Chapter 2:

Regulation and
Administration
of Investment in
Ethiopia.
 DEFINITION AND NATURE OF
REGULATION

What do we mean by regulation?

Regulation is a normative standard that should be obeyed, and a violator must be
forced to comply where there is non-compliance.

Investment regulation may be defined as control of the government on investment.

There are three types of regulation:

1. Market regulation
2. Industry regulation; and
3. Government regulation.
Market regulation
A regulated market (RM) or coordinated market is an idealized system where the government
or other organizations oversee the market, control the forces of supply and demand, and to
some extent regulate the market actions.

Market Regulation works to protect market integrity, to enforce rules that protect all market
participants, and to act proactively to mitigate risks to prevent damage to the marketplace.

is often controlled by the government and involves determining who can enter the
market and the prices they may charge.

The government body's primary function in a market economy is to regulate and

monitor the financial and economic system.
A market regulation is aimed at guaranteeing efficiency, flexibility, and low costs.

The majority of financial markets such as stock exchanges are regulated,

whereas over-the-counter markets are usually not at all or only moderately regulated.

Examples of regulatory bodies

Food and Drug Administration (FDA)
Securities and Exchange
Commission (SEC)
Environmental Protection Agency
(EPA)
Industry regulations
Many industries have specific regulations that apply to businesses who operate within it.

E.g The main government organization that is responsible for regulating all modes of
transportation, including air, is the Ministry of Transport and Logistics.

National Bank of Ethiopia is the government body that regulates the financial industry.A Bank
is formed as a share company and its minimum capital requirement is 2Bln Birr..
Governmental regulation
Governmental regulation aims at fairness, non-discrimination, consumer protection and
quality maintenance.

The problem with government regulation is that it may be inflexible in guaranteeing efficient
allocation.

All government regulations on business require companies to comply with federal, state, and
local statues and regulations administered by legislative bodies and carried out by regulatory
agencies.
Major types of government regulations
Taxes
Labor Li
censes
Employmen
t Antitrust
Advertising
Environment
al
regulations
Privacy
Why do we need to regulate investment?
Nowadays there is a need to regulate business due to failure of various businesses as a result
of incompetent management, or fraud or a mixture of both or any other reason.

Thus, it is essential to regulate the business in general and the investment in particular.

Governments and regulators need to ensure stable and competitive markets for services and
goods, and conducive atmosphere for companies to be successful and reputable in the
business.

Failure of companies, particularly, as a result of fraud or mismanagement would damage the

trust of the market as a whole and has a negative impact upon the confidence of people in
general, and the growth and economic stability of a nation.
Therefore, there has been a growing need to regulate business by governments and
regulators to establish formal standards and rules for traders to abide by and thus to protect
consumers.

Investment, as a business, cannot be an exception to such regulation and supervision.

The main purpose of regulating investment is to ensure transparency and efficiency in the
investment administration.

In general, the need for governments to control, regulate or participate in investment springs
in part from political philosophy, and in part from economic necessity.

We may also find a mixture of both types of reasons for regulating investment.
 PRINCIPLES OF GOOD
REGULATION
IN INVESTMENT

In regulating investment, it is imperative to focus on how to constructively harness the

innovative power and motivating business enterprises so that they could meet the needs of
society without weakening the unique characteristics of a free society.
According to study by the World Bank, a country that wishes its economy to perform
well should take the following five steps.

1) Simplify and deregulate in competitive markets- The regulation should be based on the
principle of competition, and it should be simple.

In addition, it is required to be deregulated so as to give the responsibility to the investors.

2) Focus on enhancing property rights- Business in general, and investment in
particular, requires the rights of property of the persons to be protected and enhanced.

In other words, the law of investment must enhance the right of property so that
potential investors could invest safely.

3) Expand the use of technology- For an investment to be effective in bringing development to

a country it must use recent technology. Therefore, the regulation should ensure this.
4)Reduce court involvement in business matters-Settlement of disputes in court may
develop a sense of hostility between the parties. To avoid such unwarranted relationship,
the regulation of investment is required to reduce the involvement of courts.

5) Make reform a continuous process- Once a regulation is made, it must be reformed so

as to fit to the new changes to investment.
The following are recognized as principles of good regulation.

A) Using resources most efficiently and economically;

B) Being proportionate, This means the role and actions of the regulator must be
proportional to the significance of the issues and risks under consideration.

By the principle of proportionality, minor issues should be given less attention while major
issues significant attention;

C)Competition- The market needs competition among investors, and the regulation should
foster that.
D)Responsibility of firms’ own management. The company management should take
responsibility for running the business in a proper manner and maintain adequate financial
resources.

