The impact of insecurity on the Ethiopian economy has been ongoing since 2013. Following the coming to the helm of a new prime minister, a pandemic and all-out war have continued to challenge the already weak economy. Recently, a new directive by the National Bank of Ethiopia has sent shock waves within exporters’ circles—the nation’s global traders who help ease the forex famine and elevate the hopes of importers. All these challenges are being faced at a time of global supply disruption caused by the Russia-Ukraine war. At such an important moment of unprecedented internal and external challenges, the government’s approach to the matter has a potential to define the economy, and hence, the country’s sustainability, writes Bamlak Fekadu.
The Ethiopian economy already has enough challenges on its plate. It is suffering from extreme volatility induced by ongoing armed conflicts, unrest, surging commodity prices, and a global shipping crisis. Local and global challenges seem to be laterally affecting the agriculture sector, putting a stress on both inputs and products. This mainstay of the country’s economy contributes 85Pct of exports and 45Pct to GDP. And, in a nation where around 70Pct of the population is engaged in agriculture, the sector’s production remains unsatisfactory with low yields. Now, the global supply challenge that is directly affecting fertilizer provisioning—a crucial ingredient in boosting productivity—is just unbearable.
This also comes at a time when the conflict in northern Ethiopia has been causing much displacement and humanitarian needs. The nation is now globally ranked first in the number of internally displaced people. Acute food insecurity and displacement adds to needs.
The price of fertilizer has nearly tripled in some areas in recent months, leaving farmers in a desperate situation as the global markets’ price continues to rise. In some war-torn areas, increases to a much higher degree have been witnessed. Lack of alternatives and the prospect of further price hikes, that cost the country USD688 million last year makes the situation grim. This year, the nation—through the Ethiopian Agricultural Businesses Corporation—has planned to purchase the input at an outlay of USD1.6 billion, which is close to the total current national forex reserve.
Global market rates for fertilizers have been rising since 2020 due to various factors. Since the beginning of 2022, prices have risen by 30Pct following 2021’s 80Pct rise. In late May, Urea is priced at USD1,012 in international markets—an all-time high. Surging input costs, supply disruptions, and export restrictions have created current global market conditions.
Meeting the demand of fertilizers, and the agricultural sector in general, is not an easy task. Currently, the economy is suffering from skyrocketing overhead inflation—36.6Pct year-on-year in April. Also, shortage of foreign currency and the foreign credit crunch has crippled the nation’s ability to address the balance of payments deficit along with an ever-climbing import bill. These conditions are on top of the pandemic, war, and drought which have all impacted the macro economy.
With all these settings present, sufficient foreign exchange is among the main remedies. Ethiopia’s export sector significantly depends on agriculture. However, exporters, who could help in easing the forex challenge, are not so happy in recent times, thus worsening the situation.
In the first week of 2022, the National Bank of Ethiopia (NBE) amended its retention and utilization of export earnings and inward remittance directive for the fourth time, replacing the short-lived previous directive. Signed off by Yinager Dessie (PhD), Governor of NBE, the new directive commands commercial banks surrender 70Pct of export revenues and remittances to the National Bank of Ethiopia (NBE), dropping exporter’s share of forex retention to 20Pct. Federal government officials and regulators at the central bank were desperate to beef up the country’s foreign currency reserves, which may pay for a little over one month of imports—USD1.6 billion.
January’s amendment is in contrast to the regime of 2017, which allowed exporters to retain 30Pct of their earnings in foreign currency for an indefinite period of time while the remaining 70Pct had to be used within 28 days or be converted into Ethiopian Birr.
According Andebet Kassa, a coffee Exporter, the regulation is nothing but a rush decision aiming to maintain the central bank’s reserves. However, no matter how displeased he is with the new directive, he also recognizes what he calls heavy-handed illegitimate activities between exporters and commercial banks. The numerous directives previously put in place to curb these illicit activities didn’t seem to work.
“We have appealed and had discussions with the exporters’ association as well as the Tea and Coffee Authority,” Andebet told EBR.
Industry players usually don’t entertain profits from coffee exports—not even breaking even—due to skyrocketing inflation affecting the overall ecosystem in the value chain. It is the retained foreign currency that subsidizes their losses, as the argument goes.
Coffee exporters are not alone in their evaluation of the latest measure. Meat, oil seed, and flower exporters—among the lofty contributors to forex generation—are also not happy. For some major exporters, especially of oil seeds, the change of the directive came at a time of dwindling production volumes owing to the conflict in northern Ethiopia.
