Addis Ababa

February, 1998


In mid-1991 the previous military regime ended, and a new government was installed. At that time, the economy was to a large extent under the dominance of the state which controlled both product and factor markets, and owned a large part of the modern sector of the economy. There were severe price distortions of foreign exchange and interest rates as well as of goods and services. Since then, the focus of economic policy has been to switch from a command to a market economy and progressively integrate Ethiopia into the world market.

The first task was to dismantle the legal restrictions on private investment and withdraw the state from controlling prices and markets. To this end, domestic and external trade were liberalized, state monopolies were abolished, and, at the same time, public enterprises were made autonomous in terms of management and finance, cut off from budgetary support, and made subject to eventual divestiture. Simultaneously, integration with the global market was initiated through reduction of import tariffs and devaluation of the Birr (Ethiopia's currency). The maximum tariff rate was reduced from 230 to 80 per cent, while the Birr was devalued by 142 per cent against the US dollar. These measures changed the course of the economy within a relatively short period of about two years, between mid-1991 and 1993, bringing into operation market forces and removing substantially price distortions.

In subsequent years, the establishment of a market economy and integration with the world market was further reinforced. The foreign exchange auction market for import of goods was fully deregulated, and the auction itself was held more frequently, changing from biweekly to weekly. Availability of foreign exchange for payments of invisibles, such as business travel and medical treatment abroad, was also increased. Import tariffs were further reduced from a maximum of 80 to 50 per cent; the average rate being presently 24.5 per cent. Price controls which remained on a few essential goods were lifted, thereby virtually completing the deregulation of prices of goods and services. In addition, petroleum prices were made periodically adjustable to reflect changes in world price. Pan-territorial pricing of fertilizer was terminated as was fertilizer subsidy. Tariffs of electricity and water were adjusted upwards, the former being scheduled to cover costs fully and allow a profit margin in the coming few years. Telecommunications, on the other hand, continues to be operated on profit basis.

Privatization gathered momentum after an initial phase of preparation. Given the underdevelopment of the economy, there are only about 200 state-owned enterprises to be privatized including factories, state farms, hotels, construction firms, transport corporations, wholesale marketing firms, and small retail outlets and restaurants. State-owned marketing enterprises lost their monopoly with the removal of entry barriers for private firms, and shrank due to both deliberate down-sizing and competition, while insolvent enterprises that could not be resuscitated were allowed to go bankrupt. Retail shops, restaurants, a few factories and hotels have been privatized. Several other enterprises have also been offered for sale.

Currently, the main focus of the on-going economic reform is the widening of the scope of foreign investment to include telecommunications and electricity generation, complete the liberalization of the current account, and the deregulation of interest rates side by side with the creation of securities market. In keeping with the objective of progressively liberalizing the foreign trade regime for goods and services, payments on invisible trade are expected to be deregulated fully by the end of 1990s. This will enable Ethiopia to attain current account convertibility. At the same time, the maximum tariff on imports will be reduced and the average rate lowered to 19.5 per cent.

To summarize, a transition from a command to a market economy has been made. There remain, of course, several scores of enterprises in the hands of the state, but essentially due to the process of undertaking privatization itself, rather than lack of readiness to privatize. Perhaps more challenging is the elimination of price controls, removal of subsidies, commercialization of telecommunications and electricity, and convertibility on the current account. In all these areas, the achievement in policy reforms has been remarkable, as Ethiopia has succeeded to establish a market economy, with minimal price distortions and successively decreasing tariff rates, on a sustainable footing.


2.1 Performance

The manufacturing sector constitutes a small portion of the economy. In 1995/96, it contributed about 6.3% of the GDP and 15.8% of the foreign exchange earning.

The sector is dominated by light manufacturing and agro-processing. Food, beverages and tobacco are the most prominent groups in terms of gross value of production, followed in their order of significance by metal and engineering, leather and footwear, light chemicals, non-metallic minerals, paper and printing, furniture and wood. The total gross value of production of the manufacturing sector in 1995/96 was about Birr 6 billion.