Here, it is emphasized that it is not the role of the regulator to run companies; it is the
responsibility of the company management to take responsibility for complying with the rules
and guidance that are established by the regulator in the most appropriate manner.

E)Facilitating innovation- The regulations and standards should facilitate innovation of

investors in their activities.
 THE NEED TO REGULATE
INVESTMENT

States need to maintain effective control over their economic environment.

Investment is an economic activity and, therefore, the government should regulate it.

In general, states have the right to regulate investment activities which are internationally
recognized.

There is a need to foster the economy of the state by allowing investors to undertake
investment activities.

It is also essential to note that there are areas states need to control, on the grounds of
security and other public policies.
REGULATION OF INVESTMENT IN ETHIOPIA

We have seen that regulating investment is essential in general.

Ethiopia also regulates investment activities under the Constitution, the economic
policy and other laws.

Constitutional Framework of Investment in Ethiopia

FDRE Constitution, Article 89, Economic Objectives

The Federal Government is duty bound to ensure that all Ethiopians are given equal
opportunity to improve their economic conditions and to promote equitable distribution of
wealth among them.
The Government is granted the right to own land and other natural resources on
behalf of the people and to deploy them for their common development and benefit.

Thus, the federal government is required to regulate land and other natural resources
use for investment.

Without regulation, these natural resources could not be used effectively and efficiently to
bring the development of the people.
The Federal Government is also duty bound to formulate policies which ensure that all
Ethiopians can benefit from the legacy of intellectual and material resources of Ethiopia.

This indicates the power of the government to regulate investment activities that
enable people to use the intellectual and material resources.
Article 55. Powers and Functions of the House of Peoples' Representatives

The FDRE Constitution grants the House of Peoples’ Representatives the power to
legislate law on the utilization of land and other natural resources.

This indicates the power of the government to regulate investment activities that
enable people to use the intellectual and material resources.
We have seen that land and other natural resources are essential for investment.

Granting the power to enact law on how to use natural resources, at least by implication,
means granting power to regulate investment.

The Constitution further grants power to the Federal Government to enact law on interstate
commerce and foreign trade under Article 55(2)(b)

Therefore, it would be safe to conclude that the Federal Government has the power to
regulate inter-state commerce in general and investment in particular.

In other words, the federal government is granted the power to regulate investment:
interregional and foreign investment.
Economic Policy of Ethiopia
What do we mean by economic policy?
The term economic policy is coined from two concepts: economy and policy.

Policy is defined as “the general principles by which a government is guided in its

management of public affairs”.
Economy means “the management or administration of the wealth and resources of a
community”.
Combining the meanings given to the terms, economic policy may be defined as the
general principles by which a government is guided in the management or administration
of the wealth and resource of a country.
In other worlds, economic policy embraces the principles by which a given
government is guided to administer the resource of a country.

Simply stated, economic policy is a set of rules that may lead to some desired end of the
society.
Economic policy has three main parts:
• objectives of the economy
• economic instruments and
• economic models.
The goal of the economic policy must be to improve the life of citizens. To achieve this goal
the economic policy is required to persuade the participants in the economic development
(individuals, family members, economic enterprises).
Economic Objectives : are the desired results and goals by the policy. Economic
objectives, in poor countries like Ethiopia include the following two.
I)Macroeconomic stability concentrates on the balance of payment and the saving
investment balance of the government. The main ones that play a great role in
macroeconomic stability are components of aggregate demand, volume of credit, wages and
profits, prices and foreign exchange.

II)Growth and development concentrates on issues that play pivotal role in the
development process of a nation. Production structure and development, citizen’s opportunity
to employment and investment determine the process of development and include rural urban
migration, increase the number of the worker, development in productivity, trade structure,
allocation of investment and demand structure
Policy instruments are methods by which we implement policy objectives. Detailed
policy instruments of a given country are partially determined by the structure of the
government itself.

Policy instruments in a free market economy include finance administration policy, (type
of taxes, government expenditure), monetary policy (provision of money, reserve
requirements), interest.

Economic models deal with how the economy is transacted (the structure, opportunities
and challenges), how the policy instruments are interconnected with the economic policy
objectives and other similar matters.

It may indicate the economic theorizing and empirical evidence of the perception.
The Ethiopian economy at the time of Derg regime was based on socialist principles
where the government controlled the economy.

During the transition period, Ethiopia issued an economic policy that would lead the
economy to free market.

The policy underlines that saving and investment play a critical role in the economic
growth of Ethiopia, the expansion of employment opportunities and the improvement of
the living standards of the people.

