Cutting through the Corruption Loopholes
Ethiopia has been grappling with foreign currency shortages for many decades. Despite this, the country’s import figures have been growing, reaching an all-time high in 2021/22 with USD 18 billion, up from USD 14.2 billion recorded in the previous year. Such a staggering increase in imports has further widened the trade deficit. This influx of import transactions involves numerous stakeholders. However, the cumbersome bureaucracies in the customs system, rampant corruption, and exorbitant duty levy have created immense frustration for importers and manufacturers.
EBR’s Selome Getachew navigates the hurdles in the import processes and how custom procedures, which change now and then, frustrate importers.
Prime Minister Abiy Ahmed (PhD) has taken a step by establishing a national anti-corruption committee to combat rampant corruption in Ethiopia. This committee aims to coordinate the government’s efforts in combatting crime, identify those involved in corrupt practices, and hold them accountable. The Prime Minister aptly refers to corruption as a destructive force that gnaws away at a country’s core, depleting its resources day and night. The crime becomes an epidemic plaguing the nation when corrupt authorities, greedy brokers, and unscrupulous investors converge. It is crucial to acknowledge recent developments, including the arrest of prominent officials, such as Tewodros Bekele, Director General of the Ethiopian Financial Intelligence Center (EFIC), by the police on allegations of grand corruption last December. This significant move underscores the government’s commitment to addressing corruption at all levels. The apprehension of high-ranking individuals demonstrates a strong stance against corruption and sends a clear message that no one is above the law.
Corruption is prevalent in almost all public service areas. The Customs Commission is one area where corruption is negatively impacting the economy. As a result, exporters who have to collect agricultural produce from all over the country to process and ready for exports are facing significant challenges because many corrupt local administrators and security personnel, from police to special force members, are creating many unauthorized custom posts which are creating transport delays and also levying illegal custom charges. This recently developing trend has already had its worst impact in making Ethiopian commodities uncompetitive because numerous unplanned custom duties push costs high for exporters. Similarly, importers are pacing such illegal practices by men in uniform who make their custom checkpoints and levy arbitrary duty illegally. In many instances, local administrators are accomplices to these sabotaging practices that have already become rampant in the country, especially in the now defunct SNNP state and Oromia, where most of the nation’s export commodities come.
Importers have been exposed to cumbersome bureaucratic hurdles, creating loopholes for corrupt practices. With the numerous illegal custom posts made by men in uniforms for arbitrary duty, businesses face a very high cost to factor in deciding the final price. The practice is exacerbating inflation on the one hand and also creating loopholes for contraband to overtake.
Trade data analysis, published on the official page of the International Trade Administration, sheds light on the numerous obstacles businesses operating in Ethiopia face. These hurdles range from a lack of transparency in the government system, including tender cancellations, inadequate infrastructure, bureaucratic procedures, coordination challenges, inefficiencies within government agencies, and foreign exchange shortages to high transportation and transaction costs. These barriers pose significant challenges for importers in the country.
One concerning trend is the increasing practice of importers leaving their goods in customs warehouses due to excessive duty tax inquiries. As a result, these goods often end up in public auctions. The implications of this process are far-reaching, affecting businesses and the economy as a whole.
The CEO of a significant food importing company, who requested anonymity for safety reasons, shared a distressing incident highlighting the issue’s severity. The CEO recounts being contacted directly by a customs assessor who raised alleged problems with the company’s documents that needed “addressed.” Despite maintaining clean papers and engaging in legitimate business practices, the CEO found himself coerced into meeting the assessor, who eventually demanded a bribe in exchange for favourable tax treatment. This practice is common widely known in Ethiopia. It happens in the broad day except that it has peaked now.
Unfortunately, experiences like these have become everyday experiences for importers in a country where two-thirds of foreign transactions occur. The CEO expressed regret that many importers, direct and manufacturers, are compelled to succumb to these illicit demands because their commitment would make them face more consequences for not having the goods in place. This widespread corruption undermines the business environment, erodes trust, and hampers economic growth.
Fekadu Belayneh, Owner and CEO of Fame Impex Trading PLC, also shares the grievances of many importers in Ethiopia, shedding light on the exorbitant tax requests they encounter, even when directly importing from manufacturers. Fekadu expresses frustration over the incompetence of assessors and handling personnel, who often need more fundamental knowledge about the goods they are assessing. Instead of relying on reliable sources or international standards, these assessors resort to platforms like Alibaba or, in desperate cases, pirate websites to gather information on products and prices. They also refer to three to nine months of other importers’ previous costs. These practices not only mislead importers but also need to meet international standards.