2.2 Major Subsectors

a) Food, Beverages and Tobacco

Food, beverages and tobacco constitute the largest subsector in terms of value of output. Food processing industries mainly consist of flour mills, bakeries, pasta and macaroni factories, edible oil mills and sugar factories. The total annual production capacity of flour mills is in the order of 300,000 tons; and of oil-mills about 40,000 tons. There are at present two sugar estates with a combined capacity of 180,000 tons of sugar per year. A third sugar estate having a first phase annual capacity of 85,000 tons of sugar and 8,100m3 of ethanol is under development presently and is expected to become operational by the end of 1997.

The beverage industry is comprised of breweries, soft drink plants, mineral water plants, distilleries and wineries. There are four breweries at present with an aggregate annual capacity of 900,000 hectoliters. The soft drink plants bottle coca-cola lines and pepsi-cola lines and are geographically dispersed in several towns. There is one major mineral water bottling plant satisfying over 90% of the country's demand. Ethiopia produces wines of international standard but are largely consumed domestically.

The only cigarette producing factory is located in Addis Ababa and produces annually about three billion pieces of different brands of cigarettes. The factory gets leaf tobacco both from domestic plantations and from abroad.

b) Textiles and Garment

This is the largest subsector in terms of employment. The subsector consists of seven integrated textile mills, two spinning mills, two thread factories, one blanket factory, two hessian sack factories, and five large-scale garment factories. One privately owned integrated textile mill is under construction and is expected to start operation in 1998. In addition, there is a large number of cooperatives and individuals engaged in traditional weaving and tailoring. The textile and garment industries by and large cater for the domestic market. They are currently facing stiff competition from imported fabrics and used clothing.

c) Basic Metals and Engineering

As might be expected this subsector is at a low stage of development; but is fast developing. By 1995/96, it accounted for 10.8% of the total gross value of production of the manufacturing sector. The range of products manufactured in the subsector includes galvanized roofing sheets, pipes, reinforcement bars, nails, window and door frames, trusses, hand tools, implements, pumps, and various metal fabrications. In addition to the above products, there exist a couple of plants assembling trucks and tractors. The engineering complex at Akaki produces a wide range of industrial spare parts, hand tools and cutlery. The complex consists of a machining shop, a foundry, a forging shop and a chrome plating shop. There are strong indications of iron ore deposit in the western part of the country which may enable the setting up of an iron and steel complex in the future.

d) Leather and Footwear

Ethiopia has the largest livestock population in Africa and the ninth largest in the world. Annual off-take is in excess of ten million heads. In order to take advantage of this enormous resource potential, the leather industry has established itself well. There are six state-owned tanneries and a number of smaller tanneries in the private sector. All the tanneries process hides and skins to the stages of pickled, wet blue, crust or finished leather. Finished leather is produced mainly for the domestic market. The main export markets are Europe and Japan.

There is a large number of footwear factories. The larger ones are state-owned and are engaged in the production of footwear from leather, canvas and rubber. Privately-owned footwear factories are much smaller in size and produce leather and plastic footwear. Currently, all footwear production is for the domestic market.

A number of tanneries and footwear and leather goods factories are being set up by private companies and the existing public ones are being privatized.

e) Chemicals

The chemicals industry produces toilet soaps and laundry soaps, detergents, paints and lacquers, various plastic products, car batteries and tyres. A number of projects which have been under implementation recently including a Caustic Soda Plant, an Aluminium Sulfate Factory, an Alkyd Resin Plant and an expansion of a tyre plant have been completed and have started operation. A Pesticides Formulation Plant is yet under commissioning.

f) Non-Metallic Minerals

There are three cement plants in the country at present. The one at Mugher is the largest and the most modern. It consists of two lines, each of 1,000 tons of clinker per day capacity. The other two cement plants are much smaller and older; and employ obsolete machinery and equipment.

There are two marble making plants at present. A ceramics plant, the first of its kind in the country, was commissioned very recently. The plant produces tableware, sanitary ware, and wall and floor tiles using domestically available raw materials. There is one glass factory in Addis Ababa producing bottles and tumblers. In addition to the above industries, there are a few other plants producing clay bricks, cement blocks and tubes, floor and roof tiles and lime for the construction industry.

g) Paper and Printing

There is only one paper mill in the country. The mill produces about 10,000 tons of printing and wrapping paper of different grades, and is dependent on imported pulp. Other industries in the subsector include paper converting plants producing stationaries, packing materials and toilet papers, and a number of printing presses.

