protocol, which only gives a 10% preferential discount to COMESA members. Ethiopia is negotiating to join the World Trade Organization (WTO) and submitted initial tariff offers on a range of commodities. It is also negotiating an economic partnership agreement with the European Union, but has not yet concluded an interim accord.

Trade as a business opportunity

As trade and investments have become a major, lucrative economic sector for Ethiopia and its economic boost within the framework of economic development and entrepreneurship, entrepreneurs endeavor to invest in the country, make business venture and take advantage of Ethiopian products and natural resources with main aim to promote Ethiopian entrepreneurship and create a more open Ethiopian economy. A high number of investors and traders are very positive to start a business in the country by exporting products to the European and American markets and therefore, they register with the Ministry of Trade and Industry in order to obtain a trading license which is indispensable for starting and operating a new business. Moreover, a residence permit and land acquisition are additionally two crucial issues that investors have to deal with.  Nevertheless, before starting a business, traders and investors should take into account a few important things such as the Investment Code, the areas of interest, the investment capital, the markets and the labour requirement. Potential entrepreneurs should also familiarize themselves with the legal and juridical system within which they will undertake business activities. The Commercial Code of 1960, the Investment Proclamation of 2002, as amended in 2003, and the Regulations on Investment Incentives and Investment Areas Reserved for Domestic Investors of 2003, as amended in 2008, provide the main legal framework for both foreign and domestic investment in Ethiopia and investors should be aware of the above before starting doing business in the country.

With respect to tariff system, custom duties and taxes, highly protective tariffs are applied on certain items such as textile products, leather goods, etc. to protect local industries and duties are levied on C.I.F. value. A maximum of 12% sales tax is also imposed on all imports and some import commodities such as cigarettes, alcohol, etc. are further liable to an excise tax.

The Ethiopian Government has established the Ethiopia Commodity Exchange (ECX) in order to enhance the export sector. ECX is a marketplace where buyers and sellers come together to trade, assured of quality, delivery and payment. ECX assures all commodity market players the security they need in the market through providing a secure and reliable end-to-end system for handling, grading, and storing commodities, matching offers and bids for commodity transactions, and a risk-free payment and goods delivery system to settle transactions, while serving all fairly and efficiently.

Apart from this, the Government has made a lot of regulatory and institutional reforms, such as improved business registration requirements and procedures so as to strengthen investor confidence, with investment in infrastructure reaching 6 billion US dollars (20% of GDP) in 2010.

Within the business context of Ethiopia, the Commercial Office of the U.S Embassy in Addis Ababa plays an important role for investors and that is because it assists in exporting goods or services to Ethiopia by making contact with potential agents or business partners, giving a commercial and financial insight of firms, regulations, restrictions and requirements regarding products and being a means for meeting local banking and business officials. To be more precise, appointing local agents to represent traders’ products in Ethiopia is recommended by the Embassy’s Commercial Office which maintains a list of experienced local representatives and are willing to collaborate with American companies.

There are a few government organizations that are responsible for trade and investment and promote Ethiopia’s investment opportunities to entrepreneurs: the Ministry of Economic Development & Cooperation, the Ministry of Trade and Industry, Ethiopian Investment Authority, Ethiopian Chamber of Commerce, Ethiopian Private Industries Association and Ethiopian Private Industries Association.

All in all, Ethiopia has improved to a great extent the business environment in terms of trade. Economic reform including the privatisation of state enterprises and rationalisation of government regulation transformed Ethiopia into a fast growing economy with a positively-changing business environment. Key regulatory and administrative reforms have made it easier to start and operate a business in Ethiopia. Globally, Ethiopia was ranked 161^st of 185 economies on the ease of trading across borders in 2012. However, Ethiopia, one of the world’s oldest civilizations, is able to make much more progress in order to create a totally stable and sustainable business environment something that must be in line with the country’s political conditions and governance and could potentially turn Ethiopia into a middle income country by 2025, as the latest Ethiopia Economic Update report from World Bank argues.

REFERENCES

1. 1.      http://www.worldbank.org/
2. 2.      http://www.africaneconomicoutlook.org/en/
3. 3.      http://ethiopia.usembassy.gov/
4. 4.      Omidyar Network, Accelerating entrepreneurship in Africa:  Understanding Africa’s Challenges to Creating Opportunity-driven Entrepreneurshi., http://www.omidyar.com/
5. 5.      Investing in Ethiopia- A guide for new investors: trade and investment, http://www.ethioembassy.org.uk/