Ethiopia’s Investment Conundrum A Tale of Promise, Peril
Once a darling of foreign investors, Ethiopia faces a complex web of challenges hindering its economic growth. Despite ambitious reforms and a promising future, the country’s investment landscape is marred by a series of setbacks.
Why has the much-anticipated influx of foreign investment yet to materialize? How have recent policy changes impacted domestic investors? What role does political instability play in deterring investment? And what can be done to revitalize Ethiopia’s economic potential, emphasizing the need for stable policies and peace for sustainable economic growth?
This in-depth analysis by EBR’s Munir Shemsu delves into these questions, examining the intricate interplay of factors that have shaped Ethiopia’s investment climate. From the impact of the war in Tigray to the challenges posed by the COVID-19 pandemic, this article sheds light on the multifaceted obstacles that impede Ethiopia’s progress, highlighting the need for a comprehensive solution.
A rush of anticipation pulsated through Ethiopia’s economy nine months ago. Prime Minister Abiy Ahmed (PhD), the Ethiopian Investment Board (EIB) Chairman, approved a directive opening trade, retail, wholesale, and import-export sectors to foreign investors. The Ethiopian Investment Commission, the Ministry of Trade & Regional Integration, and the Ministry of Revenues initiated preliminary efforts to set up an operational framework to accommodate the influx of fresh investments. While nearly 21 foreign investors showed interest early on, figures on the commencement of operations exhibit mixed results.
As the year draws close, the expected inflow has barely increased and declined from previous periods in some sectors.
The share of gross investment in total GDP continued its four-year decline from 35% in 2019 to around 19% in late 2024. Both public and private sector investment have taken a dip. Foreign direct investment (FDI) has showed slight decline. It dropped from the 4.3 billion dollars in 2021 to 3 billion dollars in the first 10 months of 2024. The government aimed to attract USD4.52 billion in the year.
An intricate set of unique forces, including finance, politics, and regulation, shapes the investment market.
While the dip in FDI has been partly attributed to Ethiopia’s ousting from the Africa Growth Opportunity Act (AGOA), which allowed tariff-free exports to the USA, the domestic investment climate has been stifled for different reasons.
Political instability in the two most resourceful states of the federation and their spillover outcomes for operational logistics, a freeze on large-scale public investments, and policy irregularities such as sudden changes in tax laws and regulatory uncertainty are partly to blame.
One general manager of a bottled water company in Ethiopia was forced to decrease production by 75% over the past three years. The factory in central Ethiopia has struggled to maintain constant output due to declined access to credit, a shortage of foreign currency, and increased shipping costs due to logistics issues on the Red Sea.
“Constantly changing policies keep adding to our problems,” the general manager told EBR in frustration.
He expressed significant frustration, particularly at the Customs Commission, due to tariff inconsistencies, shifting mandates, and service inefficiency.
The ease of Doing Business in Ethiopia has remained consistently low recently. The latest World Bank index rewarded the country with 48 points and ranked Ethiopia 159th out of 190 nations. However, the rise in contraband trade and the surge in shadowy illegal goods over the past five years have introduced a new layer of complexity.
Investors in Ethiopia’s steel industry have suffered a punishing blow. Production has sunk to just 20% of capacity, partly fueled by illegal imports and diminishing productivity.
The Ethiopian Basic Metals & Basic Engineering Association, representing 76 members, has been sounding the alarm for over a year. With close to 28 galvanized sheet producers ceasing operation in a single year, fresh investments into the sector have been rendered all too risky. Solomon Mulugeta, the Association’s general manager, points out that most manufacturers operate significantly below their capacity. He says decreased demand from the construction sector has further compounded the sector’s financing and FX issues.
“The government is unquestionably the biggest buyer,” Solomon told EBR.
Decades of large public sector infrastructure projects served as a reliable source of demand for capital-intensive investments in Ethiopia. However, the government’s fiscal rollback in the past few years as it navigated conflict and high debt servicing costs, finally capped by adopting austerity measures two years ago, has chipped away at demand.
