Ethiopian Business Review

What Goes Wrong with Ethiopia’s Export?

Though Ethiopia boasts a relatively impressive amount of exportable goods compared with other sub-Saharan countries, analysts say exports aren’t reaching their full potential.  Logistical barriers stand on the way of Ethiopia reaching its full capacity as a potential exporting powerhouse among African nations. EBR takes a closer look at why this is the case and what can be done to fix it.

Yet for another year, policymakers will be forced to pass through serious public scrutiny over Ethiopia’s stagnated export revenue, which lags way behind the plan for 2013/14. 

The Ministry of Trade (MoT) reveals that Ethiopia earned USD3.3billion during the fiscal year that just ended, registering a growth of just 6.1Pct compared with the previous year. The revenue represents only 66Pct of the planned USD5 billion for the fiscal year.

This low export performance was registered despite the government’s endeavors to increase the country’s export earnings by pursuing concrete policy measures and incentive schemes. These were adopted based on the experiences of East Asian countries that realized high economic growth through the development of new export sectors and government-led development investments.

Certainly, exports played a major role in East Asian countries in the last decade. However, Ethiopia’s current export performance, measured as percent of the Growth Domestic Product (GDP), falls way behind most Sub-Saharan counties let alone to reach the heights seen in Korea, China, or Vietnam during their initial development periods. In fact, Ethiopia has the lowest goods export-to-GDP ratio of around 7Pct, which is lower than the 30Pct registered by most Sub – Saharan African countries. 

In the past, exports appeared to be a driver of economic development in Ethiopia. In fact, according to the third economic update published by the World Bank in June 2014, high export growth was mentioned as one of the many factors contributing to Ethiopia’s economic takeoff since 2004. Benefiting from a global commodities price surge since the beginning of the 2000s, Ethiopian exports grew at an average annual growth rate of 20Pct, one of the highest rates in Sub-Saharan Africa at the time. 

This tale, however, seems to be changing since the growth of Ethiopian export revenue is exhibiting the worst performance in a decade after the 2012/13 fiscal year. During the year, the export revenue fell to USD3.08 billion from USD3.15 billion in the previous year. Judging from the export data released by the MoT recently, it is easy to deduce that the just ended fiscal year export revenue is only better than the previous with little inches.

Just like the year before, last year’s underperformance was exacerbated by the international price decline for most agricultural commodities such as coffee, Ethiopia’s flagship export item for decades. During 2013/14, export revenue from coffee, which has been account close to 3Pct of the global coffee market, has fallen by 3.8Pct to USD718.8 million while the volume shrank by 4.1Pct to 190,940 tones when compared with the previous year. 

A drop in international prices has exposed the country to low export revenue, according to Abdurahman Seid, deputy head of the Public Relation Directorate at the MoT. “Ethiopia is vulnerable to such price swings because unprocessed and undifferentiated agricultural products dominate its exports,” he told EBR.

Undeniably, the international market has continued to witness a sustained downward trend in the price of coffee for close to three years. Coffee prices at the New York Stock Exchange showed a 23Pct drop in 2013 as compared to the previous year.

The price effect is clearly dominant, according to the economic update of the World Bank. There was also a positive quantity response to higher prices between 2003 and 2010. In the case of export baskets dominated by commodities, as in Ethiopia, export growth can be attributed more to worldwide movements in prices than intrinsic improvements in domestic productivity.

Due to such positive international price trend, oil seed exports became Ethiopia’s second biggest foreign exchange earner, with USD642.6 million in 2013/14. This made Africa’s biggest coffee producer the world’s fourth largest exporter of sesame seeds. 

Indeed, most of Ethiopia’s top exports are agricultural products for which world demand is increasing, including coffee, sesame seeds, flower, and soya beans, account for close to 70Pct of the total export revenue. 

Documents required to export 7 7 7 7 7 7 7 7
Time required to export (Days) 45 45 45 45 48 43 42 42
Cost to export (USD per container) 2,017 2,017 2,107 2,357 2,210 2,160 2,160 2,160

Yet, the commodity export business is not particularly dynamic and promising for new companies, according to the World Bank. This is also confirmed by the data obtained from the MoT. In 2010, 252 coffee exporting companies were involved in the market, with a combined annual sales turnover of USD45 million. Three years later, only 196 companies remain with a combined annual sales turnover of USD30 million. 

The same is increasingly true in oil seeds and cut flowers. In the latter, the number of new entrants into the cut flower business as a share of total cut flower exports has declined from 15Pct in 2009 to less than 1Pct in 2012 , according to the World Bank report. 

Ethiopia's export performance in thousands of USDThis low dynamism is also manifested through the fact that established and rather large companies engaged in exports from Ethiopia exhibit high one-year and two-year exporter survival rates, the research conducted by the Ethiopian Development Research Institute in 2012 revealed. 

According to the research, high survival rates are often seen in environments dominated by high fixed costs to enter the exporting business, which are mostly driven by logistics problems.

This is confirmed by the experience of exporters such as Yonas Fantu, 43, who has been engaged in spices export business since 2002. Yohan has faced a number of challenges in the business of spice export. However, non-match with the logistic issue he is now facing. “When I exported 12,000 quintals of spice to India and China back in February 2014,the process took almost two months,” he told EBR. 

According to the Doing Business report published by the World Bank in 2013, 43 days are required to export from Ethiopia, which is 8 days more than needed in most sub-Saharan African countries. The average USD2,160 needed to cover the cost of export per container is also 15Pct higher than the sub-Saharan average. 

“More than “what to export”; it is the “how to export” that is important, said Guang Zhe Chen, World Bank Country Director for Ethiopia at the launching ceremony of the World Bank’s latest Ethiopia Economic Update report held last month at the Sheraton Addis. 

Being landlocked cannot be the sole cause for bad logistics performance, the World Bank study indicated. In 2005, Rwanda, another land locked country, ranked in the Doing Business Index was lower than Ethiopia’s. However, over the past 8 years, Rwanda has made substantial improvements which allow the country to reduce the number of days it takes to export from 51 to 26, while Ethiopia’s case didn’t show any noticeable improvement. 

Besides improving trade logistics and time, experts argue that improving the quality of existing export commodities, through basic value addition is needed. For example, Ethiopia exports mainly raw, unprocessed green coffee beans for around USD2 per kilogram. However, a kilogram of roasted Ethiopian coffee retails for as much as USD40 in the international market.

Studies indicate that Ethiopia has a comparative advantage in about 80 export commodities. Thus exploiting this advantage according to experts is necessary to commence the remarkable contribution of export sector for the national economy, which has been the case in the past.

2nd Year . September 2014 . No.18

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