Broken Agreements

Broken Agreements, Poor Quality Products Further Harm Export Performance

Ethiopia’s export performance falls short of the government’s plans. The country hoped to earn USD5.04 billion by the end of last fiscal year, but made less than 60Pct of that amount. For this year, the plan is USD6.5 billion and so far the six-month performance is less than the nation received last year during the same period. A number of structural issues have hindered the sector’s performance, but one has become more prevalent in recent years: exporters not honouring trade agreements with foreign countries. Exporters say that there are systemic reasons why they’re unable to honour trade agreements that have largely to do with the cost and quality of local products. Others, however, argue that this isn’t a sufficient excuse and that breaching contracts will create a negative image of the country’s already struggling export sector. EBR’s Asehenafi Endale spoke with key stakeholders to learn more about the intricacies of the issue and what’s being done to address the underlying problems.

Among the many unfinished items the second phase of the Growth and Transformation Plan (GTP II) inherited from its predecessor, uplifting the lagging export sector is perhaps the most pressing. This is because in the past three years, exports have diminished primarily due to low local production and supply as well as poor quality. The decline of commodity prices globally for the major export items that Ethiopia is known for has also contributed to the export revenue decline.
Ethiopia managed to secure only half of the export target that it set in the GTP I. Implemented in the 2010/11 fiscal year, the plan aimed to increase export revenue to USD5.04 billion by the end of the 2014/15 fiscal year. However, official government statistics reveal that the country managed to earn less than 60pct that amount last fiscal year.
It is this deficit that the government plans to compensate during the current five-year plan, hoping to boost export revenue to USD13.9 billion by 2019/20. Yet, this year’s performance demonstrates that the government’s plan is far-fetched.
According to the six-month export performance report compiled by the Ministry of Trade (MoT), Ethiopia exported commodities worth USD1.28 billion, which represents a 25Pct shortfall of the plan’s target; it is also 10Pct lower than last year’s performance during the same period.
Unlike previous years, when low production and supply were the major obstacles, this year government officials say an additional problem, which is the failure of exporters to send commodities as per agreements, is casting a shadow on the sector’s performance.
According to Asefa Mulugeta, Director General of the Export Promotion Directorate at the MoT, 13 companies failed to honour export agreements in the past six months alone. “Although this has little impact on the current export performance, it will damage the country’s image, which in the long run will have a devastating effect,” he argues.
Experts state that when traders refuse to export after they’ve agreed to do so, it will have a negative effect not only on that specific exporter but for the origin country as a whole. “This is because violating such trade standards, even by a few exporters, will send the wrong message that exporters from that specific country tend to breach trade agreements,” says Alemayhu Geda (PhD), Professor of Economics at Addis Ababa University.
Sisay Girmachew, Deputy General Manager and Export Director of Gasco Trading, a company engaged in agricultural product exporting, says there are systemic reasons why exporters may not honour trade agreements in a timely manner. “So many local companies buy export commodities in abundance. Some buy for real market purposes, but most others buy just to create artificial scarcity, which increases the local price,” he says. “Sometimes, local prices can be twice the export price, which forces exporters to buy products with inflated price from the local market. If the buying price is more than the international price, exporting is impossible.”
Another reason that hinders exporters’ abilities to deliver on their promises, according to Sisay, is the working process of the Ethiopian Commodity Exchange (ECX). “It is making us uncompetitive in many ways. It holds productions at suppliers’ warehouses,” he argues. “Sometimes we receive a grade five commodity after purchasing grade three item.”
Because of this, Sisay says that his company has failed many times to export according to agreements. In addition to that, rejection after exporting because of poor quality also cost his company more than ETB3 million.
Indeed, agricultural products, which comprise most of Ethiopia’s exports, have decreased in amount and value during the last six months compared to last year, according to data obtained from the MoT. Commodities like oil seeds, cereal crops, khat, coffee and spices have decreased in amount and value, during the period compared to the last year’s export. As a result, export earnings from agricultural commodities have decreased from USD1.03 billion to USD943 million.
However, Tewodros Assefa, Senior Manager of Corporate Communications at the ECX, attributes the export failures to declining international prices: “Take sesame for example – we had surplus production. But Sudan, India, and other countries had [larger surpluses]. So, the international price dropped, but not because of the ECX.”
