<h1 style="text-align:center;">Increasing Urban to Rural Linkages Could Create New Private Sector Opportunities in Rural Ethiopia</h1>Four persisting problems for Ethiopia's rural ecosystem that Renew Capital believes could turn into opportunities for major growth for and strengthen urban and rural connections for SMEs and households:<ul><li>Stakeholders agree urban to rural linkages are vital to the future of Ethiopia. However, it was noted that urban to rural linkages are widely disrupted by poor supply chain cohesion and high transportation costs.</li><li>Last mile delivery is a significant challenge for both humanitarian organizations and commercial cargo owners. Last mile delivery vehicles in rural areas are not organized into companies, are uninsured, and arbitrarily set rates via verbal agreements with no price transparency. 33% of fruits and vegetables are wasted due to post-harvest loss in Ethiopia.</li><li>Ethiopian farmer cooperatives have not been as effective in creating new opportunities for farmers. Whereas, other East African countries, especially Uganda, have robust cooperatives called SACCOS that provide effective services.</li><li>Agricultural inputs are imported at a high cost, increasing the vulnerability of farming communities. In 2022, fertilizer costs are set to increase by 150%</li></ul><hr><figure class="image"><img src="/uploads/IMG_7609_84c3677655.jpg"></figure>From late 2020 through February 2021, the<a href="https://www.usaid.gov/who-we-are/organization/bureaus/bureau-humanitarian-assistance"> United States Agency for International Development, Bureau of Humanitarian Assistance</a> (USAID BHA) conducted a<a href="https://pdf.usaid.gov/pdf_docs/PA00XFMD.pdf"> Private Sector Landscape Assessment (PSLA)</a> to identify areas of aligned interest between USAID BHA priorities and the private sector operating in Ethiopia in order to create more resilient, sustainable, and inclusive programs in Ethiopia.&nbsp; From this research, USAID BHA identified Ethiopia’s trucking, transportation and logistics sector and the promotion of urban to rural linkages for the country’s rural business ecosystem as high impact opportunities for development and growth.To build on the findings of the PSLA, USAID BHA partnered with Renew Capital to conduct a three phase project covering a 12 month period from March 2021 to March 2023. The first phase of the project, which was completed in June 2022, included a market assessment on the current state of Ethiopia’s rural business ecosystem, recommendations for private sector engagement and assistance opportunities that could increase urban to rural linkages. In Phase II of the project, which kicks off in Q3 2022, Renew Capital will test and pilot identified interventions in the field. Phase III will focus on scaling the successful pilots.Below, Renew Capital has summarized what the project team views as exciting opportunities based on our Phase I market assessment findings regarding Ethiopia’s rural ecosystem.In conducting market research Renew Capital observed that Ethiopian value chains are largely disrupted due to the high costs for smallholder farmers to transport raw materials along supply chains. This problem highlights synergies between USAID BHA’s two focus areas: urban to rural linkages and trucking, transportation and logistics. We believe that integrative solutions in trucking and transportation will increase urban to rural linkages in the long run. Additionally, by targeting agricultural producing communities in USAID BHA’s identified resiliency and food security activity (RFSA) areas (i.e., Tigray, Oromia, and Amhara) and increasing access to capital through private investment for innovative private sector solutions, existing market linkages could be strengthened, and new market linkages could be built to add value to key economic sectors.<figure class="image"><img src="/uploads/Screen_Shot_2022_09_06_at_3_43_36_PM_51398fb478.png"></figure>Currently, last mile delivery in Ethiopia, especially in rural areas, is an informalized gig economy. There are approximately 62,000 last mile delivery trucks in Ethiopia, which often belong to single owners, are not members of associations, and often do not have any cargo insurance, increasing risks to commercial cargo owners. Moreover, the trucks are often booked based on verbal agreements, with no formal agreements obligating truckers to show up at the expected pick up time. Finally, there is no clear pricing methodology or itemization of receipts, and no pricing competition which leads to truck owners setting high and arbitrary rates.&nbsp;Interestingly, throughout East Africa, the private sector is developing solutions for last mile delivery, access to finance, and agricultural input services. For example, Taimba, a company in Kenya, is increasing supply chain cohesion, decreasing post-harvest loss and increasing farmer incomes by reducing the costs for smallholder farmers to sell goods to retailers. According to the company, their tech-based solution cuts out approximately six middlemen that would otherwise be required to connect farm producers directly to retailers. The company reported that by cutting transport costs and increasing the speed at which produce could be sold to retailers, they increased farmer revenues by 45% and reduced post-harvest loss by 60%. Other companies include: Twiga Foods (Kenya), Amitruck (Kenya), and Kobo360 (Nigeria).Additionally, in Uganda, Savings and Credit Co-Operative Societies (SACCOS) play a strong role in organizing farmers, pooling resources, and providing goods and services to members. This system has laid the foundation for private companies, like Akellobanker and Inputi, to develop market-based solutions for commonly persisting challenges, such as access to finance or the distribution of agricultural inputs. More specifically, Akellobanker has developed a technological tool for credit scoring that has increased access to finance for farmers by leveraging collected financial data, developing credit scores, and selling it to financial institutions as evidence of farmers’ credit worthiness. Similarly, Inputi has developed an online marketplace for the direct sale of agricultural inputs to local distributors. These ideas would also increase access to finance for Ethiopian smallholder farmers, who currently lack access to finance due to their inability to provide significant collateral to financial institutions. However, the current ban on foreign controlled companies providing financial services to Ethiopians prohibits Akellobanker from entering the Ethiopian market in its current state. Despite this, there are opportunities to license the technology to an Ethiopian owned firm to mitigate the impacts of the ban. At the same time, Renew Capital anticipates with moderate confidence that Ethiopia could relax its bans on foreign controlled financial service providers in the near term.&nbsp;<figure class="image"><img src="/uploads/Screen_Shot_2022_09_06_at_3_52_17_PM_d30c23b9b8.png"></figure>Positively, the Ethiopian government’s investments and commitments to building infrastructure over the next two years indicate that last mile delivery and urban to rural linkages could be strengthened in the near term. The government has already implemented a network of Integrated Agro-Industrial Parks (IAIPs) and Rural Transformation Centers (RTCs), which are intended to provide value added agro-processing services and aggregation sites for raw materials in agro-producing areas. Future investments in urban to rural linkages should build on these existing initiatives and leverage already existing infrastructures. As discussed in our transportation, trucking, and logistics blog [<a href="https://www.renewcapital.com/resources/blogs/Ethiopia%E2%80%99s%20Trucking%20and%20Logistics%20Sector%20is%20Ripe%20for%20Tech%20Optimization%20and%20Disruption">HERE</a>], solutions that integrate existing infrastructure, such as IAIPs, will likely maximize the intended social and/or financial impact of the implemented interventions.Furthermore, GreenPath, a private agricultural production company in Ethiopia, has successfully leveraged vertical integration to their advantage, utilizing regenerative agricultural principles and EU organic certifications to increase profits in export markets. Vertical integration allows agricultural producers to sell raw materials directly to exporters, bypassing Ethiopia’s Commodity Exchange (which typically sets stable, yet lower prices than international market rates). Vertically integrated crops are typically more profitable overall, as producers can directly access international markets, and thus higher prices. Renew Capital has identified several target crops, which could represent interesting investment cases, job opportunities for women, internal migrants and youth, as well as generate higher incomes for producers. Replicating this model and further utilizing regenerative principles could increase value and revenue as well. For example, implementing additional practices including intercropping, agroforestry, silvo-pasturing, rotational grazing, and planting perennial crops rather than annual crops, can increase revenues, decrease climate change, and increase farm productivity and resilience.&nbsp;Initial research indicated that avocado, specialty herbs and spice, fruits and vegetables, as well as coffee could be attractive possibilities for these farming practices, and creating stronger linkages between rural producers, agro-processing facilities and export markets. Additionally, the development of sustainable certifications and regenerative farming practices could represent a potential path forward to generate premiums in export markets, as well as increase climate resilience in Ethiopia’s agricultural communities. Because the majority of Ethiopia’s agricultural producers are smallholder farmers owning rights to less than five hectares of land on average, some of these low-volume, high-value specialty crops if grown using regenerative farming methods could provide the greatest opportunity to generate returns at lower costs.&nbsp;As such, Renew Capital believes that implementing an integrated portfolio of solutions that addresses supply chain challenges, reduces post-harvest loss, builds climate resilience and sustainability, and provides critical services to Ethiopian smallholder farmers could result in stronger urban to rural linkages, increased incomes for smallholder farmers, and lay a strong foundation upon which to build an investment case for local and foreign investors. In summation, Ethiopia’s rural business ecosystem is ripe for optimization. Leveraging emerging technologies being implemented throughout East Africa and strengthening urban to rural market linkages could unlock this potential.&nbsp;

