Among the common risks investors interested in African countries like Ethiopia often mention are investment protection, dividend (profit) and capital repatriation. A typical concern investors bring up at deal sourcing discussions may include details of a ‘forex-crunch’ they had heard about either from local operators, or fellow investors. Whether these fears be real, perceived, or imagined, what matters is that they make an impact in investors’ minds.
In-depth research into the matter, however, highlights the misconceptions regarding dividend and capital repatriation in Ethiopia. De-constructing the misconceptions starts from understanding the legal framework of the country regarding FDI and its provisions for repatriation of profit, and capital.
According to the investment proclamation approved in 2012, any foreign investor has the right—in regards to any investment—to make repatriation of profits and capital, and service foreign loans and proceeds from the sale or liquidation of an enterprise. Furthermore when considering compensation paid to a foreign investor, the investor is only expected to settle their domestic tax, and other obligations before the repatriation.
Investors’ right to repatriation extends to profits and dividends accumulated from investment, principal, and interest payments on external loans, payments related to technology transfer agreements, proceeds from the sale or liquidation of businesses, and compensations made following expropriation or nationalization. Investors also have the right of remittance in a freely convertible currency at the prevailing rate of exchange on the date of remittance.
The constitution of the country is the ultimate guarantee for this legal provision. What’s more, a number of other laws and regulations provide various investment-specific guarantees and protections.
Several provisions on investment protection and guarantees are also enshrined in bilateral investment treaties Ethiopia has signed with more than 30 countries. Such instruments provide guarantees in the form of full protection and security, transfer of funds, protection against discrimination, and unlawful expropriation as well as direct access to international dispute settlement forums.
Investors should avoid the ‘sin of omission’ by strictly adhering to the investment directives and legislative provisions. When it comes to compliance and ensuring right to remittance, it is imperative that investors have local legal counsel and ensure every investment transaction is processed with legal advice to ensure compliance with standards necessary to ensure remittance.
Following a close assessment of several foreign investors in Ethiopia, the country scores positively on the investment exit metrics, which is closely watched by the investment community. Several multinational corporations operating in the country have successfully repatriated capital and profit out of the country.
There are two ideal exit strategies for investors from Ethiopia: exit by strategic sale to other investors, as in the case of Kenya’s Java House exit by Emerging Capital Partners to the Abraaj Group, and buy-outs by existing shareholders/investors. The successful acquisition of Tiger Brand’s 51Pct shareholding by its local partner East African Holding is a testament to the possibility and reality of successful exit for investors with time-horizons to their ventures.
Dangote Cement from Nigeria is a good example of an international investor recently able to repatriate profits out of Ethiopia. The company’s initial investment in Ethiopia was about USD550 million. The revenue from Ethiopia for the 2016 fiscal year was about USD131 million, while the revenue for the seven months the plant was operational during the 2015 fiscal year was USD55 million.
Dangote Cement’s financial report is testament to the allure of Ethiopia, investment-wise. Ethiopia was one of the only two African subsidiaries with positive cash flow and the only positive cash flow subsidiary mainly from operating activities. This is after less than two years of operation and at this rate; Dangote will return its initial capital in less than an exit-horizon period.
Dangote was recently able to repatriate USD70 million to Zenith Bank in Nigeria from its birr account in Ethiopia and it is in the process of repatriating another significant sum through a local private bank.
The apparent ease with which foreign investors have repatriated profits or dividends contradicts the claims of local operators, who say that they have to wait months in order just to secure foreign currency approval for imports.
What investors must understand is the difference between a commercial transaction and a legal transaction in Ethiopia. Repatriation of profit and capital is a legal transaction that always has priority while Letter of Credit transactions for the importation of goods and services are commercial transactions that are subject to the allocation of funds based on national priorities.
In the eyes of the law, all transactions requiring foreign exchange are not created equal. Legal transactions have guaranteed priority. Like any responsible household, the government needs to spend the limited forex resources it has on commodities with high national priorities and on basic necessities.
Though still drawing billions of dollars every year in investments, countries like China are said to be experiencing difficulty getting money out. Companies in China, for instance, need to go through a complicated procedure in order to withdraw their dollars.
Ethiopia is currently at an inflection point of economic transformation. In its plan to sustain growth, the government has adopted a strong focus on leveraging foreign direct investment aimed to foster industrialization and export diversification.
A significant forex reserve was earmarked for national infrastructural investments that in turn ‘pay-off’ and earn export revenue or facilitate trade. The infrastructural investments are expected to pay off, and the forex burden, gradually ease off. In the meantime, businesses need to put in place short-term mitigating mechanisms until trading deficits are minimized and forex allocations for commercial transactions are manageable in the medium/long term.
Examples of such measures include using ‘drawing accounts’ in forex transfers between branches—with full legal compliance and registration by the authorities—and effectively using export earnings when paying for commercial transactions.
Investment is essentially an act of faith. An investor is writing a cheque with calculated risk and expecting the reward at a particular point in time in the future. As such, what the future holds weighs more than the current transitory hiccups in an economy. Investors are looking beyond the current forex issues and putting their faith in the idea that this temporary hiccup will adjust in the future.
6th Year . January 16 – February 15 2018 . No.57