Ethiopia Commodity Exchange (ECX) was established with the mission of revolutionizing Ethiopia’s traditional agricultural marketing through creation of a new trading platform. In its 10 years of service, the Exchange has established a marketing system that is transparent, efficient, and innovative. This contributes to the overall transformation of Ethiopia’s agriculture. However, the Exchange is not without criticism. It’s been belittled for focusing more on few export commodities than modernizing the whole commodity trading. EBR’s Ashenafi Endale explores its achievements and challenges.
The establishment of the Ethiopia Commodity Exchange (ECX) is perhaps one of the breakthrough initiatives to foster agricultural lead industrialization in Africa’s 2nd populous nation. Although several attempts were made to transform the lingering agriculture in Ethiopia, many are positive towards the relatively sound achievements of the Exchange.
Founded in 2007 the Exchange went operational in 2008 under the leadership of Eleni Gebremedhin (PhD), who led it through 2012. Since then, the Exchange has been addressing some of the challenges faced by farmers, traders, and exporters. In almost a decade long service, ECX has also worked to revolutionize the sector through dynamic, efficient and orderly marketing system.
Unlike many government owned enterprises in Ethiopia, ECX was established as a free and market led institution, whilst it is under the watchful eyes of the Ethiopian Commodity Exchange Authority (ECEA) and the Office of the Prime Minister. It is an autonomous commercial enterprise whose board members are drawn from the private and public sectors. On the other hand, the management, which reports to the board, is separate from both the owners and members.
Individuals from the private sector, corporate entities, public enterprises and cooperatives can purchase a membership seat, which allows them to trade in the Exchange.
Before ECX started operations, Ethiopian markets have been functioning in traditional ways that exposed buyers and sellers to high transaction costs and risks. In fact, it was a tradition to trade with someone known to minimize the risk of buying faulty commodities and getting cheated. Trade used to be done on the basis of visual inspection due to the lack of guarantee about the quality as well as quantity of the product.
It is this tradition bound marketing system that ECX envisioned to revolutionize by creating a new market platform that serves major market actors, farmers to traders as well as processors, exporters and consumers. As a result, the Exchange managed to provide a system for handling, grading, and storing commodities, matching offers and bids for commodity transactions. It created a risk-free payment and goods delivery system to settle transactions.
Sherfa Nasir, general manager of AGNA General Business, has been supplying coffee for over two decades. He said, “ECX has brought an invaluable relief for traders and farmers. Before the market system was in place, we supply the commodity and collect payment after [several days or perhaps weeks]. It’s this system that ECX changed. Now traders who work with ECX can get payment instantly and buyers can also be sure of the quality of goods they buy because of the Exchange’s quality inspection and grading system.
ECX started with services by trading wheat and maize. Over the years, the number of items, volume, and value of goods traded also increased substantially. To date, the commodities traded include coffee, sesame, white pea beans, green mung bean and red kidney bean. In 2008/09 fiscal year, 64,000 tonnes of products worth ETB1.2 billion were traded at the Exchange. In the first six months of the current fiscal year, however, ECX traded 246,752 tonnes of agricultural products worth ETB10.1 billion.
Ermias Eshetu, the current CEO of the Exchange says even bigger results have been achieved by the Exchange. “On March 8, 2017, 5,912mt volume of transactions worth ETB254 million were sealed in a single day. The highest transaction in a single day was ETB5 million during [the formative years of the company].” Ermias told EBR proudly. “Now we have reached the capacity to facilitate transactions worth ETB24 billion per year.”
“This growth momentum will significantly increase when we include additional items in the near future,” Ermias hopes.
Coffee and sesame are the most traded items with a share of 94Pct of the total traded volume. In fact, the commodities account for one-third of the country’s USD2.8 billion export revenue last year.
Ermias, former vice president for marketing and corporate services at Zemen Bank, replaced Anteneh Getaneh in December 2014, a former vice president at the Bank of Abyssinia. Anteneh, who was the successor of the founder and long serving CEO, Eleni, served at the position only for one year.
Although ECX’s role is lauded, it’s criticised for contributing less in straightening and modernizing indigenous markets and locally consumed products. In fact, stakeholders stress that its essence is changing through time as the majority of the commodities traded at the exchange’s floor are meant for export markets. This is somehow in contrast to its primary mission of modernizing the domestic market system and products.