Four persisting problems for Ethiopia's rural ecosystem that Renew Capital believes could turn into opportunities for major growth for and strengthen urban and rural connections for SMEs and households

IMG_7609.jpg

Increasing Urban to Rural Linkages Could Create New Private Sector Opportunities in Rural Ethiopia

<h1>Ethiopia’s Trucking and Logistics Sector is Ripe for Tech Optimization and Disruption</h1>Five reasons why we believe strategic investment in Ethiopia's trucking, transportation and logistics sector could unlock the country for major growth:&nbsp;<ul><li style="text-align:justify;">Implementation of technology has dramatically decreased trucking costs in other East African countries, specifically Kenya.</li><li style="text-align:justify;">Investing in transportation, trucking and logistics in Ethiopia can increase the country’s international competitiveness.</li><li style="text-align:justify;">The sector is ripe for technological optimization with solutions including route optimization, vehicle space optimization, matching supply and demand, price transparency and delivery time predictions.</li><li style="text-align:justify;">The Ethiopian government is interested in engaging private investment in this sector.</li><li style="text-align:justify;">While there is a 49/51 majority Ethiopian ownership requirement for all shipping and freight forwarding agency services, trucking within Ethiopia is 100% open to foreign company ownership for loads over 25 tons.</li></ul><figure class="image image-style-align-center"><img src="/uploads/BHA_Truck_photo_TT_and_L_917cca23b1.jpeg" alt="Image of Two Large Trucks in the Logistics Transportation Sector: Two large trucks parked at a logistics hub in Ethiopia, showcasing the potential for technology integration in the trucking industry."></figure><hr>From late 2020 through February 2021, the <a href="https://www.usaid.gov/who-we-are/organization/bureaus/bureau-humanitarian-assistance">United States Agency for International Development, Bureau of Humanitarian Assistance</a> (USAID BHA) conducted a <a href="https://pdf.usaid.gov/pdf_docs/PA00XFMD.pdf">Private Sector Landscape Assessment (PSLA)</a> to identify areas of aligned interest between USAID BHA priorities and the private sector operating in Ethiopia in order to create more resilient, sustainable, and inclusive programs in Ethiopia. From this research, USAID BHA identified Ethiopia’s trucking, transportation, and logistics sector and the promotion of urban to rural linkages for the country’s rural business ecosystem as high impact opportunities for development and growth.To build on the findings of the PSLA, USAID BHA partnered with RENEW to conduct a three phase project covering a 12-month period. The first phase of the project, which was completed in June 2022 included a market assessment on the current state of Ethiopia’s transportation, trucking and logistics sector, with recommendations for private sector engagement and assistance opportunities. In phase two of the project, which kicks off in Q3 of 2022, RENEW will test and pilot project ideas in the field. Phase three will focus on scaling successful pilot interventions.&nbsp;&nbsp;Below, RENEW has summarized what the project team views as exciting opportunities based on our Phase I market assessment findings regarding Ethiopia’s transportation, trucking and logistics sector.<figure class="image image-style-align-center"><img src="/uploads/Screen_Shot_2022_08_24_at_10_57_16_AM_a741b4327d.png" alt="Image of Ethiopia Map with Comparisons to India, Pakistan, and China: Map of Ethiopia highlighting key transportation routes, with comparative logistics cost statistics against India, Pakistan and China."></figure>In 2016, Ethiopia scored 2.37 out of 5 in the World Bank’s Logistics Performance Index – significantly lower than neighboring and similar countries. The stakeholders most impacted by persisting barriers in the transportation, trucking and logistics sector are local SMEs, exporters, end consumers and humanitarian organizations. For example, while Ethiopia’s textile labor costs have been comparable to labor costs in southeast Asia, the transportation of a 20-foot container of garments from Ethiopia to Germany costs 247% more than from Vietnam and 72% more than from Bangladesh. Similarly, when comparing Ethiopia’s logistics costs with those in other parts of the world, RENEW found that while shipping in Ethiopia costs $0.11 USD per ton per km, it costs just $0.02 USD in India and Pakistan, and $0.05 USD in China. This underscores the untapped potential for Ethiopia’s industries if transportation costs are reduced and optimized. Logistics and transportation costs are similarly high throughout East Africa. Moreover, in a study conducted by the Boston Consulting Group (BCG) in 2021, the cost of moving a product from a factory to the consumer in Africa adds an average of 320% to the manufactured good’s cost, which can lead to a markup as high as 700%.&nbsp;Unlocking Ethiopia’s and Africa’s potential is dependent on the reduction of these costs and provides a significant opportunity for the private sector to invest in technologies that will reduce trucking costs and position East Africa as an international competitor.Overall, research indicated that poor infrastructure, limited applications of technology, and a shortage of vehicles were key barriers to efficiency and growth in the sector. For context, industry experts estimate that Ethiopia currently has 16,000 vehicles, while Kenya (with less than half the population compared to Ethiopia) has over 100,000 vehicles. Moreover, 44.6% of trucks in Ethiopia are more than 10 years old. To make matters worse, 50% of trucks are below their maximum operational capacity.That being said, the Ethiopian government has indicated that it is eager to promote private sector engagement and innovation in the transportation, trucking and logistics sector. For example, Minister of Transport, H.E. Dagmawit Moges indicated in a 2020 op-ed that “the transport and logistics service has for too long been traditional, overly [centralized] and rigidly controlled,” and utilizing innovative technologies to meet the “immediate demands and needs of citizens should be the focus.”Considering these factors, the project team believes the sector is on the cusp of explosive growth that would be hastened with the introduction of emerging logistics technologies, greater transparency and increased competition, all of which could be accomplished through a well-coordinated effort by humanitarian organizations and private sector actors.To inform our strategy, the project team has conceptualized the trucking, transportation, and logistics sector as two separate operating environments as demonstrated by the graphic below:<figure class="image image_resized" style="width:88.27%;"><img src="/uploads/Screen_Shot_2022_08_24_at_10_57_37_AM_ccfa386f97.png" alt="Graphic showing Ethiopia's trucking sector: the monopolized segment by ESLSE and the private sector 'opportunity zone' for innovation."></figure>First, A-B transit, which is controlled by the government-owned Ethiopian Shipping and Logistics Services Enterprise (ESLSE), does not provide a significant opportunity for successful intervention investment. Additionally, non-profit organizations including TradeMark East Africa, have already signed MOUs with the Ethiopian government to address challenges facing this part of the process. Rather, RENEW believes there is a compelling consideration for private sector engagement and investment in technological tools supporting the B-C-D portion of the process. We term this “the opportunity zone.” Currently, truck owners and companies operating in the opportunity zone are not sufficiently tech-enabled and contracts are controlled by middlemen and commission agents, which increase costs for consumers and humanitarian organizations. To sum it up, B-C-D trucking is a de facto “gig economy” controlled by brokers with cell phones, manually distributing jobs amongst their contacts. In our estimation, technological tools could greatly decrease inefficiencies and costs. Through conversations with industry experts, the project team has determined that the below technological interventions are needed in order to optimize B-C-D logistics in Ethiopia:<ul><li>Cargo tracking to predict arrival times</li><li>Price transparency tools</li><li>Route optimization for speed and fuel efficiency</li><li>Vehicle space optimization</li><li>Vehicle supply and cargo owner shipping demand matching to activate idle vehicles</li></ul>Importantly, technological disruptions have been successful in other East African countries. For example, in 2016, a private logi-tech company called Lori Systems, developed a tech-enabled platform to optimize Kenya’s trucking sector. Since 2016, the company has reported that it has reduced trucking costs by up to 20% just by implementing technology. By developing a targeted tech-enabled investment approach, we believe the same could be true for Ethiopia.&nbsp;Just as important, emerging logi-tech companies with visions and ideas for implementing these solutions already exist in Addis Ababa. Given the current context, RENEW believes that private sector engagement and interventions that focus on technology and avoid purchasing and/or financing asset-heavy trucks (due to limited forex to purchase spare parts, high relative cost of fuel, and limited skilled labor to service vehicles) is a strategy worth considering. From here, the project team plans to build on findings of this market assessment and determine if capital can be mobilized to benefit Ethiopia’s trucking, transportation and logistics companies operating in the opportunity zone. In doing so, Ethiopia’s domestic, regional and international trade potential could be unlocked.&nbsp;

