Addis Abeba — Ethiopia's economic reforms have yet to convince foreign investors, according to the 2025 Ethiopia Investment Climate Statement released over the weekend by the U.S. Department of State. Despite floating the birr, opening new sectors, and relaunching the Securities Exchange, persistent instability, weak property rights, and heavy state dominance continue to undermine confidence.
The report highlights Ethiopia's potential with "a large and youthful population, low-cost labor, Africa's largest airline, and growing consumer markets." But it concludes: "The government insists it is eager to attract FDI but has mostly failed to address the many shortcomings that deter foreign interest," the report cautioned.
Fragile reforms and persistent distortions
The 2024 currency float saw the birr lose over 100 percent of its value, narrowing the parallel market gap before it reopened months later. "A growing gap between bank exchange rates and the parallel rate re-emerged in November 2024," the report noted.
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The government has since liberalized banking, telecommunications, and retail trade, but foreign ownership in banks remains capped at 40 percent. Ethiopia relaunched its Securities Exchange in January 2025, upgraded 10 industrial parks to special economic zones, and expanded its digital business licensing platform.
Despite these steps, investors complain of excessive taxation, retroactive customs rules, and an inefficient logistics system. Foreign companies are often required to lease equipment from state-owned enterprises (SOEs), undermining claims of privatization.
"The Banking Proclamation still prohibited majority foreign ownership," it said, adding that the state "continues to manipulate the system to benefit inefficient SOEs."
Property rights and expropriation
The report identifies weak property rights as a major deterrent. The government's much advertised "corridor development" initiative since 2024 expelled tens of thousands of residents and businesses, including foreign-owned firms, with little or no compensation.
"Corridor development projects expelled tens of thousands of residents and businesses - including foreign-owned ones - with little to no warning or compensation," the report said.
In the conflict-ridden Oromia and Amhara regions, tourism investors reported government security forces occupying lodges without compensation. "Tourist lodges in Oromia and Amhara were taken over without compensation by members of the ENDF."
Limited federal oversight and control mean "many companies can find their buildings and equipment expropriated by local communities, often in collusion with government officials," the report said.
Corruption and governance gaps
Transparency International ranked Ethiopia 99th out of 180 in its 2024 Corruption Perceptions Index, scoring 37/100. Corruption is prevalent in tax collection, customs, and land administration.
"Authorities can seize assets over 10 million birr without proper documentation," critics warned it could be used "to target opponents without due process."
Although Ethiopia joined the New York Convention on arbitration in 2020, dispute resolution remains weak. Courts are plagued by delays, limited commercial expertise, and allegations of political interference.
Conflict, security, and investor risk
The report warned that security remains a major deterrent. "Conflict in Amhara and Oromia [regions] restricts travel, leads to frequent expropriation of assets, and limits the government's ability to intervene."
More than 4.2 million people are internally displaced due to conflict in Amhara, Oromia, and Tigray regions. Despite a 2022 peace deal with the Tigray People's Liberation Front (TPLF), fighting in Amhara persists, while insurgency in Oromia remains unresolved despite a limited peace agreement with one faction of the Oromo Liberation Army (OLA).
"As of April 2025, there are over 4.2 million Internally Displaced Persons, primarily due to conflicts in Amhara and Oromia and continued tensions in Tigray."
U.S. authorities continue to advise caution. The State Department's travel advisory for Ethiopia remains at Level 3 [Reconsider Travel] citing sporadic conflict, unrest, and crime.
Outlook
The report warned that although Ethiopia has taken steps to modernize its financial system and open sectors to foreign participation, systemic weaknesses overshadow reform momentum. SOEs dominate key industries, corruption erodes trust, and unresolved conflicts create risks of expropriation and asset loss.
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FDI inflows, led by China, Saudi Arabia, Türkiye, and the UAE, accounted for just 2.7 percent of GDP in 2024. Without credible enforcement of property rights, stronger fiscal transparency, and durable peace, Ethiopia's bid to present itself as a premier African investment hub remains uncertain.
"Foreign businesses are targeted for questionable and excessive tax bills," the report said. It added that "the absence of an effective dispute resolution system exacerbates the lack of rule of law."
The 2025 Ethiopia Investment Climate Statement came in the heels of a new joint World Bank-IMF stark warning on Ethiopia's economic outlook, declaring the country's external debt "unsustainable" and confirming that the government is already in debt distress.
Earlier in July, the International Monetary Fund (IMF) has cautioned Ethiopia that its reform program under a $3.4 billion Extended Credit Facility (ECF) arrangement was facing mounting risks due to declining foreign aid, fragile security conditions, and a resurgent parallel currency market, despite progress in meeting key program benchmarks.
