Ethiopia Investment - Ethiopia Privatisation

An Overview of Investment Climate

It is widely known that the ancient country of Ethiopia underwent a period of turmoil, economic stagnation and famine during the 1970s and 1980s. What is less well known is that since the demise of the military dictatorship of Mengistu Haile-Mariam in 1991, a new Ethiopia has emerged; politically stable and making good economic progress.

In just half a decade, it has established an impressive record of economic recovery and growth in an extremely stable macroeconomic climate. In the five years to 1997, the economy grew at an annual average rate of 6 per cent. Inflation declined to an average rate of less than 7 per cent, having peaked at 20 per cent in the early 1990s.

The exchange rate, massively devalued towards the end of 1992, stayed markedly stable, and monetiasation of budgetary deficit came to an end in 1994/95 fiscal year. The achievements of this rapid economic turnaround rest on solid foundations of political and economic reform, sound management of the economy, and an ongoing partnership with external donors and investors. Ethiopia has been at peace with itself since the establishment of a federal system of government and parliamentary democracy. Simultaneously, it has firmly moved from a command to a market economy. Macroeconomic stability has been secured by careful sequencing of economic reforms coupled with tight fiscal and monetary policy. The progress on policy reform to date has secured the foundations of future growth, creating a favourable climate forEthiopia now offers foreign investors a wide array of opportunities.

Ethiopia's proximity to Middle Eastern and European markets, abundant natural resources; land, livestock, minerals and a population of 57 million potential consumers are just some of its key attractions. In addition, its wealth of unique tourist attractions, unparalleled scenic beauty and the authorities' commitment to upgrade infrastructure in conjunction with foreign capital, all underline the country's determination and potential to work with foreign investors. foreign investment in Ethiopia which will be further enhanced by the consolidation of market reforms in the coming year.

A full appreciation of the improved environment for foreign investment can be gained by looking at four factors; the broad picture of the transition from a command to a market economy, the record of economic growth and stability, improvements in infrastructure and the specific foreign investment regime. The government's view is that both the overall economic conditions and specific incentives create a favourable foreign investment climate.

Economic Reform

At the start of the 1990s, Ethiopia had a centrally planned economy coupled with severe price distortions. The economy was dominated by the state, which controlled product and factor markets, and directly owned the bulk of the modern sector of the economy. Extensive, unwidely state monopolies were created in both production and distribution. This evidently marginalised and stifled private enterprise. For nearly two decades, the previous regime followed policies of industrialisation based on import substitution in the context of increasing overvaluation of the domestic currency and widening external imbalances. In sum, the country had a highly regulated, closed economy. In some respects, Ethiopia's situation was akin to that of the economies of Eastern Europe, now also making the transition to capitalism. Yet Ethiopia's economy remained in a chronically underdeveloped state, even in relation to the rest of Africa. Economic reform in Ethiopia has two main objectives. Firstly to shift from a command to a market economy. Secondly to progressively expose the Ethiopian economy to the rigours of international competition. This reform agenda complements the countrys long-term vision of economic growht based on agricultural development led industrialisation (known as ADLI).

From the outset, the transitional government acted on its resolve to put the private sector at the centre of the Ethiopian economy. On taking power in mid-1991 it promptly lifted price controls on most goods and services. The government progressively withdrew the state from the direct management and ownership of enterprises. Legal restrictions on private investment were quickly dismantled and the labour market was deregulated. Public enterprises were prepared for privatisation by being given managerial and financial autonomy. Government budgetary support was cut and enterprises were restructured to run on commercial lines. In most cases this was as a prelude to privatisation and possible foreign investment.

Getting Prices Right

In subsequent years, the establishment of a market economy and its integration into world markets was further reinforced. Access to the foreign exchange auction market for importers was fully deregulated via a phased removal of the negative list of importers. This in turn facilitated the unification of the auction market exchange rate via the merging of the official rate with the marginal rate. Tariffs for electricity and water were reaised. With electricity costs fully covered, profits will be generated in the coming few years. Unlike many countreis, Ethiopian public enterprises are run profitably, reflecting the country's deep-rooted managerial competence. This factor has been crucial in the transition to a market-driven economy. Therefore in most public enterprises sectors since 1991 there has been a significant strengthening of efficiency and profits, heightening the viability of privatisation and the potential for foreign participation.

Privatisation and Foreign Investment

Privatisation gathered momentum after an initial phase of preparation. In the light of the underdeveloped nature of the economy, the number of state owned enterprises to be privatised was relatively small. All public enterprises have been restructured and many state-owned conglomerates have been split into more efficient units. Marketing enterprises lost their monopoly via the removal of entry barriers to private firms. Such enterprises thus shrank due to both deliberate down-sizing and the impact of competition.

Insolvent enterprises that could not be resuscitated were allowed to go bankrupt. A total of 168 business units have been sold to date and a total of 140 enterprises remain in state hands. As in other areas of economic reform, Ethiopia has taken a prudent and cautious approach to privatisation. Medium sized privatisations have now been successfully completed. With reforms having enhanced managerial autonomy and profitability in the remaining public enterprises, it is n ow anticipated that the privatisation process will accelerate with the sale of more substantial assets, in which it is envisaged that foreign capital will play a vital role.

Moreover, new markets have been created for urban and rural land holdings. Under the command economy, the government controlled access to urban land. Land was allocated administrateively on a grant basis. As land was granted freely, and transfer between individuals was not allowed, the system foreclosed the appearance of land prices. Since 1991 this arrangement has been replaced by a land-lease system. Since the establishment of markets for lease holding, real-estate development has developed in urban areas throughout the country. In the rural areas as well, a land-lease system has been applied to unoccupied land under the control of the state, providing commercial farmers access to such land.

Last Updated on Saturday 12th December 2009