Five reasons why we believe strategic investment in Ethiopia's trucking, transportation and logistics sector could unlock the country for major growth

BHA Truck photo- TT & L.jpeg

Ethiopia’s Trucking and Logistics Sector is Ripe for Tech Optimization and Disruption

<h1 style="text-align:center;">A Brief on the Draft VAT Proclamation; The Changes Introduced</h1>Ethiopia introduced value added tax (“VAT”) two decades ago under VAT Proclamation No. 285/2002 (“VAT Proclamation”). The VAT Proclamation was introduced as a replacement for the sales tax that was in place. Since then, the VAT Proclamation has been amended twice in 2008 and 2019 per Proclamation No. 609/2008, and Proclamation No. 1157/2019 (collectively, the “Amendments”). The 2008 Amendments were mainly focused on VAT registration requirements and criminal liabilities associated with VAT. On the other hand, the 2019 Amendments were mainly on reducing the tax reporting burden for a certain category of taxpayers, withholding of VAT by taxpayers, and VAT refund. Despite the Amendments, however, the VAT Proclamation failed to cover new business concepts like e-commerce and other changes in the economy.&nbsp;Consequently, a new VAT proclamation has been drafted (“Draft Proclamation”) that will replace the age-old VAT Proclamation. The Draft Proclamation is introduced to reform the rules in relation to VAT. The revision is needed to recognize new concepts which are recognized by the international community, take into consideration the changes in the economy and make VAT easily understandable and executable.&nbsp;With the above policy background, the Draft Proclamation has made some major changes. In this blog, we will cover some of the major changes introduced by the Draft Proclamation.<figure class="image"><img src="/uploads/097_A2814_f27fb82728.jpg"></figure>Accounting period and VAT filing: Regarding accounting period and VAT filing, the Draft Proclamation seems to be in line with the 2019 Amendments, which has eased the cost of filing VAT by changing the VAT accounting period from one calendar month to three calendar months based on the annual turnover of a taxpayer. This is also expected to alleviate the cash flow problems of small VAT registered businesses. Whereas all taxpayers with an annual turnover transaction of more than 70M Birr will be required to file VAT every month.Definition of terms: Terms like body, person, tax officer, fair market value, related person, and capital goods are defined under Federal Tax Administration Proclamation No 983/2016. The Draft Proclamation has given the same meaning to the terms, which ensures consistency across different tax laws. This will eliminate the uncertainty that can arise on the meaning of terms, which technically have the same meaning but have different definitions under different tax laws.Taxable activities: The definition of the supply of goods and services is critical in defining what taxable activities are. The Draft Proclamation broadened the scope of a supply of goods to include any transaction that involves a change in ownership of the goods. Supply of service is also defined broadly and there has been a shift in the definition of supply of service to include thermal or electrical energy, gas, or water, which were defined as goods in the VAT Proclamation.Registration: There are two types of registration for VAT under the VAT Proclamation and the Draft Proclamation, which are: obligatory registration and voluntary registration.&nbsp;<ul><li>Obligatory registration: The VAT Proclamation imposes an obligation to register for VAT when the total value of taxable transactions during the 12 months exceeds ETB 500K. This was later raised to ETB 1M. The Draft Proclamation increased this amount to ETB 5M.</li><li>Voluntary registration: The VAT Proclamation allows voluntary registration if the applicant supplies at least 75% of its goods or services to a person/business registered for VAT. The Draft Proclamation has changed this requirement to a monetary requirement; if the taxable activity is more than ETB 2.5M the applicant will be allowed to register for VAT.</li></ul>Cancellation of registration: Under the VAT Proclamation, a VAT-registered person can apply for cancellation if he has ceased to make taxable transactions. Under the Draft Proclamation, notice to the tax authority within seven days is required when taxable transactions cease to exist. Another reason for cancellation under both proclamations is when the total taxable transaction annual turnover in the period of 12 calendar months is expected to be not more than ETB 1M (ETB 5M, in the Draft Proclamation). In this case, the registered person can ask for cancellation at any time after three years of the date of its most recent registration for VAT. Under the Draft Proclamation, the three year requirement is reduced to two.&nbsp;Zero-rated activities: Under the VAT Proclamation, there are mainly four taxable activities that are zero-rated; while the Draft Proclamation has maintained this list, it has included specific requirements to be fulfilled for each category. Furthermore, goods that are imported for the purpose of maintenance, renovation and improvement are zero-rated based on the Draft Proclamation.Exempted goods and services: Certain activities which are exempted from VAT under the VAT Proclamation are subject to VAT under the Draft Proclamation. The Draft Proclamation has specifically excluded all exemptions and other benefits (i.e., zero rated activities) other than those listed under the draft.&nbsp;The following are some of the activities which are currently exempted but will be subject to VAT when the Draft Proclamation becomes effective.&nbsp;<ul><li>Transportation: Although transportation is exempted under the Draft Proclamation, taxis that have less than the capacity of holding 8 persons including the driver (which includes those operating through ride-hailing platforms and taxis), renting of vehicles, and vehicles used for transportation of tourists do not fall under the definition of transportation based on the Draft Proclamation, which means they are subject to VAT taxation.</li><li>Supply or import of national or foreign currency: Although the VAT Proclamation exempts supply or import of national or foreign currency, the Draft Proclamation did not. The Draft Proclamation specifically noted that any exemptions or activities that are zero-rated under the previous laws will not be applicable unless such benefits are given by the Draft Proclamation.&nbsp;</li><li>Supply or import of fuel gas, pension funds, permit and license fees, lease of a dwelling for less than two months, and others are also excluded from VAT exemption.&nbsp;</li></ul>On another note, the Draft Proclamation has included tax exemptions that are not included under the VAT Proclamation. For instance, goods that investors import or buy locally that are exempted from customs duty per the investment incentive regulation, goods that are VAT exempted by international agreements and imported by international organizations, and goods that are imported by diplomats and missionaries are exempted from VAT. &nbsp; &nbsp;

