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Ethiopia’s improved business environment is benefitting entrepreneurs

Ethiopia has experienced impressive economic growth in the past few years and, according to the IMF, is estimated to be one of the top 10 fastest growing economies in the world over the next five years.

Malik Fal is the managing director of Omidyar Network Africa.

Malik Fal is the managing director of Omidyar Network Africa.

According to a recent report entitled Accelerating Entrepreneurship in Africa by the Omidyar Network, the country has seen regulatory and institutional reforms such as improved business registration requirements, which have helped strengthen investor confidence in the market.

The report surveyed 582 entrepreneurs in six sub-Saharan African countries: Nigeria, Ghana, Ethiopia, Kenya, Tanzania and South Africa.

“Results from Ethiopia reflect a positive outlook for conducting business as the country continues to embark on a cautious programme of economic reform, including the privatisation of state enterprises and rationalisation of government regulation,” highlighted the research.

The results also showed that Ethiopia outperforms the other countries surveyed in sub-Saharan Africa in areas such as legislation, administrative burdens and legitimacy of entrepreneurship.

Starting and operating a business has become easier

“Ethiopian respondents are particularly upbeat about the changing business environment as the country continues to reform from a more planned and centralised socialist state, to a more open economy that is increasingly adopting aspects of capitalism and a free market economic framework,” stated the report.

Those surveyed indicated that in the last 10 to 20 years Ethiopia’s business environment has improved significantly and, in fact, the results of the survey indicated that Ethiopia outperforms the other sub-Saharan African countries surveyed in terms of starting a new business.

“Respondents are more positive about the ease with which required permits and licences can be obtained,” highlighted the report. “In addition, 52% of respondents believe government regulations do not interfere with the successful start of new and growing firms, in comparison to [sub-Saharan Africa] and global average agreement rates of 36%.”

According to the World Bank, over the past five years the following amendments have made it easier to do business in Ethiopia and have positively impacted the country’s entrepreneurial environment.

  • Reforming the registry and streamlining procedures to improve the registration process for starting a new business.
  • Decentralising administrative tasks to sub-cities and merging procedures conducted at the land registry and municipal offices to ease property transfer procedures.
  • Reducing significant backlogs and improving case management and internal training – as well as expanding the role of the enforcement judge – to reduce delays in court and therefore improving the enforcement of contracts.
  • Improving access to credit information with the establishment of an online platform for sharing this information and guaranteeing borrowers’ rights to inspect their personal data.
  • Addressing internal inefficiencies in order to make cross-border training easier.

According to the report, these developments have helped develop a culture of entrepreneurship in the country.

But access to finance remains a major challenge

“Financing is the most notable constraint, with access to capital and limited financing options emerging as the most significant challenges.”

According to the survey results, only 15% of respondents know of organisations that can direct them to sources of debt capital.

“Even when entrepreneurs know where to find debt, the costs associated with accessing it are perceived to be prohibitive, with 52% of respondents believing that the cost of debt hinders company formation and growth,” continued the research. “Interviewees highlighted collateral requirements, often over 100% of the loan value, as the key hurdle. The challenge with sourcing funds is exacerbated by largely undeveloped capital markets and limited alternative funding options.”

Furthermore, under 15% of those surveyed indicated that they believe that there is a sufficient supply of seed or venture capital for growing high risk companies. “Ethiopia recorded the most negative survey responses with regard to the use of mergers and buyouts to raise capital,” added the report.

However, there has been a growth in the number of micro-financing institutions such as Addis Credit and Savings Institution. The report highlighted that the Development Bank of Ethiopia has recently started to focus on providing medium to long term loans for projects investing in manufacturing, agriculture and agro-processing.

“The expansion of state-backed funding for new and growing businesses, be it at the regional or national level, has the potential to reduce the significant funding challenges entrepreneurs face.”

In addition, Ethiopia’s rapid economic growth has attracted foreign investment, such as Diageo’s and Heineken’s acquisitions of state breweries in the country. The report argues that this has helped place the East African country in the spotlight for being a credible destination for foreign and domestic capital.

“This is already bearing fruit for entrepreneurs as exhibited by the launch of a $100 million Ethiopia fund by the Schulze group in March 2012, the first private equity fund focused exclusively on Ethiopia,” the report explained.

Nevertheless, Ethiopia lags behind the sub-Saharan African and global countries surveyed in terms of business incubation, which the report said is still in its infancy. Of those surveyed, 72% believe that entrepreneurs do not have access to incubators to support their efforts to start new companies.

“While there are some steps in the right direction, including Ice Ethiopia – an ICT focused incubation platform founded in Addis Ababa in 2011 – this area of business support is largely undeveloped,” concluded the report.