Comprehensive economic reforms implemented in July have been limited in their efficacy as the financial industry struggles to reform after decades of questionable corporate governance.
According to the general manager, despite banks reporting the availability of increased FX reserves, their demand for immediate settlement of the full amount in local currency limits the degree of their commitment. Most banks previously offered LCs with a 30 to 50% credit margin. This made it easy to open LCs and settle the remaining payment once the LC documents arrived at the bank. Solomon also noted the continued inflow of substandard contraband steel in constantly changing ways as a significant challenge the sector confronts.
“The policies are promising,” he says” Effective implementation will likely take time.”
Input shortages, significant price disparity to imports, limited working capital, and the effective freeze on large public infrastructure projects are draining demand and supply.
Unfortunately, the difficulties faced by investors in Ethiopia’s steel industry reflect a more significant trend: Nearly 450 factories will cease operations in 2023. Fresh investments into several sectors are becoming increasingly unlikely as incumbents struggle to keep their heads above water.
Research into Ethiopia’s investment landscape yields some valuable insights.
A working paper by the United Nations Development Programme (UNDP) on Ethiopia identified conflict and insecurity as the biggest deterrents to investment from the private sector and development partners.” A loss of goodwill and a perception in the investor community that Ethiopia may be a ‘country in crisis’ can be very costly in terms of their impact on Ethiopia’s ability to attract desperately needed capital, technology, and skills,” reads the Report. Even Chinese companies that have been stable features in Ethiopia’s investment landscape are reportedly fleeing, according to a statement by EIC officials in September.
Still, Prime Minister Abiy’s administration is championing expansive roadmaps that envision private sector investment-led economic growth.
Ethiopia’s ten-year development plan, which runs until 2030, has outlined a series of strategic pillars to rekindle economic growth and usher in fresh investments. Unironically dubbed ‘The Pathway to Prosperity Ten Years Perspective Development Plan,’ it outlines a massive policy shakeup.
Logistics finance and public services are also set for a reform that aligns with reigniting the double-digit economic growth rates of the early 2010s. However, the tight monetary policies implemented over the past year and a half contrast with some policy objectives. Despite increased credit access to the private sector being laid out as a crucial instrument, a 14% cap on credit growth was placed by the National Bank of Ethiopia (NBE) in August 2023. This move, aimed at curbing inflation to a single digit in July 2025, has crippled investments in real estate, construction, and manufacturing. The Ten-year plan to raise deposit mobilization by banks to about eight trillion birr by 2029 to feed investment appears out of reach, with not even half the target met nearly midway into implementation.
Furthermore, the Plan to raise the share of gross capital formation (investment) to 36% of GDP has been stifled following a significant erosion of the existing capital base as Ethiopia shifted to a market-based exchange regime last July. A policy pivot that has impacted both foreign and domestic investors.
Bart De Kennick, Managing Director of Heineken Ethiopia, revealed that existing FDI’s were being pushed into negative equity following the reforms. Negative equity occurs when a company’s liabilities exceed its assets or when affiliated intra-company loans surge due to an inability to reinvest at close to the initial borrowing value.
“International companies often rely on foreign currency funding from their parent companies,” the CEO explained during an event with the central bank governor.
A foreign currency-to-local currency loan swap was suggested as a potential solution.
Ethiopia adopted an International Monetary Fund (IMF) economic programme in late July, causing an unprecedented shift in the country’s investment landscape. However, economic agents have yet to adapt to the new environment as authorities exhibit inconsistencies in their regulatory interventions.
Franco Valuta imports were greenlit and pulled back for merchandise imports within weeks by the Finance Ministry. NBE treated the inclusion of fees in bank FX rates similarly, while the Customs Commission has frequently experienced regulatory jitters on several fronts. Unpredictability, instability, and uncertainty have become powerful forces that undermine investor confidence in allocations with long gestation periods.
Existing incongruencies between Federal and State legislations have also compounded to derail investments in regions already experiencing insecurity.
