For long, import business has been lucrative in Ethiopia, fetching relatively higher profits in a short period of time. However, this reality has been changing lately. With the persistent foreign currency shortage and import-discouraging policies of the government, many importers are now closing their doors, shifting to other sectors in search of better fortunes. EBR’s Ashenafi Endale explores.
On December 26, 2019, just ten days from the end of the taxpaying season, office of the Addis Ababa Trade and Industry Bureau (AATIB), situated around Arat Kilo in Arada district, was unusually busy as there were many business owners trying to renew their licenses before the deadline. This year, the pressure was greater than previous seasons because the Ministry of Trade and Industry (MoTI) decided that all import and export businesses be handled at the city administration and district levels from this year onwards. Starting from this year, the Ministry provides licensing services only for foreign-owned businesses.
On the same day, Shefar Assefa, a businessman engaged in the importation of furniture, came to AATIB, but not to renew his license. Rather, Shefar wanted to revoke the license he had since 2013. “I could not access foreign currency for the past three years. As a result, I couldn’t operate my business properly,” he told EBR. “So, I decided to switch to domestic trade.”
Shefar is not the only importer who has revoked his license. In recent years especially, many fellow importers are abandoning their businesses and revoking their licenses. Information obtained from MoTI reveals that the number of importers in Ethiopia was 13,230 in 2018, showing an increase of only eight percent from 2015. On the other hand, the number of exporters has shot up by 28Pct to 1,659 during the same period, almost four times higher than the rate of growth of importers. This shows how much importers are turning away from the business as it is not as lucrative as it has been for decades.
This is further evidenced by the annual import bill of the country that has been declining for the past five years. In 2014/15, the import bill of the country was USD17 billion, and has declined to USD15.1 billion in the last fiscal year. While imports of agricultural capital goods saw the highest decline in terms of value in 2018/19, falling by 32Pct just from the previous fiscal year, durable goods and industrial goods shrank by 21Pct and 10Pct, respectively. This is a result of the policies taken by the government to discourage imports. On top of this, importers in Ethiopia are currently highly discouraged mainly due to problems arising from the depleted foreign currency reserves.
“Import business was ballooning but there is not enough foreign currency. So, efforts to balance foreign trade were necessary. Although it is obvious that the bulge in imports had to be controlled, some items are unavoidable as they are very basic,” says Mesenbet Shenkute, President of the Addis Ababa Chamber of Commerce and Sectoral Associations. “For instance, the import of pharmaceuticals cannot be slashed significantly without substituting it with local production. The same is true for other basic and very essential goods that cannot be cut down without import substitution.”
But for Yinager Dessie, Governor of the National Bank of Ethiopia (NBE), the decline in the import bill does not necessarily imply that imports by private entities have fallen. “Private sector import is not decreasing and it is government import that is dropping significantly. Government has been significantly withdrawing from the economy since last year. Since government is not starting new mega projects, it’s the import of capital goods that is declining,” Yinager told EBR.
Azezew Chane, Deputy Commissioner of the Ethiopian Customs Commission (ECC), has a similar view. “There is no substantial reduction in imports but fluctuations,” he argued.
Declining export revenues has been the major bottleneck that has prevented the country from even covering one-sixth of the annual import bill. Export earnings of the country have been stagnant in recent years, reaching USD2.6 billion during the past fiscal year, its lowest point in a decade. NBE, as a result, has prioritized access to foreign currency for the importation of medicines, fuel, and industrial inputs, especially after the particularly acute constraints of the past two years.
“Industrial parks have failed to pay off, although they were expected to improve exports of industrial products. The fact that the mining sector is dominated by contraband has also drained away the foreign currency that could have been gained from gold export,” Yinager explains.
Such realities imply a shortage of forex and prompt many importers to access forex from parallel market operators or shutdown their doors. In addition to the chronic shortage of foreign currency, two major factors have aggravated the decline in import business lately. The first is the introduction of an export contract administration task force a few months ago by MoTI. This contract administration task force facilitates and overseas the activities of exporters dealing with MoTI, Ethiopian Commodities Exchange (ECX), and Ethiopian Customs Commission (ECC) in order to address the increasing malpractice in export business.
