The flow of foreign direct investment (FDI) into Ethiopia is the victim of marked decline, as consistent and noteworthy growth in the five years leading up to 2017 has since been replaced by substantial contraction.
While the total number of FDI projects remains relatively stable, there is a pointed drop in the number of projects that make it into implementation. In 2019, 49 of 305 project proposals transitioned into implementation. In 2023, just 5 of 304 planned investments were implemented, signaling a 90 percent decrease and mounting challenges in converting investment plans into tangible operations.
One of the most profound consequences of the declining FDI projects is its adverse impact on employment opportunities in Ethiopia. The number of individuals employed by FDI projects has seen a stark decline. In 2019, over 23,000 people were permanently employed by FDI projects. This number plummeted to just 5,487 in 2023, representing an 80 percent decrease. This sharp decline underscores the ripple effect of reduced investment activity, leading to a significant reduction in job opportunities.
RELATED POSTS
While Safaricom’s entry into the market with an 850 million dollar license bid in 2021 provided a temporary boost, it does not reflect the overall trend. In fact, total FDI in 2021/22 was 3.3 billion dollars, a 16.4 percent decrease from the previous year despite the Safaricom investment.
Ironically, this decline of FDI inflow coincides with a critical period where Ethiopia desperately requires foreign currency, particularly due to the absence of new loans from bilateral and multilateral creditors. This is making an already difficult economic situation untenable, intensifying the strain on dwindling foreign exchange reserves.
Analysts such as Samson Tsedeke, a senior investment advisor, observe the challenges include instability and insecurity arising from internal conflicts, policy inconsistency and inefficient bureaucracy, a severe shortage of foreign currency, external pressures such as exclusion from preferential trade agreements like AGOA, and a lack of available finance due to liquidity issues within the banking industry.
Ethiopia’s persistent instability and conflict have emerged as significant barriers for both current and potential investors. The country has been perpetually embroiled in armed conflictssince 2019, with chaos in Oromia, the deadly two-year war in Tigray, and the ongoing violence in the Amhara Regional State among the security woes driving away both local and foreign investment, including large-scale FDI projects.
The pervasive conflict and insecurity have not only affected existing foreign and domestic enterprises but have also deterred potential investors from considering Ethiopia as a viable investment destination. The devastating effects of prolonged conflicts have had profound economic repercussions, shaking investor confidence and disrupting economic activity, as is evidenced by the government’s inability to attract buyers for a second telecom license.
In November 2023, the Ethiopian government initiated a bid to grant a telecom license to a second foreign company. However, the tender for the telecom license failed to receive any bids. This lack of interest from potential investors was largely attributed to conflict and instability in various parts of the country.
The turmoil has had tangible effects on businesses like the East Steel Factory, a Chinese reinforcement bar (rebar) maker. Operating in the Eastern Industry Zone in Dukem, near Addis Ababa, the factory has been on the brink of a production halt due to ongoing insecurity and instability, severely hampering its ability to sell its products.
Over the past three years, the factory has experienced disruptions in the domestic market, particularly in regions like Tigray, Oromia, and Amhara, which have been adversely affected by instability. The impact of this conflict extends beyond mere market disruption; with the construction sector paralyzed in these conflict-affected areas, demand for steel bar products has plummeted.
Foreign currency challenges have further compounded the factory’s operational difficulties. In order to import essential inputs such as raw materials and coal, the factory relies on foreign exchange, which has become increasingly scarce due to Ethiopia’s economic challenges.
Despite investing 25.8 million dollars in its rebar production line, which began operations in 2013, the East Steel Factory has struggled to sustain its production due to the adverse effects of conflict and instability.
The shortage of foreign currency presents a significant challenge for businesses heavily reliant on imported inputs and raw materials in Ethiopia. Virtually all sectors face this challenge. This shortage has created complex hurdles for companies.
Lifan Motors, a Chinese automaker headquartered in Chongqing, is a notable example of a company grappling with the foreign currency crunch. With a production capacity of 2,000 cars per year, Lifan Motors has been forced to halt production due to acute shortages of foreign currency, which amount to approximately one million dollars monthly. The inability to secure stable supply chains for crucial components has further hampered operations, leaving the company in a precarious position.
Despite entering the Ethiopian market in 2007, the company has struggled to survive, facing difficulties in accessing foreign currency from banks. In an effort to mitigate the effects of the forex shortage, Lifan Motors attempted to export commodities such as coffee and sesame to generate foreign currency, but the challenges persist.
In addition to instability and foreign currency shortages, the inability to access finance from banks presents another significant challenge for businesses in Ethiopia.
The limited liquidity within banks has led to difficulties in availing loans to businesses. Government policies, such as the 14 percent loan increment rules implemented by the National Bank of Ethiopia (NBE), have further restricted access to finance for businesses.
This policy aims to curb inflation by limiting credit growth to 14 percent,however, it inadvertently hampers investment opportunities by constraining the availability of loans for companies seeking to expand their operations, according to Samson.
Ethiopia aimed to boost its industrial exports by building modern industrial parks, attracting foreign investors, and encouraging companies to focus on international markets. Unfortunately, this plan has not delivered as expected.
