Six years of pronounced decline in investment attractiveness due to political unrest and other economic factors has led the federal government to bet big on a new approach: Special Economic Zones (SEZs). The authorities hope to see the initiative integrate various sectors, rather than the sole focus on manufacturing that was the hallmark of the preceding industrial park era, and reduce government involvement in the development and operation of SEZs.
The Gada SEZ was inaugurated on May 11, 2024, in the presence of Prime Minister Abiy Ahmed and senior government officials. During the launch ceremony, the Prime Minister announced that the government has shifted its policy focus from industrial parks to SEZs, which he hopes will address the shortcomings of industrial parks by integrating a wide range of economic sectors and relying less on credit for construction. Abiy foresees that SEZs will create more jobs and generate foreign currency.
However, the initiative is not without its skeptics.
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Ethiopia’s experience with industrial parks, which focused solely on manufacturing and were built through significant foreign debt, has not yielded the expected results. This raises concerns about the success of SEZs, which are slated to include agriculture, trade, and even housing.
The federal government recently approved the long-awaited Special Economic Zones Proclamation. It looks to establish SEZs across the country, moving beyond the traditional focus on manufacturing industries.
According to the proclamation, these zones will attract foreign direct investment, create jobs, enhance trade and productivity, and integrate Ethiopia into global value chains. SEZs are also hoped to serve as a platform for experimenting with reform programs to facilitate the move towards economic liberalization.
There are two significant SEZ projects under development at present: the Dire Dawa SEZ and the Gada SEZ.
Work to establish the latter started in April 2019, according to Motuma Temesgen, director-general of Gada SEZ. Construction has begun following the completion of a feasibility study and site selection process.
Motuma and his team are looking to integrate economic sectors such as agriculture, trade, industry, and services at the site, which will feature free trade zones, facilities for import-export trade, administrative zones, logistics parks, real estate, recreational areas, service areas (education and health), agro-processing, urban farming, and commercial centers or central business districts.
The Gada SEZ covers 240 hectares of land located 65 kilometers south of Addis Ababa, on the crossroads of routes from the capital to Djibouti and Kenya. The Ethiopia-Djibouti railway also passes through the area.
Earlier this month, the construction of the Lumee Free Trade Zone within the Gada SEZ was launched in partnership with the China Civil Engineering Construction Corporation.
More than 21 companies have thus far shown interest in entering the Gada SEZ, according to Motuma.
He noted the Zone offers incentives including administrative, infrastructure, and fiscal benefits. Infrastructure incentives cover roads, electricity, water, telecom, drainage systems, and wastewater treatment systems. Fiscal incentives include duty-free international trade.
However, the details concerning the incentives are not yet concrete, awaiting forthcoming directives and regulations from the federal government. Motuma expects to see rules that would allow exporters to hang on to 100 percent of the forex they earn from exports.
He indicates the free trade zone within the SEZ will facilitate trade by allowing imported items to be stored until they are sold, helping importers find a market for their goods.
The Dire Dawa Free Trade Zone, established in 2018, is the first of its kind in Ethiopia. It occupies 150 hectares of land, 445 kilometers east of Addis Ababa. It sits on a plot that previously housed the Dire Dawa Industrial Park, which originally featured 15 factory sheds primarily for textile and apparel manufacturers.
One company that has benefited from the free trade zone is Elauto Engineering and Trading Plc, a car assembler. It opened a plant there in August 2022 with an investment of 700 million birr.
Roble Fida, company manager, appreciates the zone’s infrastructure but has concerns about some challenges.
Elauto faces issues with higher electricity rates and water shortages because the water supply infrastructure is still under development. An additional hurdle is the lack of a railway connection to the zone. This makes transporting cars to Addis Ababa, the company’s primary market, more expensive by truck compared to using the railway. He believes a railway connection would improve access to both the market and the port.
The factory currently assembles up to 12 cars a day and employs 110 people. Its primary customers are taxi associations. However, Roble highlights financing as a major challenge for the car assembly industry. Since taxi associations struggle to obtain loans from banks, they haven’t been able to purchase the cars they ordered, hindering sales for Elauto.
