Assessment of
the Ethiopian
Investment andExport Policy
Tsegabirhan W.giorgis(AAU, School of Economics,)

A Statement of Gratitude
First and foremost to
National Graduate Institute for Policy Studies(GRIPS), Japan
andJapan International Cooperation Agency(JICA)
For
Financing and Their Intellectual Leadership
Yet all weaknesses remain mine alone!
1/18/2012

Tsegabirhan W.giorgis

2

Policy Implications of Globalized Competition
1. Global competitive market dictates the parameters ofcompetition
2. Global governance of global value chains






1/18/2012

Global buyers/lead firms/: large, globally networked andhence control over global supply of commodities, information& market concentration, thus market power concentration!
Global buyers dictate every term (drivers) of competition:
price, quality, standards, packing, delivery time, etc.
Multiple competitive drivers instead of price only imply
development intervention should aim to achieve those nonprice competitiveness too;
Point of development intervention should be not the firm but
the value chain!
Danger of immerization: exporting at great subsidy andeventual loss

Tsegabirhan W.giorgis

3

Ethiopian Investment & Export Incentives
1. Investment incentives,
a. Exemption of import duty highly used
b. Tax holidays(relief) less used related to overall
weakness in tax enforcement in the country;

2. Export schemes, (voucher, duty-drawback,bonded warehouse) have not been used, orat best used by few;
a. Voucher scheme relatively better and improving
over time, yet, the latest figure is <20% of
exporters
1/18/2012

Tsegabirhan W.giorgis

4

No

Incentive and Support
Mechanism Types

Responsible
institution(s) for
offering andadministrating theservice
MoI and ERCA; duty-free
capital goods and spares
importation,
MoI, ERCA andbeneficiary investors

1

Duty free importation ofcapital goods

2

Personal income tax
exemption for expatriates for
2 years3

Tax holidays; exemption of
ERCA and beneficiarybusiness income tax for 2 to 7 investors
years

1/18/2012

Tsegabirhan W.giorgis

Remarks

Highly used andmostly abused
Important for those
who rely on foreigncompanies toconstruct, erect andoperate their projects
Rarely used. Firms do
not apply for suchservice owing to hightax evasion,
unconditional
reporting of loss forlong period of time 5

No

4

5

Incentive and Support
Mechanism Types

Responsible
institution(s) for
offering andadministrating theservice

Exemptions from indirect taxes,
VAT, Sur tax, Withholding andexcise taxes,
Export Promotion instruments: MOTI and custom
Tax exemption on raw material Authority
used for export product••••

1/18/2012

Duty exemption
Duty Draw back scheme
Voucher scheme
BondedManufacturing
warehouse scheme
Tsegabirhan W.giorgis

Remarks

Rarely used
due tobureaucratic
hurdles andhuge datarequirement

6

No

Incentive and Support
Mechanism Types

6

Credit facility (forinvestment and working
capital)8

Industry area facilitation

9(land preparation)
Human resource
development, training

10

11

Responsible institution(s) for
Remarks
offering and administrating theservice
Development Bank; for instance 1.5 Highly used but stillbillion Birr Credit Facility with 7.5– complaints about
9% interest rates, 3-year grace period, access and credit
30/70 equity/loan ratio, businessadministration
itself as collateral – only 30–40% has
been utilized;
Federal and Regional investment
Highly used
office and municipality;
Aggressive investment on higher
learning and vocational training
schools,

Dedicated institutes/agencies,
Production and market
MOTI, dedicated agency to promotelinkage with foreign
textile and leather industries, flower
investors
and export other commodities
Others: Industry Development Institutes are established to facilitate all the above and anyother problem

1/18/2012

Tsegabirhan W.giorgis

7

Voucher Usage Rate2005 2006 2007 2008 2009
/06

/07

/08) /09/10

Average

257

403

253

1.02 1.20 1.50 1.50 2.13

1.50

Export value of exporters whichhavebenefittedthevoucherscheme (million)
Total Annual Export value

115 209279(inbillions)

Share of voucher based
exports from total exports(in %)
1/18/20121117

Tsegabirhan W.giorgis

17

19

19

17
8

Why exporters fail to use export facilities?
1. Excessive data requirement
Detailed, absolute and perfect export plan withlong export order, with no room for adjustment

2. Control based management system in ERCA
and overall civil service of the country; while
the task requires result-oriented/based
management system, with discretionary
power of the civil servant to evaluate therequest for settlement of uses of the voucher
scheme.
1/18/2012

