Balancing Foreign Investment and Free Flow of Capital

Ethiopia is hungry for direct investment but is loath to let desperately needed foreign currency leave its shores. Thus it struggles to balance these needs on a case-by-case basis, depending on which country or regional block it is dealing with.

Capital flow refers to issues related to the transfer of funds from the host country to a home state. Yet it could be limited via capital control measures which can be defined as governmental measures that directly or indirectly affect a number of capital movements and their allocation. Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s. This period was the first time capital controls had been endorsed by mainstream economics.

The Latin American debt crisis of the early 1980s, the East Asian financial crisis of the late 1990s, the Russian ruble crisis of 1998-99, the global financial crisis of 2008, the late Greece euro crisis in 2015 and the Venezuelan Bolivar turmoil of 2016 however, highlighted the risks associated with the volatility of capital flows, and led many countries even those with relatively open capital accounts to make use of capital controls alongside macroeconomic and prudential policies as means to damp the effects of volatile flows on their economies.

Ethiopia has signed 32 bilateral investment treaties (BITs), of which 12 are with individual European Union Member States. Significant other partners include BRICS, whose members include China, India, South Africa, and Russia (but not Brazil), and a number of regional economic partners such as Israel, Egypt, and Sudan. Albeit the Ethiopian BITs with UK, United Arab Emirates, Spain, South Africa, Russia, India, Equatorial Guinea, Belgium, and Luxembourg is not yet entered into force.

However, the Ethiopian BITs adopted double standard measures as far as capital flow is concerned. Since under the Ethio-China and Ethio-Israel BITs have had stringent restrictions. On the contrary, the capital flow under Ethio-Germany and Ethio-Demark is free and without any restriction.

Capital flow is stringently regulated under the Ethio-China BIT which was signed on 11 May 1998 and entered into force 01 May 2000. It contains an article that enforces a guarantee for investors to transfer their investments and returns between territories subject to laws and regulation.

So what does exactly subject to “laws and regulations” means? Is that the limitation clause subject to economic laws only? Criminal laws or any domestic laws? or foreign exchange monetary laws? Actually, part of the Ethiopian investment proclamation vividly stipulates that any foreign investor shall have the right, in respect of his approved investment, to make remittances out of Ethiopia.

However, the proclamation in black and white provides a limitation on expatriates employed in an enterprise to remit, in convertible foreign currency, salaries and other payments accruing from their employment in accordance with the foreign exchange laws of the country.

Paradoxically, from a jurisprudential point of view, there are BITs like Mexico-South Korea as well as America-Ecuador that interpret the phrase “subject to laws and regulations” broadly to the application of laws relating to bankruptcy, insolvency, issues dealing with securities, criminal violations, as well as other issues.

In a nutshell, the Ethio-China BITs clearly restricts the free flow of capital via domestic law restrictions whether such restrictions only foreign exchange law or other broad laws is still bewildering.

Similarly, the Ethio-Israel BITs has had exceptional circumstances to restrict the free flow of capitals under article the treaty. Principally each contracting party agreed, in respect of investments, to guarantee investors of the other contracting party the rights of unrestricted transfer of their investments and returns. However, the Ethio-Israel treaty did not precisely stipulate the scope of what constitutes a transfer of investment and returns. The Ethio-Israel BIT has provided three exceptional grounds to restrict the free transfer of funds among other things, a serious balance of payment difficulties, difficulties of exchange rate policy or setbacks in providing independent monetary policy.

On the contrary, when we look at the Ethio-Denmark BITs, a capital transfer is free and no regulation to that effect. According to the agreement between Ethiopia and the Kingdom of Denmark concerning the Encouragement and reciprocal protection of investments, signed on 24 April 2001 and entered into force 21 August 2005, each party is obligated to allow the transfer (in a freely convertible currency) of payments in connection with investments, including interest and dividends. Likewise, the Ethio-Germany BIT also allows free transfer of capital without any restriction.

Internationally, the International Monetary Fund (IMF) as a regulator of the monetary regime has had provisions dealing with capital flow. As per the IMF articles of the agreement, member states are empowered to exercise controls that are necessary to regulate international capital movements.

The IMF regime provides exceptional grounds to justify derogations from the duty of free transfer of international payments.

Thus, the Ethiopian BITs regime is manifestly characterized by double standard trajectories. Actually, Ethiopia investment relation with European countries is not yet developed well, unlike China and Israel, or one can make a flawed assumption that investors from Denmark and Germany will not come in Ethiopia unless there are huge incentive packages including free flow of capital than Chinese and Israeli investors. In addition, the strategic importance and foreign policy of Ethiopia with countries seem positive and nearly equivalent. In any case, the investment viability and policy of one country towards another should be amended continuously so that there will not be any double standard treatment with almost all bilateral investment treaties in the near future.

On the other hand, those BITs that are regulated like the Ethio-Israel agreement are compatible with IMF articles of agreement on the balance of payment crisis exception while the Ethio-China treaty allows restrictions to be seen in accordance with domestic laws and regulations. Again, this kind of move is not compatible with IMF rules unless it fulfills the customary investment principles of non-discrimination and equity.

In closing, the divergent treatments’ of BITs on capital flow provoke another controversial implication of Most Favored Nation (MFN) obligations of states under the BITs and WTO regime.

MFN obligation force states to treat all its investment signatories to be treated equally whenever any advantage or favor is given to another third state. For instance, Ethiopia has a treaty with Germany which allows free transfer of capital, yet Ethio-China treaty restricts capital flow. So how could Ethiopia adhere with its MFN obligation between Chinese and German investors? It depends on whether our interpretation is going to be lex specialis derogat generalis(special laws prevail over general laws) or by taking bilateral investment treaties as an exception to multilateral treaties having MFN clause.


By Yohannes Eneyew
Yohannes Eneyew is a Lecturer of Law at the School of Law, Samara University. He is interested in international law, human rights, investment and construction law. He can be reached at

Published on Feb 18,2017 [ Vol 17 ,No 876]



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