Ethiopia is changing its two decades old Value Added Tax proclamation

097A2814.jpg

A Brief on the Draft VAT Proclamation; The Changes Introduced

<h1 style="text-align:center;">RENEW’s Legal Corner: August 2022</h1>Our take on developments in the investment ecosystems of East Africa&nbsp;<figure class="image"><img src="/uploads/LWN_6417_94da49e087.jpg"></figure><hr>ETHIOPIAEthiopia is Changing its Two Decades Old VAT Proclamation&nbsp;It has been two decades since Ethiopia introduced Value Added Tax (VAT) per Proclamation No. 285/2002 (“VAT Proclamation''). The VAT Proclamation has gone through two amendments in 2008 and 2019, making a few tweaks to the age-old law; however, it has failed to take into consideration the current economic developments and technological advancements. The executive bodies (Ministry of Finance and Ministry of Revenue) have been the principal players in introducing several directives and circulars focused on VAT to cope with the dynamic changes in the business environment. However, this is expected to change. The government is working on a new VAT proclamation which will bring significant changes to the existing VAT Proclamation (Read our review of the draft VAT proclamation here).&nbsp;Ethiopia Licensed the First Private Company to Provide Digital Financial Services&nbsp;Under the <a href="https://www.mofed.gov.et/media/filer_public/38/78/3878265a-1565-4be4-8ac9-dee9ea1f4f1a/a_homegrown_economic_reform_agenda-_a_pathway_to_prosperity_-_public_version_-_march_2020-.pdf">Homegrown Economic Reform Agenda</a>, the Ethiopian government specified&nbsp; its intention to enhance financial inclusion in the financial sector. This reform promised the revision of the then restriction against mobile payment technology service providers. In April 2020, the government introduced <a href="https://www.nbe.gov.et/wp-content/uploads/pdf/proclamation/oversight-the-national-payement-system.pdf">Licensing and Authorization of Payment Instrument Issuers Directive No. ONPS/01/2020</a> which provides the legal framework for introducing fintech companies in Ethiopia. Following this, Ethio-telecom introduced Telebirr, which is the first mobile payment mechanism launched by a non-financial institution. Since its launch, Telebirr has recorded more than 21M users and ETB 25B in transactions through July 19, 2022.1 This month, the National Bank of Ethiopia (NBE) has licensed Kacha Digital Financial Services S.C. to provide digital financial services, which makes it the first licensed private mobile money service provider. This is in line with the government’s move to liberalize the financial sector and could be considered as a big step towards full liberalization of the sector.&nbsp;Leather and Textile Exporters Get an Exemption for Sample ExportThe Ministry of Finance has exempted exporters of leather and textile products from acquiring and getting permits and paying duties before sending or receiving samples.2 These exporters can now send and receive samples of up to 30kg of textile and 30sqm of hides without paying customs duty. This is done in order to increase the competitiveness of the Ethiopian producers in the international market and enhance their capability. This is expected to resolve one of the many issues that exporters face in Ethiopia.<hr>UGANDAWomen Entrepreneurs at Forefront of New NSSF ProgramThe National Social Security Fund has rolled out its flagship accelerator program that will among other things fund over 92,400 women entrepreneurs. As a prerequisite, the businesses should be in priority sectors that include manufacturing, technology, agriculture and commerce. The beneficiaries will obtain about USD 30,000 in funding. According to an article in the New Vision, an NSSF representative stated that the opportunity is now targeting women to motivate them to improve their economic growth and survival in the bad economy. The fund seeks to support small businesses with potential to scale and create jobs. Historically women-owned businesses have not been deemed investment ready due to a plethora of internal and external factors including size and ability to scale. Thus, they find themselves in a vicious cycle of operating as a small business. However,investors are now more aware of this conundrum when it comes to supporting women-led businesses and according to a recent survey from the Morgan Stanley Institute for Sustainable Investing, 67% of global asset owners identify gender diversity as an area of interest within their investment portfolios. This is positive considering that women face biases and discrimination when they pitch to investors and it’s essential that capital is channeled to directly fund unrepresented entrepreneurs.&nbsp;Uganda Government Mull New TVET Bill.The newly proposed Technical Vocational Education and Training (TVET) Bill, which will outline technical and vocational training, courses and programmes and the management of trainers and stakeholders, is said to be one of the solutions to the unemployment problem in Uganda. The Minister of ICT and National Guidance emphasized the need to promote technical and vocational training alongside formal academic training to reduce the unemployment rate. He stated in a briefing to journalists this week that the bill is going to be employer-led legislation, which must answer to the needs of employers and also the skills that we need in society. With an exceedingly young population, Uganda is taking steps to ensure that the unemployment issue is resolved by offering various options of formal education and training or technical/vocational training.<hr>RWANDADe-escalation of Tension Between DRC-Rwanda UnderwayThe DRC as the newest member of the East African Community has presented an immense potential for regional economic growth. Several neighboring and international countries are looking forward to the economic, political ties and benefits it will bring to the regional bloc. Businesses have already started to advance and make road maps for the economic flow that is expected to happen. However, with the ever rising political tension from the reemergence of M23 rebels in eastern Congo, there is a lot of political instability that has adversely affected the businesses within the community in an already trying financial time. According to an article in All Africa, the de-escalation process will be managed by the revived DRC-Rwanda committee that held their first meeting in Luanda on July 12. The paradox of including DRC in the East African Community and it being marginalized as an unsafe region to do business in is weighing heavy on the member states.Rwanda Judiciary Looks to Reduce Case Backlogs SignificantlyAs a measure to reduce the case backlog in Rwanda, the judiciary has contracted over 20 judges and 10 registrars to preside over cases in primary courts. According to an article in the New Times Rwanda, the average time a case spends before it is tried increased from 8 to 10 months which has subsequently created a huge backlog. The judiciary is also devising other methods to remedy this issue like court annexed mediation that expedites conflict resolution between parties. The New Times article also mentioned that the trials postponed in different courts increased by 28 percent from 22,784 to 29,259, and one of the reasons for this increase is the Covid-19 preventive measures which led to limited court activity. This is a very timely measure for the country to ensure law and order are upheld coupled with fair and reasonable justice.&nbsp;&nbsp;&nbsp;1) <a href="https://businessinfoeth.com/telebirr-mobile-money-service-transaction-value-reached-25-billion-birr/">https://businessinfoeth.com/telebirr-mobile-money-service-transaction-value-reached-25-billion-birr/</a>2)) https://addisfortune.news/leather-textile-exporters-salute-relaxed-sample-shipping-rules/