Economists like Atlaw Alemu (PhD), an assistant professor at Addis Ababa University, are unsurprised by the stagnation of fresh investments in the prevailing political and economic environment. He expects only the most daring entrepreneurs to allocate fresh capital when peace remains elusive in several parts of the country.
“How can one expect new investment when the incumbents are struggling,” Atalw told EBR.
While the economist recognizes the potential benefits of recent economic reforms to address long-term concerns for investors, he finds it very unlikely to have an impact in the short term. Domestic investors, who found themselves on the brink of shutting their operations just a while back, are unlikely to recover with adequate capital because banks claim to have dollars, says Atlaw.
However, the economist finds the confluence of instability and policy uncertainty to be the biggest hurdles to investment.
As Tigray Regional State marks two years of recovery from the devastation of a civil war, its southern neighbouring state, Amhara, has been engulfed by fresh violence. Businesses reeling from constant closures decreased economic activity and a slew of new taxes are settling for survival. Fresh investments are limited to parts of the capital and predominantly focused on the service industry.
Atlaw explained how prospective investors would immediately be put off by the lack of stability nearby, even if they were eyeing businesses in urban areas. He says the guaranteed safety of equipment, employees, and products can only be a secondary concern.
“Instability spreads, what is a safe area today could easily be a center of conflict tomorrow,” the economist notes.
Atlaw also considers the inconsistency in regulatory ordinances a decisive deterrent factor in attracting new investors. He indicates that confidence in the predictability of the regulatory substructure weighs much more heavily on investors than pronouncements by officials.
“How can you allocate long-term capital when foundational policies change within months,” Atlaw enquires.
Another economist echoed the sentiment, citing the onslaught of new costs to doing business, such as taxes on previously exempted items.
“Some investors have ceased operations just because of unpredictable tax demands,” he said.
Interestingly, crucial regulatory frameworks and the officials in charge of them have changed frequently. Just seven months into her appointment, Hana Arayaselssie, head of the EIC, was promoted to Justice Minister. In comparison, the Foreign Minister assumed the position of president just eight months into his new post. While rarely evident in developing countries, primary political appointments are powerful forces swaying investor activity in the developed world.
Nonetheless, gaining even a tiny insight into Ethiopia’s current investment landscape requires grasping powerful historical precedents.
The soft political transition in 2018, which gave way to Prime Minister Abiy Ahmed’s (PhD) rise, immediately, set a precedent for comprehensive reforms to Ethiopia’s economic paradigm. Nearly a decade of double-digit economic growth predicated mainly on the back of sizeable state-led infrastructure development was set for a structural shift pinned on enhanced private investment.
Despite plans in the 1st Homegrown Economic Reform Agenda to rapidly onboard private sector investment, conflict, COVID-19 and years of accumulated concessional loans derailed efforts. Industry parks, built with the issuance of a one-billion-dollar Eurobond, stagnated production as nearly 87% of textile investors saw their products sidelined from US markets.
Regional states like Gambella and Beni Shangul Gumuz, ripe for agricultural investment, failed to maintain private sector interest as armed groups stifled the transportation of inputs and personnel. Fewer and fewer investors dared venture into new projects, accelerating the massive drop in the share of investment in Ethiopia’s GDP.
As the second HGER rolls into implementation, maintaining several targets from its first iteration, it confronts a radically changed economic environment. Licentious lending is a tale of the past as the central bank and commercial financial institutions navigate an austere economic setting. Flexible exchange rates, possibly foreign banks, and credit caps are the order of the day.
Unfortunately, some hang-ups endure even amidst prevailing political instability. Ethnic branded banking, high logistics costs, inefficient licensing procedures, and lack of a versatile entrepreneurial base are just some of the handicaps. Overcoming these challenges while ensuring peace, stability and predictable policies will likely prove highly consequential.
The experiences of countries like Vietnam, which have rapidly accelerated the share of private sector investment, are quite illuminating. Sector-specific addressing of constraints, tax incentives, and constant engagement with the private sector has yielded unprecedented gains. While peace remains fundamental for accelerating investment, complementary policies can mitigate a slowdown.EBR
13th Year • December 2024 • No. 136