It also underscores the decline in investment may be attributed among other to wrong
policies of the past government.
In general, the economic policy is intended to promote and encourage private capital
participation in investment. And the role of government is to create enabling conditions
for the mobilization of both domestic and foreign private capital in various economic
activities.
Further, the policy makes clear that adequate guarantee will be given to private
investors. It is also indicated that sectoral policies, laws, regulations and detailed
implementation procedures will be issued to implement the economic policy.

Then economic reform was made in Ethiopia in 1992 with the support of and pressure
from the World Bank /IMF and various donors including UNDP to free market economy.
The reform was made with the following main aim:

…to bring about macroeconomic stability and socio-economic recovery as well as

create a conducive environment for private sector participation, so that the private
sector becomes the main actor in the productive sectors of the economy while the
public sector concentrates on the social sectors and infrastructural development….

An economic reform, i.e. liberalizing and deregulation is not peculiar to Ethiopia.

Privatization is the transfer of assets and functions from public to private hands by
selling or contract. The basic argument for privatization is that the private investors can do
the activities more cheaply and efficiently than state and local governments. Privatization
may be whole or part.

Deregulation is also essential in market oriented economy. It refers to the removal or

substantial reduction of government regulations of entire investment. Proponents of
privatization argue that it brings competition and lowers prices. They further claim
that it stimulates innovation and stops government abuses.
Areas Of Investment Reserved For Domestic Investors
Investors could be categorized into domestic or foreign investors. This classification has
consequences, among which, is that there are areas of investment reserved for domestic
investors only.

Investment Regulation No. 474/2020

Investment Areas Reserved for Domestic Investors :Article 4
The definition of domestic investors under the Investment Proclamation includes:
• Ethiopian nationals
• Foreign nationals of Ethiopian origin (“Ethiopian Diaspora”) and
• Foreign nationals recognized as domestic investors by special legislations.
The following investment areas are exclusively reserved for domestic investors:

1. Subject to applicable law, banking, insurance and microfinance businesses, excluding

capital goods finance business;

2. Transmission and distribution of electrical energy through integrated national grid

system;

3. Primary and middle level health services;

4. Wholesale trade, petroleum products, wholesale of own products produced in

Ethiopia;
excluding wholesale of electronic commerce;
6. Import trade, excluding liquefied petroleum gas and bitumen;

7. export trade of raw coffee, khat, oil seeds, pulses, minerals, hides and skins, products of
natural forest, chicken, and livestock including pack animals bought on the market;

8.Construction and drilling services below Grade I;

9. Hotel, lodge, resort, motel, guesthouse, and pension services, excluding those that are
star-designated;

10. Restaurant, tearoom, coffee shops, bars, nightclubs, and catering services, excluding star-
designated national cuisine restaurant service;

11.Travel agency, travel ticket sales and trade auxiliary services;

12. Tour operation;

13. Operating lease of equipment’s, machineries and vehicles, excluding industry-specific

heavy equipment’s, machineries and specialized vehicles;

14. Making indigenous traditional medicines;

15.Producing bakery products and pastries for domestic market;

16 .Grinding mills;

17.Barbershop and beauty salon services, smithery, and tailoring except by garment
factories;
18 .Maintenance and repair services, including aircraft maintenance repair and overhaul
(MRO), but excluding repair and maintenance of heavy industry machineries and medical
equipment;

19. Aircraft ground handling and related services.

20. Saw milling, timber manufacturing, and assembling of semi-finished wood products;
21. Media services;

22. Customs clearance service;

23 . Brick and block manufacturing;

24 . Quarrying;
25. Lottery and sports betting;