While investments like the Eastern Industry Park house hundreds of factories and thousands of workers, the valuable data shows that only 6 out of 127 actually export. Many businesses within industrial parks lack the necessary competitiveness to succeed in international markets.
The Belgium-based Ontex Hygienic Disposables Plc, a manufacturer of Canbebe diapers, encountered significant challenges upon opening a factory in Hawassa Industrial Park in 2017. Despite aiming to target East African consumers, the company struggled with high production costs and logistical complexities. It failed to export any of its products, thus failing to meet export requirements for companies within industrial parks. Consequently, Ontex Hygienic Disposables Plc was forced to close and its assets were confiscated by the government.
Since 2021, Ethiopia has faced a significant setback in its export prospects following the delisting from the African Growth and Opportunity Act (AGOA). This exclusion came as a result of the armed conflict between the Ethiopian government and the Tigray People’s Liberation Front (TPLF). The exclusion of Ethiopia from AGOA has heavily affected businesses, particularly garment manufacturers.
The garment factories within the Hawassa Industrial Park heavily rely on the US market, with about 85 percent of their exports destined for the United States. Before the suspension of AGOA, these factories employed 30,000 people. However, following Ethiopia’s exclusion from the preferential trade deal, this number decreased to 21,000, resulting in 9,000 job losses. Export revenues also declined significantly, with exports from the industrial park plummeting from 80 million dollars in 2021 to approximately 55 million dollars.
PVH Corp., an American clothing company, closed its factory in Hawassa Industrial Park in November 2021 due to Ethiopia’s loss of duty-free access to the United States amid the conflict in Tigray. PVH had established its presence in Ethiopia in 2017.
The garment factories in Hawassa Industrial Park, which were recovering from the impact of Covid pandemic in 2021, were the primary victims of the AGOA suspension, which resulted in production cuts of up to 40 percent.
In response to the challenges posed by the loss of AGOA benefits, the government permitted garment factories to sell up to 80 percent of their products domestically, a departure from previous restrictions. However, despite this adjustment, garment manufacturers continue to face various challenges, with some factories on the brink of closure, according toHibret Lemma, CEO of the Hawassa Industrial Park Investors Association.
Experts and investors criticize the government’s lack of a long-term vision and policy framework regarding foreign direct investment.
Hibret highlights policy inconsistency, lack of institutional coordination, and experimental policies as major challenges confronting garment companies.
The banking industry’s foreign exchange retention policies have also undergone several changes, contributing to uncertainty and instability for exporters. For instance, the NBE has implemented various retention limits on export earnings over time.
Before February 2019, Ethiopian exporters were entitled to keep 10 percent of the earnings in foreign currency for an indefinite period, while the remaining 90 percent was subject to conversion into Birr if not used within a 28-day window.
In February 2019, the NBE changed the ratio to 30 percent and 70 percent, with exporters able to retain nearly a third of their earnings indefinitely. Two years later, the rules changed again and exporters were required to surrender 30 percent of forex earnings to the central bank, and allowed to retain a third of the remaining 70 percent. The rest would remain with commercial banks.
These constant changes in the rules have made things uncertain and difficult for exporters in Ethiopia.
It is among the policy-side issues that are driving investors away from hubs like Hawassa Industrial Park. Hibret recalls a time when foreign investors were clamoring over the limited space in the park. But those days have gone, and Hawassa Industrial Park has not seen any new foreign investments lately. The most recent addition was Seamless Apparels Manufacturing plc, an Indian apparel factory that joined the park two years ago.
Hibret emphasizes the importance of foreign investors, highlighting their financial resources, expertise, and global market connections essential for exporting. He points out that domestic companies are currently not ready to start exporting, let alone compete globally.
The only Ethiopian textile company exporting its products is Desta Garment Plc, established in 1993.
Over the past three years, Ethiopia has faced significant challenges related to macroeconomic instability, such as inflation and imbalances in foreign exchange rates. The large disparity between official and parallel market exchange rates, where one dollar is valued at 56 Birr in banks but more than 114 Birr in the parallel market, has put immense pressure on investors due to the overvaluation of the Birr. This affects investors, making imports expensive and exports less competitive, according to a development policy expertwho spoke with The Reporter on condition of anonymity.
Skyrocketing inflation exacerbates these challenges, making it difficult for both existing and potential foreign investors, as the rapid increase in prices pushes up wages and production costs, squeezing profit margins.
Repatriating profits has also become a hurdle for foreign investors, as the shortage of hard currency prolongs the process, according to the policy expert. It can take anywhere from 6 to 18 months to transfer profits out of the country.
Moreover, the absence of predictable and transparent government policies further discourages foreign investment.
Hibret suggests prioritizing efforts to retain existing FDI rather than focusing solely on attracting new investments. The development policy expert, on his part, stresses the importance of consistent, long-term policies to attract and retain investors.
Short-term campaigns are insufficient to address the underlying issues and instead, focusing on resolving the challenges faced by existing investors can serve as a catalyst for attracting new ones, turning them into ambassadors for Ethiopia’s investment potential, he observes.
And most urgently, as Samson underscores, peace and stability remains critically important in tackling Ethiopia’s complex business landscape.
