Balancing the Pitfalls, Profits Investors’ Dilemma in Ethiopia

Ethiopia’s reputation as an investment hub has been tarnished by issues such as corruption, lack of foreign exchange, inter-ethnic conflicts, and intermittent violence. Because of these conflicts, agricultural exports particularly sesame, coffee, flowers, fruits, vegetables and others have been severely impacted. Exporters face difficulties in finding markets, dealing with rising costs domestically, and navigating security risks which have heightened the business risks they face. The government’s focus on obtaining foreign currency to service its debts and finance the import of key commodities such as fertilizer and fuel has further strained the business environment. The cancellation of Ethiopia’s membership in the African Growth and Opportunity Act (AGOA) by the United States has further affected exports, especially in the garment and apparel industries. Some exporters are considering selling or abandoning their investments, while others are exploring opportunities in the local market as an alternative. Despite these realities, Ethiopia has recently ranked at the top among countries offering vast business prospects in Africa according to the 2023 Africa Risk-Reward Index which was published last September by the Africa Oxford Economics. EBR’s Samuel Getachew dives into the report and discusses the multifaceted challenges local and foreign investors face the prevailing business environment.

Amid dwindling export performance, Ethiopia’s agricultural products exporters are perhaps the most affected by the rapidly evolving entrepreneurial landscape in one of Africa’s most populous nations.

Widespread corruption and bureaucratic hurdles, lack of foreign exchange affecting all sectors of the local economy and inter-ethnic strife have become an endemic challenge for a nation with an estimated population of more than 125 million.

Long credited as having the fastest-growing economy in the region, Ethiopia’s reputation as a foreign investment hub in Africa is now in tatters. Ethiopia had much to offer. Many investors once saw the nation as an investment hub with favourable working environment and an easily trainable workforce. The country also offered one of the cheapest electricity in the world and proximity to all the major markets, all adding to the country’s attractiveness for FDI. Substantial exports that helped change Ethiopia’s reputation as a nation dependent on foreign aid to a welcoming destination for foreign investment can no longer be sustained.

There was a dream of making Ethiopia one of the largest and leading exporters of coffee, generating foreign exchange for a nation dependent on exports. Ethiopia currently holds a sixth rank as the world’s top coffee-producing and exporting country, with an annual revenue of USD1.4 billion and USD 1.3 billion in the past two years, while Brazil, the world’s leading producer, generated USD 8.135 billion in 2021 and 2022, respectively.

Fresh-cut flower growers and farmers from Holland in the Amhara and Oromia states helped create thousands of jobs and build infrastructure for local communities such as hospitals and schools. The region, which produces much of the nation’s sesame, pulses and beans, has now paused due to the state’s conflict, affecting the country’s export performance severely. Once a global Sesame business key role player and price setter, Ethiopia is no more in the show as countries such as Sudan, Nigeria, Chad and Niger outperformed it in recent years.

This development comes in the wake of some of the local agricultural products of Ethiopia facing stiff competition from neighbouring countries with competitive rates compared to that of the Ethiopian products, whose cost continues to rise due to a wide range of cost-pushing factors.

To the average exporter, the cost associated with hijacking and demand for ransom is becoming a regular occurrence, and often, nowadays truck drivers overcharge for their delivery, offsetting the fear of violence, costing exporters unexpected costs that are added to the final bill. And then the risk of violence erupting at short notice with little security infrastructure available in much of the nation is also affecting the prospects of exporters.

Such an exporter of sesame seeds was Henok Tesfaye, who was having a brisk business a few years ago. He sent much of his products to Israel from the Amhara region and saw endless conflicts in the last three years associated with the northern war of Ethiopia that claimed the lives by one estimate a million people and the displacements of several million. The distractions of businesses because of the massive and frequent conflict in the region have caused many companies to freeze operations.

Henok told EBR how devastating it was for him when he suspended the business due to conflicts.

“It took me many years to find the market to sell the products, and I invested heavily in it. It happened suddenly and abruptly and all my effort and my business are now all gone”, he said, explaining that he now does a coffee export business, and with dwindling foreign exchange, he sees little future for himself.

Henok, like other entrepreneurs in Ethiopia, relied on the export business to generate much-needed foreign currency. Despite the rising prices of local commodities, exporting allowed them to access scarce foreign currency for importing products from abroad that could be sold at premium margins.

Ruta Yemane, a business analyst, states that “trade barriers can be one of the difficulties faced by agricultural commodity exporters. Tariffs, import restrictions, and non-tariff barriers in importing countries can make it more difficult to export these commodities.”

“Another reason can be the political and economic instability of the country. Political instability and economic uncertainties can disrupt supply chains and have a negative impact on exports.” says Ruta.

