's Export Sector

Ethiopia’s Export Sector: At a Critical Juncture

While the country’s export sector has never performed up to the government’s expectations, figures from last fiscal year paint a grim picture. In 2015/16, Ethiopia earned USD2.8 billion from exports – about half the planned amount – and less than the roughly USD3 billion collected in previous fiscal years. As the government continues pursuing the GTP II, the export sector is at a crucial juncture – how to effectively address the problems that plague it, including fluctuating commodity prices in the international market. Experts offer a number of solutions, from diversifying exports to fixing key policy issues. EBR’s Ashenafi Endale spoke with exporters, government officials and economists to learn about the intricacies of this key economic issue.

Since the launch of the first phase of the Growth and Transformation Plan (GTP I) six years ago, no sector has challenged the Ethiopian government like exports, which is still dominated by a few primary commodities, including agricultural products such as coffee, oilseeds, pulses and cereals.
The performances of the other sectors have also fallen short of the government’s expectations, like agriculture and manufacturing. However, these have shown incremental improvements each year, demonstrating their ability to grow in light of the challenges facing them.
The same can’t be said of the export sector, which has failed to demonstrate annual progress. Although the government planned to earn USD5 billion in export earnings annually by the end of the GTP I, the only big leap came in the 2011/12 fiscal year, when the sector yielded around USD3.15 billion compared to USD2.7 billion from the previous year, a 14Pct increase. Beginning in 2012/13, however, the country’s export earnings dipped to USD3 billion and stayed there through the end of the GTP I period.
Yet, the sector’s worst performance was during the first year of the GTP II. During the 2015/16 fiscal year, export earnings dipped by 7Pct to USD2.8 billion compared with the previous fiscal year, according to data obtained from the Ministry of Trade (MoT). This figure is meagre compared to the government’s USD4.9 billion target, especially considering that export volume for certain goods increased compared to the previous year.
This is not the only sign that indicates the export sector in Ethiopia is at a critical juncture. Rather, many exporters are leaving the sector due to plunging international prices for agricultural products and a lack of government support.
For example, a few months ago major coffee exporters filed a petition to the Office of the Prime Minister asking for government’s intervention to stop the foreclosure of their companies by private banks.
This is because these companies have gone bankrupt and could not pay their loans to the banks. In response, the National Bank of Ethiopia (NBE) has ordered private banks to freeze foreclosures and direct their loan stock to the state-owned Commercial Bank of Ethiopia (CBE), though the beneficiaries were coffee exporters operating in the southern regional state.
Such challenges, however, adversely affected the country’s export earnings from coffee, Ethiopia’s major export commodity, which fell to USD722 million last fiscal year, down from USD780 million in 2014/15, despite the volume of export increasing from 183.8 tonnes to 198.6 tonnes.
As a result, the share of coffee to the total export earnings, which was close to 55Pct a decade ago, has decreased to 25Pct. Much like coffee, the decline in total export earnings came despite increment in the volume of export in some export commodities such as oilseeds.
“Due to many challenges in the export sector, the country could not collect the amount it targeted,” says Assefa Mulugeta, Director General of the Export Promotion Directorate at the MoT. “This calls for solutions in the near future.”
While the government aims to earn USD4.75 billion from the export sector this fiscal year, companies that export agricultural products still face challenges ranging from turmoil in the supply chain in the local market and logistical problems to declining prices in the international market.
But exporters say that none of these challenges put pressure on them more than the NBE directive issued in January 2016, which stopped the practice of commercial banks giving them priority in accessing foreign currency to import other commodities.
The privilege was meant to encourage exporters by giving them access to scarce foreign currency to import in addition to exporting. Prior to the NBE’s directive, there was no official law that permitted an exporter to use the foreign currency it generates to cover its import bills. The practice was an informal one that developed in order to get more foreign currency by incentivising investors to export more.
Even though this unofficial privilege has ended, exporters can still access some of the foreign currency they earn through their operations. Any exporter can hold 10Pct of their earnings from exporting in his or her account and use it to import and cover travel costs. However, they must sell 90Pct of their foreign earning to banks within 29 days.
Some exporters say this one incentive isn’t enough to cover their foreign currency needs. “We were using the foreign currency we received under the previous incentive to import tyres, stationeries, foods and other tools,” says a general manager of a major coffee exporting company in Addis Ababa, who spoke to EBR on the condition of anonymity. “Now, we have to wait in line for months to get foreign currency after the introduction of the new directive. Although we requested approval two months ago at the Commercial Bank of Ethiopia, we didn’t receive a response from them until recently.”
According to the general manager, his company is considering shifting to other businesses in the service sector due to the lack of incentives. “In the past, we managed to survive and stay in the export sector even though international prices plunged because we could compensate losses we incurred while exporting by importing consumer goods because we had priority to access foreign currency,” he recalls. “But this is no longer possible after the new directive. So switching to other sectors is the natural thing to do.”