The Custom practice in Ethiopia seems only to have taken the role of collecting more revenues for the state, while its impact on the overall economy and even the government’s end goal of raising more revenues to finance its development goals. Two significant problems happen here: customs officers change the HS code of products to levy higher duty. The World Customs Organization (WCO) is the one which developed HS codes. HS stands for Harmonized System and identifies product categories and products with a standardized two- to six-digit nomenclature. In a number of cases, Custom officers change the HS code of products to levy the highest possible duty on the product, pushing costs very high.
They also disregard importers’ prices on commercial invoices and use their prices as a reference to calculate the duty to levy. For example, an importer could have bought a bulk quantity (say 50 containers) of a particular product directly from a manufacturer for USD1,000.00 per ton; however, there could be a two-container previous importer of the same material from second-tier traders at a 35Pct more expensive price in the past three to nine months. In such cases, the customs use the highest possible recorded import price regardless of the bulk buyer’s quantity, source and capacity to negotiate for a discount. However, they take the highest reference price and import prices much higher.
Of course, trade mispricing, the deliberate over-invoicing of imports or the under-invoicing of exports, usually to avoid higher taxes or levies, are significant issues that cause countries to lose a huge source of revenues. But, in Ethiopia, most importers are accused of under-invoicing on imports, while the common global trend is that importers tend to overstate prices to transfer funds to offshore accounts illegally.
According to Jagdish N. BHAGWATI, Professor of economics and law at Columbia University, under-invoicing of imports— a discrepancy between the stated value of imported items and their actual value which is payable to the exporter abroad, such that the latter exceeds the former—may arise characteristically in two cases: when the imported commodity carries a tariff duty and when the imports go through strict controls, resulting in a premium on it in the domestic market. In some countries, such as Turkey, where the earnings of workers abroad constitute a significant source of invisible receipts through remittances, under-invoicing represents at least as important a source of foreign exchange in the parallel market.
According to the UN, Africa loses an estimated USD50 billion annually due to mispricing. This figure is part of the 90 billion dollars in capital flight that leaves Africa annually. Mispricing is the difference between the prices African countries receive for their exports and the prices they pay for their imports. Ethiopia is no exception to this massive problem. Many importers understate import prices because they usually only get part of the foreign currencies for their import businesses. The difference between the actual price of the item and the price in the commercial invoice could be the value of foreign currencies illegally sourced.
However, as the Customs Commission unquestioningly treats all importers, it commits a massive mistake of offending major lawful importers. These importers who use their currency and source directly from manufacturers find how the Customs Commission is trying to deal with this reality unbearable. This unscientific way exposes genuine importers who access forex formally for excessive tax, pushing their costs higher, leading to an inflated selling price of their imports. Beyond heightening inflation, the high imposed duty on importers is a significant barrier to conducting a smooth business in Ethiopia.
Even when importing directly from manufacturers, sometimes importers face exorbitant taxes, which impede their ability to compete in the market. Such tax requests are often unjustified and need a solid basis, leading to increased costs and reduced business profitability. This problem has become so big that it calls for immediate policy intervention, from giant multinational corporations to small local companies.
Tariff classification is critical to international trade, determining the correct commodity code and the applicable duties and taxes for imported goods. Like many other countries, Ethiopia employs the Harmonized Commodity Description and Coding System (HS) as the foundation for its tariff classification. The national tariff book provides guidelines specifying the duties and taxes for each imported product. However, despite having these tools available, many officials responsible for tax calculation need to gain the necessary knowledge and, more concerning, exhibit an unwillingness to learn.
For importers of light engineering and electronic goods in Ethiopia, the absence of appropriate guidelines and manuals for determining duty taxes poses significant challenges. A COO of an electric equipment importing company highlights the immense opportunities in Ethiopia, with its growing population and robust GDP growth, for marketing such goods. However, due to the absence of appropriate guidelines and manuals for determining duty tax on such equipment, importers in this sector are left at the mercy of assessors who often resort to corrupt practices, mirroring the experiences of their counterparts in the food importing industry.
The COO’s statement emphasizes the urgent and pressing need for comprehensive guidelines and manuals explicitly tailored to the light engineering and electronic goods sector. These resources would provide clear instructions on the proper classification and tax calculation methods, ensuring transparency and consistency in the assessment process. By establishing industry-specific guidelines, the government can eliminate ambiguity and minimize opportunities for corruption.
Yohannes Tadesse, the General Manager of TAZ Transit and Transport PLC, echoes this statement. He explains the primary drawbacks of Ethiopia’s customs system, which significantly impact importers and hinder the system’s efficient functioning. These challenges include a need for more sufficient warehouses for timely cargo inspections, a shortage of dedicated human resources for import and export consignments, an inconsistent customs system, and a lack of knowledge regarding the risk levels of imported goods.
