At A Crossroads Forex-Induced Material Shortages Threaten Ethiopia’s Flegleding Manufacturing

Every year, Ethiopia imports billions of dollars’ worth of goods, an input for the manufacturing sector. The country now stands at a crossroads with a history of underdeveloped manufacturing due to past regimes. The concept of import substitution, replacing imported products with locally produced goods, presents a significant opportunity for businesspeople and investors. However, the path to success encounters challenges, particularly raw material shortages and forex scarcity. EBR’s Eden Teshome delves into the implications of these hurdles on Ethiopia’s industrial production and explores potential strategies to overcome them.

Before 1957, Ethiopia’s manufacturing sector was comprised mainly of cottage and handicraft industries that fulfilled most of the population’s demand for manufactured goods, including clothing, ceramics, machine tools, and leather products. However, manufacturing in the country faced numerous obstacles, including inadequate infrastructure, limited private and public investment, and the absence of a consistent government policy focused on fostering industrial development. These factors collectively hindered the growth and significance of the manufacturing industry.

Even today, the manufacturing sector in Ethiopia continues to encounter challenges. In recent months, Ethiopia has faced significant challenges in its manufacturing sector due to a shortage of manufacturing materials. On average, the manufacturing sector in Ethiopia receives only 15 Pct of bank loans, despite being designated as a priority sector for economic growth.

Tasty Foods Plc, a well-known manufacturer of popular snack brands “Tasties” and “Jolly Juice,” has recently suspended its operations after being a prominent player in the market for 24 years. The company, which falls under the BekDes Group, a family-owned business, has unfortunately fallen victim to the ongoing challenges caused by persistent shortages of foreign currency, which have severely affected its ability to continue its business activities.

Another example that highlights the consequences of material shortages is the case of Moha Soft Drinks Industry S.C., the bottler for PepsiCo products in Ethiopia. The company has been forced to suspend all production activities, potentially leaving 8,000 employees without work. The shortage of foreign currency has made it impossible for the company to import essential inputs such as syrup, bottles, crates, and spare parts, rendering it unable to continue operations. This situation is similar to Moha Soft Drinks, as many other industries heavily reliant on imported materials face identical challenges in meeting consumer demand and sustaining operations.

According to an anonymous source from BGI Ethiopia, the company is also experiencing shortages of raw materials, cleaning chemicals, and spare parts for machinery. The source revealed that these challenges have been ongoing for over a year and have become more severe in recent months.

Despite the difficulties, the source mentioned that the shortages have not significantly affected the production volume at BGI Ethiopia. The company has mitigated the impact by switching to alternative inputs when necessary.

It is worth noting that these challenges are not unique to Tasty Foods, Moha, and BGI Ethiopia and reflect the broader issues many industries face.

These difficulties have had a widespread impact on the manufacturing sector, leading to the closure of 450 firms which stopped production. This figure represents almost 10Pct of the nearly 5,000 firms engaged in manufacturing in the country. Despite various efforts to bolster the industry, such as establishing 13 public and five private industrial parks since 2000, the manufacturing industry has experienced a worrisome decline. Its contribution to the country’s GDP has decreased by 1.5 Pct, declining to 4.4 Pct last year.

Industrial leaders in Addis Ababa expressed their concerns during a recent consultation meeting organised by the Manufacturing Industry Development Institute Food and Beverage Industry Research and Development Center.

During the meeting, these leaders highlighted the scarcity of essential raw materials and spare parts, which compelled them to halt production and downsize their workforce. Additionally, a representative from one of the largest beer brewing companies raised concerns about shortages of raw materials such as industrial salt. They expressed worry that three of their manufacturing plants might have to halt production due to the depletion of their stocks of industrial salt.

The representative attributed the shortage to the requirement for industries to obtain industrial salt exclusively from the newly established Afar Mining Corporation.

“To address these challenges, it is crucial to tackle the root causes of material shortages and foreign currency scarcity. The manufacturing sector requires increased investment and financial support from banks and financial institutions,” explains an independent Economic analyst.

He further explained that policy interventions prioritising foreign exchange allocation to essential industries and streamlining the importation process for raw materials are vital. “Encouraging domestic production of key inputs can also help reduce reliance on imports and mitigate the impact of foreign currency shortages.”

Tarekegn Bululta, state minister for industry, stated they are working on import substitution. “We have identified 96 specific industrial products for which we aim to develop local production and achieve import substitution in the coming years.”

