Fuelling Economic Growth

Unravelling the Potential of Supply Chain Finance in Ethiopia

The COVID-19 pandemic has presented significant challenges for the Ethiopian economy, affecting small and medium Enterprises (SMEs) more, while remittances declined and poverty levels worsened. While the Ethiopian government’s initiative to address these issues deserves credit, the potential of supply chain finance, a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers, still needs to be explored. While the merits of embracing digital transformation, sustainability practices, and regional integration remain valid, Ethiopia can further employ the transformative power of supply chain finance to assist the private sector. EBR’s Nejat Ahmed explores.

With its ambitious development goal of becoming a middle-income country by 2025, Ethiopia recognises the crucial role of industrialisation and a private sector-led economy in driving economic growth and job creation. To achieve this objective, the Ethiopian government has prioritised the transformation of the country’s economic landscape. Supply chain finance is one innovative financial solution with immense potential for fueling economic growth.

The COVID-19 pandemic has profoundly impacted the Ethiopian economy, affecting both the supply chain and the issue of returnees. Similar to global trends, Ethiopia has experienced disruptions in its supply chain due to lockdown measures, trade restrictions, and decreased global demand. These factors have led to delays and shortages in the movement of goods within the country. A survey conducted by the Ethiopian Chamber of Commerce and Sectoral Associations revealed that a significant 75Pct of businesses reported experiencing supply chain disruptions directly attributable to the COVID-19 pandemic.

Moreover, export-oriented sectors such as textiles, garments, and horticulture have faced significant challenges. With global demand plummeting and transportation disruptions, Ethiopia’s exports in these industries have suffered greatly. For example, during the pandemic, the Ethiopian Horticulture Producers and Exporters Association reported a staggering 30Pct decline in cut flower exports.

Small and Medium Enterprises (SMEs) constitute a crucial part of Ethiopia’s economy and have been adversely affected. These businesses have encountered reduced demand, limited access to finance, and operational difficulties. According to a survey conducted by the International Finance Corporation, a division of the World Bank which offers investment, advisory, and asset-management services to encourage private-sector development in less developed countries, approximately 70Pct of Ethiopian SMEs reported a decline in sales throughout the pandemic, further exacerbating the economic impact.

The pandemic has also had repercussions for Ethiopian migrants and the flow of remittances. Many Ethiopians working abroad have lost their jobs or experienced reduced income, significantly decreasing remittances. In 2020, the World Bank estimated a substantial 15Pct decline in remittance flows to Ethiopia. This decline in financial support from abroad has affected household incomes and economic stability within the country.

Furthermore, the COVID-19 crisis has resulted in substantial job losses and income reductions, ultimately leading to increased poverty levels. In the second quarter of 2020 alone, the International Labour Organization (ILO) estimated that around 1.4 million jobs were lost in Ethiopia, further exacerbating the socio-economic challenges faced by the population.

Ethiopia’s economy has undergone a significant transformation, driven by innovative financial solutions such as supply chain finance, which are financial instruments and techniques to optimise working capital along the supply chain. It provides businesses with access to much-needed liquidity by leveraging buyers’ creditworthiness or the supply chain ecosystem as a whole. This innovative form of finance has the potential to unlock economic growth in Ethiopia in several ways.

The Ethiopian government has recognised the significance of supply chain finance in driving economic growth and has introduced several initiatives and policies to promote its adoption. One such initiative is strengthening financial infrastructure, which was announced on June 15, 2022. The government aims to invest in improving economic infrastructure by upgrading payment systems, expanding access to electronic payments, and enhancing the efficiency of financial transactions. These efforts aim to create a robust financial ecosystem that supports supply chain finance and fosters economic growth.

In addition to infrastructure improvements, the government has committed to implementing regulatory reforms to facilitate supply chain finance and attract investment. The announcement of these reforms was made on September 5, 2022. The reforms are designed to create an enabling environment for businesses, improve ease of doing business, and ensure the security and stability of financial transactions. By implementing these reforms, the government aims to provide a solid foundation for supply chain finance to thrive in Ethiopia.