2.3 Size, Ownership and Geographic Distribution

The manufacturing sector is distinctly divided into two size groups; the large and medium scale industries (LMSI) which are predominantly owned by the public sector and the small scale industries (SSI) which are predominantly owned by the private sector. According to the 1997 surveys, there are 642 LMSI establishments accounting for about 97% of the total GVP of the manufacturing sector and, 2,731 SSI establishments accounting for the remaining 3%.

Of the 642 LMSI's, 169 establishments are owned by the public sector while the remaining 473 belong to the private sector. Foreign investors own 2.4% of the capital of the private sector industrial establishments. The privatization process currently underway is expected to change this ownership structure in the near future.

In terms of geographic distribution, the biggest concentration of manufacturing enterprises is found in Addis Ababa and along the 100 km stretch between Addis Ababa and the town of Nazareth (Oromiya Region). Other towns where significant levels of manufacturing activities could be observed include Bahir Dar (the capital of Amhara Region) in the north-western part, Dire Dawa some 500 kms east of Addis Ababa, Dessie/Combolcha (Amhara Region) 400 kms north, and Awassa (the capital of the Southern Peoples Region) 275 kms south.

2.4 Foreign Investment

The current conducive foreign investment policy of the Government is attracting a considerable number of foreign investments in the manufacturing sector. Between 1992 and 1997, a total of 46 foreign-promoted industrial projects with a total investment capital of Birr 1.7 billion have been approved by the Ethiopian Investment Authority. The implementation of three projects namely a tannery, a soap manufacturing factory and a computer assembly plant has already been completed and the units are currently in operation. Further eight projects covering a brewery and soft drinks, nylon fabrics, chipwood, carbon dioxide, plastic packaging, non-metallic filler, roofing sheets, bulbs, and tumblers, are expected to be operational very soon. The implementation of the remaining 34 projects is well under progress.


3.1 Domestic Market Potentials

Ethiopia, with a population of about 55 million, is the most populous country in Eastern and Southern Africa and third in Africa after Nigeria and Egypt. This provides a large internal market for industrially manufactured goods. The current need of Ethiopia's market both for processed and manufactured consumables and capital goods is largely met through imports. This can be easily observed from the figures presented in Tables I and II.

Table I

Value of Imports by End-Use in Millions of Birr

Raw materials 70.9 86.5130.1
Fuel 820.8725.6 993.3
Semi-finished goods 326.5 772.31,112.7
Capital goods 1,265.5 1,385.5 2,086.0
Consumer goods 1,132.9 1,664.8 2,125.3
Miscellaneous 2.2 105.798.2
Total: 3,618.84,740.46,545.6

From Table I, one can observe that of the total import value of Birr 6.5 billion in 1994/95, 82.8% or Birr 5.4 billion constituted industrially manufactured consumables and capital goods. On the other hand, the contribution to the GDP of the manufacturing sector, including small-scale industries and handicrafts, was only about Birr 1.9 billion during the same period.

Table II

Manufactured Goods Consumption

(in millions of Birr)

Domestic manufactures 2,250.8 3,416.6 4,262.4
Imported manufactures 2,727.1 3,928.3 5,422.2
Total: 4,977.9 7,344.9 9,684.6
Share of imported goods (%)
55 53 56

Table II demonstrates two basic phenomena in the country's economy with regard to manufactured goods consumption. Firstly, the economy meets about 55% of its industrially manufactured goods requirement from imports. Secondly, there exists a steadily growing domestic market for manufactured products. These facts show that the output of the domestic manufacturing sector falls short of the domestic demand for manufactured goods, and its share has not been growing in spite of the fact that the majority of industrially manufactured products i.e. food, beverage, tobacco, chemical, metal, textile etc., can be easily and competitively manufactured locally.

