Ethiopia's Free Trade Zone tax exemption raises concerns about industrial policy coherence

This policy, intended to support industrialization, is being scrutinized for its legal basis and potential economic distortions. The directive is tied to Regulation No. 586, which is designed to incentivize production, value addition, and domestic manufacturing capacity, not commercial activity or mere circulation of goods. Critics argue that the directive's broad scope, which exempts income from imported goods supplied to the local market without distinguishing between raw materials and finished products or requiring local value addition, primarily benefits intermediaries rather than manufacturers.

This creates a two-tier structure where the intermediary receives a more direct fiscal privilege than the manufacturer, potentially undermining the industrial policy's goal of strengthening production. Concerns are also raised about the directive's legal authority, as it may exceed the scope of Regulation No. 586, and its potential to create economic distortions by favoring Free Trade Zone importers over local traders and encouraging firms to reorganize for tax benefits rather than productive capacity. Alternatives suggested include directly supporting manufacturers, limiting eligibility to specific industrial inputs supplied to licensed manufacturers, tying benefits to measurable obligations, and implementing sunset clauses