- Economic Environment
The Ethiopian economy is based on agriculture, which accounted, in 2009/10, for about 42 percent of the gross domestic product (GDP), 75.9 percent of foreign currency earnings. Generally, the; overall economic growth of the country has been highly associated with the performance of the agriculture sector.
In 2009/10, the industrial sector, which mainly comprises small and medium enterprises accounts for about 13 percent of GDP. The services sector accounts for about 46.1percent of GDP.
Real GDP grew by an average of 11.3 percent per year for the last Seven consecutive years (2003/04-2009/10), which is the highest among the non-oil producing economies of Africa. The World Bank has also witnessed the double-digit economic growth registered in the last several years.
During 2006/07, 2007/08 and 2008/09, the general annual inflation was 15.8, 25.3 and 36.4 percents, respectively, and dropped to 2.8 percent in 2009/10. These were largely driven by the trend of the food component of price which showed 21 percent annual average growth during the indicated fiscal years. The budget deficit as a percent of GDP was only 1.3 percent in 2009/10.
- Trade and Investment
Coffee export from Ethiopia has exhibited high price variations from season to season. These variations are a combined effect of the factors affecting domestic supply and the periodic trends of the global coffee demand and supply situations. Also, the variation can be seen between different varieties and grades of coffee. Some varieties like the Yeirgacheffe and Sidama command considerable premium in the international market. In 2009/10 export receipts from coffee were US$ 528.3 million.
Export earnings from oil seeds, the second largest export commodity went up from US$ 356.1million in 2008/09 to US$ 258.5 million in 2009/10due to the increase in the international market prices.
In 2009/10, the receipts from the export of pulses, leather and leather products as well as fruits and vegetables were US$ 130.1, US$ 56.4 and US$ 31.5 million respectively.
Earnings from the export of meat and meat products rose to US$ 34 million in 2009/10 from US$ 26.6 million in 2008/09 due to higher exports to the Middle East. There was also an increase in earnings from the export of live animals, which reached US$ 90.7 million in 2009/10 due to better international prices. The receipt obtained from the export of cut flowers was US$ 170.2 in 2009/10 compared to US$ 130.7 in 2008/09.
Similarly, the income from ‘chat’, a stimulant green leaf, reached US$ 209.5 million in 2009/10. Gold export also increased from US$ 97.8 million in the year 2008/09 to US$ 281.4 million in 2009/10.
In order to enhance the export sector, the Government has established the Ethiopia Commodity Exchange (ECX). ECX is a marketplace where buyers and sellers come together to trade, assured of quality, delivery and payment. ECX assures all commodity market players the security they need in the market through providing a secure and reliable end-to-end system for handling, grading, and storing commodities, matching offers and bids for commodity transactions, and a risk-free payment and goods delivery system to settle transactions, while serving all fairly and efficiently.
2.2 Foreign Direct Investment
Since 1992, Ethiopia has made considerable progress in economic and social development. This is due to the favorable policies and strategies that are instrumental in improving the national economy. The Rural Development Policy and Strategy, the Industrial Development Strategy, and other sectoral policies and strategies have initiated a new push towards creating frameworks conducive to economic and social development.
The Rural Development Policy and Strategy, which is under implementation in the country, underlines that agriculture-centered development will bring about fast economic growth, enable its people become beneficiary of the economic growth, and lay solid foundation for industrial development.
The Industrial Development Strategy focuses on export manufacturing with priority given to textile and garments, leather and leather products, agro-processing, construction and small and micro-enterprises.
The Government of Ethiopia in recognition of the role of the private sector in the economy has revised over three times the Investment Code over the last eighteen years to make it more transparent, attractive and competitive. Major positive changes regarding foreign investments have been introduced through Investment Proclamation No.280/2002 and Regulations No.84/2003(as amended).
As a result of the implementation of the above mentioned policies and strategies, agricultural and industrial production, and export trade are growing steadily from year to year both in terms of variety and volume.