3.2 Export Prospects

Ethiopia has the potential to export some basic manufactured products, such as processed agricultural products, garments and leather products to the European and other markets. The country is endowed with abundant natural resources and diverse physical climate favoring the manufacturing sector. Moreover, the geographical location of the country provides it with an advantage of proximity to European and Middle East markets.

Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA) embracing 23 countries in eastern and southern Africa with a total population of approximately 300 million. Exports and imports with member countries enjoy preferentially tariff rates.

Export products from Ethiopia to the European Union market are entitled to duty reductions or exemptions and are free from all quota restrictions under the terms of the Lome Convention. The trade preference accorded Ethiopia includes duty free entry of all industrial manufactured products.

Under the generalized system of preference (GSP), a wide range of Ethiopia's manufactured products are entitled to preferential duty treatment in the United States, Canada, Switzerland, Norway, Sweden, Finland, Austria, Japan as well as most European Union countries. Besides, no quantitative restrictions are applicable on Ethiopia's exports of any of the 3,000 plus items currently eligible for GSP treatment.

Ethiopia, with a population of about 55 million, has an abundant, hard-working, cheap and disciplined work force. The minimum wage for unskilled labor is less than USD 20 per month.

Ethiopia also has sufficiently skilled and well-trained work force. Its technical and vocational training schools, engineering colleges and universities annually produce trained personnel in business, management, law, engineering, economics, and accounting in fairly large numbers. Furthermore, the market price of Ethiopian skilled personnel is very attractive. The starting salaries of university graduates normally range between USD 90-140 per month depending on the field of study.

3.3 Tariff Protection

Currently, import duties on consumer goods go as high as 80% whereas most imported raw materials destined as input to industry are nominally taxed. The higher tax rates apply on textiles, garments, electronic goods, vehicles and the likes. This gives considerable protection to domestic manufacturers of these goods. On the other hand, all exports are exempted from taxes, hence encouraging manufacturing activities geared for the export market.


The long term objective of the government's economic policy is to bring about a structural transformation of the economy in which the relative weights of agriculture, industry and services change significantly in favour of the latter two. This will raise appreciably the share of the industrial sector in the economy both in terms of output and employment. The structural transformation is envisaged to occur with a high growth of agriculture which will still be superseded by the growth of industry and services.

The new economic policy attaches great importance to the liberalization, privatization and internationalization of the country's manufacturing sector; with a commitment to replace the hitherto significant role of the state with greater domestic and foreign private participation.

The government has adopted a long-term development strategy known as Agriculture-Development-Led Industrialization (ADLI). This development strategy envisages an agricultural-led growth process, in which industry will increasingly play a prominent role. In conformity with the country's comparative advantage, manufacturing is expected to rely on labour intensive technology and utilization of domestically available raw materials. The strategy of Import Substitution Industrialization (ISI), followed in the previous decades, is being replaced by a strategy of integration into the world market, supported by a policy stance of tariff reduction. The aim is to put the manufacturing sector on a competitive basis internationally, so as to enable the country to enhance its export of manufactures and progressively shift the composition of its exports from primary agricultural products to manufactured goods.

The ADLI strategy considers that the agricultural sector will constitute a large market for industrialization in terms of consumer goods, and to some extent, capital goods and inputs. Consequently, the interdependent agricultural and industrial development strategy adopted is expected to accelerate the overall economic development. The ADLI strategy has the following subsidiary targets:-

The ADLI strategy is intended to promote an unhindered participation of the private sector in all fields of economic activity, within a framework of private property rights and competitive markets. It is expected that the external and export sectors will be vital to the successful implementation of the strategy.

To date, Ethiopia's exports have relied on natural resources. Its exports, with minor exceptions, are based on surplus venting, i.e., exploitation of relatively abundant agricultural resources. For decades, there has been only little improvement in the production of exportable commodities. Farm level productivity of coffee, for instance, has remained stagnant, on top of a significant amount of total output being obtained from wild coffee trees. The availability of hides and skins is dependent on a derived demand of the domestic meat market. In the early years of exports, these products were treated more or less as surplus resources. Over time, however, the market for hides and skins came on its own, and some improvement of quality took place, which has long ceased to show further progress. Other small export items show similar dependence on venting surplus land and natural resource advantage.

