Ethiopian Business Review

• OIC’s new Index Based Livestock Insurance for Borena pastoralists

Oromia Insurance Company (OIC) has recently launched a new product dubbed Index Based Livestock Insurance (IBLI) for pastoralists in Borena Zone, Oromia National Regional State. For farmers and pastoralists in Ethiopia’s drought vulnerable zone, the launching of IBLI is very good news.

Borena has been affected by drought recurrently over the past couple of years. According to the United Nations Office for the Coordination of Humanitarian Affairs, in 2010 and 11, drought in Borena caused serious damage to the rich livestock resources of the region. As a result 412,000 out of a total of 1.29 million people in the region were receiving food assistance including aid provided under the Productive Safety Net Programme.

Whenever drought hits the area, forage crop and water availability are seriously affected making survival of livestock in the area difficult. As a result pastoralists, whose livelihoods depend mainly on livestock resources, lose much of their herds during drought seasons.

This sustains the cycle of poverty in the area, further casting a shadow over their hope of a better future. It is to such people that OIC now brings a new of its kind insurance service, bringing subscribers relief.

If satellite pictures taken show that there is shortage of forage, then the pastoralists will be eligible to claim 50 per cent of the value of their animal in the first half of the year and the remaining in the second half if the drought continues throughout the year.

“Now I feel safe”, a pastoralist in the area who subscribed to the service told a local radio journalist while the program was launched.

According to Megerssa Miressa, Head of Micro Insurance Department at OIC, the new insurance policy insures forage availability.

This means, if there is drought in the area, which will be confirmed based on satellite pictures taken by the National Aeronautics and Space Administration (NASA), America’s responsible agency for civilian space program and for aeronautics and aerospace research, then the company will compensate the farmers for every head of an animal to which a premium has been paid. The satellite picture will be interpreted by experts at Cornel University and the International Livestock Research Institute (ILRI). Not only that, confirmation will be given by the Ethiopian Mapping and Meteorological Agencies respectively.

“If readings of the data show that the area has been affected by drought and thus forage availability is not sufficient, then, whether animals have died or not, the pastoralists will be eligible for compensation”, Megersa told Ethiopian Business Review.

OIC has first studied NASA’s 30 years satellite data of the Borena Zone before launching the new service.

The study, which was done by ILRI, has helped OIC to obtain a real picture of the zone’s climate variation” Tilahun Tadesse, Strategic Planning and Marketing Manager at OIC said.

Borrena Zone Map

ILRI also offer wide ranging services in the product design stage. Similarly Cornel University, in the United States, was engaged in this process. ILRI’s technical support will continue for the next three years as OIC has already inked an agreement for it.

OIC initiated the idea of launching IBLI when it learned about its success story at the sixth International Microinsurance Conference held From 9 to 11 November 2010 in Manila, Philippines. In the conference that brought together 520 participants from 50 countries, Northern Kenya’s Marsabit District was raised as a successful region in IBLI. It was in that conference that Mitiku Abdissa, then OIC’s General Manager who was attending the conference, approached the leadership of ILRI to extend the project to Borena Pastoralists.

Borena, a drought prone arid and semi-arid Zone in Oromia Region, is found in southern Ethiopia bordering Kenya. The Zone has similar climate with Northern Kenya. As a result it was easy to extend the project.

Once the conference was concluded, OIC and ILRI agreed to work out the details of the project together. ILRI then pursued comprehensive research aimed at designing, developing and implementing market mediated index-based insurance products for the zone.

The initiative then culminated in launching a workshop on adapting IBLI for Ethiopia on July 12/2010 in Addis Ababa. In the workshop, Christopher B. Barrett, Professor of Applied Economics and Management and International Professor of Agriculture, at Cornell University made presentation on developing Index Based Livestock Insurance to reduce vulnerability due to drought-related livestock deaths in Ethiopia. The Professor further participated in other subsequent discussions to fine-tune the project. The design of the insurance product with the management team of OIC and experts at ILRI was also done by further incorporating experts from the University of Bergamo in Italy and the Chrisitian-Albrechts-Universität zu Kiel in Germany.