Globally, the role of wide-ranging incentives for exporters is well recognised. For instance, an International Monetary Fund (IMF) report documenting China’s rise as an exporting powerhouse says policy reform and supporting industries through incentives are the main reasons why that country has enjoyed astounding economic success: “The first great reform took place at the end of the 1970s with the ‘quasi-privati[s]ation’ of communal farming, which introduced private incentives aimed at boosting productivity…. This was followed by a policy [that] allowed rural households to invest their savings in local businesses, manufacturing and transport, which gave rise to the so-called ‘town and village enterprises’.”
The IMF says other policies soon followed: “The ensuing trade liberali[s]ation reforms included opening up an export-oriented processing segment [and] implementing a unilateral trade liberali[s]ation process…. The aim was to introduce incentive schemes and use financial consolidation and privati[s]ation as [a] means of improving efficiency and competitiveness. Other notable features of the reform process include the removal of red tape, the opening of the financial markets, and fiscal reform.”
Yohannes Ayalew, Chief Economist at the NBE, however, says the intention of the directive is not to discourage exporters. “The government provides incentives in terms of taxes and credit,” he argues. “In fact, exporters are the only privileged individuals in the country that can borrow money with the minimum lending interest rate of 7.5Pct.”
As a result, he says Ethiopian exporters should be capable of competing in the international arena because they are given many privileges. “They should play their own part instead of blaming the government for any mishap,” he adds.
A lack of such incentives is not the only factor thwarting Ethiopia’s export performance. Although the factors that affect export growth vary by country, according to many studies conducted on the subject, high trade costs, private sector under-development, low local production, inefficient telecommunications, and financial services determine the export growth rate in Ethiopia.
Although demand for exports globally have declined, Ethiopia is plagued by internal difficulties that prevent the sector from achieving its full potential, like lacklustre logistics. According to a 2015 IMF report, the country’s logistics sector lags behind many of the Asian nations that underwent export-led rapid economic development. The study utilises a Logistics Performance Index, which “provides a cross-country comparison of major trade logistics categories and ranges from 1 to 5, with a higher score representing better performance.”
In 2012, Ethiopia’s overall score was 2.24, whereas China, South Korea, Thailand and Vietnam scored 3.52, 3.70, 3.18 and 3.0, respectively. As a result, “Ethiopia’s export competitiveness is hampered by an overvalued exchange rate and lagging export productivity” due to a lack of this key infrastructure element that’s central to trading.
In addition to this, the absence of a value chain development policy framework and a lack of policies for institutionalised local and international market information systems play a great role in the country’s poor export competitiveness.
For the general manager, however, low local production is the biggest problem. “Because the agriculture sector is dominated by smallholder farmers, you cannot get enough products to export in one place. Rather, you have to collect the products from all over the country,” he says. “Putting aside the remaining hindrances, you cannot go further without resolving this problem.”
Certainly, the Ethiopian economy remains highly dependent on agriculture, a sector from which 75Pct of the population derives its livelihood. This reality puts farmers and exporters in a precarious position, as agriculture is plagued by a number of vagaries, including droughts and unpredictable rains, all of which affect its performance.
The government also admits the existence of these problems. In fact, in the GTP II document, both external demand and domestic supply were highlighted as determinants of the level of exports. Although external demand reportedly contributed to the poor export performance, domestic production bottlenecks were blamed, to a greater extent, for the inability to achieve the anticipated structural shift.
Experts, on the other hand, say the issue should be addressed by employing a strategy that deals with systemic issues plaguing exporters. “The short-term solution should focus on exporters that are planning to leave the sector,” argues Alemayehu Geda (PhD), a macroeconomist and Professor at Addis Ababa University. “Providing incentives might encourage exporters to postpone their exit, which gives the government more time to implement its long-term strategy. It should primarily focus on resolving the deep-rooted problems of the sector step by step.”
He argues that in order for the incentives to compel investors to continue exporting key commodities like coffee, the government must “identify the real exporters that can transform the sector.”
Ethiopian exporters are generally classified into three categories: opportunistic, those that enter the sector in search of foreign currency and traditional exporting companies. These exporters enter the sector in search of quick profit and leave shortly after they acquire it. The second group begin exporting to gain foreign currency for their import operations. The last group – companies genuinely invested in exporting – have usually worked in the sector for several years and generally have more expertise.
Classifying exporting companies and providing incentives is a complex job according to experts, given the uncoordinated manner by which government institutions operate.
Kassahun Geleta, Coffee Development Marketing Support Team Leader at the recently re-established Ethiopian Coffee and Tea Development and Marketing Authority, says the lack of coordination between government institutions responsible for the export sector is a major hindrance. “For instance, in the coffee sub-sector there is no integration between the MoT, Ministry of Industry, Ministry of Agriculture and the Ethiopian Commodity Exchange. Each of them produce different directives,” he says. “We hope that the newly re-established Authority will mitigate the lack of coordination at least in the coffee sub-sector.”
Since it was closed down in 2004, the Authority’s former duties were divided between different ministries at the team level. However, after the export earnings from coffee began to decline, the ministries upgraded regulatory tasks to the directorate levels, although there was no improvement. Finally the government decided to recreate the Authority based on its former structure.
“Many people have been saying it was wrong to manage such an important commodity at those levels with less attention,” says Kassahun. “Now it has come back with more duties and aims to improve coffee export performance.”