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  • Yekereme

    Come on, I am here on the ground doing business for the last 5 years and you are telling me the government has made it easier to start business. Hey, I have lived in various western countries, and starting business there has amounted to registering my company, pay my monthly tax dues as well as prepare annual statement and that was it. I could work from my home, from a coffee shop, or wherever I find comfort. My profession is within IT and the only thing I needed was being healthy, a clear and peaceful mind, a laptop and Internet connection. If your business is what can be classified as smaller one then you get even break in paying your tax dues until end of the year along with your annual tax declaration. There is virtually no cost to get started, as I reused a laptop I had bought earlier while being employed in the corporate world. Fast internet connection is required for me but that too I already had a subscription at my home for about 750birr, unlimited, reliable and very very very fast connection.

    Forward to Ethiopia and to start a company I need to rent an office with current ever increasing rent the least you can do is around +5000birr/month, and then acquire a cash register for around 8000birr. Only there you have a startup cost of 5000birr/month * 6 months + 8000 birr = 38000 birr. You simply need to hire an accountant, possibly a part timer, which costs you about 1500birr/month, in order to pull together your monthly declaration and keep your books clean. If you really don’t, and even miss to put those silly “Don’t pay if receipt is not issued” signs in the office you get fined to bleed by the authority, I have luckily passed such inspection 2 times but have had friends who were fined around 10000birr due to compliance failure. Broadband was just a dream until recently afforded by entities such as EAL or ECA…. Now the building I rent office in provides one such connection but oh men, reliable connection is just not to talk about, and we are at the mercy of monopoply tele, the weather, ELPA (the authority providing electricity), idiots who seem to run around digging up optical fiber cables…just suddenly it can go dark and that for some good while, and I can’t tell you how much loss such interruption incurs me. Oh, did I forget to also mention the ridicules so called “Professional Competence Certification Directive” MoCIT has issued. This kind of requirement has been imposed on each and every business sector implying that in order to be able to get your trade license or renew it annually you need to fulfill some criteria that has been defined by a governmental authority and that same authority need to be able to issue you a certificate certifying your compliance. In case of IT there is a ridiculous ca. 70 pages of document telling you that if you are for instance doing software development / consultancy you would be required to have 5 employees with majors in IT, a test lab, a server, other necessary equipment, fitting office. Now this is just horrendous. The current connected and open sourced economy allows me to co work with whomever I want right across the world without hiring that person and as for test lab, there are much better way of doing it through the means of crowd sourcing for some tiny pennies. Now all this is just about how to get started.

    Once you get started you need to be able to land deals, and good deals to sustain and we know who gets those deals, exactly the same individuals this report covered (funny enough I was led to this article by a tweet from one of those individuals who this report covered and frankly I would even like to title that tiny click who is really making it as mafia, b/c that is exactly how they conduct there businesses). I have been there seen it and believe me I am not part of the highly inflamed opposition to EPRDF, if I were I would not sit in Ethiopia chewing away my hardly earned savings and complain for 5 years. No I am not, I am simply not ready or willing to rub shoulder with these group, I am just a guy who is just at my last penny after having tried to make it here and have this year to make it or leave Ethiopia for good.

  • On the positive side, the World Economic Forum Global Competitiveness Report 2011-2012 indicates that foreign companies’ perception of the occurrence of petty corruption in Ethiopia has changed slightly for the better. For example, whereas the surveyed companies in the 2008-2009 report ranked corruption as the single most problematic factor for conducting business in the country, corruption is now perceived by companies to be much less of a constraining factor compared to access to financing, inflation, tax regulations, and inefficient government bureaucracy. The same report also reveals that foreign businesses perceive the demand for bribes and other irregular payments for routine government services to be less widespread than in other countries in the region. In addition to the overall level of corruption in Ethiopia, the World Bank & IFC Enterprise Surveys 2006 reports that the average number of companies expecting to pay facilitation payments and identifying corruption as a major constraint is much higher in other Sub-Saharan countries than in Ethiopia. Still, however, companies are generally advised to consult with experienced attorneys, to develop, implement and strengthen integrity systems , and to carry out extensive due diligence before committing funds or when already doing business in the country.

  • Kebede

    Hi, your analysis Ethiopians economic growth prospect appears to have been made in Ethiopia’s residences. Asking the party members who have monopolized business and government in Ethiopia is expected to show your kind of results. If you want others to rely on your work, you would need to ask the people who are free.
    What would you expect if you try to do the same kind of survey in North Korea or Eritrea? The result will be the same as yours. Hope you do better next time!

    • solomon

      I agree with Kebede.
      the Ethiopian economy is fully locked down to Government officials or those closed to them. corruption is religion.

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