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RENEW’s Legal Corner: July 2022

By Tsegamlak Solomon, Lincoln Ford & Sintayehu Abebe | Wed Jul 06 2022
Our take on developments in the investment ecosystems of East Africa

A New Investment Incentive Regulation is Already Underway 
The Council of Ministers has come up with a new investment incentive regulation this month. After the introduction of investment laws in 2020, the business community had been looking for new investment incentive packages from the government. To the satisfaction of the investors and other stakeholders, the Council of Ministers has approved a new investment incentive regulation in its 8th ordinary summit. This regulation contains income tax and custom duty exemptions and introduced some big changes to the investment ecosystem compared to the previous law. (Read our review of the new incentive regulation here.)
The National Bank of Ethiopia Revised the Reserve Requirement for a Second Time This Year 
The National Bank of Ethiopia (NBE) took different measures to mitigate the soaring inflation in Ethiopia, one of which was increasing the reserve requirement of commercial banks. However, this month the NBE reversed that decision and reduced the reserve requirement of commercial banks from 10% to 7%. In September 2021 when the NBE introduced a 10% reserve requirement, the decision was seen as a means to reduce the supply of money in the market. However, this month’s measure of reduction in the reserve requirement is expected to increase the flow of money in the market and fuel the already skyrocketing inflation rate.  
Financial Regulator has Banned Virtual Currencies from the Ethiopian Market  
The NBE has banned digital currencies. According to the NBE, there is a huge transaction rate through digital currencies and this is creating a suitable condition for money laundering and illegal financial activities in the country. The National Bank of Ethiopia Establishment Proclamation No. 591/2008 clearly recognizes Ethiopian Birr as the country’s national currency for any financial transaction in Ethiopia unless the NBE permits otherwise. In addition, National Payment System Proclamation No. 718/2011 clearly renounces payment systems that are not allowed by the NBE. In its press release this month, the NBE gave these rationales for the prohibition of virtual currency from Ethiopia’s financial system. 
Recently, the Ethiopian government has introduced a National ID Program and embraced blockchain technology only for the effective implementation of a biometric ID system. Though the government opens its hand to blockchain technology in general, this decision shows its rejection of blockchain technology from the country’s financial sphere.
Council of Ministers Approves Budget for the Coming Fiscal Year 
The Council of Ministers has approved Ethiopia’s budget for the coming fiscal year. The country’s budget for the 2022-2023 fiscal year will be 786.61 ETB which is an  increase from the previous year’s amount by 16.59%. (1) The House of People Representatives (HPR) is expected to ratify the decision of the council. The major source of the budget will be domestic sources  according to the Ministry of Finance. The government is expected to broaden its tax base to raise more money from domestic sources.

Senators Urge Efforts to Address Affordable Housing Gaps
In a recent meeting on Economic Development and Finance, Rwandan senators have put the Ministry of Infrastructure to task in order to fast-track sustainable urbanization in line with the National Strategy for Transformation 2018-2024. This is important to RENEW’s investment practice because it reveals affordable housing as a fairly underfunded sector in Rwanda and puts policies in place to accelerate urbanization. The World Bank earlier this year extended a $150 million loan for the expansion of access to housing finance. According to the New Times Rwanda, the 25-year credit facility, which was approved by parliament and cabinet, attracts an interest rate of 1.35% per annum. It will be implemented by the Development Bank of Rwanda, working with other financial institutions to expand mortgage lending. This will also set a precedent for investment firms looking to venture into the real estate sector and offer more debt financing.
EAC Says New Common External Tariff will Benefit Citizens
The East African Community (EAC) ministers recently adopted a higher tariff for fourth band goods produced outside of East Africa, such as dairy and meat products, cereals, textiles, edible oils, leather products, iron and steel, among others. The newly revised 35% regional Common External Tariff is likely to take effect in July as a second pillar to regional integration. It will promote efficiency in local production and manufacturing, which would ensure high quality East African products that can compete with other foreign imports. In addition, it will create jobs for the youth as expressed in a New Times interview with the Secretary General of the EAC, who said “We really encourage more people to come and invest in East Africa and produce from here, instead of bringing finished products, because bringing finished products means they are processed and manufactured elsewhere and you are creating jobs elsewhere.” 
This decision by the EAC ministers in charge of trade and finance is a notable move towards regional economic integration and subsequently boosting trade and investment in the African Continental Free Trade Area.

CSOs want 70% of Budget for Development Expenditure 
The civil society budget advocacy group (CSBAG) has criticized the government for allocating most of the country’s budget for consumption expenditures. For the 2022-2023 fiscal year, 30% of the country’s budget will be used for development purposes while the rest will be allocated to cover consumption expenses. According to the CSBAG, the delivery of services to citizens requires the allocation of more money to development expenses and this will not be seen in the coming fiscal year. In addition, the CSO shared its worries about the increasing public debt of the country. The public debt is resulting in low resource service delivery and the country needs to mobilize its domestic resources in order to tackle this problem. In addition, for economic recovery the CSO suggested zero new tax rates and a pro-people rental tax. Moreover, targeting the lower-income part of society and supporting the subsistence economy have been suggested as major ways to drive economic recovery.  
38.8B UGX to be Reinvested in the Uganda Development Bank 
Shareholders of the Uganda Development Bank (UDB) permitted the bank to retain UGX 38.8 billion of profit which will be used to finance development projects. Compared to 2021, the bank’s profit showed a 76% increase; this increase is attributed to growth in capitalization of the bank coupled with an increase in investment in interest-earning assets, notably loan disbursement to development projects and reinvestment of the profits to the bank. According to the CEO of the bank, the reinvestment “will be used for the growth of the investment portfolios in Uganda.”  
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