Rough Seas Ahead

Red Sea Crisis Cripples Ethiopian Trade Exposes Economic Vulnerabilities

As a landlocked country, Ethiopia relies heavily on the ports of Djibouti and Eritrea for its international trade, with the Red Sea serving as a crucial maritime corridor. However, the ongoing crisis in the region, which began on October 7 with Hamas attacking Israel, is having significant ramifications for Ethiopia.

EBR’s Eden Teshome delves into the challenges faced by Ethiopian businesses amidst the escalating conflict between the Houthi rebels in Yemen and Israel’s retaliatory strikes in the Red Sea. Ethiopian importers and exporters are feeling the strain, from rerouting shipments and enduring longer transit times to dealing with skyrocketing freight rates and potential infrastructure bottlenecks. This piece explores how this regional security issue disrupts global maritime trade and forces Ethiopian firms to explore alternative markets and distribution channels.

The Red Sea crisis, which began in October 2023, involves the Iran-backed Houthi movement in Yemen launching missile and drone attacks on Israel, seizing and attacking merchant and naval vessels in the Red Sea, and threatening to target ships heading to Israeli ports. This crisis stems from the ongoing conflicts in the region, including the Israel-Hamas war, the Iran-Israel proxy conflict, and the Yemeni crisis.

In response, the UN Security Council has condemned the Houthi attacks, and the United States-led Operation Prosperity Guardian has been launched to protect Red Sea shipping with coalition air and missile strikes against the Houthis, while other countries are independently patrolling the waters near Yemen. The Red Sea is in crisis, with the Houthi gambit in the Red Sea imposing severe costs on global trade, similar to the issue of Somali piracy a decade ago. Although the United States and its allies are taking military action to suppress the Houthi threat, the crisis extends beyond just the trouble emanating from Yemen, reflecting the complex and interconnected nature of the conflicts in the region.

The escalating conflict in the Red Sea has dealt a severe blow to Ethiopia’s import-oriented businesses as the country grapples with rerouted shipments, soaring freight rates, and infrastructure bottlenecks. With the vast majority of Ethiopia’s exports and imports trades passing through the Red Sea maritime corridor, the recent attacks by Houthi rebels and retaliatory strikes by Israel have disrupted a crucial trade lifeline for the landlocked nation.

“Since 80%-85% of exports and imports occur around the Red Sea, any delays have a significant impact,” said an economist who would like to remain anonymous. “This situation represents a substantial loss for those exporting both perishable and non-perishable goods, as well as for all the involved parties. There might also be some degree of uncertainty and fear.”

The Red Sea crisis has forced Ethiopian exporters to seek alternative shipping routes, leading to extended transit times and higher logistics costs. Tadese Melaku, the Manager of Coffee Trade at Horra Trading, explained that his company has turned to the logistics provider, the Mediterranean Shipping Company (MSC), which offers a longer journey through South Africa’s Cape of Good Hope to avoid the Red Sea.

“Previously, it took one month for our product to reach customers, but now it takes two months,” Tadese said. “This extended transit time has slightly diminished the quality of our products, which can lead to losses for our buyers. Additionally, scheduling issues and inefficiencies at the Djibouti port, where containers are often delayed, exacerbate the problem.”

Unlike coffee exports, which used to be dispatched within about three days once containerised, Tadese said meeting this timeline is becoming increasingly challenging as the crisis disrupts the supply chain.

An anonymous person from the freight forwarding company Akakas Logistics echoed these concerns, noting that the rerouting has significantly impacted their operations. “As freight forwarders, we are not sea freight operators, but we are facing significant challenges due to the Red Sea crisis,” he said. “The longer routes and delays are adding to our costs and making it difficult to meet our clients’ demands.”

The disruption in the Red Sea has also led to a surge in shipping and insurance rates, further squeezing the profit margins of Ethiopian businesses. Tadese explained that while his company is not responsible for insurance costs under the FOB (Free On Board) terms, the extended transit times have resulted in significant storage fees denominated in US dollars.