Due to the investment-friendly environment created in the country, the inflow of foreign direct investment (FDI) has been increasing over the last eighteen years. China, India, Sudan, Germany, Italy, Turkey, Saudi Arabia, Yemen, the United Kingdom Israel, Canada and the United States are the major sources of FDI.
3.1 Electricity Supply
The hydropower potential in Ethiopia is estimated at 45,000 MW and the potential for generating electricity from geothermal is about 5,000 MW. Ethiopia has around 1,562.2 MW of installed power generating capacity, out of which 1,382.6 MW is generated from hydropower plants. The remaining 179.6 MW comes from diesel and thermal power plants. Presently, two huge hydropower plants with generating capacity of over 2000 MW are also under construction.
3.2 Ethio Telecom
The Ethio Telecom, which is state owned, is the sole telecom service provider in the country. It provides national and international telecommunication services using Satellite, Mirco-wave Digital Radio Multi Access System (DRMAS), VSAT, UHF, VHF, Long Line and HF Radio. Hence, all kinds of telecommunication services including fixed line, mobile, internet, data transmission, etc. are available in the country and their coverage is increasing rapidly.
3.3 Water supply
A huge programme deemed to satisfy safe water demand in the towns and rural areas was implemented during the country’s first five year development plan for Accelerated and Sustained Development to end Poverty and presently the preparation of another water supply programme, which will be implemented in the second five year development plan, is being finalized.
3.4 Road transport
In 2008/09, the total road network, excluding community roads, had reached 29,257 miles, out of which 46 percent are track roads and the remaining 54 percent are rural roads with annual growth rate of 5 percent. Based on the classification of the road network, more than 12,694 miles are in the Federal network, out of which asphalt road constituted 30 percent and gravel road 70 percent. All-weather rural road, constituting 15,613 miles of the total road net work in 2008/09 grew by an average of 7% per annum in the last several years.
3.5 Air Transport
Air transport is an important part of Ethiopia's transport network. Ethiopian Airlines, Africa's World Class Airline, has gained an excellent reputation internationally in its 66 years of active services, provides both domestic and international air transport services. It has an outstanding safety records and is one of the few profitable African airlines.
Ethiopian services include both passenger and cargo transport in its international flights and domestic routes. It also provides training and maintenance services to more than a dozen other African and Middle Eastern airlines. Domestic flight services are provided through 17 destinations across the country.
Ethiopian links the country with over 50 destinations worldwide including Brussels, Frankfurt, London, Paris, Rome, Stockholm, Washington DC, Bahrain, Bangkok, Beijing, Beirut, Dubai, Guangzhou, Hong Kong, Jeddah, Kuwait, Mumbai, Delhi, Riyadh, Sana’a, Tel Aviv , Johannesburg, Nairobi, Lagos, Lusaka, Accra, Dakar and many more big cities in Africa. It is also expanding its international services.
Ethiopian cargo services covers over 40 cargo destinations such as Dubai, Jeddah and Luxembourg via its hubs in Addis Ababa and Liege. Ethiopian cargo operates dedicated freighter aircraft on charter and scheduled basis.
3.6 Marine Transport
Addis Ababa, the capital city, is linked by road to the port of Djibouti, at the Gulf of Aden. The port of Berbera in Somaliland and Port Sudan are other external trade routes that provide services for export-import trades of the country. Another potential port accessible to Ethiopia is Mombassa in Kenya.
In order to ensure efficient, cost effective and reliable import and export movement of cargo to and from the sea ports of neighboring countries, the government has established the Dry Port Service Enterprise. The Enterprise is currently operating two dry ports which are located at Modjo, in the Oromiya Regional State, and at Semera, in Afar Regional State.
- Financial Services
The National Bank of Ethiopia is the central bank of the country. Commercial banking functions are performed by the state-owned Commercial Bank of Ethiopia (CBE) and an increasing number of private banks. The CBE and private commercial banks offer savings and checking accounts, short-term loans, foreign-exchange transactions and mail and cable money transfer services. They also participate in equity investments, provide guarantees and perform other commercial banking activities.
