vehicles remain unaffordable

Vehicles Remain Unaffordable

Buying a car continues to be a daunting task in Ethiopia. Because of its unaffordability, many are forced to become commuters. Although there is hope that it would decline soon following the pledge of the government to reduce taxes on new cars, the price keeps on increasing every day. The local assemblers are also not in a position to fill the existing gap as they sell their cars for a price equal, if not higher, compared to the imported ones. The spike in the price of cars is also worsening the income inequality and implies that the value of the local currency is dwindling against the basket of major foreign currencies. EBR’s Kiya Ali reports.

Six months ago, Kirubel Gulilat, in his late 20s, managed to raise ETB300,000 through Ekub, an informal rotating savings-and-credit system. This was good news for him as it came at a time he was planning to buy a car. To realize his plan, he went to a number of car dealerships. But things did not go as he had hoped because the dealers, majority of which sell the same kind of car, were not able to serve him with what he wanted.

“When I went to the car dealers, the majority of them only had Toyota Yaris and VITZ. I wanted to buy a Toyota Corolla, also known as Woyane, and decided to wait until I found one,” he recalls. Unfortunately, before his hope came true the price of cars skyrocketed in Ethiopia, forcing him to change his mind.

“As the price increases every day at an unimaginable rate, I had no choice but to buy the type of car I refused to purchase a few months ago,” he says. “To my surprise, four months after the initial inquiry on the price of the car, which was ETB400,000, the price had increased to ETB600,000.” He is not the only one to experience this. The skyrocketing price of cars catches many Ethiopians, who have saved for long, by surprise.

Buying a car has never been stress-free for both lower-and-middle income citizens in Ethiopia. In addition, no policy changes have been witnessed during successive regimes, all of which made owning a car a daunting task for Ethiopians. The unaffordability of vehicles is attributed to the huge import taxes and related ownership duties levied on cars. According to a study published by Deloitte Africa in the past year, effective rates of 329Pct and 289Pct, respectively, were put on Toyota Vitz 2003 and Toyota Land Cruiser 2010.

Yet, the recent spike in prices of vehicles is unique to its kind. A case in point is the cost of VITZ, whose price had been in the range of ETB200,000 and ETB250,000 between 2015 and 2017, but drastically shot up by over ETB150,000 in the past 12 months. In a similar manner, Toyota Corolla’s price has also increased by more than ETB150,000 from its price a year ago. A Toyota Corolla Executive 2007 is available in the market for ETB 830,000, whereas used Toyata Vitz and Yaris models could be found with an average price tag of ETB 420,000 and ETB 460,000, respectively. These models’ price rose by between ETB100,000 and ETB150,000 in the past 12 months.

The price increment has been aggressive in the past four months, ever since the government stopped considering depreciation as a cost that must be deducted while computing taxes on vehicles.

The forex shortage, which has been more severe in recent years, worsened the price upsurge. The forex crunch became more severe for car sellers after the National Bank of Ethiopia (NBE) implemented a rule that requires importers to request for an amount of forex that is equivalent to the original price of the goods. Prior to the effectiveness of this law, car importers were allowed to request less than the amount of forex required and fulfill the rest from various sources, such as the black market.

“Lately, we have to wait up to two years to get foreign currency after applying for a Letter of Credit (LC) from commercial banks,” says Tomas Hailu, a car importer. “This has pushed us to import less and charge a higher price as there is a huge supply gap.”

Another importer, Ermias Getachew, shares this sentiment. “While poor transportation is a problem lingering in Ethiopia, a car remains a luxury item that is affordable by those who have a higher income. Surprisingly, even those under this class can only buy used cars as the new ones are very expensive”

Literature written on the subject stress that cars would remain expensive in developing countries, like Ethiopia, as long as the nation continues being a technology taker, forcing them to be import-dependent. On the other hand, there is little room for large-scale assembly industries in Africa because of many reasons such as stiff competition from importers.

Currently, 1.2 billion cars operate in different countries across the world. Toyota has the lion’s share of sales in developing countries. Ethiopia is not an exception. From the one million cars registered throughout the country, 88Pct are used cars and more than half of that are Toyota products. The average lifetime of these vehicles is estimated to be between 15 and 20 years. This has exposed the country to air pollution, additional expenses for road repair, and unnecessary expenses on spare parts.

From an individual buyer’s perspective, as buyers lack enough information on how the car was treated, maintenance cost of the car is usually overlooked. But, used cars usually have worn-out consumables such as hoses, tires, shocks, filters, fans and clutch. “Rigorous inspection should be conducted and an imported car must undergo appropriate maintenance,” argues Mulugeta Girma, a mechanic, who also mentioned that a used car is also one of the major reasons for the rising rate of traffic accidents which have killed over 4,000 people in the past fiscal year.

Minister of Revenue, Adanech Abebe, is aware of the adverse impacts of used cars. “The importation of used cars without any restriction has brought unwanted consequences,” she said. “We are working to either to put a limitation on the importation of old cars or provide incentives for the importers of new cars based on the experiences of other countries.”

Egypt, South Africa, Sudan and Morocco are among the African countries that imposed a total ban on second hand vehicles. Benin, Democratic Republic of Congo and Eritrea restricted the importations of cars whose age is above 10 years. On the other hand, Kenya, Ghana, Uganda, Sierra Leone and Rwanda imposed huge taxes on used cars imported from abroad.

The Ethiopian government is also drafting a new law to raise taxes levied on cars based on their ages. The Ministry of Finance and Economic Cooperation recently announced that a tax amounting between zero to 100Pct of the original price would be levied on new car, while a ban would put on old cars, the age range is yet to be specified. The Ministry is yet to disclose the final draft of the new rule. The Federal Transport Authority is also discussing possibilities to raise the capacity of local assemblers by encouraging import substitution.

The appreciation of automobile price also has its own economic implication. “As majority of the cars are imported via international trade using foreign currency, the rise in price of vehicles shows that the value of the local currency is devaluating,” Tedros Bekele, a marketing director of a local car importer and assembler company tells EBR.

Currently, the value of the Birr against the basket of major foreign currencies is depreciating in the black market, although it remains relatively better in the official market. A dollar is being traded for as much as ETB40 in the black market, while a pound is exchanged for as high as ETB50 and a Euro is sold for over ETB45.

Although the central bank dictates that importers must fully get foreign currency from commercial banks based on the real value of the item, the current appreciation implies that the reverse is being applied at the moment. Even though foreign currency is very scarce, the importation of old cars is increasing. “This clearly shows that the source of forex for car importers is still the black market,” says an economist EBR spoke to.

The other implication of vehicle price appreciation is economic inequality, which is a major macroeconomic problem in Ethiopia. The inequality could be in the form of income or wealth distribution. “Although the price of cars keeps on increasing, there still are a few people who can afford and buy it. That is why streets are crowded despite the expansion of roads,” Haji Ibsa, director of Public Relation and Communication Directorate at MoFEC says. “Yet, the number of car owners is insignificant compared with the total population. It reflects the widening of the gap between the poor and the rich.”

8th Year • Sep.16 – Oct.15 2019 • No. 78

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