It was a while back when senior managers of foreign companies with investments in Ethiopia met high ranking government officials entrusted with persuading the world that Ethiopia is a remarkable destination for foreign direct investment (FDI). Many of those who have already come and run some operations had a different opinion. It is tough to do business in Ethiopia, they asserted, using the Doing Business Index of the World Bank (WB) released last year.
Unsurprisingly, senior officials of the Ethiopian Investment Commission (EIC) were dismissive of complaints in relation to the bureaucracy, finance, land and contract administration. They promised the index for the year 2018, when it was to be released, would testify to the “reforms” their government has undertaken to help ease the burden on businesses.
The jury was out last week, once again demonstrating there is no love lost between Ethiopia and the Bretton Woods Institutions. The latter is a constant pain in pointing out the snags in the country’s economy, whether it be the overvalued Birr or mounting public debt as well as the widening deficit in the balance of trade. The Ethiopian government, already faced with a dire political situation, prefers China’s unquestioning camaraderie if a presentation by Seyoum Mesfin, former minister of Foreign Affairs, made to a group of think-tanks at the Sheraton Addis last week, serves as any indication.
At other times, these institutions function as a fallback, in case policies do not pan out and the economy still ails, as long as the state is willing to go along with prescriptions too painful to swallow. Relenting to pressure from the Bretton Woods in adjusting the exchange rate with a stroke of a pen is one illustration of a policy decision with consequences far from what policymakers are prepared to grasp.
But nothing speaks better for the institutions than annual reviews such as the International Monetary Fund’s (IMF) Article IV consultations and the World Bank Group’s Doing Business reports. The former, in its 2017 report, is believed to have played a crucial role in the National Bank of Ethiopia’s (NBE) decision to devalue the country’s currency by 15pc. While the latter, which measures a country’s business environment conduciveness for domestic firms, has already instigated a workshop where reforms are expected to be introduced.
If the reforms, however reactive, signal that the authorities take the Doing Business report seriously, then they better be hard-hitting, with long-term economic outcomes and sustainability in mind. Vitally, they need to take a page out of the experience of regional peers, specifically from Kenya and Rwanda, since even those who prefer to swallow the report with a grain of salt cannot deny that doing business in Ethiopia is indeed hard.
For investors coming to Ethiopia, the main incentives have been cheap labour, with Ethiopia being one of the most popular destinations for low-cost country sourcing, complemented by the-lowest-in-the-world electricity tariff and the might of the state in doing whatever its custodians are pleased with, to no limit of their power.
Nonetheless, business owners in Ethiopia routinely complain of limited access to finance, the foreign exchange crunch, uncompetitive logistics industry, mediocre customs clearance procedures and bureaucratic hackles. These elements factor into the components that comprise the 10 indices of the 2018 Doing Business report, which unsurprisingly has found Ethiopia to be the 161st most conducive for businesses out of the sampled 190 countries.
The score for Ethiopia is two rankings below that of yesteryear’s, where Ethiopia stood 159th. On the report’s distance to frontier (DTF) measure, with the highest score of 100 being the best performance by an economy across every indicator, Ethiopia’s is 47.7pc. Regional peers like Kenya and Rwanda scored 65.15pc and 73.4pc, respectively, with the latter ranking second highest in the sub-Saharan region.
For sub-Saharan Africa itself, which is composed of countries that have historically ranked poor in infrastructure, low domestic resource mobilisation and unskilled labour, the report awards an average score of 50.43pc, indicating that Ethiopia is underperforming in a region that is, despite the improvements, already underperforming.
To its credit, the report is not all doom and gloom. In the frontier measure, Ethiopia’s score has shown an improvement compared to that of the past year. Amongst the areas the report takes into consideration, ranging from starting a business, getting electricity and credit to paying taxes and the cost and outcome of insolvencies, two reforms have been recorded.
Ethiopia has removed the requirements for a minimum paid-up capital for those looking to start a business. For businesses that import and export items, cross-border trade has been made more fluid after a risk-based inspection system was introduced at the customs, and documentation was made more efficient.
Sadly, these improvements are likely to have been nullified by developments the report overlooks. Some factors do not figure into the indices, like the political climate of a country which would nonetheless affect business confidence. The timing is also an issue, as it was concluded early in June this year, while major monetary policies have been undertaken in the ensuing months.
Last month, the central bank had imposed a 16.5pc cap on credit by private banks, inevitably affecting investments by making access to finance stringent. There are also the political tensions in different parts of the country, having begun two years ago and climaxed last year. Sometimes sporadic, often destructive unrests, where businesses and manufacturing plants have become targets of popular disillusionment, have taken their toll on the economy.
The latest in this saga is a discontented public in the town of Arerti, in the Amhara Regional State, where angry protestors burnt a chip wood plant erected with an investment of 80 million Br to ashes last week, leaving hundreds of employees jobless.
Consequently, along with other factors such as the forex crunch and the 2015 El Nino-induced drought, the growth rate in gross domestic product (GDP )could not satisfy the yearning for double-digits in the past two fiscal years, according to the IMF.
Apparently, the country’s economy needs reforms. The current inflationary pressure, stagnant export earnings and ever-increasing imports, together with the sad news of the nation’s deteriorated standing in easing doing business index, are a call for help. And policymakers need not look far but to the country’s regional peers to improve the business environment and enhance confidence.
Amongst the areas Ethiopia has performed poor are protecting minority investors (minority shareholders), starting a business, getting credit and dealing with construction permits. All of which are indices that countries like Kenya, Rwanda, Senegal or Nigeria, each of which implemented five or six reforms during the year 2018, have performed better at.
When it comes to protecting the rights of minority shareholders in companies, Ethiopia can look up to Rwanda, where corporate transparency and accountability is established by requiring public companies to publish audit reports in newspapers. In dealing with construction permits, the Rwandans have eliminated physical procedures and initiated online permit application processes. And on the access to finance front, especially in getting credit, Senegal is a good example, where five years ago the country expanded the types of assets that could be taken as collateral.
In starting a business, authorities need not look farther than Kenya. The East African nation of almost 50 million citizens has online platforms where individuals can register a company, reserve names and trademarks, and pay for the services.
Incomparably, every year in Ethiopia, businesses are compelled to waste their time lining up to get clearance from the tax authority, a requirement indispensable to renew both trade registration and license. In this age and era, it is baffling why the renewal of a permit is required, lest a company registration.
It would only be sufficient for companies to notify regulators at the Ministry of Trade (MoT) when they make a change on shareholders’ structure, move their physical addresses or change the types of businesses they were initially permitted to engage in. The tax authority should have its own mechanism to reach out to taxpayers, without necessarily using the licensing arrangement as a long leash.
Kenya is also an excellent example of a country that has a well-liberalised economy, allowing the private sector to be more competitive. Improved trade could be achieved by becoming a signatory to trade agreements, which is of great importance to a landlocked country like Ethiopia as it reduces the cost of doing business.
The right place to start would be the free trade area agreed under the Common Market for Eastern & Southern Africa’s (COMESA), of which both Rwanda and Kenya are members. Joining the World Trade Organisation (WTO), with far better political commitment than what Ethiopia has been demonstrating, is also imperative. The derivative reforms required in the process of accession to the WTO are more useful to help open up the economy than the actual membership.
Such reforms need to be taken for the sake of small and medium-sized enterprises (SMEs), which Prime Minister Hailemariam Desalegne, during his press appearance last Thursday, has confessed are the future. It is these small businesses that aggregate to create a vibrant private sector that could benefit Ethiopia’s youthful population.
To get there, it would only be helpful if the government nitpicked some of its neighbours’ laudable efforts.
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