Special Economic Zones Falter as Investment Plans Miss the Mark

Special Economic Zones Falter as Investment Plans Miss the Mark

Nov 29 , 2025. By YITBAREK GETACHEW ( FORTUNE STAFF WRITER )

Federal authorities' bold plan to accelerate industrialisation through Special Economic Zones (SEZs) faced early setbacks this fiscal year. The Ethiopian Investment Commission set an ambitious goal of generating 400 million dollars in import-substituting production within three months. Instead, actual output reached only 211 million dollars, missing the target by 47pc and disclosing a 43pc decline compared to last year.

The federal government’s drive to accelerate industrialisation through Special Economic Zones (SEZs) stumbled early in the current fiscal year, revealing cracks in the Ethiopian Investment Commission’s (EIC) capacity to turn bold aspirations into tangible results.

Aspiring to generate 400 million dollars in the first quarter alone through a proxy-production scheme, designed to displace imports with domestic output, the Commission fell markedly short, delivering only 53pc of the target. The miss, despite expanded investor engagement, revealed the gap between planning zeal and execution reality.

The numbers were, on the surface, conflicting. While foreign direct investment (FDI) posted a modest 2.2pc year-on-year increase to reach four billion dollars, and over 544 new and expanded projects received permits, the flagship proxy-production scheme lagged. Planned around 21 substitute products and 32 participating firms, the programme unexpectedly ballooned to 102 products and 175 companies. But the volume of actual production dropped to 211 million dollars, 189 million shy of the target and a 43pc drop from last year.

The discrepancy speaks to an implementation issue. The Commission documented broad interest but failed to translate it into outcomes. Meanwhile, traditional manufacturers, operating outside the scheme, produced over a billion dollars in substitute goods, indicating that market momentum was not the problem, but perhaps the mechanism was. Even with some operational gains, the Commission faces a wide range of systemic constraints that threaten the pace of industrial transition.

“The first quarter shows that while there is progress, much work remains to be done," said Zeleke Temesgen (PhD), the Commissioner. "We need to improve performance in the coming months to ensure the medium-term plan is on track.”

Fourteen industrial parks were upgraded to Special Economic Zones, contributing 123 million dollars in export earnings. The government’s promotional forum drew commitments of 1.6 billion dollars from 700 investors. Officials insisted that legal reforms and structured public–private dialogues were beginning to stabilise investor expectations and reinforce the broader push for private-sector-led growth.

Deputy Commissioner Dagato Kumbe conceded that the shortfall was due to internal and external constraints. The planning process began by identifying organisations capable of participating in proxy production, evaluating the sectors in which each could operate, and conducting consultations to create tailored production plans.

“The team agreed with the companies that certain tasks couldn't be completed for various reasons," he said. "We'll work with these companies to compensate for the remaining months."

Dagato attributed global instability, unexpected legal changes, and delays in securing raw materials to the results that led federal lawmakers to press for corrective action. The Trade & Tourism Affairs Standing Committee, chaired by Aysha Yahya, urged the Commission to prioritise investors committed to import substitution. She argued that partial or stalled project implementation undermines job creation and the broader investment agenda.

According to Aysha, the country needs projects to move quickly from planning to production if the Special Economic Zones are to fulfil their purpose. Her Committee has raised concerns over execution gaps across several sites. Her Deputy, Yohannes Mesfin, challenged the Commissioners, stating that some investors had not even activated the production equipment imported under tax-incentive schemes. He claimed that others had transferred production sheds to third parties, rented facilities without commencing operations, or failed to meet agreed staffing levels.

However, Yohannes acknowledged that the Commission had presented a thorough report but said that compliance issues remained acute. He cautioned that the success of the government’s medium-term plan depends on tighter oversight and enforcement.

According to the Commission’s own assessment, only six out of 13 surveyed organisations thoroughly used government incentives as intended. The remaining either passed the incentives to others or failed to use the machinery purchased with state support.

The investment program tied to export promotion performed better. Planned to generate 136.6 million dollars, it brought in 143.456 million dollars, led by agricultural goods, which recorded a 31.6pc increase from the previous year. Out of the 342.7 million Br allocated to the Commission for the fiscal year, 207.461 million Br was designated for the first quarter. Spending reached 183 million Br, 88pc of the quarterly plan.

The Commissioner disclosed efforts to activate projects had reached 50pc, with 10pc of current fiscal-year investment permits moving into implementation. He credited shifting promotional outreach from broad and generalised messaging to targeted promotion.

“As all special economic zones currently employ around 70,000 workers, we plan to add 20,000 job opportunities this fiscal year,” Zeleke said.

According to the Commissioner, in the absence of a fully operational proxy-product plan, the main emphasis remained on export performance rather than on reducing dependence on imports. He noted that most output from the eastern industrial area is destined for domestic markets, particularly the agricultural sector.

“It's related to exports, not a standalone reduction,” he told Fortune.

The Commission’s difficulties drew scrutiny from analysts who say the gap between ambition and execution reflects deeper structural constraints. Henok Assefa, a tax, finance, and investment consultant at Prime Consulting Plc, sees Ethiopia’s import-substitution strategy resting on assumptions that require stronger institutional backing.

“Import substitution can't succeed through goodwill alone," Henok told Fortune. "It requires strategic planning, effective execution, and strong commitment.”

Henok pointed to high-forex consumption in sectors such as fertilisers, pharmaceuticals, capital goods, and fuel as the most pressing areas for substitution. He argued that capital-goods substitution takes time because it demands advanced machinery manufacturing, technology transfers, and specialised skills.

Henok insisted that foreign direct investment remains essential to complement domestic capacities. While acknowledging some progress, he warned that security challenges and the country’s poor performance in ease-of-doing-business rankings continue to deter inflows. Henok claims Ethiopia has the potential to attract up to 50 billion dollars in FDI, but secured only about five billion dollars last year. Policy uncertainty, regional insecurity, and bureaucratic hurdles have kept investor interest below potential.

“FDI needs peace and security to thrive," he said. "There is also the ease of doing business index, and we're far behind in that.”

Henok observed domestic investors inclined toward trading rather than manufacturing because it offers faster returns and fewer regulatory hurdles.

“Domestic investors prioritise imports over manufacturing,” he said. “Those currently in production are weak, and most of the financial system hasn't been able to attract investors.”

Commission officials acknowledge the shortcomings but argue that much of the pressure derives from inconsistent investor behaviour and unresolved operational bottlenecks. Several companies have failed to activate equipment, transferred production sheds illegally, or failed to hire required personnel. The Commission warned that correcting these issues is essential to achieving medium-term targets and ensuring stable operations in industrial parks.

According to Commissioner Zeleke, the trend is especially visible in the Amhara and Oromia regional states, where support requests often go unanswered, limiting the agency’s ability to provide services and enforce compliance.

PUBLISHED ON Nov 29,2025 [ VOL 26 , NO 1335]