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    Money TalksAddressing obstacles to E-Commerce in Ethiopia

    Addressing obstacles to E-Commerce in Ethiopia

    Date:

    The need for cash notes and physical presence at market places has gone down significantly, especially since COVID-19. Online orders and payment, digital transaction, home delivery businesses, and even digital health services, e-learning and e-governance have become the buzz words as the pandemic has disturbed the natural course of economic activities.

    For developing economies like Ethiopia which have been far flung from digitization, seamlessly integrating to the new trends remains an uphill battle. Though Ethiopia has been planning to embark on e-commerce for over a decade now, basic ingredients remain missing.

    Bersufikad Getachew, founder and general manager of digital payment platforms like Guzogo and Cashgo, is among entrepreneurs who saw the business side of the pandemic. Over the last three years, he developed a number of such platforms that provide mobile money, e-wallet and other applications for fourteen commercial banks in Ethiopia. The applications have enabled them provide international remittance, e-ticketing, e-payment services, among others.

    Currently, there are close to 35 such companies in Ethiopia. The figure has substantially surged over the past couple of years, according to Addis Ababa Chamber of Commerce and Sectoral Associations (AACSA) data. They mainly facilitate digital payment platforms, provide online displays, and deliver online orders. The National Bank of Ethiopia (NBE) has also lately authorized three licenses, a year after it introduced new directives to register switch operators, ATM operators, POS operators, and payment gateway operators.

    “The transactions across our applications are growing but not as much as we wanted. There is high demand for digital transaction. However, it is not complete because the e-commerce approach in Ethiopia is not end-to-end. It especially failed to bring the merchant onboard. The end consumer is using mobile money and cards. However, wholesalers, retailers, importers, industries and commodity suppliers are not using the technologies,” says Bersufikad.

    The major reason behind the failure to launch full scale e-commerce in Ethiopia is lack of legal frameworks that can seamlessly integrate full-fledged digital market place, payment technologies, tax system, banks, suppliers and other regulators together.  For instance, a number of companies that are tied to transact digitally complain that tax authorities do not consider it as legitimate transaction. Even though the House of People’s Representatives (HPR) in 2020 passed the Electronic Transaction Proclamation, which recognized electronic receipts among others, the practice has barely taken off.

    Payment platforms, e-receipt, delivery, merchandise, logistics, e-registration and reliable online stores are crucial components to initiate full-fledged e-commerce.

    “The most crucial part is the legal framework to integrate and govern all these. In case payment or delivery fails, defective product is delivered or other failures occur; the e-commerce legal framework solves such problems,” says Yillebes Addis, CEO of EthSwitch.

    Mesfin Gulilat, Research and Development Senior Expert at the Ministry of Revenues, agrees. “Ethiopia cannot launch full-fledged e-commerce with the existing laws. The existing VAT proclamation and Income Tax Proclamation need to be revised first. These existing proclamations do not specify how e-commerce companies should be defined and how they should operate. For instance, where should be the location or registration of online goods suppliers? How do regional states share tax revenues from such businesses? Function, logistics, permanent establishment requirement, and supplier location completely change when it comes to e-commerce,” says Mesfin.

    The Ministry of Revenues is currently under preparation to replace its existing tax logging system dubbed SIGTAS (Standard Integrated Government Tax Administration System) with new algorithm named ITAS (Integrated Tax Administrating System). The ministry is preparing to float an international bid to procure ITAs, which is expected to cost close to USD100 million. ITAS will have 12 business function programs, including e-receipt, e-filing, e-payment, e-registration and other online services. Mesfin also stresses that stakeholders like the Ministry of Finance, Ministry of Innovation and Technology (MInT), Information Network Security Agency (INSA), tele, banks and other payment operators are not working closely.

    According to Mandefro Eshete (PhD), legal advisor at the Ministry of Innovation and Technology (MInT), it is the Ministry of Revenues that is dragging its feet to craft e-commerce laws especially e-receipt regulations and directives. “ITAS is the technology part that can enable e-receipt, among its many functions. However, it cannot function without proper legal framework. The Ministry of Revenues has some shortcomings in taking the leading role when it comes to modernizing the tax system and creating a tax system that is favorable for e-commerce.”

    Nonetheless, digital advisor to the PM, Myriam Seid argues there is no gap in legal framework to initiate full-fledged e-commerce in Ethiopia. “I believe e-commerce is already starting in Ethiopia. The existing tax proclamations and investment proclamation are all enabling for e-commerce. Rather, I believe we have the enabling laws but we lack the technologies required for e-commerce. For instance, building digital logistics network cannot be done overnight,” she reckons.  

    In fact, the Ministry of Revenues and Ministry of Finance have established a steering committee to revise the existing VAT proclamation and Income Tax proclamations so they can fit into e-commerce concepts.

    “Currently we are revising both proclamations. A draft document of the VAT proclamation is finalized and currently we are discussing it with stakeholders. It will be tabled for the council of Ministers soon. The Income tax proclamation is at research level. These two proclamations are old, based on analogue operations and are backward to fit into technological systems used in e-commerce. So, we are amending them to accommodate modern electronic tax technologies,” said Mulay Woldu, tax policy director at the Ministry of Finance.

    The necessity of amending the two proclamations emerged following the COVID-19 pandemic, according to Mulay. “But it is also delayed due to the pandemic itself. We could not discuss the draft with stakeholders and undertake studies. We also could not travel abroad to draw lessons to craft the drafts. Currently, we have taken lessons from OECD countries as well as developing countries,” he added.

    Apart from absence of legal frameworks, Bersufikad worries the caps on digital transaction volumes is another obstacle to Ethiopia’s pursuit of e-commerce. “The amount of cash that can be used by card, mobile and internet banking clients is limited. This is because banks do not want their deposit eroded. Banks are a major obstacle to digital economy in Ethiopia. They do not want their deposit to be shared through interoperability of Fintechs. But the fact is, it could reduce their branch expenses.”

    Though many hope e-commerce in Ethiopia will take a dynamic trajectory once foreign telecom operators like safaricom and their Fintechs enter Ethiopia, Bersufikad’s conclusion is otherwise. “There are so many local digital transaction companies emerging in Ethiopia, which could be the engine of Ethiopia’s e-commerce in the near future. But if those foreign Fintech companies come, the locals cannot even survive, let alone grow. Therefore, the government must close the IT and digital finance sector only for local enterprises. The sector should be closed until emerging local Finteck operators are on equal footing to compete with foreign Fintechs, just like the banking industry,” he stressed.

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