According to Prof. Christopher Barrett, who is also Director of Food System and Poverty Reduction at Cornel, index based insurance avoids problems that make individual insurance unprofitable for small, remote clients. This is because the system does not involve transaction costs of measuring individual losses, preserving effort incentives as no single individual can influence index. Furthermore adverse selection does not matter as payouts do not depend on the risk incurred by those who purchase the insurance policy. The services are also available on a near real-time basis, making it faster for clients to receive a response.

As OIC has been promoting these merits of the new product, pastoralists in eight districts of Borena have started subscribing to the insurance coverage. OIC plans to further this to the neighbouring zone of Gujji and the Somali National Region State.

From left to right, Tesfaye Desta, General Manager of OCI dressed in the traditional clothing of Borena, Abebe Welde, Oromiya Pastoralist Area Development Commission Commissioner, Christopher B.Baret (Prof.) from Cornel University and representative of ILRI attending the launching of IBLI in Yabelo, Borena Zone.

Pastoralists pay a 15 per cent premium fee for their animals which are valued 15,000, 5,000 and 700 birr for camel, cattle and sheep/goat respectively per annum per head to get the insurance coverage. Accordingly, if satellite pictures taken show that there is shortage of forage, then the pastoralists will be eligible to claim 50 per cent of the value of their animal in the first half of the year and the remaining in the second half if the drought continues throughout the year.

As of September 25, the premium the company has collected for the services from over 200 pastoralists has surpassed 215,000 birr.

Many livestock keepers in the Zone who subscribe the service hope that the new insurance policy will protect them from the recurrent drought related asset losses they face.

Borena is at the center of the 2011 horn of Africa crisis. Figures compiled by the British Department for International Development (DfID) suggest that between 50,000 and 100,000 people, more than half of them children under five, died in the crisis that affected Somalia, Ethiopia and Kenya.

The US government estimates separately that more than 29,000 children under five died from May to July 2011 in the three countries. The accompanying destruction of livelihoods, livestock and local market systems affected 13 million people.

Pastoralists in the Horn of Africa face huge loss of animals by the time the international community mobilizes humanitarian assistance. This is because the mobilization work usually takes a long time. That is why pundits consider IBLI a promising option for putting risk-based poverty traps behind.

The new insurance service of OIC will perhaps be a timely solution to reduce the risk of pastoralists in the region. Experts such as Yonathan Shiferaw, Programme Associate for Disaster Risk Reduction and Livelihoods Recovery Programme with the Disaster Prevention and Preparedness Agency (DPPA), share this view. However, Yonathan said, it is advisable if the company [OIC] issues voucher for the pastoralists to buy forage from suppliers and keep their animals alive rather than giving the payouts in cash.

OIC started micro insurance service in December 2009. The service grew to include multi-peril crop insurance in the 2010/11 fiscal year with five farmers’ cooperatives. IBLI is just another micro insurance product that OIC launched to further address insurance coverage for unreached clients.

Although its formation period dates back February 2008, Oromia Insurance Company S.C was legally established in January 2009. As of June 30, 2011 the Company has 545 shareholders with a subscribed capital of just barely over 85 million birr and paid up capital of nearly 29.135 million birr. A distinctive feature of the company is that over 1.3 million farmers in Oromia have become shareholders through cooperative unions in the region.

• Surpassed last year’s earning by 14 per cent
• Earning shows 69.14 per cent of the plan
• The gap between plan and accomplishment alarms realizing GTP

The direct relationship between export and country’s economic growth is apparent. Economists also insist that if export figures (quantity or earning) fluctuate year after year, uncertainties will emerge in the economy. In turn, these uncertainties build unfavourable pressure on investment. These might, in the end, have negative repercussions on overall growth. Balance of payment crisis also turns out to be the other effect.

For economists or others with related professional background, the accomplishment of the Ethiopian 2011/12 export does not seem to make them say wow; perhaps it would ignite several questions.

