New Hopes, Challenges for Cross-Border Trade

Since the inception of the Organization of African Unity (OAU), the concepts of economic union and integration have existed without realization due to various factors including the similarity of goods produced, subpar infrastructure, and dissimilar legal systems, to name a few. Relative to other regions, the continent is primarily reserved to small-scale trading. Ethiopia, like many other African nations, enjoys such cross-border trade along its borders with neighboring nations. For many years, such trade has been treated as illegal, and the traders were nothing but contrabandists. Despite the significance of these trade points and the signing of framework agreements among neighboring countries, the severe lack of infrastructure and skills necessary to oversee the trade process has prevented countries from reaping the benefits of developed cross-border trade. Even though there are few improvements on the Ethiopian side in terms of setting up free trade zones and other infrastructure, ongoing security and natural challenges prevent this landlocked country from realizing the full potential of cross-border trade, writes EBR’s Bamlak Fekadu.

Tog Wajaale, the notoriously-known city situated on the Ethiopian border near Somaliland is 230 km from the Port of Berbera and only 80 km from the capital Hargeisa. Its position offers a fantastic business environment for cross-border trade running almost 24 hours a day. It is a bustling market town accommodating both formal and informal trading. The black market for cattle as well as food and non-food commodities, accompanied with a highly complicated parallel foreign exchange market in which commercial bank branches engage in are features of Tog Wajaale. The Ethiopian central bank has consequently relegated some branches in the area to the sub-branch level.

While banks exist on the Ethiopian side of the border, none exist on the other side, and traders must rely on cash and make use of Hawala money transfer services. Further, road networks are very poor and there’s limited access to markets during the rainy season.

Still, the market in the area is key to the food security of households in the catchment area who sell livestock and feed to buy food and non-food items for themselves. Further, imported commodities from the Port of Berbera are transported to Tog Wajaale, where some are repackaged before crossing over into Ethiopia. On the reverse route, livestock are trekked from Ethiopia to be trucked to Berbera for export. This cross-border trade provides direct employment to several groups of people, including traders, brokers, loaders, transporters, livestock trekkers, and service givers, among others.

Mahlet Teklu, 29, is a native of the town, living off of her grocery business for close to a decade in both Togo Wajaale as well as in the State of Somali’s capital of Jigjiga, 680 km southeast of Addis Ababa. The food market in the city is relatively cheaper than other parts of the country, though some attest that the easterly cities of Dire Dawa and Harar are also somewhat inexpensive. In any way, border towns are known to experience lower prices than other areas by virtue of them being centers of trade. Not all is rosy, however.

“Small-scale mall traders have been prevented from traveling across borders, as they had done in the past, to buy and sell things,” said Mahlet. She perceives that many livestock traders in the neighboring country are looking for alternative supply markets due to massive livestock losses caused by the drought in the region.

Still, the reputation of the town as a hot spot for the parallel currency market and illegal export trade has been there for more than a century. Therefore, she doubts that the trend of doing business the traditional way can be impeded.

“The trust in the Birr among traders on the Somaliland side has been falling as the currency has lost ground against major currencies like the Dollar, Euro, and Pound,” she told EBR. Mahlet and her colleagues used to trade in their respective currencies in values equivalent to the Dollar’s parallel exchange rate.

Better governance of trade among the countries bordering these areas could have helped in tapping more of the potential of the area, according to Mahlet, adding that “better managed cross border trade could have helped a lot in solving the challenges of the forex crunch,” she told EBR.

Cross-border trade is an enduring feature of African borders, and Ethiopia has a long history of informal economic relations on its frontiers. The conventional wisdom holds that the presence of a large informal economy is a sign of the state’s weakness. In fact, state authorities in every border town’s suburb regard cross-border trade as illegal, despite the fact that protocols exist for trading between Sudan, South Sudan, and Djibouti, while trading between Kenya, Eritrea, and Somalia is still being debated.

Ethiopia is an anchor in the region in many ways. Due colonial-era borders, it shares ethnicities with all of its neighbors. It is also landlocked and the largest economy in the Horn of Africa. From grains and fruits to cattle and manufactured goods, Ethiopia hosts it all. As such, the major trading border towns are Togo Wajaale with Somaliland, Moyale with Kenya, Galafi with Djibouti, Beledweyne with Somalia, and Metema-Galabat with Sudan.

The United Nations Office for the Coordination of Humanitarian Affairs’ (OCHA) information portal ReliefWeb gives some insights. Its East Africa Cross Border Trade Bulletin published in July, shows that maize grain remained the most traded commodity in the region in the first quarter of 2022. Further, wheat and maize flour surpassed dry beans as the second and third most traded commodities in the region while rice, sugar, and sorghum remained significantly traded.

The prices of staple food commodities were elevated given below-average harvests, high inflation as a result of COVID-related pent-up demand driving up prices, as well as high oil, wheat, and flour prices owing to the Ukraine-Russia conflict. The report also showed that livestock trade between Ethiopia and Somalia declined because of a prolonged drought that reduced the number of quality animals in the market, as was experienced by Mahlet.

