ETHIOPIA: An Introduction to General Business Law
The following Overview featured in Global 2023 and is awaiting update from the firm.
Current Economic Conditions
Legislation Reform
Since 2018, Ethiopia has undergone several holistic policy and legislative reforms. In light of this, several laws that have aimed at easing doing business have been enacted. The enactment of the new Commercial Code; Movable Property Security Rights Proclamation; Public-Private-Partnership Proclamation; Capital Market Proclamation; the revision of different investment regulations and the Ethiopian Civil Societies Proclamation, as well as the ratification of the New York Convention are among many others.
Revision of the 1960 Commercial Code
Revising the old Commercial Code that has been in effect since 1960 has brought one of the major legislative changes. It repealed three books governing traders, business organizations, and bankruptcy, while the remaining books are set to be amended by an undergoing Financial Code which is expected to be introduced soon.
It has also expanded the forms of opening business in Ethiopia by including one-member private limited companies and liability limited partnerships in its list. There have been improvements in corporate management issues: inclusion of minority shareholders protection, addition of supervisory boards in management of share companies, and board of directors in private limited companies.
In addition, the new code has also introduced a merged documentary requirement for establishing businesses as well as new rules regulating a group of companies have been added.
Recognition of LLPs for law firms
In this new Code liability limited partnership (LLP) has been recognized as one form of business organization. A memorandum of association is required to form LLPs. Moreover, LLPs can be formed to provide a professional service including accounting, legal, etc. and services complementarily thereto. The partners forming the LLP need to have separate licenses from the appropriate organ.
Ratification of the 1958 New York Convention
Ethiopia ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2020. The Convention applies to arbitration agreements and arbitral awards made only after Ethiopia acceded to the Convention. This is a significant step forward for Ethiopia and underpins the country’s ongoing efforts to attract greater foreign investment. The adoption of a uniform framework for the recognition and enforcement of arbitral awards will certainly help to improve the country’s profile as a business-friendly jurisdiction.
Enactment of New Arbitration and Conciliation Working Procedure Law
Following the ratification of the New York Convention, in April 2021, Ethiopia enacted a Proclamation to Provide for Arbitration and Conciliation Working Procedure. The scope of application of the Proclamation extends to both local and international arbitrations. Moreover, it also covers dispute resolution through conciliation. One of the main features of this law is avoidance of automatic appeal right.
Financial Sector Liberalization
As a result of the new financial sector liberalization efforts, the banking business was opened for the first time to foreign nationals of Ethiopian origin. There is an ongoing trend to liberalize the banking sector. Although the banking, insurance, and microfinance business are still reserved for domestic investors, there is a new policy issued which aims at changing the situation.
Under the policy, foreign banks will be allowed to enter the banking industry in four ways. The first is the continuation of their previous engagement in the form of representative offices. However, the policy contemplates such foreign banks entering into the Ethiopian market by opening branch offices and acquiring shares in local banks. The policy also allows for the incorporation of new banks under Ethiopian law by foreign banks.
Telecom and Mobile Money Liberalization
Under the new investment law, the telecom sector has been liberalized for foreign participation. Following such liberalization, the Ethiopian Communications Authority issued a bid for a license to engage in the telecom sector. Safaricom Consortium has won the bid and successfully launched in the Ethiopian market. Further, a second bid for a license to enter into the Ethiopian telecom market has been issued. The government has also decided to sell 49% of its stake in its ownership of Ethio- telecom, a government-owned telecom.
Ethiopian Civil Societies Proclamation
The new Civil Society Organizations Proclamation No. 1113/2019 was introduced on 7 March 2019, in the House of Peoples’ Representatives with the main objective of creating an enabling environment to enhance the role of civil society organizations in the development and democratization of the country. Areas that were off-limit for resident/foreign CSOs, such as the promotion of human and democratic rights, conflict resolutions, promotion of efficiency of the justice system, and advocacy for equality among nations and nationalities, are now open to be undertaken by CSOs. The source of funding was one of the major factors for categorizing CSOs into local and foreign/resident.
Public-Private-Partnership (PPP)
Ethiopia has recently enacted a new Proclamation facilitating Public Private Partnerships (PPP), recognizing that the private sector is essential to support the country's economic growth and improving the quality of public services, particularly in infrastructure. The Proclamation sets out the new PPP legislative framework with a view to promoting and implementing privately financed infrastructure projects by enhancing transparency, fairness, value for money, and efficiency through the establishment of specific procedures.
New Investment Law
On 30 January 2020, Ethiopia enacted a New Investment Proclamation No.1180/2020. Following this Proclamation, other subsequent legislations such as the Investment Regulation No.474/2020, Investment Incentive Regulation No. 517/2022, and directives that are very important for the regulation and administration of investment in the country have been introduced. The major development in this new investment law is the shift from the positive listing of areas allowed for foreign investors to a negative listing which is broader. The government has also opened up previously closed sectors to foreign investment. In addition to this, these legislations lay down procedures for handling investors’ grievances and for resolving investor–state disputes, principally through domestic institutions.
New Capital Market Law
The Ethiopian Government passed the Capital Markets Proclamation No. 1248/2021 to set up a local capital market with a clear set aim of developing the national economy through mobilizing capital, promoting financial innovation, and sharing investment risks. The Government has also set up a project team that has been working to draft proper directives for approval by the Board of Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the effective implementation of the Capital Market Proclamation.
Last January, the Ethiopia Capital Market Authority (ECMA) disclosed that it has finalized preparations to start operation within the coming two years. On 27 March 2023, the Ethiopian Capital Market Authority reiterated that it would start issuing licenses to capital market service providers after three months.
Public Enterprises Privatization Law
According to this 2020 Proclamation, privatization is a transaction that results in either the sale of assets or share capital of a public enterprise in full or in part to private ownership and control. The Proclamation considers extensively pre-privatization activities, public enterprise restructuring, and other activities before privatization. Essentially, the Proclamation provides for the procedure of conversion of a public enterprise to a share company, valuation of public enterprises, and issues relating to post-privatization.
The Level of Activity, Trends, and Developments in Our Area
Developments Relating to Law Firms
The new Commercial Code allowed the formation of LLPs for professional associations with at least two professional partners, with capital contributed either in cash, in kind, or including intellectual property or professional service. The law leaves both the capital and the number of partners of the company open-ended. Equally relevant is a new proclamation called the Federal Advocacy Service Licensing and Administration Proclamation, which is designed to regulate details of licensing, and legal practice by foreign lawyers or law firms. The two laws are aimed at laying out details about the formation of LLPs and the rights and liabilities of partners, as well as the process of licensing and the criteria to be eligible to obtain licenses.
Potential Hurdles and Solutions:
Forex Crunch and Opening of the Financial Services Sector
Ethiopia has had a negative trade balance for more than a decade. As a result, the forex reserves have not been stable. Acquiring forex from the domestic channels would take sometimes an indefinite amount of time. However, there are a few ways to overcome this hurdle. One is to use external loans and supplier credit (this is usually reserved for exporters) to mitigate the domestic forex crunch. However, to be able to pay back the foreign loans which entered Ethiopia in terms of forex, the loans need to be registered in the NBE. There are also options for using the Franco-Valuta method to settle international payments.
Security Situation and the Peace Deal
The war in northern Ethiopia and the nationwide political instabilities have greatly affected investment in Ethiopia. However, a peace deal that was signed in November 2022 and other negotiations for peaceful resolutions of political conflicts seem to have changed the situation for the better. There is hope for wide-ranging peace and reconciliation. The peace deal to a large extent has set the stage for ending the northern conflict.