The consequences of material shortages in the manufacturing sector extend beyond the immediate economic impact. Thousands of employees risk losing their livelihoods, and the disruption in the business ecosystem can have far-reaching effects. A collaborative effort is needed from the government, financial institutions, and industry stakeholders to mitigate the challenge. Ethiopia can foster a resilient and thriving industrial base that drives economic growth and job creation by prioritising the manufacturing sector, providing financial support, and addressing foreign currency scarcity.

According to Tarekegn, the past two years have presented significant challenges for Ethiopia’s industrial sector. These challenges have stemmed from internal conflicts and the war in Ukraine, which have disrupted the movement of production and input materials. However, efforts to find solutions and ensure the continuity of production have been full of challenges.

Tarekegn explains that progress has been observed despite the difficulties. One notable development is the implementation of policy changes to support industries producing materials that can substitute imports. This indicates a shift in policy to prioritise and encourage domestic production of previously imported goods.

Furthermore, he mentioned that national investors have started to operate in industrial parks, which were previously restricted. “This change in policy aims to provide more opportunities and support for local investors, fostering a conducive environment for their participation in the industrial sector.”

These policy changes and initiatives demonstrate the government’s recognition of the importance of import substitution and the need to support local industries. The government aims to stimulate investment, enhance productivity, and reduce reliance on imports by encouraging domestic production and providing access to industrial parks.

Despite the challenges faced by the industrial sector, Tarekegn’s remarks highlight the progress towards overcoming these obstacles. The policy changes and initiatives being implemented indicate a commitment to supporting national investors and promoting import substitution in Ethiopia’s industrial sector.

Import substitution has been identified as a strategy to address the challenges faced by Ethiopia’s manufacturing sector. The country aims to increase the share of domestically substituted goods from 37.5Pct to an ambitious 60Pct within the next three years. The Ministry of Industry (MoI) has highlighted the successful local production of essential consumer goods such as edible oils, pasta, dairy products, and generic pharmaceuticals. During the 2022/23 fiscal year, Ethiopia saved nearly USD 2.3 billion in imported goods through local production.

However, the implementation of import substitution has faced obstacles. The shortage of raw materials, limited access to financial resources, and a lack of cohesive government support have hindered its progress. The ongoing conflicts in various regions of Ethiopia, particularly in the north, have further hampered the productivity of the manufacturing sector. The scarcity of foreign currency is a significant challenge, as it hinders industries engaged in import substitution. Raw materials that these industries need are not locally available. However, the need for foreign currency has made it difficult to open letters of credit at commercial banks.

Despite these challenges, the Ethiopian government remains optimistic about the potential of the manufacturing sector. Prime Minister Abiy Ahmed’s administration aims for an 8.2 Pct expansion of the industry this year, as it already contributes 28 Pct to the country’s GDP. However, concerted efforts are needed to address the issues of material shortages, foreign currency scarcity, and insufficient support to ensure the successful implementation of import substitution and the growth of the manufacturing sector.

“The industrial sector in Ethiopia recognises the need for synergy and collaboration across multiple ministries to address its challenges effectively,” said Tarekegn. “A cluster approach has been adopted, bringing together ministries responsible for finance, customs, as well as universities and technical institutes to address the sector’s needs and provide skilled manpower.”

He further explained that one of the sector’s significant bottlenecks was related to financing. “To overcome this, the government has formulated a three-year plan that aims to allocate 24 Pct of financing to the sector.” Increased financial support helps to alleviate the constraints faced by industrial businesses and foster their growth and development in Ethiopia.

According to the economic analyst, addressing the challenges faced by Ethiopia’s manufacturing sector requires a comprehensive approach that involves increased financial support, policy interventions, domestic production stimulation, and efforts to resolve foreign currency scarcity. By prioritising the sector and implementing effective strategies, Ethiopia can build a resilient and thriving manufacturing industry that contributes significantly to economic growth and job creation.

In the short term, the raw material shortage can lead to immediate disruptions in production and employment. In the long term, it can harm the competitiveness of industries, hinder economic diversification, and potentially discourage foreign investment, explains the economic analyst.

In the context of industrial manufacturing capacity and sector growth in African countries, South Africa stands out as a leader, surpassing other sub-Saharan nations and outperforming North African countries. South Africa has achieved an index score of 0.8404, making it the African economy closest to the global standard. Despite operational and profitability challenges in the secondary sector, the South African government remains committed to factories and heavy industry as significant employment creators. This focus is because of the observed positive impacts of these industries on growth and employment across various sectors. Notably, manufacturing sectors such as footwear, textiles, and leather products; automotive, machinery, and related equipment; and food and furniture production have shown high growth and employment multipliers in South Africa. EBR

12th Year • January 16 2024 – February 15 2024 • No. 125