Ethiopia’s Economic Tightrope Walk

Will Trade Liberalization, Local Production Uplift Consumers or Overwhelm Domestic Businesses?

The recent policy change in Ethiopia regarding industrial parks and trade liberalisation presents opportunities and challenges for businesses and consumers in the country. By allowing companies in the industrial parks to sell up to 50% of their produce locally and opening retail/wholesale sectors to foreign participation, policymakers aim to boost domestic production, increase competition, and stabilise market prices amidst persistent inflationary pressures. However, the implementation and impact of these measures remain to be seen. EBR’s Eden Teshome has spoken to key stakeholders – manufacturers and consumers – to understand how these policy shifts will likely reshape Ethiopia’s economic landscape.

Ethiopia’s economy has been on an upward trajectory in recent years. Last October, the International Monetary Fund (IMF) projected the country’s economy to grow 6.2 % by the end of 2024 on the backdrop of a 6.1 % economic growth in 2023, buoyed by heavy government investment in infrastructure and a burgeoning manufacturing sector. However, the country has also grappled with persistent inflationary pressures that have squeezed consumer purchasing power. To address these challenges, the Ethiopian government has unveiled a series of policy changes that aim to boost domestic production, increase competition, and stabilise market prices.

At the heart of these reforms is a decision to allow industrial park companies – a key component of Ethiopia’s industrialisation strategy – to offer up to 50% of their output to the domestic market. Previously, manufacturers in the industrial park were required to export 100% of their produce. This shift, coupled with the opening up formerly restricted sectors such as the import-export, wholesale, and retail trade to foreign participation, is poised to have far-reaching implications for businesses, consumers, and the broader economy.

“Allowing industrial manufacturers to sell 50% of their products locally is a game-changer,” explains Alemu (PhD), associate professor of economics at Addis Ababa University. “It will not only expand the market for these companies but also increase the supply of export-quality goods available to Ethiopian consumers and businesses.”

The potential benefits are manifold. By tapping into the domestic market, industrial park firms can diversify their revenue streams and hedge against the volatility of global export markets. Increased local sales could facilitate technology and knowledge spillovers as manufacturers interact more closely with local suppliers and customers. It will also be an essential tool to substitute imports and save hard-earned foreign currency.

“This reform will strengthen the linkages between the industrial parks and the broader Ethiopian economy,” notes Atlaw. “Local producers will have better access to raw materials and intermediate goods, while consumers will enjoy greater choice and potentially lower prices for quality products.”

However, the road ahead is challenging. Policymakers must carefully navigate the interplay between domestic supply, foreign exchange earnings, and inflationary pressures.

“The government has framed these reforms as a way to boost foreign exchange earnings, but the 50% local sales of a potentially exportable produce could complicate that goal,” cautions Atlaw. “The net impact will depend on a range of factors, including the ability of local manufacturers to compete with imports and the degree of currency depreciation.”

Ethiopia’s perennial struggle with inflation is another concern. While the increased supply of goods could help alleviate some price pressures, Atlaw argues that the reforms alone are unlikely to be a silver bullet.

“Inflation is primarily driven by monetary policy, so this reform will only indirectly affect inflationary dynamics through its impact on supply. If the growth in money supply outpaces the expansion of domestic production, inflationary pressures will persist.”
Navigating these complexities will require a delicate balancing act from policymakers. Fortunately, they can draw on the experiences of other countries that have grappled with similar challenges in pursuing industrialisation and economic transformation.

“Ethiopia’s long-term goals around industrialisation, job creation, and structural change are well-aligned with these policy changes,” Atlaw asserts. “But there are potential pitfalls that must be addressed, such as ensuring a level playing field for local firms and managing the social and environmental impacts of rapid industrial growth.”

One such pitfall could be the risk of domestic manufacturers being overwhelmed by foreign competition, particularly in previously shielded sectors like retail and wholesale trade. Careful sequencing and complementary policies, such as targeted support for small and medium enterprises, will mitigate this threat.

Sustainable development experts emphasise the need to be aware of industrial expansion’s environmental and social implications. They advise balancing the drive for economic growth with sustainable practices, worker protection, and equitable development.

“The government’s ability to create an ecosystem that fosters inclusive and sustainable industrialisation will be key,” says Atlaw. “This means investing in infrastructure, skills development, and environmental safeguards – not just incentivising foreign direct investment.”

Beyond the policy sphere, the success of these reforms will also hinge on the private sector’s response. Business leaders, both domestic and international, will play a pivotal role in determining the magnitude and distribution of the economic benefits.
Hanna Arayasellasie, Chief Commissioner of the Ethiopian Investment Commission (EIC), is cautiously optimistic about the private sector’s appetite for these changes. “We have seen a significant increase in foreign direct investment over the past year, and the opening up of previously restricted sectors has generated a lot of interest from investors.”

However, she acknowledges that execution will be critical. “The government has made strides in improving the investment climate, but there is still work to be done in areas like logistics, foreign currency availability, and ensuring a streamlined regulatory environment.”

The 50% local sales allowance presents opportunities and challenges for companies already operating in Ethiopia’s industrial parks. Ermias Behailu, the General Manager of VELOCITY, a garment manufacturer in the Hawassa Industrial Park, expresses enthusiasm and caution.

“This reform will allow us to better serve the domestic market and respond to local consumer preferences. But we will need to carefully navigate the competitive dynamics and ensure that our export competitiveness is not compromised.”

Ermias highlights the importance of improving logistics and access to foreign exchange as crucial enablers for industrial park companies to thrive in local and global arenas.

As Ethiopia’s economic transformation unfolds, the broader implications for consumers and the general public cannot be overlooked. Tesfaye Berhanu, a small business owner in Addis Ababa, welcomes the prospect of increased product availability and competition.
“If these reforms lead to more choice and lower prices for quality goods, it will be a major boon for Ethiopian consumers like myself. But we’ll have to wait and see how it plays out in practice.”

For Tesfaye and millions of other ordinary citizens of Ethiopia, the success of these policy changes will be measured not only by macroeconomic indicators but also by their tangible impact on daily lives and livelihoods.

As Ethiopia navigates this pivotal juncture, policymakers, business leaders, and the public will need to work in tandem to unlock the full potential of the country’s industrial transformation. Striking the right balance between domestic market development, export competitiveness, and inclusive growth will be the key to realising Ethiopia’s ambitions of becoming a manufacturing powerhouse and a beacon of economic prosperity in Africa.

The Ethiopian government’s recent policy changes regarding industrial parks and trade liberalisation represent a pivotal moment for the country’s economy. By allowing foreign companies in industrial parks to sell locally and opening up the retail and wholesale sectors to greater foreign participation, policymakers are attempting to boost domestic production, increase competition, and stabilise market prices.

While the immediate impact on supply and pricing dynamics remains to be seen, the broader implications of these reforms could be far-reaching.

The changes could strengthen local economic linkages, attract more industries to Ethiopia, and contribute to the country’s long-term goals of industrialisation, job creation, and structural transformation.

However, implementing these policies will require careful navigation, as policymakers pay due attention to balancing the need to promote domestic production with the imperative to maintain a healthy export sector and manage the complex trade-offs that may arise. With the right approach and vigilant monitoring, these reforms could unlock a new era of economic prosperity for Ethiopia – but the path forward is not without its challenges.

EBR 12th Year • July 2024 • No. 130