He rejects exporters’ claims by stating that the ECX has a responsibility to disseminate market data every 24 hours. “We cannot change the fundamentals of our establishment. “We do nothing more than post the details of a product to our platform and that platform helps farmers know daily market information. We are just facilitators. But I cannot say there is no grade misplacing during high seasons,” says Tewodros. “They can claim legal appeal from the MoT or the Ministry of Agriculture.”
Asefa supports Tewodros’ argument, stating that global dynamics hinder exporters’ abilities to fulfil their duties.
“China has been the top buyer of our oilseeds, especially sesame. But because of [their] economic slowdown, export to China has decreased significantly. Their imports from Ethiopia decreased over the last nine months. They were also a top buyer of our leather, which it processes and sells to Russia. But because of political challenges, Russia is not taking leather from China, so they’re not buying it from Ethiopia,” says Asefa. As a result, he says the export destination of sesame and other agricultural product is shifting from China to Israel, Jordan, Turkey and other countries.
Despite this fact, Asefa says that the failure of exporters to send commodities based on international agreements is inexcusable. “In the past, such acts were done by new entrants to the market. But now it is becoming common among many well-established exporting companies,” Asefa testifies. Because of this we are on the verge of putting administrative penalties on local companies failing to export as per their agreements, in order to protect the country’s image.”
Next to agricultural products, the manufacturing sector is another that’s been contributing less to exports, because of manufacturers’ attention to the domestic market. Even the past six months earning from the export of manufactured products fell from USD184 million last year to USD174 million.
“Even companies that have taken incentives after promising they will export all of their productions, especially in the textile industry, are being trapped by the domestic market,” he adds. “We [need to] take serious measures, because this practice is hurting the country’s foreign currency earning [potential],” Asefa adds.
Currently the Directorate is preparing to gather exporters for a briefing meeting before implementing penalties, which includes license revocation, “because the exporters do not understand the impact of defaulting on the country,” says Asefa. The Directorate will be established as an agency within three months, overseeing the export performance and expand market destinations, according to Asefa.
Upon its establishment, the agency will follow-up on all exports instead of the few agricultural products currently under its mandate. It is also expected to provide international market information for exporters, importers, and producers; organise meetings with them every three months; brand and promote Ethiopian products; facilitate organisation of exhibition and trade fairs; prepare catalogues; and exchanging business delegations.
In addition to the failure to export, the low quality of some items is also taking its toll on the sector. “Unless there are strict means of ensuring quality supply is created, the increasing rejected commodities by importers will continue to hunt the export sector,” Asefa fears.
This fear became a reality last month when Dubai police arrested Ethiopian meat exporters after they attended the Gulf Food Exhibition because of the low-quality meat they exported in the past.
Although such events hurt the country’s image, Asefa hopes that the performance will improve in the future, with the government establishing new corporations in the agricultural products supply chain and industry parks that are under construction. “However, the performance still might not show improvement in the right away, but we will try to meet our target of the current fiscal year within the remaining months,” Asefa hopes.
During the GTP I period, there was no agricultural supply company established by the government. Even in the first year of the GTP II, the government is laying the foundations. “With all these inefficiencies, how can you expect more from the export sector without laying the appropriate foundation,” ponders Alemayehu, the economics professor. “Increasing supply and quality from the agriculture sector has no other alternative than resolving the problems that hinder it.”
Agreeing with the expert’s recommendations, Asefa adds that there must be structural transformation in the agriculture sector: “The commercialisation of farming must start, technology-intensive FDI must come to the manufacturing sector, and agro-processing must be increased.”
He argues that the private sector must do its part if any long-lasting solutions are to take place. “Most local companies are inherited and operate unprofessionally, which makes it difficult to implement strict laws,” says Asefa. “Additionally, we are working with the Business Diplomacy Directorate at the Ministry of Foreign Affairs to establish more business ties with countries, because even if such illegal business practices remain, it can be solved through strong diplomatic relationships.” EBR

4th Year • April 16 2016 – May 15 2016 • No. 38

Ashenafi Endale

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