The number of banks operating in the country reached sixteen (three of them government-owned and the rest private) at the end of 2009. These include the two specialized state-owned banks, i.e. the Development Bank of Ethiopia (DBE) and the Construction and Business Bank (CBB). The DBE, with its 32 branches, extends short-, medium- and long-term loans to viable development projects including industrial and agricultural projects.
The CBB, with its 27 branches, provides long-term loans for the construction of plants producing housing construction materials and the construction of private schools, clinics, hospitals, and real estate development. Private banks operating in the capital and other major cities are Abyssinia, Awash, Nib, Berhane, Buna, Cooperative Bank of Oromia, Dashen, Lion, Oromia, United, Wegagen, Zemen and Abay.
The number of insurance companies is thirteen (one is government-owned and the rest are private). Private insurance companies existing in the country are Africa, Awash, Global, Lion, Nib, Nice, Nile, Nyala, United, Oromiya, Ethio-Life and Abay.
In addition to banks and insurance companies, micro-finance institutions (MFIs) play an important role in providing credit and saving facilities for micro enterprises. Currently, there are a number of MFIs providing microfinance activities in areas of credit delivery, saving, money transfer and pension payment services in eight of the eleven regions.
The Ethiopian tax law provides for the imposition of direct and indirect taxes. The direct taxes are divided in to five categories: personal income tax, rental tax, withholding tax, business profit tax and other taxes. The main types of indirect taxes applicable are value added tax, custom duty, excise tax and turn over taxes.
5.1 Direct Taxes
Incomes taxable under Income Tax Proclamation No. 286/2002 (as amended) include incomes from employment, business activities, personal activities, entrepreneurial activities by non-residents, movable property, immovable property, alienation property, dividends distributed by resident company, profit shares paid by registered partnerships, interest paid by the national, regional or local governments, and license fees.
Other direct taxes applicable are royalties (5%), income paid for services rendered outside of Ethiopia (10%), income from games of chance (15%), dividends (10%), income from rental of property (15%), and interest income (5%) and are payable at flat rates.
5.2 Indirect Taxes
The value added tax (VAT) system, which came into effect on 4th July 2002, largely replaced the old business tax system of commodity and service taxes including the sales tax and the withholding tax. The VAT rate is 15% of the value of every taxable transaction by a registered person and all imports of goods and services other than those exempted. Taxable transactions which shall be charged with zero percent are: export of goods or services to the extent provided in the regulations, the rendering of transportation or other services directly connected with international transport of goods or passengers as well as the supply of lubricants and other consumable technical supplies taken on board for consumption during international flights.
Excise tax is payable on a range of consumer goods, whether locally produced or imported, e.g., alcohol, tobacco, salt, fuel, television sets, cars, carpets and toys. Its rates vary from 10% on receivers, garments and textiles of any type and fabrics to 100% on perfumes, vehicles above 1,800 cc and alcoholic drinks. It is payable in addition to VAT.
Turn over tax, under the total value of 500,000 Birr, is paid at a rate of 2% on goods sold or services rendered (by contractors using grain mills, tractors and combine harvesters) locally and 10% on others.
- Human Resource
Ethiopia has abundant supply of skilled workers in various fields at internationally competitive rates. Wages and salaries vary on the type of profession and level of skill required. They are determined by agreement between the employer and the employee.
In conformity with the international conventions and other legal commitments, Ethiopia has enacted its labor law to ensure the worker-employer relations be governed by the basic principles of rights and obligations with a view to enabling workers and employers maintain industrial peace and work in spirit of harmony and cooperation.
The labor law has fixed hours of work as eight hours a day and thirty-nine hours a week. Work done in excess of these hours is deemed to be overtime. Labor disputes in Ethiopia are resolved through the application of the law, collective agreements, work rules, and employment contracts.
Foreign investors obtain work permits for their expatriate employees directly from the Ethiopian Investment Agency (EIA). The EIA processes applications of work permits in an hour.