The export sector in Ethiopia has been under scrutiny for poor performance for decades. As Ethiopia has not been a manufacturing hub as such, the criticism has been downplayed. Despite the number of investors who are seemingly interested in the export business, the country has also been struggling to export value-added items including its flagship coffee. Looking at the exponentially increasing number of exporters that joined the line of business in the last five years, one may think new entrants are helping the country’s success in global trade. Unfortunately, exporters are increasingly in the business to support their imports. And there are even more controversial activities in the field. Though the number of exporters and Dollars earned has shown significant increases, practices in the export sector are full of malpractice that that are hurting the Ethiopian economy, writes Selome Getachew.
“I wouldn’t have dared to start an export business had it not been for my foreign currency needs,” an importer of a well-known electronics brand told EBR upon anonymity. Though engaged in this import business for more than three decades, the forex shortage which exacerbated in the past three to four years, has forced them to start an export business.
For the past two and half years, the National Bank of Ethiopia (NBE) has been dropping bombshells of directives and regulations regarding foreign currency surrender and usage protocols. Prior to the new regulation released by NBE in January 2022, the one issued in September 2020 allowed exporters to use 100Pct of the total amount they brought into the country. Short lived however, that was replaced by a new amendment in March 2021 requiring a 30Pct surrender from the total amount to NBE. Yet again, in September 2021, the central bank mandated 50Pct to NBE, 40Pct to the bank, and 10Pct to the exporter. Of course, this also did not last long.
The latest forex surrender requirement and retention rights directive released in January 2022 was a total shock for all banks and exporters. Banks are required to surrender 70Pct of the foreign currency earnings from the export of goods and services, private transfers or remittances, and NGO transfers. Those that bring in the foreign exchange are now permitted to retain 20Pct of their earnings in foreign currency indefinitely in a retention account while the remaining 10Pct shall be surrendered to the respective bank. With this current condition, banks have been allowing exporters to use 20 to 30Pct of their export earnings upon specific and individual deals.
The government is tightening its grip on its limited forex reserves as the challenge in this regard has worsened in the past seven years, getting to a critical stage particularly in the last three years. Though not special to this regime—as the last time Ethiopia’s trade balance was positive was during Emperor Haile Selassie’s tenure—such rapid changes by NBE and such drastic shortages of forex have never been experienced in Ethiopia.
According to NBE’s quarterly bulletin of the third quarter of 2021/22 fiscal year, Ethiopia’s trade balance reached USD3.6 billion—a 32Pct from the previous year and 3.5Pct from the previous quarter. The nation runs a consistent and decades-old trade deficit due to the small range of exportable goods and logistical difficulties. Some of the main exports are gold, coffee, live animals, oilseeds, and cut flowers. On the other hand, Ethiopia is a massive importer of fuel, foodstuffs, pharmaceuticals, textiles, and apparel. Ethiopia faces a growing trade deficit with total imports increasing on average by 12.5Pct per year during the last 10 years. The rise in the trade deficit has been driven by rising imports, which ballooned from USD4.8 billion in 2010 to USD14.4 billion in 2015, which was the peak of Ethiopia’s trade deficit. Concerned by the widening trade balance, the Ethiopian government managed to suppress imports and has undertaken other macroeconomic measures in recent years, resulting in a narrowing of the trade deficit to USD10.6 billion in fiscal year 2020/21.
Prior to NBE’s September 2020 directive, importers used to queue for forex approval. Despite its advantage, it also disappointed many small importers at the time. A branch manager at Addis International Bank told EBR that “if we used the first-come-first-served manner to entertain the forex release, it will make us lose our big depositors and borrowers, who have a big impact on the bank. So, we were forced to give priority to those who have larger transactions with the bank.”
The fact that imports barely get forex approval without an export performance made most of the importers aggressively jump into exporting, with neither the passion nor know-how. The Ethiopian Coffee and Tea Authority (ECTA) recently disclosed that the total number of coffee exporters in Ethiopia has increased tenfold to reach 2,000 in just the last three to four years. As one officer told EBR, the authority stopped giving coffee export licenses to newcomers since things went out of hand.
“Two years back, our association’s members were 120. This reached 459 in just two years—a three-fold growth,” said Gizat Worku, General Manager of the Ethiopian Coffee Exporters Association. “Not only importers, but growers are also aggressively getting into the export business,” added Gizat. “I, myself, have witnessed 600 growers with export licenses with hopes of grabbing a huge sum of forex, which, in reality, is the reverse. The international market is stiff with competition and demands a high level of international relations and marketing.”
On August 11, 2022, Adugna Debela (PhD), Director General of ECTA told a local government publication that there are a lot of exporters who sell coffee at lower prices in the international market, some even lower than the price they paid to farmers. This is a clear indication of the practice of using exports just to earn Dollars for import purposes.
