Legal, Policy Volatility Turns Promises into Headwinds

Jul 12 , 2025.

Political leaders and their policy advisors often promise great leaps forward, yet they frequently fall short, landing with a thud.

In July 2024, Mamo Mehiretu, governor of the Central Bank, declared that the five-decade-old straitjacket on the foreign-exchange market had been cut away in favour of a liberalised forex regime. On the same day, Ahmed Shide, the finance minister, authorised importers to pay suppliers directly in hard currency under a franco-valuta scheme.

The pair was hailed for nudging the economy towards openness. Importers rushed to place orders; shipping companies hurried to load containers. Within months, however, the cheer turned to groans. Officials slammed the window shut, possibly under unspecified “pressures” to make a U-turn on franco valuta policy.

Vessels already at sea drifted in limbo, and businesses scrambled for cover. Investors have a name for this habit of abrupt policy shift: legislative unpredictability.

What should be alarming is that the franco-valuta fiasco was no aberration. Over the past two decades, policymakers have dangled incentives before carmakers. At least six large assembly plants ultimately adopted the mantra, employing thousands and fueling dreams of industrial progress.

Then, abruptly, Melaku Alebel’s Industry Ministry ordered all factories to switch to fully electric vehicles, even though the national grid often fails to keep the lights on. Alemu Sime’s (PhD) officials at the Ministry of Transport & Logistics added to the wound, banning imports of anything that burned petrol or diesel. Tractors and combiners carrying farm inputs stalled at Djibouti’s ports, threatening to impact harvests.

Such zigzags betray deeper institutional malaise.

Ethiopia once astonished global development economists, posting an average annual growth rate of around 10pc between 2004 and 2019. Now the engine stutters. Researchers using autoregressive distributed-lag models on data from 1996 to 2020 found a link between political instability and capricious rules, as well as declines in investment, labour-force growth, human capital formation, and exports.

The World Bank’s “Doing Business” surveys have ranked Ethiopia below 159th out of 190 countries for five straight years. In one recent poll, 55pc of firms called opaque and unpredictable tax administration their biggest headache; 49pc blamed lapses in governance and transparency; 35pc bemoaned the shortage of foreign exchange.

A bizarre episode from the tax office illustrates the chaos. After lying dormant for 48 years, the long-forgotten “Wall & Roof” levy suddenly re-emerged. Businesses had no inkling until inspectors arrived, waving assessment sheets in their faces. Beverage producers fared little better when bottle taxes were raised tenfold overnight, disrupting cost projections and wiping out profits.

Agriculture, which still provides nearly 40pc of output and 80pc of export earnings, is similarly exposed. Conflicts in Tigray, Oromia and Amhara regional states have already hindered planting and trade. The ban on diesel vehicles then immobilised combine harvesters and fertiliser trucks. Investors in agriculture suddenly found themselves with no machinery, until the authorities were compelled to reverse course.

Manufacturers, once touted as a new growth pole, are nursing bruises. In 2020, foreign direct investment (FDI) inflows fell by 9.7pc in the first quarter and 12.4pc in the second. The count of new projects shrank by a staggering 96pc; pledged capital dropped by nearly 56pc. The sector’s contribution to GDP slipped by 1.5pc, well adrift of the federal government’s target of 10pc annual growth.

The IMF recently disclosed that FDI to Ethiopia flattened over the past three years.

Capacity utilisation languishes because managers are hesitant to invest in upgrades most blamed unpredictable rule-making.

Why do rules change so abruptly?

Part of the answer could lie in a muddled practice of federalism. The Constitution devolves powers to regional states, creating overlapping jurisdictions and turf wars. Ministries in Addis Abeba may issue directives that regional bureaus ignore or contradict. Courts, meanwhile, are proven to be limited in their enforcement power of verdicts.

The Supreme Court cannot strike down unconstitutional acts; that prerogative belongs to the House of Federation, a political chamber whose members owe allegiance to the incumbent political party. Investors thus have little legal recourse when officials rip up agreements.

One recent fiasco shows how governance can go awry.

A bill on money laundering and terrorist financing sailed through Parliament with little fuss. Only later did watchdogs spot a clause granting undercover agents immunity for acts committed in the line of duty, including, critics warned, torture. The uproar forced lawmakers to delete the passage within three weeks. The volte-face spared the state from further embarrassment but deepened doubts about the legislative process.

Uncertainty breeds a vicious cycle. When rules shift without warning, businesses shelve expansion plans, banks tighten lending, and foreign capital flees. Slower growth shrinks the tax base, prompting officials to hunt for quick fixes such as arbitrary levies or import bans, which in turn sow more confusion.

The toll is visible in the gulf between foreign and local investors. Around 60pc of foreign-owned ventures advance from licensing to operation; only five percent of domestic projects clear the same hurdle. Citizens appear less able than outsiders to manoeuvre their own country’s regulatory maze.

Ironically, there is no shortage of prescriptions. International best practice calls for regulatory-impact assessments, sunset clauses, extensive public consultations, and independent oversight.

The authorities could start by empowering courts to review executive actions, clarifying the division of labour between federal and regional authorities. Capacity-building within ministries would narrow the gap between proclamation and implementation. Transparency portals could cut information asymmetries and curb the rumour mill.

Constitutional reform is the hardest nut. Yet, without a clear arbiter to resolve disputes between layers of government, Ethiopia will continue to speak in contradictory voices. The African Continental Free Trade Area (AfCFTA), to which Ethiopia has signed on, may offer a lever as membership requires conformity with broadly accepted norms. Aligning domestic rules with regional standards could lend discipline and predictability to the system.

Nonetheless, all these efforts rest on a more basic need for political stability. Militarised conflicts and armed clashes sap attention and resources, while encouraging officials to employ economic tools for political ends. Private initiative wilts in such an atmosphere.

Ironically, businesses face a legal, policy, and regulatory environment where yesterday’s incentives can become today’s bans and tomorrow’s fines. Billions of dollars in prospective investment can be on the balance. Thousands of jobs could remain on hold. Investors can live with risk; what they cannot abide is caprice.

Unless lawmakers and policymakers tame their penchant for sudden U-turns, they may find that the most valuable export is uncertainty itself.

PUBLISHED ON Jul 12,2025 [ VOL 26 , NO 1315]