Introduction

In Ethiopia, as in most other jurisdictions, one of the major issues for foreign investors is access to foreign exchange (forex). Because of the country’s negative trade balance, the availability of forex is highly restricted by laws and strictly regulated by the central bank, the National Bank of Ethiopia (NBE).

It is this forex shortage, among other reasons, that forced the Ethiopian government to adopt an investment policy that favors foreign and domestic export and manufacturing investments, which can generate foreign currency or reduce the foreign currency that the country pays for its imports. This policy can easily be demonstrated by the government’s recent construction of a number of industrial parks that focus on manufacturing and exports and the call for investors to carry out investments in the parks. The stated goal of this policy is to make Ethiopia the manufacturing hub of Africa.

This article provides information regarding foreign investment and forex regulation in Ethiopia, which is essential for existing and potential investors in Ethiopia.

Overview of the investment regime

The Investment Proclamation No. 769/2012 (as amended) and the Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 (as amended) (Investment Regulation) are the principal legislations that regulate foreign investment in Ethiopia.

There are four categories in Ethiopian investment law:

• areas of investment reserved exclusively for government;
• areas of investment reserved exclusively for joint investment with government;
• areas of investment reserved for Ethiopian nationals; and
• areas of investment open to foreign investors.

In general, foreign investment is actively encouraged in most sectors of the economy except in areas like banking, insurance, broadcasting services, postal services, import and export and small-scale businesses, among others. These investment areas are reserved for either the government or Ethiopian nationals. The manufacturing sector and commercial agriculture are open for foreign investment, with different government incentives available. Regarding areas of investment open for foreign investors, there are no local content or indigenization requirements. However, investment in the logistics sector requires a minimum of 51% local ownership.

The investment laws contain a number of guarantees and protections to foreign investors and their investments. They, among others, safeguard investments against unlawful expropriation. They also guarantee investors’ rights to remit funds (profits, dividends, proceeds of share transfers, etc.) out of Ethiopia in convertible foreign currency at the prevailing rate of exchange on the date of remittance.

Regarding the permissible investment modalities, both foreign direct investment (FDI) and portfolio investment are recognized by Ethiopian investment law.

Restrictions on investment in the financial services sector

The financial services sector in Ethiopia is generally not open to foreign investors. According to the Investment Regulations and the financial laws, the majority of financial services (banking, insurance, micro-credit and saving services) are exclusively reserved for Ethiopian nationals. In other words, foreign investors cannot fully or partly own businesses that provide these services in Ethiopia. They can, however, engage in capital goods leasing services.

Forex-related regulatory requirements for foreign investors

As stated above, there are various forex-related regulatory requirements for foreign investors (including private equity investors) in Ethiopia, which are the preconditions for the repatriation of forex from the country. There are exchange controls on injections and withdrawal (repatriation) of capital to and from Ethiopia. Any capital inflow by foreign investors is recognized and registered at the Ethiopian Investment Commission (EIC) at the initial stage of investment, including investments made through a concessionary or a partnership agreement with the government or with an autonomous institution, and similar treatment is accorded to ploughed-back profits. The initial capital investment should be deposited in one of the commercial banks in Ethiopia and only upon presentation of a certificate of deposit can a branch or subsidiary company be registered by the EIC. It is important to comply with this requirement, as subsequent requests for repatriation of profits and dividends and other payments depend in large part on compliance with the requirements of the EIC and the NBE.

Foreign investors are guaranteed to make the following remittances out of Ethiopia in convertible foreign currency at the prevailing exchange rate at the time of remittance:

• profits and dividends accruing from investment;
• principal and interest payments of external loans;
• payments related to technology transfer agreements;
• proceeds from the sale or liquidation of an enterprise;
• proceeds from the transfer of shares or of partial ownership of an enterprise to a domestic investor; and
• compensation paid to an investor under the investment laws.

Expatriates employed in an enterprise may remit, in convertible foreign currency, salaries and other payments accruing from their employment in accordance with the foreign exchange regulations or directives of the country.

Any foreign loan to local Ethiopian companies (including a loan from a foreign shareholder) shall also be subject to the NBE’s approval, which requires certain conditions to be met. Payment of interest on foreign loans and the principal loan is allowed only if the NBE approves the foreign loan in the first place. If the NBE has not approved the loans, it will not authorize the repatriation of interest and principal payments on the loans or credit facilities. Where a loan contract is entered into without fulfilling the above requirements, foreign exchange for the repayment of the loan may be denied.

In order to approve a foreign loan, the relevant NBE directive requires that debt-to-equity ratio may not exceed 60:40 of the foreign capital (equity from the shareholders). Similarly, the maximum all-in-cost ceiling (defined as rate of interest, other fees and expenses in foreign currency excluding commitment fee and pre-payment fee) for an external loan shall be not be more than six months LIBOR or equivalent in EURIBOR, plus 5%.

Conclusion

Foreign investors need to be aware of forex scarcity and the resultant stringent forex regulations in Ethiopia. Additionally, it is essential for investors to comply with forex regulatory requirements in order to achieve their investment objectives.