“Over the past three years, many importers have joined the export business just for the sake of generating foreign currency for their import business. They particularly buy agricultural commodities at inflated prices from ECX and the domestic market. But they export the commodities at lower-than-purchase prices, meaning they export at a loss. This is compensated by inflating the price of the imported items,” says Misganu Arega, State Minister of Trade and Investment. “Coupled with highly increasing export contract defaulting, such unprofessional malpractices have wiped out genuine exporters who have been in the business for decades. It also affects the business reputation of Ethiopia in the eyes of the international market.”
In Ethiopia, exporters can use 30Pct of the foreign currency they generate to import any item while the remaining 70Pct can only be used for imports related to the export business and is surrendered to NBE if not used within 28 days. Even though this is still applicable, contract administration and enforcement by MoTI has discouraged many from engaging in both export and import.
Just two months after the contract administration program was launched, inflated prices of sesame, coffee, and other agricultural export commodities have stabilized to normal. Previously, the number of sesame exporters had dramatically soared to over 1,300 as the commodity is the simplest and fastest to export and generate foreign currency. The volume of grains traded at ECX had previously also soared as the ‘export-at-any-cost’ importers would scramble and buy the limited supply of grains that were easily exportable. Importers who used to generate foreign currency by engaging in export are now severely affected by the new contract administration’s rules of engagement.
The second contributing factor for the drop in the number of importers is the directive introduced by NBE last year. The directive states that the price an importer declares must not be more than five percent higher or lower than existing international prices at the time of import. In line with this rule, ECC also adjusted its price data to reflect real time information. The directive aims at reducing over- and under-invoicing, common in Ethiopia’s foreign trade and linked with the parallel market and capital flight.
Before the directive, importers used to access the major portion of their foreign currency demand from the parallel market while securing the remaining small amount from commercial banks just to legalize the import. The introduction of the new directive has placed a large obstacle on this practice.
Additionally, the amendment of the excise tax law that is currently awaiting parliament approval has additional impact on import business, even ahead of its ratification. The draft proclamation imposes up to 500Pct excise tax on imported cars aged seven years or more. Besides cars, major import items are included in the draft whose impact has already been felt. “The new excise tax will substantially affect import business. Importers will soon leave the market, if it is ratified,” argues Tadesse Lencho, (PhD) lecturer of law at the Addis Ababa University (AAU).
The experience of importers imply this reality. “It takes USD25,000 to import a new car, on average. We used to import over five used cars with this amount. But now we cannot access that much foreign currency to import as many new cars. Even if we do, the number of local buyers who can afford new cars is limited,” explains a car importer. “Currently, I am negotiating with my clients if they can make down payments in foreign currency.”
Although there is no shortcut to solve the foreign currency problem, Melaku Ezezew, President of the Ethiopian Chamber of Commerce and Sectoral Associations, hopes the import business will improve in terms of efficiency, particularly after the government launched the Electronic Single Window Service (ESWS) on January 4, 2020. The service is expected to help MoTI, ECC, NBE, and another 16 public institutions involved in the verification and approval of documents on an interfacing online platform. The new system is expected to reduce the 44 days it takes to import to landlocked Ethiopia to just three days, according to Robel Tesfaye, Program Director of the ESWS.
Establishing joint ventures with countries that have strong foreign trade relationships with Ethiopia can be a good way for the nation to improve the import business currently facing difficulties. The recent steps taken by the Saudi Ex-Im Bank is a good start. The under-establishment Bank envisions financing Ethiopian importers. “Financing importers that buy products from Saudi Arabia is the main objective of the Bank, in addition to helping Saudi investors abroad,” Faysel Alhamdi, representative of the Bank, stated. “We have short and long-term revolving funds for this.” EBR
9th Year • Feb.16 – Mar.15 2020 • No. 83