Insufficient warehouse capacity for cargo inspections poses a significant challenge, leading to delays and potential bottlenecks in the clearance process. The limited availability of dedicated human resources specifically trained for import and export consignments exacerbates the problem, causing further delays and inefficiencies.
Citing a case study paper prepared by Tagel Tesfaye as part of his graduate thesis on Public Management and Policy at Addis Ababa University, in which 2,905 population size of the Commission in four selected branches and 157 survey questionnaires were administered, the findings from the study confirm that corruption in the Commission is increasing in extent and type (pity and grand corruptions). It becomes evident that daily work pressures at the Commission and the pursuit of results measured by the amount of income can lead to unethical behaviours among employees.
Team managers, driven solely by increasing revenues, may be concerned with something other than how tasks are accomplished. The close relationships fostered between ERCA officials and various actors involved in tax and customs create an environment conducive to corrupt practices. Additionally, the sheer volume of transactions processed by ERCA daily, combined with the above causes, results in significant revenue losses. As negotiation often occurs with clients while processing large transactions, uncollected revenue increases concurrently. Specific clients lacking audited accounts may collude with ERCA staff to manipulate accounting records, understating their value. In essence, inefficiencies, corrupt practices, and a lack of accountability have thwarted the customs system in Ethiopia.
Corruption within Ethiopia’s customs system poses a significant obstacle to conducting imports and undermines the country’s economic progress. The establishment of a national anti-corruption committee by Prime Minister Abiy reflects the government’s commitment to tackling this pervasive issue. However, further measures are necessary to enhance transparency, streamline bureaucratic procedures, improve infrastructure, and foster coordination among government agencies.
Transparency within the government system is crucial to combat corruption effectively. Implementing electronic documentation and automated processes can reduce opportunities for bribery and favouritism. Ethiopia can create an environment discouraging corrupt practices by promoting accountability and openness.
Streamlining bureaucratic procedures is essential to eliminate unnecessary delays and reduce opportunities for corruption. Simplifying customs processes, digitizing documentation, and establishing clear guidelines will enhance efficiency and facilitate smoother import operations.
Infrastructure investment in warehouse facilities and modernizing customs checkpoints and clearance offices will improve cargo handling and inspection capabilities. Adequate infrastructure will contribute to timely cargo clearance, reducing the risk of corruption and minimizing disruptions to trade.
Establishing a national anti-corruption committee demonstrates the government’s commitment to addressing this issue. However, this is not a permanent solution to an alarmingly growing public policy crisis. Enhancing transparency, streamlining procedures, investing in digital infrastructure, fostering coordination among government agencies, and providing comprehensive training to customs officials and all public institutions are essential to creating an environment conducive to fair trade and economic prosperity. By undertaking these measures, Ethiopia can unlock its immense potential and pave the way for sustainable development.
Revamping the customs involves a complex and challenging task. However, ensuring that the customs system is efficient, effective, and transparent is essential. By Modernization of customs procedures, improving coordination with other government agencies such as the police and border controls, increasing transparency, and, more importantly, improving the training of customs officials and engaging in broader public awareness campaigns, it is possible to create an effective and efficient customs system that can protect the economy and the security of the country. Investors would also benefit more from such an efficient system.
The tax-to-GDP ratio in Ethiopia is estimated to be around 14Pct in 2023. It means the Government collects about 14 birr in taxes for every 100 birr of GDP. This figure is lower than the average tax-to-GDP ratio in Sub-Saharan Africa, around 17. That makes the goal of improving the tax-to-GDP ratio a just cause. However, the current system, which puts collecting more revenues as the highest goal, must sustainably help the country and encourage the business community to be faithful. It just widens the loophole for illegal traders and corrupt customs officials to prosper at the expense of the broader general public. Several factors contribute to the low tax-to-GDP ratio in Ethiopia. One factor is the country’s large informal economy. The informal economy is the part of the economy that is not taxed. According to some estimates, about 80Pct of Ethiopia’s economy is informal, making it difficult to register and tax transactions. That’s why formalizing trade is a crucial issue to improve tax collection.
However, in the present scenario, the Government is more interested in taxing already registered traders than encouraging informal traders to legalize their activities. This practice requires easing the legal way of doing business and also encouraging formal business practice by incentivizing through rewards and acknowledgements. It may even need to lower tax rates, including revising customs duty.
11th Year • September 2023 • No. 121 EBR