26. Laundry services, excluding those provided on industrial scale;

27. Translation and secretarial services;

28. Security services;

29. Brokerage services;

30. Attorney and legal consultancy services; and

31.Private employment agency services, excluding such services for the employment of seafarers and other
similar professionals that require high expertise and international experience and network.
32.Transport services, excluding the following areas:
(a) Railway transport services;
(b) Cable-car transport services;
(c) Cold-chain transport services;
(d)Freight transport services having a capacity of more than 25 tones; and (e)Transport
services reserved for joint investment with the Government or domestic investors.
 Investment Areas Reserved for Joint Investment with the Government:
Article 3
Any investor may invest in the following investment areas only jointly with the Government:
1.Manufacturing of weapons, ammunition and explosives used as weapons or to make
weapons;
2. Import and export of electricity;
3. International air transport services;
4. Bus rapid transit; and
5. Postal services excluding courier services.
Investment Areas Reserved for Joint Investment with Domestic and Foreign Investors:
Article 5
A foreign investor jointly investing with a domestic investor (Ethiopian nationals or
companies wholly owned by Ethiopian nationals) in the following areas can own up to a
maximum of 49% of share capital of a joint venture company.
These areas are:
1. Freight forwarding and shipping agency services;
2. Domestic air transport service;
3. Cross country passenger transport service using buses with a seating capacity of
more than 45 passengers;
4. Urban mass transport service with large carrying capacity;
5. Advertisement and promotion services;
6. Audiovisual services; motion picture and video recording and distribution; and
7. Accounting and auditing services.
Investment Areas Open to Foreign Investors
Investment areas not listed under Articles 3, 4 and 5 herein are open to foreign investors.

Procedures of Investment in Ethiopia

Article 7 and 8 of Investment Regulation No. 474/2020

Application for Investment Permit by a Domestic and Foreign Investor

In order to obtain investment permit, any domestic investor must fill out a paper-based or
online application form and submit same to the appropriate investment organ
accompanied by the following documents:
1/ Where the application is filed by an agent, a copy of valid authorization document;

2/ Where the investment is to be made by a sole proprietor, a copy of the individual's identity
card or an identity card or other documents bestowing a domestic investor status, and two
recent passport photo size photographs;

3/ Where the investment is to be made by a business organization, a copy of its memorandum

of association and Articles of Association and commercial registration certificate; or where the
business organization is to be newly established, draft Memorandum of Association and
Articles of Association, a copy of each shareholder’s identity card or identity card or other
documents bestowing a domestic investor status, and two recent passport photo size
photographs of the general manager;
4/ Where the investment is to be made by a public enterprise or project company
established under public-private partnership, a copy of the regulation or decision by which
it was established or a copy of its Memorandum of Association and Articles of Association;

5/ Where the investment is to be made by a cooperative society, a copy of its articles of

association.
Application for Investment Permit by a Foreign
Investor
1/ In order to obtain investment permit, any foreign investor must fill out a paper-based or
online application form and submit same to the Commission accompanied by the following
documents:
a) Where the application is filed by an agent, a copy of a valid authorization document;
b) Where the investment is to be made by a sole proprietor, a copy of bio-pages of a valid
passport showing his identity and two recent passport photo size photographs;

c)Where the investment is to be made by an Ethiopian national permanently residing abroad

who prefers treatment as a foreign investor, a copy of document evidencing his permanent
residence abroad and two recent passport photo size photographs;
d) Where the investment is to be made by a business organization to be incorporated in Ethiopia:
(1)Draft Memorandum of Association and Articles of Association of the business organization, a
copy of bio-pages of a valid passport of each shareholder showing his identity, and two recent
passport photo size photographs of the general manager of the business organization;

(2)Where the business organization has a foreign national member who can be considered a
domestic investor, a copy of an identity card or other relevant document establishing such status;

(3)Where there is a business organization in the business organization, a copy of its

Memorandum of Association and Articles of Association or similar constitutive document,
commercial registration certificate and a copy of minutes of resolution passed by authorized
organ of the parent business organization resolving to engage in investment activity in Ethiopia.
e) Where the investment is to be made by an Ethiopian branch of a business organization
incorporated abroad:

(1) A copy of Memorandum of Association and Articles of Associations or similar constitutive

document as well as commercial registration certificate of the parent business organization;

(2)A copy of document attesting appointment of the branch manager and his two recent
passport photo size photographs, and a copy of bio-pages of a valid passport or identity card of
the manager;

(3)A copy of minutes of resolution of the authorized organ of the parent business organization
resolving to establish a branch business organization in Ethiopia;
f) Document evidencing the financial position or profile of the investor, when deemed
appropriate by the Commission.

2/ Documents under Sub-Article (1) of this Article originating from outside of Ethiopia
must
be authenticated by foreign and domestic bodies authorized to authenticate documents.
Business License

We have seen that it is important to regulate the activities of investors through the
enforcement of their rights and duties.

The regulation will be made effective through granting or refusing a license to carry on
the functions of a particular investment.

Licensing investors means issuing of a license by the authorized government body to the
person (whether an individual or a business organization) to undertake in the investment.

The principle is that everybody who needs to carry out trading must have a valid business
license.
A business license may be defined as a permission issued for a trader to carry out a particular
business.

Act of a trade in general, and that of investment in particular, needs a profession/skill and it is
performed with the interaction made with the society.

Thus, license is essential to check that that the activity is legal and does not contravene the
morality of the society, and to protect the rights of consumers.

