DOING BUSSINESS IN ETHIOPIA I

Market Challenges Return to top The GOE is engaged in a slow process of economic reform and liberalization; however, the state remains heavily involved in most economic sectors. The government retains control over the utilities sector, as well as telecoms, and prohibits foreign ownership of banking, insurance, and financial services companies.
State-owned enterprises and political ruling-party owned entities dominate the economic landscape, reducing room for the private sector to flourish, although many of the subsidiaries of these entities themselves seek joint venture and equity partners.
The state-owned telecommunications company, Ethio Telecom (ET), offers slow, expensive, and unreliable phone and Internet services. As of June 2011, Ethiopia had 10.5 million mobile phone subscribers and 128,000 Internet subscribers. Residential and commercial ADSL (broadband) services were announced in April 2011 and introduced in Q3 2011.
The prohibition on foreign financial services institutions from operating in Ethiopia and the undeveloped regulatory environment have resulted in a limited and weak financial sector. The acute foreign exchange shortage that plagued Ethiopia during 2008-2010 is now significantly relaxed following a trade balance improvement, better services trade performance, increased remittances and substantial official transfers.
Despite the improvement, however, foreign exchange availability will continue to challenge businesses in the future. Foreign exchange reserves dropped to less than one months of imports coverage at the end of 2008, but gradually rose to 2.1 months of import coverage in June 2010 and further to 3.1 months of import coverage in June 2011.
All land is owned by the state and cannot be purchased or sold, but can be leased for up to 99 years. A land-lease regulation passed in late 2011 places limits on duration of construction projects, allows for revaluation of leases at a government-set benchmark rate, places previously owned land (―old possessions‖) under leasehold, and restricts transfer of leasehold rights. Compensation is paid by the state for real property seized upon the termination of a lease, but is not paid for the land on which the property is built. Intermittent power outages used to force factories to cease operations during peak periods in 2010, but such critical shortages have been largely resolved in 2011. However, electricity demand still outpaces supply as new hydropower dams struggle to produce at full capacity and power transmission lines and facilities are insufficient.
The GOE is investing significantly in very large-scale hydroelectric project construction (using both external loans and its own resources). If successfully completed, these projects could meet domestic electricity demands and produce a significant surplus for export. Government procedures and paperwork are usually complicated and time-consuming, although improvements have been made in recent years. The customs clearance process is slow and imported goods are sometimes taxed at attributed values instead of invoice values.
Ethiopia’s judicial system is poorly staffed and inexperienced, particularly with respect to commercial disputes. The GOE recently established a new court system dedicated to resolving commercial disputes more efficiently. Under this new system, if a company includes an arbitration clause in its contract, it can apply for services from the Addis Ababa Chamber of Commerce Arbitration Institute and bypass some inefficiency in the judicial system.
Lack of access to finance is a hindrance for local businesses. Lending caps imposed on commercial banks in order to control the money supply and inflation were lifted in April 2011 but immediately replaced with a directive compelling banks to purchase five-year central bank bills, at three percent interest, in an amount equal to 27% of total new loans. As a result, commercial bank liquidity and capacity to supply credit has been seriously threatened.
The central bank recently reduced reserve and liquidity requirements of commercial banks from 15% and 25% to 10% and 20%, respectively, which is expected to at least temporarily result in an uptick in available loans. However, the business and finance community widely acknowledges that this measure alone cannot improve the situation dramatically.
A largely illiterate and semi-skilled workforce suffers from low productivity levels. Ethiopia’s adult literacy rate is estimated at 36%. The GOE’s de factor requirement that imports be transported by state-owned Ethiopian Shipping Lines (ESL) has caused severe delivery delays and high transportation costs for importers. ESL also requires payment in foreign exchange for services. In January 2011, the GOE announced price controls for 18 commodities/consumables based on allegations of price gouging by major traders. In June 2011, the GOE lifted these price controls.

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