“I strongly oppose the correlation between import and export forex usage,” said Gizat. “The rivalry among the exporters is not how much profit is made but rather how well the loss is managed. It is shameful for a nation—we do not compete with the international market but rather among ourselves. Unless a relevant policy is in place, the long-term impact won’t be good for the export sector.”
Yared Haile-Meskel, Managing Director of YHM Consulting, has a different perspective on NBE’s recent regulation which looks to break the link between importers and exporters. He emphasizes the regulation’s inappropriateness stems from incorrect thinking and policy. “The government is saying its interest is more important than the people who worked so hard to earn the forex,” said Yared. “This is a relic of our Marxist view of the world and it focuses on the distribution of resources rather than increasing the size of the resource. It assumes the government’s interest is more important than that of its citizens. It doesn’t recognize that people elect a government to protect their own interests, instead of the other way around. So, the move is more ideological than economical.”
By reducing the amount of forex delegated to exporters and their respective banks, NBE is trying to solve one problem which it is facing: behind-the-door dealings.
Tesfaye, alias, a practicing Mechanical Engineer spoke to EBR on condition of anonymity for security purposes. Lately, he has been spending much of his time brokering the trade of foreign currencies between exporters and importers with ‘transaction’ fees reaching ETB36 to 42 to the US Dollar as of late September when he spoke to EBR. Of course, this fee—which goes to the earner of the forex—fluctuates along with supply and parallel exchange rates.
In its forex surrender policy, NBE states that an exporter can transfer its right to use the foreign currency earned by the exporter to a third party. Herein lies the loophole where numerous exporters are taking an unfair advantage of. Exporters are simply in business to exploit this loophole—causing damage to legitimate exporters, the nation’s forex reserves, and also the image of the nation in international markets. According to Tesfaye, as soon as the foreign currency is deposited in an exporter’s account, the search for importers willing to buy the currency by paying the agency fee begins.
Tesfaye says he has around 10 regular importer-clients constantly in need of forex. “Just a single company working with me demands USD7 million per month for imports but I’m only able to satisfy 60 to 70Pct of the demand.”
Such transactions are done on the low with payments coming from private accounts and far from balance sheets and proper accounting. Middlemen like Tesfaye and branch managers get a minimum of ETB1 for every US Dollar as commission. With large-scale importers at play here, commission fees get to hefty amounts. “It is not only branch managers who are involved in this trade,” Tesfaye says with a smile on his face. “For very large amounts, higher-level directors come and take their share of the pie.”
Costantinos Berhutesfa (PhD), former UN Senior Policy Advisor and Professor of public policy, is of the opine that the idea of exporters retaining their accrued forex revenue emanated from the fact that on the one hand, exporters need to have incentives to promote the nation’s dismal export earnings. On the other hand, coffee exporters, for example, were exporting at a loss so as to compete historically with low international prices. The solution sought by NBE was to provide all the forex to the exporters so that they can import other commodities and sell them at prices that can balance their loss but at a heavy cost to the public. This resulted in exorbitant prices, exacerbating inflationary pressures on the market and hence the need for the NBE to come up with directives regulating the retention and utilization of export earnings and inward remittances.
“Export licenses are not used to engage in exports only,” said one Togo Chale forex trader. “Some have them just to secure loans at the reduced rates which banks offer to incentivize exporters and get their hands on Dollars. Such loans are secured at a minimum interest rate of 8 to 9Pct. Fake contracts will be fabricated and delivered to the lending bank. The so-called exporter will then purchase forex at the Togo Chale border and deposit in his bank—making it seem like export proceeds. “There is an illegal export document that can be purchased to make things easier and more trustworthy,” says the trader. “The exporter has thus hit two birds with one stone. For one, the so-called export performance opens doors for additional low-interest loans to borrow. Second, he will sell the forex at the bank to an importer and collect the margin.”
Such scramble for US Dollars manifested in malpractice has resulted in illegal transactions that are costing the nation uncountable millions and is exacerbating the high inflation rate, among numerous other problems. Banks are financing the export sector knowing full-well that every container is pushed out at a loss. They then go out of line to try and lean on the import profitability of the company by supporting them with a 9Pct interest rate. Thirdly, the foreign exchange earnings are illegally transferred instead of used to support the export business or government-mandated priority imports. These moves result in unaccounted transactions with unaccounted losses for the nation. Moreover, Ethiopian commodities are undervalued in the international market, securing way below their truthful prices.
As Yared emphasized, Ethiopia’s problem is not a result of a lack of resources but a lack of basic competence and lateral thinking to manage the economy. Unless these matters are assessed properly and actions are taken, the consequences will leave the Ethiopian economy with assignments that won’t be addressed for years.EBR
11th Year • Oct 2022 • No. 111