Despite designing and implementing strategies to resolve the situation in the short-term, experts argue Ethiopia needs a long-term programme that can revitalise the country’s international trade through structural, sustainable solutions. “It is when these strategies are applied effectively and efficiently that the Ethiopian export sector will become competitive in the international arena,” says Yohannes.
According to research conducted by Abay Asfaw and Zewdu Belete entitled ‘Export Earnings Instability and Export Structure: the Case of Ethiopia’, external trade has major problems on the supply and demand sides. Demand side problems include dependency on a few primary products, characterised by large fluctuations in volume and a high degree of concentration on a few commodities for export. On the other hand, low income elasticity for the type of commodities that Ethiopia exports, declining prices for its exports and limited destinations were mentioned as supply side constrains.
In addition, entrenched structural problems, weak policy frameworks and institutions, protection at home and abroad as well as the structure of international trade, which is characterised by dependence on primary commodities, are reasons for the poor export performance of commodities from throughout Africa.
Contrary to this trend, Asian countries like China have continuously increased their share in global trade over the past two decades through value addition and export diversification. Although it is difficult to resolve supply side constraints, experts argue that value addition and diversification must be part of the nation’s agenda because many countries that pursue this strategy successfully improved their export performance.
Much like China, developing countries throughout Asia and Latin America have managed to diversify their exports with greater volume of manufactures.
By definition, export diversification entails altering a country’s export structure. This can be attained by changing the existing basket of commodities or by embellishing them through innovation and technology. On the other hand, value addition refers to a process whereby producers make a product more useful and sophisticated to consumers by adding value.
Similar to other African countries, value addition and diversification is largely absent in Ethiopia. But in recent years, the export industry has seen significant diversification away from its primary dependence on coffee. For instance, in 1991 coffee brought more than 55Pct of the country‘s total export revenue. But by the end of 2015 its share declined to roughly 25Pct while the shares of other goods such as khat and leather and leather products have increased substantially.
The flower industry also represents a major success story in the country’s attempt to diversify its exports. Horticulture has registered remarkable growth from less than 1Pct in the beginning of the 2000s to about 7Pct last fiscal year. However, experts stress that although the overall result shows a significant departure from the traditional, mono-crop dominated export sector, much of the country’s diversification exists within the realm of agriculture. “Export diversification has been a concern and development agenda item in Ethiopia for more than 40 years,” says Alemayehu.
As a result, the export structure has remained fixed, with greater concentration on a few agricultural and traditional exports such as coffee, hides and skins, and oilseeds and pulses. These traditional exports accounted for 74Pct of the country’s total export earnings in the 2015/16 fiscal year.
Globally, experts who support diversification base their argument on its vital role in reducing export earning instability caused by cyclical fluctuation in international commodity prices. Love James, Director of the former Consumer Project on Technology, in his study entitled ‘Concentration, Diversification and Earnings Instability’, argues that the more highly concentrated a country’s exports, the lower the probability that fluctuations in one direction in some of its exports will be offset by counter fluctuations or stability in others. Hence, he notes the need for diversification, which tends to be linked to the expansion of manufactured exports.
However, Alemayehu says the success of export orientation depends to a greater extent on reasonable, macroeconomic policy implementation. “The government’s endeavour to increase foreign exchange earnings calls for sound policies that focus on value addition on selected manufactured goods. It is only with the manufacturing sector that Ethiopia can boost its export competitiveness.”
Assefa agrees with this assessment: “Though it will be challenging, Ethiopia must start adding value and diversifying into manufactured products. Otherwise, it will be difficult to maintain the existing export earnings in the future.”
He says this would be possible if the country manages to attract foreign investors that have the capability and the know-how to strengthen the manufacturing sector. “Besides attracting foreign investors, building the capacity of local manufacturers should be given attention,” Assefa argues. “No country developed only with foreign direct investment.”
To this end, the government recently inaugurated the much-anticipated Hawassa Industrial Park, constructed at a cost of more than USD250 million in the presence of Prime Minister Hailemariam Desalegn and other high-ranking officials. The Park, which is expected to generate USD1 billion per year in export revenue and create job opportunities for more than 60,000 people, is one of the 12 planned to be constructed during the second phase of the Growth and Transformation Plan.
According to the government, the Park will bring relief to Ethiopia’s manufacturing sector, which is expected to serve as the backbone of the economy in the years to come. “We expect the newly inaugurated Hawassa Industrial Park will bring dynamics in the target set to increase export of manufactured goods,” says Assefa.
While industrial parks are likely to improve export output, experts argue that systemic supply chain challenges need to be addressed. Alemayehu advises the government should address these constraints. In particular, improvements in different agricultural products such as coffee need to be made all along the production, marketing, transport and processing chains to improve export performance. EBR


4th Year • September 16 2016 – October 15 2016 • No. 43

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