Exports from Ethiopia to Somalia are higher than last year and recent five-year average levels because of high demand in Somalia where production has been below average for the last three consecutive seasons. This condition is expected to continue as drought conditions are ongoing.

With mixed outlooks to regional trade in non-manufactured goods, Ethiopia is looking to tap into special economic areas or free trade zones (FTZ) to better reap possibilities of trade—and to a much larger scale. As such, Ethiopia began running the FTZ in the eastern part of the country. Dire Dawa was selected as the site for the FTZ due to its proximity to ports, market potential, high cargo gravity, and ability to accommodate operations involving multiple modes of transportation.

The government expressed its strong belief in the FTZ due to its closeness to Djibouti port—only 324 km and a five-hour drive. The corridor is the main trade route of the largest landlocked nation in the world, accounting for around 85Pct of the country’s trade through maritime routes.

The establishment of FTZs will be prioritized by giving more emphasis to trade, comprehensive logistics service, and export processing and facilitation zones. According to Dagmawit Moges, Minister of Transport and Logistics, the government will also leverage the immense experience of Ethiopian Airlines in cargo operations and logistics in realizing the formation of the Dire Dawa FTZ which has become the second in East Africa, next to the one in Djibouti launched in 2018.

The Dire Dawa FTZ is one of several free trade zones and special economic zones that will be established in other parts of the country with the aim of boosting trade competitiveness, the flow of foreign direct investment (FDI), urbanization, and industrialization, according to Dagmawit.

According to last year’s quarterly report by the National Bank of Ethiopia (NBE), intra-African trade between Ethiopia and neighboring countries has further flourished in the past few years.

Ethiopia’s exports to neighboring countries during the period was 91.4Pct of total exports to African nations. The top three here being Somalia, Djibouti, and Sudan—taking up 48.8, 23.7, and 13.1 of exports, respectively. The value of imports into Ethiopia from African nations is rising even though the landlocked country still receives only 6Pct of its imports from African countries, with Egypt, Djibouti, and Kenya taking up the top three countries exporting to Ethiopia.

Federal and local governments are working to open borders for intra-continental trade and permit an unrestricted flow of goods and services across nations. The development of a special economic zones program, which aims to build dry ports on key import and export trade corridors, was approved by the Council of Ministers on August 12, just one day before the launching of Dire Dawa FTZ. By streamlining logistics services, the administration aims to promote regional and global trade.

To assuage concerns that foreign corporations will only benefit from FTZs, Abiy Ahmed (PhD), Prime Minister, pushed local investors to benefit from policies and directives and take their positions saying that “I will assure you that upcoming directives will give priority and leverage for domestic investors.“ Indeed, soon after, Elauto Engineering and Trading inaugurated an ETB600 million factory inside the nation’s first FTZ with the capacity to assemble up to 12,000 cars annually.

Ethiopia has been cautious in opening its market to the world economy. As a result, it has a minimal experience in negotiating and putting into effect regional and international trade agreements. The nation has thus far ratified cross-border trade agreements with South Sudan, Sudan, and Djibouti. Negotiations are underway with the major export markets of Kenya and Somalia as of March this year, despite the delicate challenge in terms of maneuvering the border between Somalia and Somaliland.

In 2019, the Premier agreed with Kenya’s government to launch an FTZ and enhance infrastructural development. The deal the two countries sealed is a free trade deal seeking to enhance cross-border trade and the movement of people. The agreement aims to encourage small-scale traders by developing a simplified framework to facilitate their business activities at the border. However, even though infrastructural development is progressing, the FTZ between Kenya and Ethiopia hasn’t commenced operations thus far.

According to ten-year data from the Ministry of Trade and Regional Integration (MoTRI), Ethiopia’s exports to Kenya since 2019 totaled USD257.8 million. In the same period, Ethiopia’s imports from Kenya were USD406.3 million. From this total USD664 million trade turnover with Kenya, the balance is in Kenya’s advantage to the tune of USD148.4 million.

Located 774 km south of Addis Ababa, the Moyale One-Stop Border Post (OSBP) is a new development in the field, commencing operations in June 2021. The border post was financed mainly by the African Development Bank (AfDB) and is aimed at making it easier to move people and goods across the border, potentially cutting processing times by up to 30Pct.

Moreover, the federal government has announced plans to spend over ETB500 million on building a market center at the vital crossing point to Kenya, hoping to further facilitate cross-border trade. The project is part of an initiative promoted by the Common Market for Eastern and Southern Africa (COMESA), with USD95 million in financing from the European Union (EU). Ethiopia has been a founding member of COMESA since its inception in the early 1990s.

Zena Abebe is an importer who has resorted to Kenya to trade. The development of the OSBP has made it easier for him and he imports cereal and other food items.