Our take on developments in the investment ecosystems of East Africa

_LWN6417.jpg

RENEW’s Legal Corner: August 2022

<h1 style="text-align:center;">&nbsp;#10YearsInvested: Impact Investing Then &amp; Now</h1>This month, we continue our celebration of operating in Ethiopia for 10 years with a special focus on impact investing and where the field has come in the last 10 years. In case you missed previous posts in the series, you can find them here:<ul><li><a href="https://www.renewcapital.com/resources/blogs/Photo%20Journey%20%20Ethiopia%20Then%20%20%20Now%20%20A%20Tribute%20to%20a%20Cooking%20Pot">Photo Journey: Ethiopia Then &amp; Now. A Tribute to a Cooking Pot </a>(March 2022)</li><li><a href="https://www.renewcapital.com/resources/blogs/10%20Years%20of%20Changes%20in%20Ethiopia%20%20What%20Do%20the%20Numbers%20Tell%20Us%20">10 Years of Changes in Ethiopia. What Do the Numbers Tell Us? </a>(April 2022)</li><li><a href="https://www.renewcapital.com/resources/blogs/10%20Years%20of%20Blended%20Finance">10 Years of Blended Finance</a> (May 2022)</li></ul>When RENEW found its home in Ethiopia in 2012, ‘impact investing’ was considered a $46 billion industry. Only a handful of practitioners had started to tackle the complex challenge of deploying capital to achieve both financial and social returns. Only a few people and organizations were even familiar with the concept.&nbsp;Fast forward to today, estimates suggest that the impact investing industry will surpass $1 trillion in assets under management (AUM) by the end of 2022. While this still only represents around 2% of global AUM, impact investing is becoming increasingly mainstream as investors are demanding that their capital is deployed to achieve good, and institutions are responding.The industry’s growth over the past decade is exciting, and the world has welcomed many new practitioners to the field. At the same time, the global social and environmental challenges are becoming increasingly urgent. Climate change, natural disasters, political discord and human conflict are highlighting the fragility of our existence and the imminent need to act. Furthermore, if we are to achieve the United Nations’ Sustainable Development Goals by 2030, there is an estimated $4.2 trillion in annual unmet financing needs for developing countries.&nbsp;It is evident that the development and aid community cannot fill this gap alone. The private sector has the opportunity and the responsibility to substantially increase its sustainable financing commitments and be accountable for the actual social and environmental impacts of their investments. Enter Impact Investing.<figure class="image"><img src="/uploads/pasted_image_0_2_d9ac2d8e9b.png"></figure>Context and HistoryWhile the term “impact investing” is relatively new, it falls under the broader concept of socially responsible investing that has existed in different forms for centuries. For example, 18th century Methodist and Quaker groups in the United States banned all investment in slavery, war and other “sinful” industries. In the 20th century, the World Bank established the International Finance Corporation to promote sustainable development through private sector investments. Financing became a lever for ending the Vietnam War and South Africa’s Apartheid system, as well as saving the environment.These efforts focused largely on exclusion of harmful activities from portfolios. Falling short of true impact investing, they are more aligned with Environmental, Social, and Governance or “ESG”&nbsp; investing, a term coined in 2005 by UN General Secretary Kofi Annan to create a framework for incorporating values into capital markets. In addition to screening out harmful investments, ESG focuses on the identification and mitigation of environmental, social and governance risks that have a material effect on the business.Another industry that helped shape impact investing is microfinance. Emerging in the 1970s, microfinance set out to drive positive non-financial outcomes through small, high-risk investments. The primary goal of microfinance is the social impact, and as such, it does not seek out the same combined financial and social returns that define impact investing.&nbsp;Such socially-minded investment strategies continued to evolve, but it was not until 2007 that the term “impact investing” was introduced by the Rockefeller Foundation as “investments made with the intention of generating both financial return and social and/or environmental impact.”Soon after, the <a href="https://thegiin.org">Global Impact Investing Network (GIIN)</a> was founded to convene market practitioners and relevant stakeholders. Such early steps were important for the industry, but as noted at the outset, impact investing was very much in its nascency in 2012.&nbsp;A Decade of Growth and MaturationThe defining theme of the impact investing industry over the last decade has been its tremendous growth. <a href="https://thegiin.org/research/publication/impinv-survey-2020">GIIN’s 2020 Investor Survey </a>estimates that there was over $715 billion impact investing AUM in 2019. The estimated total AUM over $1 trillion by the end of this year represents a more than 20x increase from ten years ago.&nbsp;The number of impact investors has similarly proliferated, estimated to have reached 1,720 strong in 2019, including numerous mainstream institutions. In just the last few years, notable entrants launching impact initiatives include traditional private equity firms such as Apollo and KKR and corporate initiatives such as the Citi Impact Fund and Salesforce Ventures Impact.&nbsp;However, the field remains diverse by investor type, ranging from family offices to large pension funds. Development finance institutions (DFIs) manage more than one-third (36%) of AUM, while 1,200 asset managers account for just over half (54%). Allocation also ranges widely across industries and markets. Of the investors sampled in GIIN’s report, 59% of capital in 2019 was allocated to emerging markets, with Sub Saharan Africa (SSA) capturing the largest portion at 21%.&nbsp;<figure class="image"><img src="/uploads/pasted_image_0_3_c82e14cd66.png"></figure>Many factors have propelled impact investing’s takeoff in recent years, including rising awareness of global challenges, shifting investor preferences and a generally supportive economic backdrop. The industry’s growing track record of achieving competitive financial returns and demonstrable impact outcomes has helped attract additional capital. One of the most crucial developments, however, has been the establishment of market standards and frameworks to help safeguard against concerns of “impact washing.”Similar to prior “greenwashing” concerns around the environmental movement, “impact washing” refers to investment practices that claim to generate positive social or environmental outcomes but lack supporting evidence for those assertions. These types of reputation-laundering marketing practices rightfully engender suspicion about the industry.To its credit, the impact investing community has recognized and is continuously making steps to mitigate this risk by promoting transparency and accountability through iterative initiatives. For example, in 2016, the <a href="https://impactmanagementproject.com/">Impact Management Project</a> was established, bringing together more than 2,000 enterprises, investors and practitioners to facilitate collaboration and consensus-building on impact best practices.&nbsp;In 2019, the GIIN released its updated <a href="https://iris.thegiin.org">IRIS+ system</a> which provides common metrics for investors to measure and manage their impact. <a href="https://www.impactprinciples.org/">The Operating Principles for Impact Management</a>, a framework for integrating impact throughout the investment process, was launched in the same year.&nbsp;Such frameworks and tools help protect the impact investing market’s integrity by defining standards and best practices that investors should adhere to when claiming the impact label. GIIN’s 2020 report noted that “in the first edition of the Annual Survey (2010), 85% of respondents used their own proprietary [Impact Measurement and Management] systems. One decade later, 89% use external systems, tools and frameworks for IMM.” Regulatory action such as the European Union’s Sustainable Finance Disclosure Requirements and the U.S. Security and Exchange Commission’s proposed guidance on ESG and impact categorization are welcome developments to bring further accountability to the industry.Of course, more work needs to be done. Transparency and accountability to demonstrable impact outcomes are central to the industry’s future, and all market practitioners have an on-going responsibility to help substantiate impact investing’s potential.&nbsp;Advancing&nbsp; Impact Investing in AfricaRENEW is proud to have been an early advocate in the impact investing space and all that we have achieved on our journey. We are inspired by the number of lives we have been able to touch, yet we recognize that impact investing remains substantially underutilized in East Africa. Our team is driven by the opportunity we have to continue leading this movement, constantly pushing boundaries to learn how capitalism can be re-imagined and harnessed to drive positive outcomes for Africa, transforming the continent’s narrative from a place of giving to a place of investing. &nbsp;