According to a report issued by the Ministry of Trade (MoT), the overall export earnings in the year has reached 3.153 billion USD. This is just 69.14 per cent of the anticipated 4.56 billion USD. The difference between the plan and accomplishment is noteworthy. And yet, official reports from the ministry tend to show a different picture, simply the positive side of the story by comparing the achievement with the earning of the previous year, 2.747 billion USD. This way the performance has surpassed last year’s earning by 14 per cent.

The export performance, in general, is still growing above the official rate of economic growth. The item by item comparison of the achievement of 2011/12 with the previous year shows that growth has been witnessed in many areas. Revenue from export of oil seeds for instance increased by 146.8 million USD, gold by 140.8 million USD, livestock by 59.2 million USD), flower by 21.8 million USD, textile by 22.8 million USD, pulses by 20.9 million and meat by 15.8 million USD. Minor increases have also been reported to have witnessed in other items.

Accomplishing less than 70 per cent of the plan cannot be overlooked. From the entire agricultural commodities which have been planned to be exported under the supervision of MoT, none of the items attained the anticipated figure (quantity or earning). Coffee, the most vital export item of the country has been nowhere near the target. From the produce in the given year, the exported quantity could not make more than 58.64 per cent. Though the Ministry planned to earn 1.179 billion USD from 288,857 tons of coffee export, the final data show that it achieved only 832.91 (70.65 per cent)million USD of 169,387 (58.64 per cent) tons.

The performance of the manufacturing sector is also way below the par. The Ministry of Industry (MoI) achieved just a little over half (55.8 per cent) of its plan in export. Considering the Ministry’s plans for year, the relatively better achievement came from Agro Processing Products, where 63 per cent of its plan has been achieved.

In the textile and garment, and leather and leather products sectors which had ambitious targets, big disparities were witnessed. The Ministry planned to collect close to 206 million USD from leather and leather products, and 171 million USD from textile to finally settle with 112 million USD (54 per cent) and 84.63 million USD (49 per cent), respectively. Considering the scale of emphasis and priority the government has given for the two sectors the achievement is rather worrisome.

Though the overall earnings in the manufacturing sector show 22.8 per cent growth to reach 255.4 million USD from the previous year’s 207.92 million USD, it is still around 54 per cent of the target (471.3 million USD). If this under performance continues, it would be difficult to reach the broad ambitious goals set in the Growth and Transformation Plan (GTP) which shall come to end in 2014/15.

With the sluggish progress witnessed in the concluded fiscal year from textile and garment export, achieving the projected one billion dollars earning by the end of the GTP period seems unattainable. This is because as the country is nearing half the period of the five years GTP, the yearly earning has remained less than 100 million USD. So if the GTP goals should be achieved, there is a need to increase export earnings in the sector by about 12 fold.

Graph 1 - Top 10 export items in the last two years, revenue in thousands
Source:Ministry of Trade
Illustration by EBR

Where does the problem lie?

The performance of the export sector this year leads to series of questions in the thoughts of inquisitive minds. What really went wrong? Is it because the nation has been trying to punch above its weight in ambitious plans? Or is it simply a failure to analyse factors that affect export while planning? Is it because the Global economic crisis has been deepening in several export destinations for Ethiopia’s commodities? Or what other unforeseen factor during planning of the GTP caused this under performance? This requires critical examination of broad factors that are interlinked and intertwined at various levels.

Coffee, the major agricultural export crop of the country for long, seems losing its dominance. The commodity, which for long enjoyed the popular Ethiopian Radio Song የኢኮኖሚ ዋልታ /ˈje ɪˈkɒnəmi wɒltӕ/ (Axis of the National Economy) seems no more up to its usual standard. The 26 per cent share that it contributed to the total export earnings in 2011/12 shows this. For long above 60 per cent of Ethiopia’s export earning used to come from the bean. Its declining share of export earning is partly a sign that the nation has been diversifying its export items.