“The global supply chain disruption is unresolved and the surge in tariffs led us to trade with a new destination,” said Zena. “Yet, despite its significance to cross-border trade, Moyale is behind in urbanization.”

The OSBP facilitates clearance for cargo from both Ethiopia and Kenya on either side of the border, undertaking exit and entry formalities collaboratively and is a much-heralded initiative peculiar to Moyale.

“The service on Ethiopia’s side needs improvement; it is far behind Kenya’s due to a lack of computer-use skills,” Zena told EBR.

Gebretsadik Tassew, Director of Multilateral Trade Relations and Negotiations at MoTRI said “Ethiopia is also gearing up to erect a OSBP with Djibouti, at Galalfi town.”

Galafi is a crucial entry point to the logistic corridor into mainland Ethiopia, handling the majority of Ethiopia’s imports and exports. It was in February 2015 that Ethiopia and Djibouti inked an agreement on a cross-border trade protocol which determines the border area of over 340km radius beyond Afambo town. It also requires the value of goods exported or imported by any trader there not exceeding USD1,000.

The agreement further states livestock, dairy products, and spices are permitted to be exported from Ethiopia and food items like edible oil as well as small home and kitchen appliances, along with textiles, apparel, and used shoes, are allowed in from Djibouti.

Ethiopia’s newest neighbor, South Sudan, signed a trade protocol in 2017, which permits the trading of goods worth over ETB20,000 per month—mostly agricultural commodities.

Agricultural products, similar to other neighborly agreements, are the tradable commodities between Sudan and Ethiopia. There are some exceptions to the permitted trade from the Sudanese side, including plastic materials and some cosmetics.

Developed cross-border trade with Sudan is much more developed than others with fuel, cotton, and large-scale agricultural products being traded. An agreement with Sudan was signed by Girma Birru in December 2005, the then Minister of Trade and Industry, and limits the amount of small-scale border trade between the two parties to not exceed ETB2,000 or its Sudanese Pound equivalent.

The current ongoing war in northern Ethiopia has put a strain on Sudanese relations and trade. Indeed, the region as a whole and trade within it has experienced struggles brought on by drought, instability, and war. However, militaristic clashes on the northern Ethio-Sudan border—resulting in the closure of the border—have had a more significant impact on traders.

Mohamed Amin is one such business owner in the border town of Metema, found 840 km from the capital, which felt trading to be an uphill struggle. The trader imports onions and other agricultural products from Sudan. But, the closure of the border due to the war has put his business in a hectic condition for over a year.

The absence of a more expansive protocol to govern cross-border trade—especially of non-manufactured goods—has negatively affected the spirits of cross-border traders, whom the authorities still see as smugglers and contrabandists. “Officials’ understanding of cross-border trade is limited because they regard all traders as illegal,” Mohamed told EBR, mirroring the thoughts of traders in Togo Wajaale in southeastern Ethiopia.

Ethiopian trade across national boundaries suffers from struggles apart from conflict, instability, and bureaucratic frustration. The devaluation of the birr is another cause for concern as is experienced by traders around Togo Wajaale. In Metema-Galabat, Sudanese onions were previously sold at an average price of between ETB1,000 and 1,500. Now, Mohammed claims this has risen to more than ETB3,000 per quintal. The inflationary cause here, with all other things considered, is the Birr’s devaluation.

Urgessa Deressa (PhD), a Lecturer in global studies and international relations at New Generation University College, believes that governments should focus on developing and updating legal frameworks and protocols for small-scale cross-border trade, as it has the potential to enhance relations with neighboring countries and will benefit budding small exporters.

Regional governments should expedite the execution of their commitments inked during their membership in COMESA and even further on to the African Continental Free Trade Area (AfCFTA). This will further the realization of prosperous economic integrity throughout East African nations.

“The protocols of cross-border trade will reduce small traders’ demand for forex to import items like apparel, clothing, and the like,” Urgessa says. “Such measures will potentially reduce the flow of foreign currency in the parallel market.”

The concept of a free trade area has become a magic term, capturing African countries’ attention. Signed in 2018 by 44 countries, AfCFTA is designed to leverage the markets of 1.2 billion people once it is fully implemented and is expected to comprise USD2.5 trillion in GDP. AfCFTA is anticipated to be the largest free trade area in the world by the number of participating nations after the World Trade Organization. It is anticipated that its creation will boost intra-African commerce, which is currently at just 20Pct.

African nations and their governments are now privy to the multiple benefits of cross border trade with their immediate neighbors. It helps alleviate foreign exchange burdens as traders use their local currencies. Social and cultural relations are bolstered, giving fuel to more a peaceful coexistence. In all, economic, political, and social benefits are bountiful. What is currently being given enlarged governmental focus is large-scale cross-border trade with the enactment of FTZs and OSBPs. However, due attention must also be placed on small-scale yet highly-impactful trade performed by locals as true cross-border trade must involve larger swathes of the population instead of only corporations. EBR

10th Year • Sep 2022 • No. 110

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