Pie in the Sky

Ethiopia’s Textile Industry Lags behind

At a time when the government is only left with a year and half to fulfil its export targets set in the Growth and Transformation Plan (GTP), the textile sub-sector, the third largest manufacturing industry in the country in terms of value addition after food processing and beverage and the leather sub sectors, registered another dissatisfactory export performance in the last six months of the current fiscal year. The nation’s six month export revenue released by the Ministry of Trade (MoT) last February revealed that textile companies operating in the country exported only USD57.5million worth of garments and textiles. This has increased the combined export revenue from the sub sector to USD301.9 since the launching of GTP. Although export revenue over the last six months fell 48.6Pct below the period’s target envisioned by the ambitious five-year plan, it grew 27Pct compared to the previous year. Despite the increase it appears that it will be difficult for Ethiopia to increase foreign earnings from the textile and garment industry to one billion dollar by the end of 2014/15. As a result the GTP goals for this sub sector appear to be farfetched.
The failure comes despite the promotion and incentives the textile industry received from the government in recent years. Ethiopia has introduced concrete policies to boost the industry, and allow Ethiopia to compete with the rest of the world. The adaptation of an Agricultural Development- Led Industrialization Strategy (ADLI) is a milestone in this regard. Within the framework of ADLI, the Ethiopian Industrial Development Strategy (EIDS) was launched in 2004, outlining the priority areas and mechanisms of interventions to hasten the industrial sector’s development. Specifically the strategy focuses on selected manufacturing activities such as textiles and garments, meat processing, agro processing, leather and leather products.
The previous five-year plan and the GTP have also maintained the textile and garment industry together with other sub sectors as priority areas. Through these strategies, the government explicitly demonstrates its intention to establish a competitive textile industry. All these policy frameworks were intended to uplift the industry, which first began in 1939, following the establishment of the first textile factory in Dire Dawa during the Italian occupation.
In addition to providing a policy framework, the government has been providing incentives to attract and encourage local and foreign investors to get involved in textiles. Since the textile and other industries depend on imported capital goods such as machines, the government gradually reduced the maximum tariff rates for imported materials used as tools for the businesses from the colossal 230Pct to the current 35Pct. Tax holiday privileges between 2 to 7 years, depending on the Investment Board of Ethiopia’s decision are also provided. If companies lose money during the tax holiday they can carry that loss forward (an accounting technique that applies the current year’s net operating losses to future years’ profits in order to reduce tax liability) for half of the income tax exemption period. Foreign investors are also entitled to remit profits and dividends out of Ethiopia in convertible foreign currency. Based on the investment proclamation ratified in 2011, the government promised to introduce a one-stop-shop system that could provide services to investors using a ‘single window’.
These efforts helped the textile industry to grow gradually. Currently, there are 40 large textile companies already in production in Ethiopia. Additional 58 medium and smaller ones are also in operation. Compared with the meagre 13 a decade ago, the government’s effort to provide policy frameworks and incentives to encourage investment in the textile industry proves indispensable. Twelve of Ethiopia’s larger textile companies are owned by foreigners (mostly from Turkey and China). In addition, 20 foreign investors have obtained licenses for production. This shows the increasing prospect of investing in the industry.
After all these developments, however, the textile sub sector still remains incapable of contributing enough to meet the nation’s increasing foreign currency need. Over the past several years, the sector’s inability to bring in a large amount of money from exports coupled with its low gross value production appears to confirm this. Since the launch of the GTP, the export revenue has failed by at least 45Pct of the government’s annual targets. In addition the textile industry’s gross value of production at the end of 2012/13 remains close to USD500 million in spite of the government’s vision of raising the gross value of production to USD2.5 billion by the end of the 2014/15 fiscal year, according to the annual report of the Ministry of Industry (MoI). However, for Ahmed Abetew, Minister of Industry, meeting the export target is something the government has a good chance to achieve. “The export lag is created not because production declined rather it is the result of increased local demand” Ahemed said in the press briefing organized by the Ministry to evaluate its six month progress. Most of the textile companies exported only 40Pct of their production capacity. “So, increasing the share of exports is important in order to realize the target,” Ahemed told Journalists. “In addition 15 large textile factories will join the industry soon which should make it easier for the government to meet its target.”