Graph 2 - Coffee World Trade Markets and Trade Global import, in thousands 60 - Kilogram Bags
Source:US Department of Agriculture
Illustration by EBR

In the fiscal year Ethiopia exported less than 60 per cent of the planned quantity of coffee. Why? Data released by the Office of Global Analysis at United State Department of Agriculture in June 2012 indicated that the global demand for coffee has not decreased as such in 2011/12. The data also shows that demand will slightly increase in 2012/13. Some in the industry believe the coffee export decline is particularly linked to international market fluctuations (graph 3). Stephen Leighton, a writer, who contributed his view for the Fresh Cup Magazine, in an article he published under the headline ‘How Ethiopia is stonewalling specialty buyers’ a few months ago, explains the critical relationship that exist between coffee exporters and Ethiopian Commodity Exchange (ECX) as one reason for the decline. On this article, which was later published on hasblog.co.uk, he said “The system [ECX’s System] adds unnecessary red tape, forms, paper and a whole heap of extra work for exporters, producers and the officials themselves…..I think the road they have began going down is pushing specialty buyers away from Ethiopia’s amazing coffee. In so doing, the country is in danger of becoming reliant on the huge firms that have controlled the New York commodity trading market for many years- it’s these companies that have typically kept prices just above the cost of coffee production.”

There are also reports that explain the coffee export decline in association with poor policy makings in the country. The world market and trade report, published by United States Department of Agriculture in June 2012 says “Ethiopia’s coffee sector was briefly interrupted in December (2011) when the government announced a policy requiring coffee to be exported in containers instead of traditional 60 kg bags, but the measure was quickly overturned.”

The damage that this policy action made on the coffee export can easily be noticed on the month to month performance report from MoT. Comparing the plan set for each month, the worst performances were observed in December and January. In December 2011, only as low as 29 per cent of the planned quantity was exported and just 36 per cent of the planned revenue collected. In January 2012 coffee export further declined to 25 per cent in quantity and 34 per cent in revenue.

The sudden policy move by the government cannot be taken as the sole reason for the overall failure of the plan in the year as it was overturned immediately. But its end result showed that exporters were frightened by the instability. The packing policy was a major shock for most in the sector as exporters were frustrated that Ethiopian government was trying to make things tough for private exporters. “The no-jute policy was announced when I was in Ethiopia on a buying trip. When one of the exporters told the news to my colleagues and me, we were shocked. The exporter theorized that it was the move by the government to crush private exporters and give more power to the cooperative unions. This is a general feeling among exporters.” Leighton wrote.

At the end of February 2012, considering the first half shipment performance, Ethiopian Coffee Exporters’ Association had predicted that the second half result would be higher. During his interview with Bloomberg, Tesfaye Kenea, the acting general manager of the association, admitted that shipment in the first half totaled about 60,000 tons, less by 35,000 tons compared to same period last year. According to his explanation, the reason behind the country’s coffee export decline in the first half of the fiscal year was the two months crop delay as a result of a “lengthy rainy season.” The other reason he was quoted by Bloomberg as having said was the declining coffee price in New York while in Ethiopian price was not going down proportionally, he said. Thus exporters were downhearted to bring more coffee product for the market abroad.

For those who closely follow the global coffee market, it would not be surprising to see more price declines in international market. Particularly the price of Coffee Arabica, which hit the 14 years high in may 2011, is expected to decline further after registering 26 per cent decline in June 2012. Though it has higher price compared to Coffee Robusta, the Arabica species that Ethiopia exports has been performing awfully. This has been evidenced by the consistent decline of its price. The graph bellow shows this.

Graph 3 - Coffee (Robusta and Arabiya) price since last October 2011 to August 2012
Source:Financial Times

This is directly related to consumers’ behaviour to buy lower and cheaper goods as the economic condition is worsening in export destination in the west. Consumers showed already their preference to trade off with their budget and move towards lower priced coffee options. Coffee Network, a US based Information Company in the industry estimates that the demand for Robusta will move up to 59 million bags (each weighing 60 kgs) in 2012/13 from the previous year 57 million bags. This slight demand increase in Robusta likely affects the demand for Arabica. Even if Arabica is not going to lose more of its customers to Robusta this year, it might take further time to see the price decline reversing. In an article entitled ‘Robusta Coffee Beats Arabica as Folgers Cut Prices’ by Bloomberg, Kona Haque, an analyst at Macquarie Group Ltd. in London who has followed the agricultural markets for 14 years, was quoted as saying “we have additional demand the market has to cater for Robusta, and roasters are unlikely to shift back to Arabica.” This is not good news for Coffee Arabica exporter countries like Ethiopia.