In Bahir Dar, the flower growers from Holland, who had contributed to job creation, faced significant losses and security challenges due to the recent conflict in the state of Amhara. They witnessed their investments decline while dealing with looters and inadequate security measures from the central government.

One of the owners of a flower farm who requested anonymity said that on the night when heavy fighting erupted, youthful gangs turned up with machetes and decided to invade his farm. The hired private security guard fled, fearing for their safety, and left the investors vulnerable to physical harm.

“We were on our own with no guards around. We negotiated with the rioters to do as they wanted in exchange for our safety and that of our families”, he said.

“We saw them as they took and destroyed what they were not able to take with them, seeing our lifetime investment in ruins and seeing us as part of a problem instead of a solution in a part of Ethiopia that is in dire need of investment and job creation”.

 Last year, the central government ordered all banks to pause the issuance of foreign currency to importers of what it terms as non-priority items such as used cars and alcohol, helping create a parallel market for the scarce foreign currency.

Further worsening the business environment and during the conflict in Tigray, the Biden administration in Washington DC cancelled Ethiopia’s African Growth and Opportunity Act (AGOA) members, a George W Bush era policy to complement exports from its various Sub-Saharan African nations. Many foreign exporters rushed to leave the country looking for opportunities in neighbouring nations, further complicating Ethiopia’s prospect of earning foreign currency and affecting the country’s export business.

Today, Ethiopia’s sunny days seem to have vanished from the citizens’ psyche. To a cash-strapped nation, the International Monetary Fund has been pressuring it to devalue its local currency, is trading to two-one in the parallel market, and much of the local economy is near collapse with inflation at a record high, hovering around 30Pct.

In addition, Ethiopia is still grappling with turmoil with the displacement of millions linked to civil war and lack of infrastructure affecting the shipment of goods headed to the international market. The national carrier, Ethiopian Airlines, is the only option for local exporters, often hiking prices with little competition and insight.

A few years ago, Ethiopian Airlines cancelled a contract with BGI’s Castel wine for its inboard flights for cheaper wine brands exported from South Africa. There was hope by BGI to help earn scarce foreign currency, but that remained a pipedream.

Following the conflict, confident fresh flower growers in Ethiopia have experienced blocked shipments and ransom demands. As a result, several growers are expressing dissatisfaction and considering selling or abandoning their investments in the country due to the uncertain and challenging business environment.

Awash Wine, Ethiopia’s most significant wine marker that was once a state entity that was privatized to an investment holding partly owned by Rock Star, Sir Bob Geldof, now uses armed federal police officers to have its shipments come to the capital city, adding to the cost of its products with recurring issues of lack of foreign currency to bring raw materials to its farms from abroad increasing.

Lutz Harmann is a German investor in the now-defunct southern region. He is involved in farming and the selling of fruits. He has experienced the challenges of exporting Ethiopian fruits to the international market, and he believes it is similar to the European flower exporters based in the Horn of Africa nation.

Lutz said, “Finding the right client is a challenge but what is more challenging is the whole administration and bureaucracy of sending the produce, including being obliged to have a national bank authorization for foreign exchange, which is impossible to do in the current environment”.

Many exporters share his sentiment, especially coffee exporters who used some of the foreign exchange earned to import some of their products to the local market.

They were only allowed to keep a partial 20Pct of the forex they earned from their exports in favour of the government that kept the balance. It has been upgraded to 50Pct since last August, but some exporters are looking at the local market as a better option.

Recently, Moyee, partially owned by an entity based in Amsterdam, Netherlands, with a local Ethiopian partner, decided to open several outlets of its speciality brand inside a European standard café, complementing its export business within Addis Ababa. To them, selling a cup of coffee for ETB110 makes sense and is an easy way to earn a hefty profit locally, not just exclusively linked to its export business with ample challenges.

While a significant portion of the population in Ethiopia drinks inexpensive coffee under a tree, the expanding middle class is increasingly interested in experiencing luxurious hospitality, reflecting a growing demand for elevated experiences among a broader demographic.

Others have followed suit, including Dukamo, a mega exporter of coffee that is now in retail business. Few months ago, their brand opened a second outlet in Bole, Addis Ababa’s most affluent neighbourhood, with a Japanese restaurant vibe with low seats to help cater to a population with spending power and an overpriced cup of brewed coffee.

An executive with one of the big brands says there is a demand for Ethiopian products, but the myriad hurdles are exhausting his patience. Recently, one of his employees was taken hostage by a rebel group which demanded a ransom payment to release the employee.