The strategy for export development is therefore conceived along four lines in parallel, i.e., first, to maximize the gains from surplus venting through productivity improvement and cultivation of unused land; second, to utilize the advantage of natural resources for exports of high value agricultural products; third, to open a new basis of exports of manufactured goods, grounded on the country's comparative advantage of labour; and fourth, to discover exportable mineral and fuel deposits.

By far the greatest potential for growth lies in the export of manufactures, specially in textile and clothing as well as leather products. The world market for these products is huge, and has been shifting continuously from the advanced to developing countries. Initial focus should be on labour-intensive products where Ethiopia's comparative advantage lies. This means clothing, and possibly some leather products, in effect with imported inputs. Domestic production of textile products, yarns and fabrics should aim at a protected domestic market, and lower ends of foreign markets where possible. Progress from semi-processed leather to fully-processed leather could perhaps be attained with direct foreign investment as a second step in the development of the leather industry.

It is vitally important that Ethiopia enters the clothing export market urgently, before the approaching termination of the Multi-fibre Agreement of quota system within a decade. There are two reasons for this. First, clothing offers a good possibility of increasing exports. Second, it is a good entry point for the development of a competitive textile industry in Ethiopia.

The proposed strategy is to encourage domestic investment operating under international subcontracting, and technical/management agreement, rather than attracting foreign investment, which is bound to result in a much slower development of the clothing industry. The local firms would, in effect, operate on a fee basis for a CMT (cut, make and trim) service. Foreign firms would provide training for technical as well as managerial staff, choose or even supply fabrics and components, determine design, and market the product under a multi-year contract. Additionally, a management contract may well be needed to startup production, at least for the bigger firms.

Although size is not a determinant factor of productivity, clustering of firms could have a merit of creating externalities. It makes growth of industry faster through formal and information experience sharing and learning from each other at both technical and management levels. The overriding concern should be to attain an explosive growth of export-oriented garment industry through favorable policies, effective policy implementation, fostering of international subcontracting agreements, and financing of domestic investment. Consultancy firms (foreign, joint ventures, or domestic) could play a significant role by promoting subcontracting agreements between foreign and domestic firms.

Ethiopia has a resource advantage in exports of semi-processed leather, and has a potential competitive advantage in export of leather garments in the same sense as textile clothing. In finished leather, the country is not competitive yet. Thus the proposed strategy is two-pronged, i.e., increasing the export of semi-processed leather and making an entry into the export market for leather products, particularly garments. The export of semi-processed leather may be expanded by raising the availability of supply of raw hides and skins, quantitatively and qualitatively, and increasing the capacity of processing by establishing tanneries. This is not simple as it sounds. Particularly to increase the availability of the raw product, it would be necessary to take measures for the expansion of the modern marketing system of meat and livestock, displacing traditional systems, and export of meat. Being a derived supply, the availability of raw hides and skins, if left to the domestic market for meat, would increase only at the rate of growth of the domestic demand for meat, which is dependent on growth of GDP and income elasticity of demand (likely to be higher than unity).

The strategy to follow for making an entry into the export market for leather products, particularly garments, is the same as for export of clothing. Other leather products, such as shoes and bags, should also be exported under similar arrangements of international subcontracting with technical/management assistance, in so far as it is possible to do so. To be clear, this implies keeping the choice open between imported and domestically supplied finished leather. There is a well tested pattern of international trade as of recent years, in which a developing country exports semi-processed leather, an advanced country processes it into finished leather and exports it back to the developing country, which then produces the leather article for export to the same advanced country. Ethiopia should aim to get into this circuit of trade.

A residual issue arises with this strategy. How would the domestic industry of shoes and other finished articles obtain its supply. In principle, the answer should be by competing with export of leather. There are two concerns. If too much of the leather is consumed domestically rather than exported, the foreign exchange saved under the tariff barrier on finished articles could become lower than the foreign exchange that would have been earned by export of leather. If, alternately, the domestic industry is unable to grow due to being out-competed by exports in the domestic market of leather, the long term growth potential of the industry could, it may be argued, be adversely affected for the short term benefit of maximizing net foreign exchange gains. These concerns would need to be examined through detailed analysis of the entire domestic market of raw hides and skins, leather and leather products, the domestic industry, level of effective protection, and exports. The thrust of the export strategy presented above is, however, expected to hold.