Tsegabirhan W.giorgis

9

Overall on incentives
1. Productivity not at the center of support
2. Innovation not at the center of support
3. Globally incentives target at the industry not at the
chain, but competitiveness is being determined by
performance along the value chain. Ethiopia should
be innovative to recognize this new reality and direct
its policy attention at solving development
bottlenecks along the value chain!
4. From the literature, instead of tax holidays, consider
to lower CIT;
5. Consider
theintroductionofaccelerated
depreciation instead of the ongoing straight-line
depreciation;
1/18/2012

Tsegabirhan W.giorgis

10

Foregone Revenue & Costs

Foregone Revenue & Costs
1. Though there is holistic support weconcentrate on investment and export
incentive instruments and schemes
2. Foregone duty and tax elements include :a. Import duty exemption (customs duty)b. Forgone tax including VAT, Excise Tax, Sur Tax& withholding tax.

1/18/2012

Tsegabirhan W.giorgis

12Annual Forgone Government Revenue, (in millions
USD)

1/18/2012

Tsegabirhan W.giorgis

13

Forgone Import Duty
1. The absolute size of foregone revenue has
been consistently increasing over the period
2004-2010
2. The foregone customs duty per additional
unit of investment has been increasing fromthe order of ETB 0.01 to ETB 0.32 per one
Birr of additional investment.

1/18/2012

Tsegabirhan W.giorgis

14

Forgone Import Duty to Support one Birr of Realized
Investment

1/18/2012

Tsegabirhan W.giorgis

15

Foregone Tax Revenue
1. The foregone tax revenue from VAT, Excise
tax, Sur tax, Withholding tax, has been highand increasing over time;
2. Yet, export promotion schemes are not fully
utilized. Voucher only <20% of exports. Had
these export promotion schemes were fully
used, foregone tax would have been
substantially large and increasing over time.

1/18/2012

Tsegabirhan W.giorgis

16

Forgone tax (VAT + Excise + Sur + Withholding) (in Millions
USD)

1/18/2012

Tsegabirhan W.giorgis

17

Share of foregone tax to Export (in %)1/18/2012

Tsegabirhan W.giorgis

18

Foregone Tax Revenue
1. But difficult to attribute all foregone tax
revenue to exports
2. What if we attribute the foregone tax
revenue to exports under three scenarios:
100%, 50% and 25% attributed to export?

1/18/2012

Tsegabirhan W.giorgis

19

Foregone Tax per Additional One Dollar of Export

Year

If 100/% offoregone
attributed toexportIf only 50% of
foregone tax
attributed toexportIf only 25% of
foregone tax
attributed toexport

2004

0.05

0.03

0.01

2005

0.35

0.18

0.09

2006

0.35

0.18

0.09

2007

0.51

0.25

0.13

2008

0.55

0.28

0.14

2009

0.63

0.32

0.16

2010

0.44

0.22

0.11

20

1/18/2012

Tsegabirhan W.giorgis

21

Other costs incurred by the government
1.
2.
3.
4.
5.
6.
7.
8.

Holistic support for which data are not available
So the above assessment is based on partial figures,
Credit facilitation
Prior land allocation: No (or no access to) data on number of such land
allocation, opportunity cost of land, etc.
Prior access to inputs in shortage: cement, for how many and how muchTraining, data on number of training, training duration, training cost per
trainee are not available/not accessible/;
Market search etc are real costs, but for which there is no ready data toincorporate and assign it to particular sectoral/industry/ investment
Cost of industry development institutes: Leather, Textile, Diary & Meat,
Flower & Horticulture, and probably othersa. Establishment cost should be highb. Running budget of Ethiopian Leather and Leather Institute for2010/2011 was ETB 1.6 million, multiplying by 5 more developmental
institutes or taking a weighted sum of such number of institutes would
give high cost figure,

1/18/2012

Tsegabirhan W.giorgis

22

Foregone & Cost
Overall the foregone duty and taxes are on thehigh side.
The other costs of holistic support are expected
to be on the high side
At a time when the government direct
investment in major developmental projects
is increasing, the opportunity cost of suchforegone government revenue should
definitely be high.
1/18/2012

Tsegabirhan W.giorgis

23

Benefits/Outcomes/ of the
Incentives Systems

Benefits
1. Sufficiently long period to expect visible change incontribution to GDP, investment, export, production
capacity etc.
a. Investment Incentives 1993¥96 -2012(13-16 yrs)
b. Export incentives since 2001-2012 (11 years)c. Industrial policy since 2003 (9 years)

2. Contribution of the manufacturing industry to GDP
remained marginal and stagnant over time,
3. Low investment rate, of all, low investment
realization rate, (< 20% for recent years)