“I was called in the late hours of the night and asked to authorize a sizeable payment in secret, and as a company, we had little choice”, he said, adding that despite the predicament, all his drivers’ demand a higher scale payment, which is more than the norm, costing him a hefty number of resources that are becoming scarcer by the day.

“With such a challenging environment and absence of security, I wonder how long I can sustain key operations or how I can cope with the prohibitive cost of doing business in a nation grappling with insecurity and poor infrastructure given that our farms are far away from Addis Ababa and domiciled in the rural towns”, complained the executive.

The difficulties faced by businesses in Ethiopia over the past five years are evident due to the country’s turbulent political and economic situation. This state of affairs has garnered attention from scholars seeking to examine the circumstances. Alemayehu Gheda (PhD), a professor of economics at Addis Ababa University and a prominent public intellectual has dedicated much of his career to studying Ethiopia’s economy and the private sector.

The professor identified several critical issues in his recent survey with his graduate students. Foremost among them is the lack of national security, which was not even a concern in a similar study conducted five years ago. These challenges stem from the lack of reliable electricity supply for manufacturers and the availability of foreign exchange for sectors heavily dependent on imported raw materials. Additionally, logistical difficulties and corruption, particularly within customs, persist as recurring problems impacting a significant portion of the industry.

While these challenges have increased the risks associated with business in the country, they have also created considerable opportunities. According to the Africa Risk-Reward Index, published in September by Africa Oxford Economics, a prominent African economics consultancy specializing in independent political and economic analysis, Ethiopia ranked at the top among countries offering vast business prospects in its 2023 report. As mentioned above, the report thoroughly examines polarisation’s profitability and potential drawbacks across various African countries and African-led security interventions and how these countries prepare for future financing.

By closely analyzing these three factors, the firm determined the countries exhibiting the highest risk-to-reward ratios when establishing foreign businesses. The reward scores were calculated considering key indicators such as medium-term economic growth forecasts, the size of the economy, financial structure, and demographics. Amongst these factors, the economic growth outlook held the most tremendous significance in determining the reward score, as regions with robust economic growth tend to offer more investment opportunities.

Based on the analysis, Ethiopia emerged as the top-performing nation, exhibiting a reward score of 6.58 out of 10. Out of all the countries listed, none could surpass the 6-point mark achieved by Ethiopia, making it the most conducive destination for foreign business ventures. However, it is essential to note that Ethiopia’s risk score remained relatively high despite a promising decrease from the previous year’s assessment.

Ethiopia has grappled with internal polarization since 2019, stemming from ethnic, religious, and regional tensions. Despite these challenges, the federal government has proactively addressed the issue by overhauling political narratives, implementing unifying projects like successfully filling the Grand Ethiopian Renaissance Dam for the fourth time, and mobilizing millions of people under the green legacy project.

Contrary to some reports, the government actively bridges divides promotes inclusivity, and fosters unity among diverse groups. This has created a comparatively stable environment for investment, which is paramount for businesses seeking a secure and predictable market.

Increased stability enhances Ethiopia’s appeal as a foreign investment destination, as investors prioritize environments with reduced social or political unrest risks. This instils confidence in existing foreign investors and attracts new businesses seeking stable and profitable ventures.

In summary, the report’s findings suggest that Ethiopia is progressing in addressing internal polarization, creating a more stable environment for investment, and enhancing its appeal as a lucrative destination offering greener pastures for foreign investment.

According to a study conducted by Harvard University, Ethiopia has taken proactive steps to address internal polarization through political overhauls and unifying projects. This has contributed to a comparatively stable environment for investment. Implementing projects like successfully filling the Grand Ethiopian Renaissance Dam for the fourth time demonstrates the government’s commitment to unity and inclusivity among diverse groups despite ongoing ethnic, religious, and regional tensions.

Contrary to some reports, the Ethiopian government’s efforts to bridge divides and promote inclusivity actively make the country a more stable investment destination. Stability is a critical factor that foreign investors consider when choosing investment destinations. Countries with reduced social or political unrest risks are more attractive as they offer security and predictability in the market.

While cases still require several interventions to ensure peace and security, the improving stability in Ethiopia has instilled confidence in existing foreign investors. It has the potential to attract new businesses seeking stable and profitable ventures in the country. This, in turn, creates a favourable risk-to-reward ratio for establishing foreign firms in Ethiopia.

In conclusion, the findings of the Oxford Economic Report align with Harvard University’s research, suggesting that Ethiopia’s proactive measures in addressing internal polarization have resulted in a more stable investment environment. This progress enhances Ethiopia’s appeal as a lucrative destination, offering greener pastures for FDI.EBR

12th Year • Nov 16 – December 15 2023 • No. 123

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