Ethiopia\’s Troubled Investment Climate Amid Reform Efforts, U.S. Warns
Ethiopia\’s Economic Reforms: Promises and Persistent Challenges
Ethiopia has made several attempts to modernize its economy and attract foreign investment. However, according to a recent report, these efforts have yet to convince international investors. The document outlines the current state of Ethiopia’s economic landscape, highlighting both opportunities and ongoing challenges.
Opportunities in Ethiopia’s Economy
Despite the hurdles, Ethiopia presents a number of compelling economic opportunities. The country has a large and youthful population, which offers a significant labor pool at relatively low costs. It is also home to Africa’s largest airline, Ethiopian Airlines, and has a growing consumer market that could be attractive to foreign businesses.
The government has taken steps to open up new sectors and liberalize certain industries. For instance, it floated the birr, which was intended to stabilize the currency and reduce reliance on the parallel market. Additionally, the Securities Exchange was relaunched in 2025, and ten industrial parks were upgraded to special economic zones.
However, these reforms are still seen as fragile and incomplete. The report points out that despite these developments, many structural issues remain unresolved, which continue to deter foreign interest.
Currency Fluctuations and Market Distortions
One of the most notable developments in 2024 was the floating of the birr, which led to a dramatic depreciation of over 100 percent. While this initially narrowed the gap between official and parallel exchange rates, the disparity re-emerged later in the year.
The government has also liberalized sectors such as banking, telecommunications, and retail trade. However, foreign ownership in banks is still capped at 40 percent, limiting the potential for full foreign participation. Furthermore, the report notes that while Ethiopia has expanded its digital business licensing platform, investors still face challenges such as excessive taxation, retroactive customs rules, and an inefficient logistics system.
Foreign companies often find themselves leasing equipment from state-owned enterprises (SOEs), which undermines claims of privatization. The Banking Proclamation continues to restrict majority foreign ownership, and the state is accused of manipulating the system to favor inefficient SOEs.
Property Rights and Expropriation Concerns
Weak property rights are another major concern for foreign investors. The government’s \”corridor development\” initiative, launched in 2024, has led to the displacement of tens of thousands of residents and businesses, including foreign-owned firms, with little or no compensation.
In regions like Oromia and Amhara, where conflicts persist, tourism investors have reported that government security forces have occupied lodges without compensation. This lack of legal protection for property rights creates uncertainty for foreign businesses.
Moreover, limited federal oversight means that local communities and government officials can sometimes expropriate buildings and equipment without due process. This further erodes confidence among investors.
Corruption and Governance Issues
Corruption remains a persistent problem in Ethiopia. Transparency International ranked the country 99th out of 180 in its 2024 Corruption Perceptions Index, scoring 37/100. The report highlights that corruption is prevalent in tax collection, customs, and land administration.
Authorities can seize assets valued at over 10 million birr without proper documentation, raising concerns about misuse of power. Although Ethiopia joined the New York Convention on arbitration in 2020, dispute resolution mechanisms remain weak. Courts are plagued by delays, limited commercial expertise, and allegations of political interference.
Security Risks and Conflict
Security conditions in Ethiopia continue to pose a risk to investors. Conflicts in the Amhara and Oromia regions restrict travel, lead to frequent expropriation of assets, and limit the government’s ability to intervene effectively.
Over 4.2 million people are internally displaced due to conflict in Amhara, Oromia, and Tigray. Despite a 2022 peace deal with the Tigray People\’s Liberation Front (TPLF), fighting in Amhara persists, and insurgency in Oromia remains unresolved.
The U.S. State Department continues to advise caution, maintaining its travel advisory for Ethiopia at Level 3 [Reconsider Travel], citing sporadic conflict, unrest, and crime.
Outlook and Investment Climate
While Ethiopia has taken steps to modernize its financial system and open sectors to foreign participation, systemic weaknesses overshadow these efforts. State-owned enterprises (SOEs) dominate key industries, and unresolved conflicts create risks of expropriation and asset loss.
Foreign direct investment (FDI) inflows, led by China, Saudi Arabia, Türkiye, and the UAE, accounted for just 2.7 percent of GDP in 2024. Without credible enforcement of property rights, stronger fiscal transparency, and durable peace, Ethiopia’s bid to position itself as a premier African investment hub remains uncertain.
The 2025 Ethiopia Investment Climate Statement comes amid warnings from the World Bank and IMF about the country\’s unsustainable external debt and economic distress. Earlier in July, the IMF cautioned Ethiopia that its reform program under a $3.4 billion Extended Credit Facility (ECF) arrangement faces mounting risks due to declining foreign aid, fragile security conditions, and a resurgent parallel currency market.