Impact Investing: a reflection on the past decade and the industries development 

pasted image 0 (2).png

 10 Years of Impact Investing and How it Came to Be

<h1 style="text-align:center;">RENEW’s Legal Corner: August 2022</h1>Our take on developments in the investment ecosystems of East Africa&nbsp;<figure class="image"><img src="/uploads/LWN_6417_94da49e087.jpg"></figure><hr>ETHIOPIAEthiopia is Changing its Two Decades Old VAT Proclamation&nbsp;It has been two decades since Ethiopia introduced Value Added Tax (VAT) per Proclamation No. 285/2002 (“VAT Proclamation''). The VAT Proclamation has gone through two amendments in 2008 and 2019, making a few tweaks to the age-old law; however, it has failed to take into consideration the current economic developments and technological advancements. The executive bodies (Ministry of Finance and Ministry of Revenue) have been the principal players in introducing several directives and circulars focused on VAT to cope with the dynamic changes in the business environment. However, this is expected to change. The government is working on a new VAT proclamation which will bring significant changes to the existing VAT Proclamation (Read our review of the draft VAT proclamation here).&nbsp;Ethiopia Licensed the First Private Company to Provide Digital Financial Services&nbsp;Under the <a href="https://www.mofed.gov.et/media/filer_public/38/78/3878265a-1565-4be4-8ac9-dee9ea1f4f1a/a_homegrown_economic_reform_agenda-_a_pathway_to_prosperity_-_public_version_-_march_2020-.pdf">Homegrown Economic Reform Agenda</a>, the Ethiopian government specified&nbsp; its intention to enhance financial inclusion in the financial sector. This reform promised the revision of the then restriction against mobile payment technology service providers. In April 2020, the government introduced <a href="https://www.nbe.gov.et/wp-content/uploads/pdf/proclamation/oversight-the-national-payement-system.pdf">Licensing and Authorization of Payment Instrument Issuers Directive No. ONPS/01/2020</a> which provides the legal framework for introducing fintech companies in Ethiopia. Following this, Ethio-telecom introduced Telebirr, which is the first mobile payment mechanism launched by a non-financial institution. Since its launch, Telebirr has recorded more than 21M users and ETB 25B in transactions through July 19, 2022.1 This month, the National Bank of Ethiopia (NBE) has licensed Kacha Digital Financial Services S.C. to provide digital financial services, which makes it the first licensed private mobile money service provider. This is in line with the government’s move to liberalize the financial sector and could be considered as a big step towards full liberalization of the sector.&nbsp;Leather and Textile Exporters Get an Exemption for Sample ExportThe Ministry of Finance has exempted exporters of leather and textile products from acquiring and getting permits and paying duties before sending or receiving samples.2 These exporters can now send and receive samples of up to 30kg of textile and 30sqm of hides without paying customs duty. This is done in order to increase the competitiveness of the Ethiopian producers in the international market and enhance their capability. This is expected to resolve one of the many issues that exporters face in Ethiopia.<hr>UGANDAWomen Entrepreneurs at Forefront of New NSSF ProgramThe National Social Security Fund has rolled out its flagship accelerator program that will among other things fund over 92,400 women entrepreneurs. As a prerequisite, the businesses should be in priority sectors that include manufacturing, technology, agriculture and commerce. The beneficiaries will obtain about USD 30,000 in funding. According to an article in the New Vision, an NSSF representative stated that the opportunity is now targeting women to motivate them to improve their economic growth and survival in the bad economy. The fund seeks to support small businesses with potential to scale and create jobs. Historically women-owned businesses have not been deemed investment ready due to a plethora of internal and external factors including size and ability to scale. Thus, they find themselves in a vicious cycle of operating as a small business. However,investors are now more aware of this conundrum when it comes to supporting women-led businesses and according to a recent survey from the Morgan Stanley Institute for Sustainable Investing, 67% of global asset owners identify gender diversity as an area of interest within their investment portfolios. This is positive considering that women face biases and discrimination when they pitch to investors and it’s essential that capital is channeled to directly fund unrepresented entrepreneurs.&nbsp;Uganda Government Mull New TVET Bill.The newly proposed Technical Vocational Education and Training (TVET) Bill, which will outline technical and vocational training, courses and programmes and the management of trainers and stakeholders, is said to be one of the solutions to the unemployment problem in Uganda. The Minister of ICT and National Guidance emphasized the need to promote technical and vocational training alongside formal academic training to reduce the unemployment rate. He stated in a briefing to journalists this week that the bill is going to be employer-led legislation, which must answer to the needs of employers and also the skills that we need in society. With an exceedingly young population, Uganda is taking steps to ensure that the unemployment issue is resolved by offering various options of formal education and training or technical/vocational training.<hr>RWANDADe-escalation of Tension Between DRC-Rwanda UnderwayThe DRC as the newest member of the East African Community has presented an immense potential for regional economic growth. Several neighboring and international countries are looking forward to the economic, political ties and benefits it will bring to the regional bloc. Businesses have already started to advance and make road maps for the economic flow that is expected to happen. However, with the ever rising political tension from the reemergence of M23 rebels in eastern Congo, there is a lot of political instability that has adversely affected the businesses within the community in an already trying financial time. According to an article in All Africa, the de-escalation process will be managed by the revived DRC-Rwanda committee that held their first meeting in Luanda on July 12. The paradox of including DRC in the East African Community and it being marginalized as an unsafe region to do business in is weighing heavy on the member states.Rwanda Judiciary Looks to Reduce Case Backlogs SignificantlyAs a measure to reduce the case backlog in Rwanda, the judiciary has contracted over 20 judges and 10 registrars to preside over cases in primary courts. According to an article in the New Times Rwanda, the average time a case spends before it is tried increased from 8 to 10 months which has subsequently created a huge backlog. The judiciary is also devising other methods to remedy this issue like court annexed mediation that expedites conflict resolution between parties. The New Times article also mentioned that the trials postponed in different courts increased by 28 percent from 22,784 to 29,259, and one of the reasons for this increase is the Covid-19 preventive measures which led to limited court activity. This is a very timely measure for the country to ensure law and order are upheld coupled with fair and reasonable justice.&nbsp;&nbsp;&nbsp;1) <a href="https://businessinfoeth.com/telebirr-mobile-money-service-transaction-value-reached-25-billion-birr/">https://businessinfoeth.com/telebirr-mobile-money-service-transaction-value-reached-25-billion-birr/</a>2)) https://addisfortune.news/leather-textile-exporters-salute-relaxed-sample-shipping-rules/