With this piece of government initiative, supply chain finance enables SMEs to access affordable working capital, which is often a significant obstacle to their growth. By offering liquidity against invoices or purchase orders, businesses can bridge cash flow gaps, invest in operations, and pursue expansion opportunities. This access to working capital enhances productivity and the overall growth prospects of SMEs.

The government has launched ongoing capacity-building programmes to empower businesses and promote best practices in supply chain finance. These programmes, conducted in collaboration with financial institutions and industry stakeholders, focus on enhancing financial literacy, educating businesses on supply chain finance opportunities, and promoting effective working capital management. The goal is to equip businesses with the necessary knowledge and skills to leverage supply chain finance effectively, thereby driving economic growth and development.

Supply chain finance also allows more giant corporations to optimise their working capital by extending payment terms to suppliers. SMEs can receive early payments based on the buyer’s creditworthiness, reducing their reliance on expensive short-term financing options and improving their financial stability.

Domestic and international financial institutions, including banks and non-banking institutions, are crucial in providing financing and risk mitigation services. They work closely with businesses to structure tailored supply chain finance solutions, facilitating access to operating capital.

Government initiatives such as the Ethiopian National Financial Inclusion Strategy and the Ethiopian Investment Commission (EIC) also contribute to the promotion of supply chain finance. These initiatives encourage the development of innovative financial solutions, attract foreign direct investment (FDI), and support businesses establishing operations in the country.

Further, the Ethiopian government intends to form partnerships with international financial institutions. The government announced the partnership plan on May 20, 2023. By collaborating with these institutions, the government aims to leverage their expertise and support to expand supply chain finance initiatives, attract foreign direct investment, and drive sustainable economic growth. These partnerships will bring valuable resources and knowledge to develop Ethiopia’s supply chain finance ecosystem further.

Technology is a critical enabler in advancing supply chain finance in this process. Digital platforms and blockchain technology revolutionise transaction recording, verification, and settlement. These advancements streamline operations, reduce administrative burdens, enhance transparency, and mitigate fraud risks. Real-time collaboration through digital platforms improves approval and funding processes, enhances visibility and traceability in the supply chain, and enables better risk assessment and decision-making.

Despite the immense potential of supply chain finance in Ethiopia, challenges such as limited financial literacy, inadequate infrastructure, and regulatory constraints must be addressed. Through initiatives like the Ethiopian Ministry of Finance and the Ethiopian Development Bank (EDB), the Ethiopian government actively tackles these challenges. They implement regulatory reforms, develop capacity-building programmes, and provide specialised financial products and services to promote working capital access for businesses along the supply chain.

Even with existing challenges, one of the significant advantages of supply chain finance is its potential to foster inclusive growth. Providing access to affordable working capital empowers SMEs, particularly those in underserved sectors and rural areas, to actively participate in the formal economy, create jobs, and contribute to economic development.

As Abeba Abreha, a proprietor of a small coffee shop who benefits from supply chain finance from an organisation she prefers not to disclose, explained, “Prior to adopting supply chain finance, our primary hurdle revolved around restricted access to working capital. Being a start-up, we encountered difficulties in obtaining conventional financing alternatives. Supply chain finance offered us a practical remedy to overcome this obstacle and acquire the necessary funds to procure coffee beans and other vital provisions.”

Abeba added, “supply chain finance has had a notable influence on the growth and efficiency of our business. By gaining access to working capital, we are able to procure larger quantities of coffee beans, invest in equipment, and broaden our range of menu offerings. This has led to improved sales and enhanced customer satisfaction, thereby contributing to our overall expansion.”

Additionally, supply chain finance enhances business resilience by mitigating risks and improving cash flow management. This resilience strengthens the overall economic ecosystem, making it more adaptable to market fluctuations and external shocks.

Supply chain finance can be a transformative force in Ethiopia’s economic landscape. This innovative financial solution drives economic growth and resilience by facilitating access to affordable working capital, streamlining processes through technology, and fostering inclusive growth. Continued collaboration among stakeholders and targeted interventions to overcome challenges will enable Ethiopia to unlock the full potential of supply chain finance and accelerate its journey towards sustainable development.

With a population of approximately 126,5 million in 2023, Ethiopia is the second-most populous nation in Africa, following Nigeria.