Through the instrumentality of license, it is possible to check persons are engaging in a lawful
activity and to prevent illegal activities by refusing a license.
Restrictions On Foreign Direct Investment (FDI)

There are two most common restrictions on FDI made by governments. They

are restrictions on ownership and performance requirements.

A) Restrictions on ownership can take several forms. In some countries, foreign investors
are excluded from specific fields.

In Ethiopia, the investment law does not clearly indicate restrictions with regard to
ownership.

However, a foreign investor must obtain prior approval from the Ethiopian
Investment
B) Restriction to invest on some sectors foreign investors are often excluded from
certain sectors on the grounds of national security or competition.

It is felt that particularly in developing countries local enterprises might not be able to
develop unless foreign competition is restricted by a combination of import tariffs and
controls on FDI.

This may give the opportunity for EIC to restrict ownership of foreign investor.

This is the infant industry argument. According to this argument, newly established
enterprises in developing countries cannot initially compete with well-established
industries in developed countries.
Thus, governments should temporarily support new enterprises (with tariffs, import
quotas, and subsidies) until they grow strong to meet international competition.
Coming to the Ethiopian investment law, a foreigner is not allowed to invest in those
listed under Article 4 Investment Regulation No. 474/2020

C) Performance Requirement- Performance requirement is the other restriction on foreign

direct investment.
It can take several forms. The most common performance requirements are related to local
contents, exports, technology transfer and local participation in top management.

The basic function of performance requirements is to minimize the cost of FDI and
maximize the benefit out of it.

Pursuant to Article 19 of Investment Regulation No. 474/2020, foreign employees must be

replaced by Ethiopians during a limited period by arranging the necessary training for the
latter.
D) Capital Requirement- One of the purposes of attracting foreign direct investment
is to attract foreign capital to the host state.

To achieve this, a foreign investor is required to allocate the following minimum

capital. Article 9 of Investment Proclamation No. 1180/2020
Minimum Capital Requirements for Foreign Investors
1/ Any foreign investor, to be allowed to invest under this Proclamation, shall be required to
allocate a minimum capital of USD 200,000.00 (two hundred thousand) for a single
investment project.

2/ Notwithstanding the provision of Sub-article (1) of this Article, the minimum capital
required of a foreign investor jointly investing with a domestic investor shall be USD
150,000.00 (one hundred fifty thousand).
3/ Notwithstanding the provision of Sub-article (1) of this Article, the minimum capital
required of a foreign investor investing in architectural or engineering works or
related technical consultancy services, technical testing and analysis or in publishing
works shall be:
a) USD 100,000.00 (one hundred thousand) if the investment is made on his own;
b)USD 50,000.00 (fifty thousand) if the investment is made jointly with a domestic
investor.
 Accounting entries of Investments

When a company purchases an investment, it is recorded as a debit to the

appropriate investment account (an asset), offset with a credit to the account
representing the consideration (e.g., cash) given in exchange for the asset.

Purchase of Ownership Shares Classified as Trading Securities

Many companies distribute dividends to their stockholders periodically as a way of sharing

a
portion of any income that has been earned.

Receipt of Dividend from Investment in Stock

U.S. GAAP requires investments in trading securities to be reported on the balance sheet at
fair value. Therefore, if the shares are worth $28,000 at December 31, Year One, the
company must adjust the reported value from $25,000 to $28,000 by reporting a gain.

A Trading Security Adjusted to Fair Value at End of Year

The gain here is labeled as “unrealized” to indicate that the value of the asset has
appreciated but no final sale has yet taken place. The gain is not guaranteed; the value
might go back down before the shares are sold. Unrealized income or losses are recorded in
an account called accumulated other comprehensive income, which is found in the
owner's equity section of the balance sheet. These represent gains and losses from
changes in the value of assets or liabilities that have not yet been settled and recognized.
At year-end, this investment (as a trading security) will be reported on the investor’s balance
sheet at its fair value of $28,000 rather than historical cost . On the income statement, both
the dividend revenue of $200 and the unrealized gain of $3,000 are shown as increases in net
income.

If, instead, the fair value at year-end had been only $21,000, a $4,000 unrealized loss will
appear on income statement to reflect the decline in value ($25,000 historical cost
dropping to $21,000 fair value).
If these shares are subsequently sold for $27,000, the difference between the sales price
and the carrying amount is recorded as a gain or a loss on the Year Two income statement.

Because the sales price of these shares ($27,000) is less than the reported balance
($28,000), recognition of a $1,000 loss is appropriate. This loss reflects the drop in
value that took place during Year Two.
END