Price and demand was not a concern only for the agricultural export, it was also a growing concern to Ethiopian Manufacturers in the year.

Last July 2012, experts and officials at the Ministry of Industry sat together to identify causes for the failure to meet the target set in the previous fiscal year. Manufacturers’ reluctance to face challenges in international trade and their tendency to choose domestic buyers was stated as one reason. New investments and expansion projects of existing factories, which the ministry had taken into account while planning, were not operational on the schedule according to the Ministry. This further caused the decline of export.

The report adds, “Because of the global economic crisis, particularly in Europe, there were price fluctuations. And buyers tend to cut prices, as well as creating delays to acquire [even] the done deal products”

Looking the current trend of the global economy, where the crisis in Europe and America is still deepening and China just started to cough, the year ahead brings more challenge for Ethiopia’s export. Thus targets set in the GTP should be reworked again.

“More than three years have passed since the trade collapse of 2008/09, but the world economy and trade remain fragile. The further slowing of trade expected in 2012 shows that the downside risks remain high. We are not yet out of the woods,” WTO Director General Pascal Lamy was quoted on a press release posted on the organization’s official website, in May 2012.

WTO forecasts that trade growth rate will further slowdown in 2012 to 3.7 per cent, which is below the 5.4 per cent 20 years average.

The global situation shows that Ethiopia can not remain immune from the economic crisis in the west which now has started its way to the East. The deepening European economic slump and the latest Chinese economic slowdown (The National Bureau of Statistics of China report in July confirmed that the Chinese GDP growth rate slowed down to 7.6 per cent from its 9.2 per cent success in 2011) will make international trade in the coming year more fragile with a fluctuating price and uncertain demand from buyers.

Considering the risk of Chinese economic slowdown, Professor Mthuli Ncube, the Chief Economist and Vice President of the African Development Bank, put his view on his article ‘The Expansion of Chinese Influence in Africa - Opportunities and Risks, posted on Bank’s website, he wrote that Africa has benefited from the Chinese economic boom through increased trade and investment, mainly in natural resource sectors. Thus, Africa is particularly vulnerable to economic shocks hitting the Chinese economy. He further noted that since Chinese economic ties with Africa are largely resource based, a fall in China’s demand for Africa’s commodities could create tensions in the current account and fiscal positions of these countries.

These could be part of the reasons why experts at the MoT are at the moment revising their plan for 2005 E.C (2012/2013).

Though it came so late now, as the first quarter of the year has just ended, the MoI has finalized revising its export plan too. This time again, the plan seems very high. It is 112.3 per cent higher than achievement of last year.

Graph 4 - Export plans and achievements of MoI so far in GTP, in Million USD
Source:Ministry of Trade
Illustration by EBR

As MoI achieved last year’s half plan, its plan to boost export of Textile and Garment by 26.5 per cent in 2012/13 compared to the plan of last year, means increasing export by more than 150 per cent compared with last year’s performance. The ministry has also planned as high as 108.2 per cent more than its performance in the export of leather and leather products compared to last year’s performance.

The only sector where the ministry has planned more or less the same to last years plan is in the agro processing sector- just only 0.24 per cent higher. But still this one is 58.8 per cent higher than last year’s performance. Even the 2012/13 plan for the chemical and pharmaceuticals climb high to 116.8 per cent comparing its last season performance.

Though planned high, MoI seems to have prepared itself for some tasks which are to be fulfilled to achieve the new plan. These includes, monitoring investment expansion, making sure the fulfilment of inputs, assisting manufacturers in need of spare parts, supporting exporting manufacturers’ to secure loan service and other facilitation works according to the revised plan for 2012/13.

“The plan for 2012/13 is prepared in view of with the GTP. The challenges those faced and solutions given in the last fiscal year are also considered,” reads the plan..

Around 15 textile companies, including the best performer of last fiscal year, Aika Addis Textile, those under expansion and already producing will be under close supervision, to attain the plan..