However, according to the World Bank, it remains one of the poorest, with a per capita gross national income of USD1,020.

According to the World Bank, Ethiopia has experienced remarkable economic growth over the past 15 years. This growth has been driven by various factors, including a significant number of micro, small, and medium-sized enterprises (MSMEs), which have played a vital role in the economy by employing up to 4.5 million people before the COVID-19 outbreak.

Given Ethiopia’s relatively low number of private enterprises, supporting and empowering SMEs by addressing the financial gap and implementing favourable economic policies that foster their growth is crucial. Recognising this, the Ethiopian government has prioritised transforming the country into a middle-income nation by 2025. Industrialisation will be a primary catalyst for economic growth and job creation. To achieve this objective, the government has launched a 10-year development plan to transition the economy from a public sector-dominated to a private sector-led one. This plan involves introducing competition in growth-enabling sectors such as energy, logistics, and telecommunications and improving the overall business climate.

By promoting industrialisation and nurturing a vibrant private sector, Ethiopia aims to unlock the full potential of its economy. This approach creates opportunities for domestic and foreign investment and fosters innovation, productivity, and competitiveness. The government’s commitment to enhancing the business environment and encouraging private sector participation aligns with the intention to support SMEs and promote inclusive economic growth.

As supply chain finance gains prominence in Ethiopia, it becomes a pivotal tool in achieving the government’s socio-economic mission. By providing accessible and affordable working capital to SMEs along the supply chain, supply chain finance empowers these businesses to seize growth opportunities, invest in operations, and contribute to job creation. Furthermore, integrating technology and digital platforms in supply chain finance enhances efficiency, transparency, and risk management, thereby facilitating the growth and development of businesses in Ethiopia.

Supply chain finance holds immense potential for Ethiopia, aligning with broader African trends and opportunities. As the country experiences economic growth and an expanding industrial sector, leveraging digital transformation, sustainability practices, and regional integration can propel its supply chain ecosystem to new heights.

The World Bank highlights that digital technologies can boost Africa’s GDP by USD 148 billion by 2025. Embracing digital tools in supply chain management enhances efficiency, reduces costs, and fosters seamless coordination among supply chain partners. By adopting digital solutions, Ethiopian businesses can optimise cash flow, mitigate financial risks, and enhance the overall performance of their supply chains.

Ethiopia benefits from incorporating sustainability practices into its supply chain finance operations. The rising global demand for sustainable sourcing and ethical practices presents an opportunity for Ethiopian businesses to differentiate themselves in the market. By integrating sustainability criteria into their supply chain finance decisions, companies can attract international partners, access new markets, and contribute to sustainable development goals.

Ethiopia’s participation in the African Continental Free Trade Area (AfCFTA), set to create the world’s largest single market, offers immense prospects for supply chain finance. With a market encompassing 1.3 billion people and a combined GDP exceeding USD3 trillion, the AfCFTA facilitates cross-border trade, promotes regional value chains, and drives supply chain development throughout the continent. By aligning supply chain finance strategies with the objectives of the AfCFTA, Ethiopian businesses can seize cross-border trade opportunities, expand their market reach, and strengthen their supply chain networks.

Ethiopia’s supply chain finance landscape is primed for growth, reinforced by the overarching trends shaping the African continent. Embracing digital transformation, sustainability practices, and regional integration can unlock the full potential of supply chain finance in Ethiopia. By optimizing supply chains, attracting investment, and contributing to economic growth and development, Ethiopian businesses can position themselves as key players in the dynamic and evolving African supply chain ecosystem.

With all these factors, Ethiopia’s ambitious socioeconomic mission to become a middle-income country by 2025 relies on industrialization and a private sector-led economy. SMEs, which play a significant role in the Ethiopian economy, require adequate financial support and favourable economic policies to thrive. That’s why supply chain finance emerges as a valuable tool in bridging the finance gap for MSMEs and driving economic growth. Through continued collaboration among stakeholders and targeted interventions, Ethiopia can harness the transformative power of supply chain finance to realize its development goals and accelerate its journey towards sustainable economic prosperity. EBR

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

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