Many studies conducted in the field partially attribute the weak performances of Ethiopian textile industry to the inadequacy of a policy framework and lack of the existing policy implementation. Although most of the constraints in the textile industry emerged after investors started operation, the initial licensing and registration process still poses challenges to potential investors. To avoid the long bureaucratic process of licensing and registration, the government promised to introduce one window service two years ago. This will enable investors to access services such as power, customs and banking from one desk. When implemented this strategy will ease the challenges faced by investors. “Coordinating the activities of different government institutions and putting them in one place requires a huge investment and commitment”, Getahun Negash, Corporate Communications Directorate Director at Ethiopian Investment Agency told EBR. According to him, the system will start operation at full scale within a few months.
Another constraint faced by the textile industry is shortages of foreign exchange. Investors want to take the profits they earn out of the country in the form of hard currency. This crucial problem also affects textile companies that import inputs and capital goods for their manufacturing process. Sara Abera, general manager of Sara Garment is one of the investors affected by shortages of hard currency for importing raw materials. “Especially last year, importing raw materials has been difficult due to a foreign currency shortage, she told EBR. “But recently things seem to be getting better.”
Beside inadequate policy implementation, the existing policy framework is also far from being adequate for addressing the current problems faced by companies engaged in the industry, a study conducted by the Common Market of Eastern and Southern Africa (COMESA) in 2012 revealed. While the ADLI and EIDS have formally identified textiles as a priority area of the country, concrete steps yet to be taken to achieve clarity and consensus, which expose textile companies to unfair trade practices that erode their competitive base.
Surprisingly one of the major policy related problems came with the government’s effort to enhance the textile industry itself. Following the progressive reduction of tariff rates from a maximum of 230Pct to 35Pct, the domestic market has been exposed to competitive pressure from imported textile products. Since 1995, Ethiopia revised the tariff rates for imported raw materials, intermediate inputs, finished and capital goods six times. Currently a maximum of a 35Pct tariff rate is being imposed on most finished products whereas intermediate inputs and raw materials face lower tariff rates, which range between 5Pct to 20Pct. As a result, many textile companies has been affected by a lack of domestic demand since most imported textile products originate from countries that provide a great deal of leverage to firms aiming at the export market, according to the study. Cheap and excessively abundant imported items such as clothing are becoming common occurrences on the streets of Addis Ababa, which leads textile companies to operate below capacity.
“The alarming thing is that even imported products that have low quality compared with the locally manufactured garments are crowding the market, Berhanu Degefa, General Manger of Edget Garment told EBR. The Industry Minister, however, refuted this argument by saying, if the textile factories cannot operate under such tariff rates, there is little the government can do to rectify the problem. “For the importation of raw materials, one has to pay close to a 20Pct tariff whereas for importing finished textile products the government is imposing a 35Pct tariff rate”, he said. However, last year alone more than half of the textile companies operating in the country used only 40pc of their capacity, according to the annual report of the Ministry. The underutilization is the result of inefficient infrastructure, which increases the cost of doing business immensely.
At the moment power interruptions have been constraining textile companies the most, even though the power supply has improved in recent years. The power outages stop work unexpectedly and lead to unplanned down time which increases the production cost. Although the MoI is helping textile companies access independent electric lines, the problem appears to be getting worse. Many stakeholders agree that in the last few years, the textile sub sector has seen a set of initiatives that carries the basic elements of sound policy. However, no integrated and coherent strategy has yet emerged, beyond public utterances and ad-hoc measures, which indicate the general direction. Besides these factors, the lack of supporting infrastructures such as uninterrupted power supply and efficient institutions are handicapping the competitiveness of textile companies in Ethiopia, making the ambition of generating USD one billion from the exporting textiles and garments a pie in the sky. EBR

2nd Year • March 2014 • No 13