Investment opportunities abound in manufacturing. These opportunities take advantage of the country's comparative advantage in labour intensive industries, the potentially large domestic market or the natural resource endowments of the country. Ethiopia has a large supply of cheap, diligent, semi-skilled and skilled labour which can be easily upgraded to the required skill level. The labour is easily trainable and new skills can be readily transferred to. The accumulated manufacturing experience is also quite significant. It is to be noted that most of the manufacturing enterprises in the country are wholly run by Ethiopian managers, engineers and technicians.

The availability of cheap and skilled labour provides comparative advantages and enhanced competitiveness for labour intensive industries to be developed in the country both for domestic and export markets. These advantages offer, as already mentioned above, opportunities for investment in textile garment and leather product industries, and possibly, in light engineering and assembly type of operations.

These industries will further be helped by Ethiopia's membership of the Common Market for Eastern and Southern Africa (COMESA) embracing 23 countries with a population of approximately 300 million. Ethiopia enjoys the benefits of preferential tariff rates on exports to these countries. Under the terms of ACP/Lome convention, export products from Ethiopia to the European Union market are entitled to duty reductions or exemptions and freedom from all quota restrictions. Also under the generalized system of preference (GSP), a wide range of manufactured products are entitled to preferential duty treatment in the U.S.A, Canada, Switzerland, Norway, Sweden, Finland, Austria, Japan as well as most European Union countries.

The population of Ethiopia is estimated at 55 million and the annual growth rate of the population is slightly over 3%. This indicates the domestic market potential and its possible growth which is indeed considerable. The large and fast growing domestic market offers good prospects for investment in and the development of consumer good industries such as food, beverages, tobacco, plastic products, soap and detergents, drugs and pharmaceuticals, paper and paper products as well as electrical and electronic products.

Ethiopia is endowed with a variety of natural resources which could support viable resource-based industries. Of great significance in this respect is the prospect for agro- and agriculture-based industries such as meat processing, dairy processing, sugar, edible oil, and starch and glucose. Ethiopia grows cotton and this could readily be expanded to support the development of additional textile factories. The country further possesses suitable agro-ecological zones for developing large-scale plantations for rubber and pulp processing.

Mineral-based chemical and chemical product industries also offer a great potential. The basic raw materials for these industries include fossil fuels such as crude oil, natural gas and coal; and non-metallic industrial minerals such as limestone, sodium chloride, potassium chloride, pyrite, soda ash, potash and phosphate rocks. Based on existing studies, most of these and other minerals required for industrial processing, including fertilizer production, could be developed locally.

Mineral explorations conducted some years back have shown that there is about 58 million tons of iron ore deposit containing 41.6% iron with 16.7% titanium in an area called Bikilal in the western part of the country. A deposit of about 200 million tones of coal has also been explored at a place called Delbi in the south western part of the country. In addition, a large quantity of natural gas deposit found at Calub, south-eastern part of the country, is now ready for use.


A number of specific investment opportunities in the manufacturing sector have been proposed in separate leaflets. The list of this opportunities, which do not necessarily reflect the priorities of the government, is provided below.

For further information, please contact Ministry of Trade and Industry through the following address.

Ministry of Trade and Industry
P.O. Box: 704

251-1-15 25 45

Fax: 251-1-51 54 11

Addis Ababa, Ethiopia

Table of Contents

1. Overview of Economic Policy
2. Background to the Manufacturing Sector
2.1 Performance
2.2 Major Subsectors
2.3 Size, Ownership and Geographic Distribution
2.4 Foreign Investment
3. Potentials of the Sector
3.1 Domestic Market Potentials
3.2 Export Prospects
3.3 Tariff Protection
4. Sector Policies and Strategies
5. Potential Areas of Investment in Manufacturing
6. Specific Investment Opportunities