“The additional cost issue is significant: due to delays extending from 20 to 60 days, we incur storage fees in USD, which heavily impacts us,” Tadese said. “Buyers are also complaining about the delays and requesting to share the costs they are facing. Additionally, using a longer route means we pay in USD at various ports for our imports.” Indeed, this has created an additional USD 1,500 in import charges per 20ft container, pushing cost structures further.

The anonymous economist noted that the rising freight rates are a significant concern for Ethiopia’s economy. “Logistics have always been costly in Ethiopia. Some argue that transporting from Djibouti to Ethiopia already takes longer than from China to Djibouti.” The ongoing conflict in the Red Sea worsens the logistical nightmares in Ethiopia.”

The potential damage to the port of Hodeida, a key Yemeni port on the Red Sea coast, and the ongoing instability in the region could exacerbate the existing infrastructure challenges Ethiopian traders face. The person who asked for anonymity from Akakas Logistics pointed out that Ethiopia’s logistics landscape is already plagued by bureaucratic hurdles in government agencies and massive inefficiencies that have undermined prudent services.

Ethiopia faces significant logistical challenges that hinder its economy. “The country suffers from highly inefficient logistics, further exacerbated by bureaucratic hurdles complicating international trade. The ongoing conflict in the Red Sea worsens these existing logistical challenges.

The crisis may also compel Ethiopian importers and exporters to explore alternative markets and distribution channels, which could be challenging given the country’s landlocked geography. Tadese, the coffee trader, acknowledges that his company relies on exports to earn foreign currency for its other businesses, and the current situation is putting significant pressure on their operations.

“We export coffee to earn foreign currency to cover the import needs of our other businesses,” Tadese said.

The economist warned that trade agreements alone will not solve the problem, and Ethiopia needs to focus on improving local production and addressing structural bottlenecks on the supply side first.

“Currently, production is insufficient even for domestic needs,” the economist said.”

Platforms such as the African Growth and Opportunity Act (AGOA) and other trade agreements will only be effective when the country is internally stable and can efficiently produce goods for the local and global markets. They are unlikely to be effective for an economy that imports with foreign support and lending.

The economist also highlighted the need for Ethiopia to diversify its economy and [trade partners] and explore alternative markets rather than relying heavily on the Red Sea corridor.

“As an agricultural economy, Ethiopia relies heavily on agricultural products and has not diversified into industrial development or other investment areas,” the economist said. “Without diversification, exploring alternative markets remains ineffective. To shift trade from the Red Sea to other ports such as Mombasa, Kenya, which is further south in the Indian Ocean, might be a right thing to do. “

The prolonged Red Sea crisis significantly threatens Ethiopia’s economic growth and competitiveness. Disruptions to the supply chain, rising costs, and infrastructure challenges undermine the country’s ability to meet its export targets and maintain its position in global markets.

“Ethiopia should prioritise addressing its broader issues before focusing on other areas; the country needs to stabilise itself first,” the economist said. “It faces significant internal and external problems at present. Unless political issues and administrative challenges are resolved, it’s difficult to address other problems effectively.”

The coffee trader Tadese also acknowledges the need for negotiations and adaptations to weather the crisis but emphasises the mutual benefits of trade relationships.

“Since the business is mutually beneficial, we negotiate with our customers,” Tadese said. “On their coffee formula, which includes coffee from various countries, relies on the Ethiopian coffee as a key ingredient. Therefore, it is essential for them to purchase our coffee, as it serves them a spice in their blend of coffee. We also need the transactions to earn foreign currency.”

As the Red Sea crisis unfolds, Ethiopia’s international trade needs to employ a multifaceted approach to mitigate the impact and safeguard its long-term competitiveness. This may involve diversifying export markets, investing in infrastructure upgrades, and addressing broader political and administrative challenges that have long plagued the country’s economic development. EBR

12th Year • Aug 2024 • No. 132