“The past year has not been as good as before due to the conflict,” Kiya Seyoum, a sesame Exporter told EBR. “I used to export sesame to the Chinese market. It was a support system for the import business, export often doesn’t surpass breakeven.”
An export manager with over a decade of experience requiring anonymity told EBR that the export sector is the only way to recover from the forex crunch. The export sector could help resolve the problem, hence supporting the import of fertilizers and other important inputs for the agriculture. This, in turn, further supports the export sector itself.
“Exporters have literally lost their appetite. Exports have declined compared to the same period last year. The latest report on the success of coffee exports surpassing the USD1 billion mark is only because of the price hike in the global market, and not because of an increased volume of production. Volumes have actually dropped.” The expert insists the central bank should direct commercial banks to provide sustainable loans to smooth the export process, especially by reducing the 10Pct interest charged on pre-shipment loans that are usually set for four months. It is suggested that both the rate and repayment period be improved.
Fikadu Digafe, Vice Governor and Chief Economist of NBE, said that the central bank will not entertain any requests for preferential treatment or exemptions in adjusting retention rates, since the amendment is a temporary measure. Yet, the revised retention rates have helped the government add close to USD400 million to its coffers in just two months.
Conflicts and NBE directives are not the only things challenging the Ethiopian import-export sector. The Russia-Ukraine war has also dealt it a major blow by creating major global supply disruptions. The conflict has resulted in the imposition of sanctions as well as blockages to major ports and trade routes—with wheat and petroleum products at the center. The conflict between Russia and Ukraine began in 2014, after Russia annexed Crimea from Ukraine. The annexation was followed by a military engagement between the two that has lasted for eight years until it broke out into an all-out war.
As a result of the conflict and the ensuing chaos, businesses have been forced to find alternative suppliers or markets for their products. This has led to increased costs and disruptions in global supply chains. In some cases, businesses have even been forced to shut down operations, altogether.
One area that has been particularly affected is agriculture. The war has caused exports from Ukraine to decline by more than 50Pct, leading to a shortage of many agricultural products globally. One such product is wheat, whose price has doubled or even tripled from pre-war levels in some parts of the world, including in Ukraine itself.
The impact of this conflict on global wheat supplies has not gone unnoticed by international markets. The price for wheat futures contracts traded on the Chicago Board of Trade (CBOT) reached its highest level in three years earlier this year as traders worry about further potential shortages due to a prolonged conflict. Reduced global supplies of wheat has analysts worried about potential social unrest if it is allowed to continue for an extended period of time
The conflict has also disrupted production and shipment of fertilizers from Russia and Ukraine, leading to higher prices and reduced availability around the world with Russia accused by the United States and partners of weaponizing trade routes as well as food. Fertilizer is essential for agriculture, providing plants with the nutrients they need to grow healthily and with strength. In recent years, Russia and Ukraine have been key producers of fertilizer, accounting for about one-third of global output. However, the war has disrupted this production process, leading to shortages and price hikes worldwide.
As a result of the conflict, several major fertilizer factories in eastern Ukraine have been damaged or destroyed including Petrochemicals Complex LLC in Kramatorsk which produces ammonia gas, a major input of fertilizer. Additionally, exports from Russia have reduced primarily due to sanctions imposed by Western countries.
This disruption in production is having a serious impact on global agricultural output. According to the United Nations Food & Agriculture Organization (FAO), global fertilizer use is expected to decline by 3Pct this year as a result of these supply disruptions. This will lead to lower crop yields around the world – particularly in developing countries that are most reliant on fertilizers for their agriculture sector.
The Ethiopian economy is also on the receiving end of its fair share of the negative impact from the Russia-Ukraine war. Even though a well compiled analysis is yet to be found on the exact impact of the conflict on the economy at home, one can make direct relations with some of the sneezes and coughs in recent months. According to the World Food Program (WFP), Ethiopia buys around 23Pct of its wheat imports from Russia and 44Pct from Ukraine. Thus, 67Pct of the nation’s wheat imports are now in jeopardy.
Both global supply disruptions and local security don’t seem to be giving the import-export trade—and the economy in general—a good time any time soon. How the government maneuvers the storm might have the potential to define the sustainability of the economy in its entirety. EBR
10th Year • May 2022 • No. 107