However, Ermias argues that ECX’s essence has not fully changed. “We have focused on few products like coffee and sesame for now, because they are export products and the hard currency the products generate is used to import medicine, edible oil, fuel, spare parts and other basic necessities for the nation,” he narrates. “Our plan is to include every product in the domestic market as well as shares, and currencies.”
Although notable achievements have been achieved by ECX in the past couple of years, there have been several discussions at the Prime Minister’s Office recently between government officials and prominent exporters, who requested the restructuring of the Exchange. The Parliament also approved a proclamation which transferred the Exchange’s accountability to the Ministry of Trade, instead of the Office of the Prime Minister.
The serious meetings were partially triggered by the decline in export performance of products traded at the ECX. Despite ambitious targets over the years, the hard currency earnings from export could not exceed USD3 billion, which is six times less compared to the fast growing import bill. The sector has generated only USD1.4 billion in the first six months of the current budget year, though the country planned to generate USD2.5 billion.
Coffee, the biggest product traded at the Exchange as well as Ethiopia’s major export asset, generated USD722 million, last year. The revenue of the previous year was USD780 million. Even in the first seven months of the current year, the export earnings from coffee was only USD360 million, which is 40Pct of the plan.
In a bid to compensate the revenue loss due to the declining price of commodities in the global market, the country increased the volume of coffee export. However, the revenue did not show any increase until now. The volume of coffee exported has been fluctuating between 183,000 tonnes and 198,000 tonnes per year over the last six years while the price of coffee at the international market has been falling in these years.
Even though the government has been pointing its fingers towards the declining commodity prices at the international market, stakeholders who met with government officials at the Prime Minister’s Office directed the problems towards the grading, delivery and pricing systems at the ECX.
Suppliers complained about the quality checking system at ECX’s warehouses, which they say is exposed to corruption. They claim that the checking system sometimes under-grad products for no sound reason. “The fact that all types of coffee with different grades are stored at the same warehouse has increased the chance for one product to be replaced by another that has a lower grade,” says a supplier who talks to EBR on condition of anonymity.
Of course, exporters frequently complain that they receive lower grade and volume of goods than what they have paid for, due to corruption at the warehouses. One exporter told EBR that he always buys one more container, in order to balance the poor quality and loss in volume due to the corruption at the warehouses. Currently, there are over 300 coffee exporters in the country.
Mohammad Zinab, general manager of Abadir Coffee Trading, who exports coffee to Middle East, argues that ECX should stop the warehouse services totally to shorten the time it takes to export commodities. “Trucks should head directly to the buyers processing plant, without unloading it at [the Exchange’s] warehouses,” said Mohammad. “The ECX could conduct the quality checking and grading at specific points where the product is collected. Then give receipt, which shows the grade and amount of the product, for the truck owner,”
This system, according to Mohammad allows the trading to take place while the product is on truck. “The buyer then receives [commodities] checking the sealed truck and receipt. This can shorten the delivery time to 15 days from 30. For this to happen, an autonomous body that undertakes the quality checking and grading independently needs to be established.” Mohammad suggested.
In spite of the above complaints, Mohammad appreciates the support of the government to exporters especially in availing fast pre-shipment loans with lower interest rates. The Commercial Bank of Ethiopia gives pre-shipment loans for exporters with 7.5Pct interest, while private banks offer with 9.5Pct. Both of them are the lowest interest rates in the industry. The maximum interest rate is 17Pct for other types of loans.
Most of the exporters agree that the role of ECX has to be limited at executing the e-trading. “ECX’s electronics trading method is a major breakthrough,” argues Sherfa. “The traders do not know each other, and there is no corruption.”
Ermias also agrees that the e-trading platform has brought many benefits for traders. “Sellers and buyers transact through an online platform now, rather than the former system which requires physical presence at the trading floor,” he explains. “The e-trading has brought many changes because formerly, buyers and sellers enter the floor after negotiating outside, which affects the free pricing system.”
During the first six months of the current fiscal year, 89Pct of the volume of goods traded were handled through the e-trading platform, while the rest was through open outcry, which takes place at the Exchange’s floor. ECX launched the e-trading system in 2015.
Mohammad, on the other hand, stresses that the e-trading system is a useful tool because it eliminates intermediary brokers. The flexibility of timing for the trading sessions is also an added benefit. “The rest of the roles [of the EXC] should be given to institutions like the re-established Coffee and Tea Development and Marketing Authority,” he argues. EBR
5th Year • June 2017 • No. 51