RENEW Strategies

10 Things You Should Know About Ethiopia’s Business Environment

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Matthew Davis, CFA
| April 1, 2016

The World Bank recently published its 2015 Enterprise Survey on Ethiopia, which outlines some very interesting information about the biggest obstacles private sector companies face in Ethiopia. The survey summarizes “key factual indicators at the country and regional levels” for twelve business environment categories, including: corruption, crime, finance, firm characteristics, gender, informality, infrastructure, innovation and technology, performance, regulations and taxes, trade and workforce.*

The RENEW team compiled 10 takeaways. We mainly focused our analysis on the outliers – indicators that were significantly different in Ethiopia as compared with the sub-Saharan Africa (SSA) region as a whole.

1. Access to finance is the number one obstacle for Ethiopian firms: The World Bank asked 848 companies in Ethiopia to rank the most prevalent obstacles that they face while doing business in Ethiopia. From the list of 15 common obstacles presented, access to finance was identified as number one. This comes as no surprise. Ethiopia’s current financial services sector, like that in many developing economies, is simply not equipped to provide adequate financing options for growing small to medium sized enterprises (SMEs), which in turn creates a “missing middle” in the country’s economy. The good news is that companies like RENEW and the Impact Angel Network are stepping in to help fill this financing gap through private equity investments.

Photo is the property of the World Bank.

2. Customs and foreign exchange are constraining growth: While it takes on average 19.2 days to clear import from customs, about 3 days longer than the SSA region’s average, the proportion of inputs and/or supplies that are of domestic origin are significantly higher than SSA - 82.5% versus 66.1%. This may be a result of forex issues and protectionist trade policies.

3. Regulations and taxes are not as bad as we think: RENEW was surprised to find that, although the amount of time senior management spends dealing with the requirements of government regulations in Ethiopia is higher than that of SSA (11.9% versus 7.6%), the remaining indicators are all lower. Examples include the number of days it takes to acquire an operating license (5.4 versus 19.1), number of visits required to meet with tax officials (1.6 versus 2.2), the percentage of firms identifying tax rates as a major constraint (22.8% versus 33.2%).

4. Productivity is low but growth is high: While capacity utilization and labor productivity are lower in Ethiopia than the SSA region, real sales and labor growth rates are higher. We see this as a good sign, since productivity can be can be improved with stronger management systems and training, along with investments in better technology and capital goods; both of which RENEW and the IAN address through our investments and portfolio management.

5. International certifications could be a source of competitive advantage: Ethiopian firms are not doing well with gaining international quality certifications as compared to the SSA region: 4.3% versus 14.7%. This is another area where foreign investors assist Ethiopian companies in achieving the next level of business and economic development.

6. Firms need more electricity and faster access to the grid: Generator use is much higher in Ethiopia than SSA (48.9% versus 26.5%), which is to be expected given that the country is quickly industrializing but in need of more power. In fact, electricity was listed as the second highest obstacle that firms face in Ethiopia. It takes companies 194.3 days to obtain an electrical connection upon application, versus the 33.0 days for the rest of SSA. On a positive note, roads are better in Ethiopia, which shows in the survey’s last indicator: percentage of firms identifying transportation as a major constraint is 8.3% versus 22.8% for the SSA region.

7. Firms need to hire more women executives – especially CFOs(RENEW’s opinion): One indicator that stuck out to us is that only 4.5% of firms in Ethiopia have a female top manager. And while the country did better in other gender indicators than SSA, RENEW’s takeaway from the entire Gender section of the survey is that we, as outside investors, need to encourage Ethiopian companies to hire qualified women into senior management positions.

8. Ethiopia’s business environment is still closed: The proportion of private domestic ownership in a firm versus the private foreign ownership in a firm (95.9% versus 3.8%) shows that RENEW and the IAN are part of a very small percentage of foreign investors doing business in Ethiopia. Private equity investment is still very much an unknown concept to business owners, an issue that RENEW sets out to address in each of the trainings we provide on financing options to entrepreneurs, banks and government employees.

9. Firms could leverage foreign investors as a source of capital: If you have a free moment, this is the section of the survey to spend some time on. To RENEW, all of the indicators point to a "financial anemia" of sorts. The main indicators that stood out to us concern how and where investments come from: 83.3% of investments were financed internally, versus 7.8% financed by banks, 0.3% financed by supplier credit, or 0.8% financed by equity of stock sales. Only 16.4% of firms in Ethiopia use banks for working capital loans, in comparison to the 21.8% of companies in SSA.

10. Yes, there's corruption; but not as bad as some: While it is evident that corruption still occurs in Ethiopia, the survey’s indicators demonstrate that Ethiopia is doing better than the SSA region as a whole.

Overall, we are encouraged by these survey results and remain bullish on Ethiopia.

*World Bank 2015 Enterprise Survey on Ethiopia


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