Business Closure on a Massive Scale

Is the new Initiative Going to Address the Problem?

The number of businesses that return or fail to renew their licenses has increased over the last couple of years. At the federal level, 14,096 businesses returned their licenses in 2018, while 328,265 businesses didn’t renew their licenses in the past ten years. A decline in business activities and political unrest, coupled with forex shortages and a lack of raw materials, problems which have not been solved for many years contribute to the problem. The government, which is aware of the issue, recently launched a new initiative to solve the challenges faced by the private sector. EBR’s Ashenafi Endale reports.

Although doing business had never been easy in Ethiopia, it was a nightmare for Netsanet Abera, a mother of three, who ran a company importing textiles and garment products for almost ten years before she closed it a year ago.

Even though Netsanet, 36, faced a number of challenges while managing her business, none were comparable to the foreign currency shortage. “Before I closed the company, I tried to move into other businesses like processing coffee and exporting. However, accessing foreign currency was impossible, so I had to drop my dream of becoming a successful entrepreneur.”

Netsanet was not the only one affected. Many frustrted businesses are also closing their doors. At the federal level, 14,096 businesses have returned their licenses in 2018, according to information from the Ministry of Trade and Industry (MoTI). As a result, the Ministry struck these businesses from the commercial register along with their trade names.

But not all businesses end their operations by following legal procedures. In fact, the majority prefer just not to renew their licenses because in Ethiopia, following the legal procedure to close down a business can be just as burdensome as running a business.

In fact, data from the MoTI showed that between 2010 and 2018, 1.4 million business licenses were issued, excluding the states of Gambela, Somali, Afar, Benisahngul Gumuz and Harari. Only 1.1 million of them renewed their licenses, and 328,265 businesses failed to. It is safe to assume that the number of businesses failing to renew their licenses in the whole country is much higher.

The mounting number of canceled business licenses is attributed to various factors, ranging from fundamental and deep-rooted procedural hurdles, to a lack of finance and infrastructures as well as shortage of foreign currency. These factors, according to Tsedeke Yihune, owner of Flintstone Homes, a real estate company, have had a major impact on the country’s investment environment.

These factors, as well as political unrest and a slowdown in business, have exacerbated the situation in recent years. “Businesses in all areas, including large companies, have reported losses over the last two years,” explains Shemelis Arega, senior communication expert at the MoTI.

Tsedeke says that the business environment in Ethiopia is determined by peace and fiscal stability, both of which are deteriorating. “Improving the business environment, meaning ensuring peace and fiscal stability, is Ethiopia’s most burning issue right now.”

While the termination of licenses has skyrocketed, starting a new business has become even more difficult, according to the Doing Business report published by the World Bank in 2019. The report, which measures the number of procedures, time, cost and minimum paid-in capital required to start a business in 190 countries, revealed that 11 requirements must be fulfilled, and that it takes 32 days to legally start a business in Ethiopia.

Lengthy procedures to start new businesses and the lack of knowledge of the proper systems among government officials is another hurdle, as Bethlehem Awoke, a returnee from the United States, told EBR. EBR met Bethlehem on May 10, 2019, while she was arguing with officials of MoTI over her request for a business license. “I am trying to invest in the IT sector and start a taxi service similar to Uber, but the officers here don’t have a clue about the business,” she says. “I have been here three times before. I don’t think many Diasporas are willing to face such hurdles.”

Former Deputy Commissioner of the Ethiopian Investment Commission (EIC), Teka Gebreyesus, agrees. “Government institutions have not upgraded their method of delivery, and they failed to provide quality and timely services to the private sector. So far, public officers have reacted positively to private sector demands, but only after making sure there would be no negative consequences from their bosses.”

Of course, businesses in Ethiopia have long complained about facing a complicated, and often redundant, and unnecessary procedures. The country’s commercial rules are often said to be outdated and unable to cater to the needs of modern business practices. These challenges are even more pronounced and punitive for small and medium-sized local business that have little to no resilience to absorb the challenges and high transaction costs associated with starting and running businesses.

The government has recently started to take measures to ease these challenges. A national initiative to improve the investment climate and ease of doing business was launched in December 2018 by the administration of Prime Minister Abiy Ahmed (PhD). The initiative identified over 80 distinct actions to be delivered across 10 government agencies, and defined short, medium and long-term deliverables.

The national doing business steering committee has been formed to monitor the progress and implementation of the national initiative. Supported by consultants from the World Bank, the committee comprises officials from the Ministry of Finance, the Ministry of Revenue and the MoTI, in addition to Ethiopian Investment Commission, among others.

The reform initiative prioritized tackling regulatory and administrative red tape which largely affect local businesses, especially small and medium-size companies. It envisions promoting startup businesses by establishing a simple business registration and licensing system, through easier terms for accessing credit and a simplified tax payment set up. It also aims to support the expansion of already established businesses through simplified property registration, transactions, getting construction permits and undertaking import and export.

Beyond the economic (jobs and competitiveness) impact, these reforms are expected to meaningfully enhance transparency and predictability in public service delivery, and thereby fight corruption, according to a progress report on the Doing Business initiative, compiled by the Investment Commission. The elimination of requirements such as the publication of trade names in newspapers, as well as presenting lease agreements in order to register and license businesses are amongst the reforms of the initiative.

“So far, the committee is focused on identifying and cutting out laws hampering the business environment and integrating services provided at different institutions,” Abebe Abebayehu, commissioner of the EIC, and a member of the committee, told EBR.

According to Abebe, eight new laws and 40 procedural and administrative reforms were enacted over the past few months with the aim to reduce the time, cost and procedural hurdles businesses face from startup to operation and exit. The EIC, for its part, is amending the existing investment law, while the MoTI is revising the long existed commercial law.

Additionally, on May 14, 2019, over ten amendments to the existing Trade Registering and Licensing Proclamation were presented before Parliament. One surprising amendment states that business who are on the verge of bankruptcy can extend their licenses just by presenting one quarter of their capital, instead of the existing requirement, which requires them to present half of their capital. This particular amendment rightly captured the difficulties most businesses face, especially over the last three years, due to staggering business activities.
The MoTI also reduced 1,352 trade licensing types to 519, in March 2019, according to Wondimu Filate, director of public relations at the Ministry. Types of licenses requiring certificates of competence were reduced from 303 to 37. “There were many business types and it was confusing. People were asked to have ten licenses to do one business. But now, they can do ten businesses with one license,” Wondimu explains.

“Businesses and the economy have lost so much, because such initiatives were not taken earlier,” argues Fantu Farris, a World Bank expert who is consulting the committee formed to implement the initiative. “The ongoing reforms will provide an ample space for private sector development in Ethiopia.”

8th Year • Jun.16 – July.15 2019 • No. 75