<h1 style="text-align:center;">My Path to RENEW</h1>I come from a family of entrepreneurs and travelers. My grandfather, the son of Arab and British immigrants, was born and grew up in Dire Dawa, Ethiopia. As a young adult, my great grandfather moved to Ethiopia, a land he viewed as a place of opportunity. While in Ethiopia, he began to build a life, met his wife and started a family. My grandfather, my namesake, spent his childhood traveling between Dire Dawa, Addis Ababa, and Nairobi for school. Through hard work, grit and entrepreneurship, my grandfather immigrated to the United States where he built his own structural engineering and architecture firm.&nbsp;I spent my childhood hearing stories about East Africa. Addis Ababa, Dire Dawa and Nairobi were frequent cities discussed during storytime around my grandparents’ kitchen table. Never did my grandfather think that a grandson of his would be drawn back into the lands of his childhood, a place I now view as a land of opportunity, just like my great grandfather did. My journey to Ethiopia was not direct and it took me a few years to realize this was where I wanted to be. However, each step along the way prepared me and equipped me to become a member of the RENEW team.<figure class="image"><img src="/uploads/Screen_Shot_2022_07_28_at_11_54_12_AM_862a84d1e5.png"></figure>After graduating from college with degrees in political science and Arabic, I moved to Jordan for a year to learn Arabic and live in a culture far different from my own. During that time, I learned the importance of building mutual respect, engaging with different cultures and valuing others despite differences in faith, worldviews and life experiences. More importantly, these experiences opened my eyes to different ways of viewing history. Historical events shaped the identities and passions of my Arab friends in powerful ways. It is through the lens of past events that they view current events. I never knew one could interpret the world so differently.&nbsp;While living with my Palestinian refugee roommate in Jordan, I would turn on Sky News every night during dinner. Whatever the news, I would ask him “shoo raiek,” meaning “what do you think?” This simple question would launch us into hours-long conversations and debates far more valuable than any university Middle Eastern history class I took. I found these conversations so exhilarating, even if they were sometimes offensive to me or to my country. These conversations taught me empathy and compassion, and they drove my interest in living and working outside the United States.<figure class="image"><img src="/uploads/LWN_6342_1_8719ba2e40.jpg"></figure>Early in my career, I was eager to get back to the developing world. I struggled with the roots of traditional foreign aid models that seemed to breed dependence rather than empowerment. I wondered what it would look like to provide people with the tools and capital to build their own lives and businesses on their own journeys to self-reliance. This is the only true outcome of economic empowerment.&nbsp;I never knew a place like RENEW existed, but when it was introduced to me, I knew it was the company and mission I had been longing for. To provide the tools, capital and knowledge to people in the developing world to build themselves out of poverty and provide opportunities for their peers and communities through entrepreneurship was central to my own developing vision. RENEW does just that. I now spend my days and weeks knowing that I have contributed to RENEW’s powerful mission of building Small and Medium Enterprises into market leaders, job creators and problem solvers. Just as it was so many years ago for my great grandfather, I believe that Ethiopia– and East Africa, more broadly– remains a land of opportunity ripe with economic potential and alive with an entrepreneurial spirit.

Screen Shot 2022-07-28 at 11.54.12 AM.png

My Path to RENEW

<h1 style="text-align:center;">RENEW’s Legal Corner: July 2022</h1>Our take on developments in the investment ecosystems of East Africa<figure class="image"><img src="/uploads/LWN_4361_73f63f253a.jpg"></figure><hr>ETHIOPIAA New Investment Incentive Regulation is Already Underway&nbsp;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 <a href="https://www.renewcapital.com/resources/blogs/The%20New%20Investment%20Incentive%20Scheme%20is%20Expected%20to%20Change%20the%20Investment%20Ecosystem%20">here</a>.)The National Bank of Ethiopia Revised the Reserve Requirement for a Second Time This Year&nbsp;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.&nbsp;&nbsp;Financial Regulator has Banned Virtual Currencies from the Ethiopian Market&nbsp;&nbsp;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. <a href="https://nbebank.com/wp-content/uploads/2019/04/amendement%20of-nbe-stab-proclamation.pdf">The National Bank of Ethiopia Establishment Proclamation No. 591/2008</a> clearly recognizes Ethiopian Birr as the country’s national currency for any financial transaction in Ethiopia unless the NBE permits otherwise. In addition, <a href="https://nbebank.com/wp-content/uploads/2019/04/nationalpaymentsystem.pdf">National Payment System Proclamation No. 718/2011</a> 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.&nbsp;Recently, the Ethiopian government has introduced a <a href="https://id.gov.et/">National ID Program</a> 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&nbsp;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&nbsp; 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&nbsp; according to the Ministry of Finance. The government is expected to broaden its tax base to raise more money from domestic sources.<hr>RWANDASenators Urge Efforts to Address Affordable Housing GapsIn 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 CitizensThe 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.”&nbsp;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.<hr>UGANDACSOs want 70% of Budget for Development Expenditure&nbsp;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.&nbsp;&nbsp;38.8B UGX to be Reinvested in the Uganda Development Bank&nbsp;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.” &nbsp; &nbsp;&nbsp;&nbsp;1) <a href="https://www.fanabc.com/english/council-of-ministers-approves-786-6-billion-birr-draft-budget/">https://www.fanabc.com/english/council-of-ministers-approves-786-6-billion-birr-draft-budget/</a>