Boosting production of existing factories and also making sure that new ones start production to a desired level might be possible. However this is just the supply side of the equation. A corresponding demand growth should be there in export destinations which are mainly European and North American Countries, currently experiencing a deepening economic crisis. In light of statistics that show a declining global trade in 2011/12 and ahead, demand of Ethiopia’s export might not grow significantly.

As A Final Remark:

Planning too high without having capacity and more without scanning the external environment would only make any plan be it GTP or another, simply far-fetched.

The need to critically examine factors that posed challenges to the over all performance of the export sector in the previous year is important. It would be wise for the respective ministries to revise the whole GTP in light of current realities at home and externally. In the dynamic world where factors outside our control are numerous, it is scientific to regularly revise and update a plan to accommodate changes.

In mid February 2010, Ministry of Finance and Economic Development (MoFED) representatives attended a workshop in Mombasa, Kenya. The Workshop was about Integrated Financial Management Information System (IFMIS), which MoFED had planned months earlier.

IFMIS, which is expected to raise efficiency, effectiveness and transparency in financial sector has “successfully” finished its pilot phase, after two years. The pilot project, which consumed USD 19 million, had been running under close supervision of MoFED. Since last September, the project has been moving to implement the system in selected ministries, federal agencies and regional bureaus.

IFMIS enables public institutions to use a single system with extensive facilities from one physical source. It will have a common database where information on payrolls, human resources, revenues, and customs will be stored and retrieved. This will enable MoFED to improve the quality of the nation’s financial decision making by generating timely financial information. That is why MoFED is IFMIS requires centralizing financial system of institutions. This functions effectively under uninterrupted power supply and reliable internet connectivity. Once these infrastructures are guaranteed, which in Ethiopia seems less likely, stakeholders might see the benefits of the system. now working to expand its application of IFMIS to more public offices. A total of 700 end users will be trained in series of trainings from September to November, 2012. The end users will implement the system in their respective offices after October, Tagel Mola, Manager of the Project said.

Item classification and coding (with NATO & UN standards) is one of the major changes that IFMIS will bring, according to a brochure published by MoFED.

“IFMIS upgrades the whole financial system in the public institutions,” said Kibatu Seifu, 27, one of the key users who looked busy providing trainings to purchasing experts. “It makes everything easy and effective to operate and monitor”, he added.

The supply, installation and technical support task of IFMIS has been contracted to Oracle; a US based multinational computer corporation, and its partner Transnational Computer Technology (TCT). The former delivers its latest version of Oracle E-Business Suite (EBS) while the later works on implementing the system. The quality of the project implementation is monitored by The International Monetary Fund’s East Africa Regional Technical Assistance Center (AFRITAC-East), which is a multi-donor institution based in Dar es Salaam , Tanzania. AFRITAC provides technical assistance in economic and financial management to Eritrea, Ethiopia, Kenya, Malawi, Rwanda, Tanzania, and Uganda through a core team of international experts.

“We have been receiving good project monitoring services by consultants from AFRITAC- East. They already established a good quality assurance system,” IFMIS Project Manager at MoFED said.

Despite all these ambitions and positives, IFMIS seems shrouded in huge scepticism. The challenges reflected by participants at the regional workshop on IFMIS in February 2010 seem inevitable in Ethiopia. In that workshop, which was organized by AFRITAC-East and World Bank, different African countries which had been implementing IFMIS listed a range of problems they were experiencing. The lowly developed telecom infrastructure in the region was raised as a major challenge. This same regional problem is a challenge in Ethiopia, rather, in its worse version. This poses a critical challenge to the success of the project.

“We are working on it with Ethio Telecom,” Tagel told Ethiopian Business Review, hoping things would improve.

Uninterrupted power supply is also another infrastructure that IFMIS needs for successful implementation. This is particularly important because IFMIS requires centralizing financial system of institutions. This functions effectively under uninterrupted power supply and reliable internet connectivity. Once these infrastructures are guaranteed, which in Ethiopia seems less likely, stakeholders might see the benefits of the system. With all the challenges that surround it, IFMIS is here with the potential to revolutionize the management of public finance.