Foreign direct investment (FDI) in Ethiopia

FDI in Figures

According to UNCTAD's World Investment Report 2023, FDI inflows to Ethiopia decreased to USD 3.6 billion in 2021, down from USD 4.2 billion the previous year. However, the total stock of FDI remained substantial at USD 35.2 billion, representing around 29.3% of the country’s GDP. Foreign investment primarily targets sectors such as oil refining, mining, real estate, manufacturing, and renewable energy. Ethiopia has also capitalized on challenges faced by Bangladesh's textile sector to attract foreign textile companies. China stands out as a significant investor, accounting for 60% of new FDI projects approved, with substantial investments in manufacturing and services. Other major investing countries include Saudi Arabia and Turkey. Despite challenges such as the conflict in the Tigray region and political instability, Ethiopia attracted USD 3.4 billion in FDI in the fiscal year 2022/23. Notable investments include Safaricom's pledge to invest USD 300 million annually for ten years and the United Kingdom's Marriott Drilling Group securing financing for the construction of two geothermal power stations in Tulu Moye and Hawassa, which will be the country's first.

Several constraints hinder foreign investment in Ethiopia, including high state interference in the economy, poor infrastructure, challenges related to land acquisition, strict foreign exchange controls, high transaction costs, and institutional weaknesses. The lack of an independent judiciary undermines the rule of law and long-term economic development prospects. Moreover, the Ethiopian government maintains full control over the services sector. Progress has been made in improving transport infrastructure and electricity production to enhance Ethiopia's attractiveness. However, the non-convertibility of the Ethiopian birr restricts foreign exchange availability, impeding companies’ ability to repatriate profits and obtain investment inputs. The impending privatization of state-owned sectors and the creation of special economic zones are expected to boost private investment. To enhance the business climate, the government recently approved a new foreign investment law and issued new investment incentives regulations in 2022. Foreign and domestic private entities have the right to establish, acquire, own, and divest most types of business enterprises. While private land ownership is not permitted, land can be leased for up to 99 years. Foreign investors seeking to acquire existing private enterprises or shares must obtain prior approval from the Ethiopian Investment Commission (EIC). Despite challenges, Ethiopia benefits from abundant and low-cost trainable labor and strategic access to lucrative markets in the Middle East and Europe, though it depends on Djibouti for access to the Red Sea and Suez Canal. Ethiopia ranks 125th among 132 economies on the Global Innovation Index 2023 and 156th out of 184 countries on the latest Index of Economic Freedom.

What to consider if you invest in Ethiopia

Strong Points

Among the reasons to invest in the country there are:

• one of the fastest growing economies in the world, with GDP growth averaging 10% in the last decade according to the IMF
• Ethiopia is the second largest market in Africa, with a population of around 102 million people and a rapidly growing middle class
• a relatively stable climate for investors
• lower levels of corruption compared to the regional level
• a widespread territory, rich in natural resources and extremely fertile
• several governmental policies aimed at attracting FDI inflows are in place (i.e. over 30 bilateral investment promotion and protection agreements signed, Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA), foreign investors have the right to make remittances out of the country in convertible foreign currency at the prevailing rate of exchange, fiscal incentives, etc.)
• the country has the second largest labor force in Africa in terms of number of people, with low salary levels
• the economy is now in a phase of diversification.

Weak Points

Ethiopia's weak points in terms of FDI attractiveness are:

• its vulnerability to climate conditions and changes in world commodity prices
• the isolation of the country, which is landlocked
• insufficient level of foreign exchange reserves
• some difficulties in the business and governance environment
• the unstable regional context (and national one in the last period, with some protests from the Oromo ethnic group)
• the exchange rate volatility
• the fact that ethnic conflicts - often arising from the use of resources and land disputes - occasionally become violent.

Government Measures to Motivate or Restrict FDI

Telecommunications, power transmission and distribution, and postal services, with the exception of courier services, are closed to the private sector, both the foreign and domestic. The manufacture of weapons and ammunition can only be undertaken in joint ventures with the government.