Our take on developments in the investment ecosystems of East Africa: July


_LWN4361.jpg

RENEW’s Legal Corner: July 2022

<h1 style="text-align:center;">The New Investment Incentive Scheme is Expected to Change the Investment Ecosystem &nbsp;</h1>As part of the country’s <a href="https://www.imf.org/en/News/Articles/2019/12/23/na122319-six-things-to-know-about-ethiopias-new-program#:~:text=The%20IMF%20has%20approved%20a,for%20sustainable%20and%20inclusive%20growth">economic reform program</a>, the government of Ethiopia adopted a new investment proclamation and regulation in 2020, repealing the decade-old investment Proclamation No. 769/2012 (read our blog on the new investment proclamation <a href="https://www.renewcapital.com/resources/blogs/Having%20Skin%20in%20the%20Game%20Can%20Help%20with%20Investment%20Reform">here</a>) and Regulation No. 272/2012, hereinafter referred to as the Repealed Regulation. Despite the adoption of these investment laws, investment incentives provided under the Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 were not repealed and were kept as transitory provisions until a new Incentive Regulation is enacted. The business community has been waiting for the introduction of new investment incentives and after more than two years, the Council of Ministers has approved new regulations to provide for investment incentives, hereinafter referred to as the Incentive Regulation.&nbsp;&nbsp;Investment Proclamation No. 1180/2020 clearly stipulates the necessity to further increase and diversify foreign investment inflow into Ethiopia to accelerate inward transfer and diffusion of knowledge, skill, and technology. The adoption of a separate and detailed Investment Regulation compared to the previous one can be considered as a move to achieve this commitment and make the country a destination for Foreign Direct Investment (FDI). Nevertheless, whether the Investment Regulation will achieve its targeted goal will be seen in the coming years. With this in mind, we have covered the major highlights of the Incentive Regulation briefly below.<figure class="image"><img src="/uploads/097_A2846_254237521f.jpg"></figure>Administration of Investment Incentives - The Incentive Regulation has given the Ministry of Finance (MoF) a broad range of powers in administering investment incentives. Previously, various government bodies were empowered to govern different sections of the incentives. For instance, the Ethiopian Investment Board was assigned to come up with a directive to regulate the exemption of motor vehicles, and the Ethiopian Investment Commission had the power to decide on the importation of duty-free capital goods and construction materials. However, under the Incentive Regulation, the MoF has the power to issue directives to govern these matters. In addition to this authority, the MoF can grant tax incentives, issue directives on the eligibility criteria for tax incentives, and conduct a cost-benefit analysis on investment incentives to determine the impact of tax incentives on the economy. Furthermore, the MoF is empowered as an overseeing body over other regulatory institutions in ensuring whether tax incentives are used for their designated purposes.&nbsp;&nbsp;Investment Areas and Incentives - Investors which invest in areas that are far from Addis Ababa have additional investment incentives provided under the incentive laws. The Repealed&nbsp; Regulation clearly mentions these areas; however, the Incentive Regulation does not. It states that investors who invest in areas far from the urban center and/or with very low infrastructure development will be entitled to an income tax deduction of 30% for three consecutive years after the expiry of the income tax exemption period. The MoF is expected to come up with a directive listing these geographic areas. Similarly, investors who invest in new, atypical, and selected tourist destination areas in hotels, lodges, and resorts with a rank of a star will be entitled to a five-year income tax exemption. The MoF directive is also expected to list these atypical and selected tourist destination areas.&nbsp;&nbsp; Employment Opportunities for Ethiopians Abroad - Investors who provide job opportunities for Ethiopians abroad are provided with income tax exemptions. There are three requirements to be fulfilled by the investors in order to benefit from this exemption. First, the employee who will go outside of Ethiopia should obtain a qualification certificate from an institution recognized for providing training to persons who are to be placed in a foreign country. Nonetheless, the Investment Regulation does not state the type of qualification or training necessary for employees who will go outside of Ethiopia. Secondly, the employer should bring evidence from the Ministry of Labor and Skills that proves the employment of Ethiopians outside of Ethiopia. Lastly, based on the number of Ethiopians sent abroad, the income tax exemption schemes provided under the Incentive Regulation can differ. Nevertheless, the investor will not get more than six years of exemption, regardless of the number of Ethiopians it sends abroad for work.Exemption for Expansion or Upgrading of Existing Investment - In relation to exemptions provided for investors who expand and upgrade their existing investment, the Incentive Regulation has made some changes. Under the new law, investors should bring evidence to benefit from such incentives. They should show whether the investment has achieved the type and volume of product and other preconditions as mentioned in their investment license. In addition, the expansion should be in line with the eligibility criteria listed under the directive that will be issued by the MoF. Finally, to benefit from such exemption the investors are expected to submit audit reports about their existing investment.Incentives for the Mining, Petroleum and Geothermal Works - Section four of the Incentive&nbsp; Regulation gives detailed coverage for mining, petroleum and geothermal works. Investors who engage in these sectors can import machinery, equipment and vehicles without paying customs duty for the operation of their investment. However, capital goods that are imported into Ethiopia cannot be sold to other parties without securing prior approval from the MoF, but the investor can re-export these goods without paying customs duty. Expatriate employees of a contractor and/or a subcontractor that engages in petroleum and geothermal works are allowed to import household goods and personal effects of any kind free of customs duties in accordance with regulations.&nbsp;Commencement Period for Income Tax Exemption - The starting period for the income tax exemption under the Repealed Regulation is the date of commencement of production or provision of services by the investor. The Ethiopian Investment Commission is required to notify federal or regional tax organs about the commencement of production or provision of services by the investor. Under the new Incentive Regulation, income tax exemption starts after the investor obtains its investment license or expansion permit. The EIC or a federal government body delegated by the EIC to issue investment permits will notify the Ministry of Revenue about the obtainment of an investment license or expansion permit.&nbsp;&nbsp;&nbsp;

As part of the country’s economic reform program, the government of Ethiopia adopted a new investment proclamation and regulation in 2020, repealing the decade-old investment Proclamation No. 769/2012.