Ethiopia’s coffee faces up to 0.5% GDP hit if EU forest rules shut out smallholders, report warns

#EBR_News Oct 29, 202

Ethiopia could lose export earnings equivalent to as much as 0.5% of its gross domestic product (GDP) if coffee from smallholder farms fails to meet the European Union’s new anti-deforestation rules, according to a new briefing paper by ODI Global, the London-based think tank. 

The report says the shock would be felt in foreign exchange earnings, rural livelihoods and, potentially, the banking system.

The paper, published this month and authored by Ermias Engida, Jodie Keane, Bernardo Arce Fernandez and Yohannes Ayele, examines the EU Deforestation Regulation (EUDR). The law requires importers to prove that coffee, among other commodities, was not grown on land deforested after 31 December 2020. 

According to the report, binding enforcement for large operators has been postponed to late 2026, and for small enterprises to mid-2027. Producers must supply the exact GPS location of each plot, trace every lot from farm to port and show they have complied with local laws.

Ethiopia is especially exposed, the report says, because around four million smallholders, mostly farming plots of less than one hectare, account for roughly 95% of output. The EU takes about 30% of coffee exports, and coffee makes up around 35% of merchandise export earnings. In 2024/25 the country exported nearly 469,000 tonnes and earned a record $2.65 billion, the report states. 

The authors estimate the risk of exclusion from the EU market, from both legality and geolocation gaps, at as high as 60%. The Ethiopian Coffee and Tea Authority (ECTA) had mapped about 200,000 of the country’s 860,000 coffee hectares, or 23%, by July 2024, the report notes.

In revenue terms, the report estimates losses on EU-bound coffee of about $160 million if 20% of shipments are excluded, rising to $453 million if 57% are excluded. Foreign exchange losses could range from 2.2% to 6.3%, and reach 8.5% in the worst case, according to the authors. 

Even if rejected coffee is redirected to Asian buyers, the loss of the EU’s price premium of more than 26% for specialty coffee would still cost between $42 million and $118 million, they say. This matters because foreign currency is already scarce. 

The report cites ECTA-linked data placing reserves at about $4.4 billion at the end of the 2025 fiscal year, or roughly 3.7 months of imports. It also cites Bloomberg, which reported that Ethiopia spent $1.35 billion in 2025 defending the birr.

The authors also see risks for lenders. According to the report, the Cooperative Bank of Oromia (COOP) directs about 40% of its loans to cooperatives in coffee and cereals, with 20% to 30% of its portfolio tied to coffee export finance. Interviews with sector participants suggest some EU buyers are already offering less favourable forward contract terms. 

The Sidama Coffee Farmers’ Cooperative Union told researchers it has already excluded 40% of its member cooperatives from EU exports and expects to lose up to 20% of its EU sales, half of that because of the EUDR.

The paper stresses that the threat comes from paperwork rather than environmental damage. It cites the European Forest Institute (EFI), which found no more than 20 coffee plots linked to post-2020 deforestation.

 It also credits the government’s progress, including the Ethiopian Coffee Traceability Management System and 31 million land certificates issued out of an estimated 50 million plots, though the traceability system is not yet fully operational. The authors add that exporters say they would redirect shipments to the United States, Canada and China if EU buyers do not help cover compliance costs. 

The findings rest on 28 interviews with institutions, exporters, processors and cooperative unions, and smallholders were not interviewed directly.

The report urges Ethiopia to press Brussels to clarify what legal evidence it will accept, and to seek a more country-specific approach. It also recommends strengthening cooperatives, easing their liquidity constraints and building incentives such as carbon credits and sustainability premiums.