The recently approved Ethiopian SEZ Proclamation points out that industrial parks have been focused only on manufacturing, limiting economic diversification.
The new law aims to diversify the economy beyond manufacturing by offering several key incentives for SEZ developers, operators, and enterprises such as customs and tax exemptions; duty-free import of construction materials; capital goods customs exemption; and withholding tax exemption.
According to the new law, imports and exports within SEZs are exempt from customs duties, VAT, and other indirect taxes. Capital goods and construction materials are also duty-free. Goods and services entering SEZs from the customs territory benefit from zero-rate VAT and are exempt from domestic indirect taxes. Income from investments in SEZs is exempt from dividend income tax and withholding tax during the tax holiday. Additionally, foreign employees are exempt from income tax on their salaries for five years from the business license date.
The law allows private investors, as well as regional and local governments and public-private partnerships, to develop and operate SEZs. Previously, the federal government dominated the development, ownership, and operation of industrial parks. This marks a clear departure from the previous state-led development strategy.
Previously, the federal government dominated the development, ownership, and operation of the industrial parks. This marks a clear departure from previous policy of state-led development strategy.
During the launch of the Gada SEZ, the PM criticized the old policy where the government dominated the sector and relied heavily on foreign loans. He stated that the government has now shifted its policy to involve private investors in the development, ownership, and operation of SEZs.
SEZs have become a key tool for rapid industrial development worldwide. Many countries have used them to attract investment and stimulate economic growth. The purpose of SEZs is to develop supply chains, test policies, and create efficiency and cost-effectiveness by clustering industries together. Clustering industries in one area typically reduces transport and production costs.
SEZs offer both fiscal and non-fiscal incentives to attract firms, including tax reductions, such as reduced corporate taxes or tax holidays, and investment incentives like tax credits or accelerated depreciation allowances to encourage capital investment. Companies in SEZs also benefit from lower import taxes and tariffs.
SEZs have been crucial in increasing exports in many countries. A fifth of Bangladesh’s exports flow from SEZs. The figure is 50 percent in Sri Lanka, and 60 percent in both China and the Philippines.
China has effectively used SEZs to attract foreign investment and transform its economy. Established in the early 1980s, these zones became magnets for foreign investment, which fueled China’s economic growth. The first four SEZs were established in 1979 in the Southeastern coastal region: Shenzhen, Zhuhai, Shantou, and Xiamen.
According to the World Bank, SEZs have contributed 22 percent of China’s GDP, 45 percent of national foreign direct investment, and 60 percent of exports. They have created over 30 million jobs, increased farmers’ incomes by 30 percent, and accelerated industrialization, agricultural modernization, and urbanization.
In Vietnam, SEZs are central to attracting foreign direct investment (FDI). They account for over 50 percent of total FDI and 80 percent of manufacturing FDI. SEZs contribute 40 percent of Vietnam’s GDP and 45 percent of its export value.
In contrast, SEZs in Africa have not achieved significant economic transformation. Research shows that SEZs in Africa have low performance and employ fewer people compared to those in Asian countries. African SEZs generally account for a small percentage of national industrial employment.
For example, in 2019, SEZs in China employed 14 percent of the industrial workforce, significantly boosting job creation and the industrial sector. However, in most African countries, SEZs employ less than four percent of the total workforce.
Inspired by China, Ethiopia has been building industrial parks since 2012. The first public industrial park, Bole Lemi, opened on the outskirts of Addis Ababa in 2014. The second, Hawassa Industrial Park, started operations in 2016.
Today, Ethiopia has more than a dozen operational industrial parks: 4 focused on apparel, 8 on multiple sectors, and 1 on pharmaceuticals. These parks primarily focus on manufacturing, such as textiles and leather. These IPs have created over 100,000 jobs and generated USD 1.1 billion so far, according to the federal government. Despite an investment of over USD 1.5 billion, their economic impact remains limited, contributing only about five percent to Ethiopia’s total exports.