1/18/2012

If investment low, then output, employment, export
necessarily are low and below plans and expectations
Tsegabirhan W.giorgis

25

Percentage share of the manufacturing industry from
Ethiopian GDP (in %)196

1973/ 19

Industry/Ye

2/6

74

ar

3

91/ 2002/

2003/

2004/

2005/

2006/

2007/

2008/

2009

2010

92

03

04

05

06

07

08

09

/10

/11

9.9

9.2 5.5

5.2

5.2 5.2

5.0

2.5 5.2

5.4 3.6

3.4

4.7

3.8 1.9

1.8

Manufacturi
5.4

ng
Large

5.0 4.9

5.0 5.0

andMediumScale
Manufacturi
ng

3.4

3.5

3.4

1.8 1.7

1.6

3.4

3.4

3.5

3.6

Small Scale
and Cottage
Industries
1/18/2012

4.1

Tsegabirhan W.giorgis

1.5 1.5

1.4 1.4

26

Registered Investment by Status of Implementation
1992-

1996-

2001-

1995

2000

2005

2006

2007

2008

2009

2010

Total Capital (inmillion ETB)

3.5

7.9

21.8

87.4

86.6

177.2

231.3

122.7

42

32

69

50

86

81

93

88

469

536 1778

6013

6336 10,672

7088

7142

51

33

92

96

Share of un realized
investment (Preimplementation )(in%)
Total Number ofRegistered Investors
Share of Preimplementation(in %)
1/18/201273

83

Tsegabirhan W.giorgis

91

93

27

Ethiopian Investment by Status of Implementation

1/18/2012

Tsegabirhan W.giorgis

28

Realized Investment by Type (FDI & Domestic) (in ETB ‘000)

1/18/2012

Tsegabirhan W.giorgis

29

Share of Realized FDI from total Realized Investment (in %)1/18/2012

Tsegabirhan W.giorgis

30

Average Capital Size of Realized Investment (in Million USD)

1/18/2012

Tsegabirhan W.giorgis

31

Average Capital Size (in Million USD)

1/18/2012

Tsegabirhan W.giorgis

32

Observation from the investment data
• Investment realization rate remained quite low,
particularly since 2002, for recent years as low as <10%
• Average size of investment capital is low, themaximum recorded throughout was <5 million USD,
size of FDI > domestic investment• Share of Realized FDI has been increasing & exceeding
domestic investment, reaching more than 90% of total
realized investment in 2009 & 2010
• Thus, share of domestic investment has declined to be<10% in the recent two years (2009-2010)

1/18/2012

Tsegabirhan W.giorgis

33

Conclusion and Policy Implications• The investment and export incentives aim for pricecompetitiveness. The global competitive market on
the other hand demands more than that: quality,
product differentiation, delivery time, meeting
different standards, and related others.
• Sustainable price competitiveness itself criticallydepends upon productivity & innovation not on
Investment incentives & support.
• The existing Ethiopian investment and export
incentives do not target for both productivity &innovation. Thus, need for paying attention to
productivity & innovation
1/18/2012

Tsegabirhan W.giorgis

34

Summary and Conclusion-2• Ethiopia needs to be innovative to recognize
the need for targeting the value chain insteadof the conventional industry; The incentives
need to be pragmatically targeted at solving
development bottlenecks along the value
chain!

1/18/2012

Tsegabirhan W.giorgis

35

Summary and Conclusion-3• The overall foregone import duty and tax revenue that theEthiopian government has been incurring appears to be on the highside and it is increasing over time.
• As of 2010, the Ethiopian government is foregoing Birr 0.32 foreach additional Birr of investment.
• Foregone tax revenue as a percentage share of exports is quite
high and increasing. Increased from 5.5% in 2004 to 63% in 2009
and 44% in 2010. For each additional one US dollar export , theEthiopian government has been foregoing more and more, $0.05 in
2004, $0.63 in 2009 and $0.44 in 2010. Yet we cannot attribute all
foregone tax to exports only.
• If it were possible to estimate all types of costs of support, land,
training, market search, running the service providing institutionalarrangement of the government, it appears that the Ethiopian
government is incurring huge costs to promote both investment
and export.

1/18/2012

Tsegabirhan W.giorgis

36

Summary and Conclusion-4• On the other hand, the outcomes of theinvestment and export incentives appears quite
limited in terms of investment, export and theresultant production capacity• One of the major findings that deserves urgent
policy attention is the low and deteriorating
investment realization rate.
• Effectiveness of both investment and export
incentives may be related to the effectiveness of
the implementation capacity of the government,
specifically to the effectiveness of the civil
service
1/18/2012

Tsegabirhan W.giorgis

37