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Money TalksThe high stakes of Ethiopia’s possible delisting from AGOA

The high stakes of Ethiopia’s possible delisting from AGOA

Us led international pressure against the government of Ethiopia has been the hallmark of the past year. Travel bans against government officials have already been put in place during this time. The US is also weighing up its options to impose further sanctions on Ethiopian individuals and organizations that have contributed to the longevity of the war in the North. The latest of such threats has to do with the potential delisting of Ethiopia from countries with AGOA privilege. The federal government of Ethiopia spent USD 1.5 billion to build 13 industrial parks. Total exports from these industrial parks are valued at USD 730 million. 70 percent of the total exports were, however, made through the AGOA privilege. Therefore, the stakes of a possible delisting are high for Ethiopian industrial parks.

Four years ago, Tewabech Teshome was on the brink of an arranged marriage. Despite being at the tender age of sixteen back then, Tewabech fled to Hawassa from her rural village of Bonsa woreda in Sidama regional state. When her path crossed with The Reporter on October 13, 2021, she was bossing one production line at Epic Apparel Plc inside Hawassa Industrial Park (HIP). She not only managed to increase her net salary to 2,500 birr from a meager 750 birr when she joined the park four years ago, but she also used the time to raise her educational pedigree from eighth grade to completing twelfth grade.  

The high stakes of Ethiopia’s possible delisting from AGOA

 

“The park is more than my home now. I support my younger brothers to go to school. My plan is University education. This park did not just create jobs for innocent women, it harnessed us with dignity,” said a tearful Tewabech.  

Commissioned in 2016 with USD 246 million investment, HIP employs one-fifth of the population of Hawassa city. To be exact, the park employs 35,000 youth, 85 percent of whom are young women. With 52 state-of-the-arts factory sheds and all-in-one regulatory service, the facility is home to 23 garment, apparel and textile manufacturers. Two of these manufacturers are local. Though there are thirteen such industrial parks developed and run by the federal government, seven by private developers, and four agro-industries under regional governments, HIP is considered the beacon of Ethiopia’s baby-steps to transform from agrarian to industrial economy. Leaving aside the two Industrial Parks in Tigray, which were completely looted during the ongoing war in Tigray regional state, the 24 parks directly employ 85,000 work force. Most of these employees migrate from rural areas while others are returnees from the Middle East. Each of these jobs creates 2.5 indirect jobs.

HIP generated USD 144 million last year, which is half of the total foreign currency earned from all parks. Out of the total export by industrial parks (IPs), over 70 percent ended up in the US market under AGOA. Over 96 percent of the products from HIP go to the US market. Big American brands including PVH have special attachment with HIP. In fact, Ethiopia imports much more from the USA. Most of the light industries did not hesitate to relocate their factories mainly from china, India, Singapore, USA and other countries to Ethiopia, after USA introduced AGOA back in 2001 and extended it again in 2015. The objective is to encourage export and growth of Least Developed Countries (LDCs), especially sub-Saharan economies, by exporting duty-free to the US market. The customs tax removal has dropped the prices, making them affordable to US consumers and surging the demand of products from AGOA beneficiary countries. Ethiopia’s industrialization and export policies are also designed to fit into AGOA. Ethiopia hugely invested in industrial parks the last decade, mainly to tap on AGOA. IPDC recently even unveiled fresh IP spatial plans with five logistics parks, five special economic parks, over 25 development IPs and 50 satellite parks.

Epic Group, a Hong Kong based company, is one of those companies that moved to Ethiopia following the lucrative opportunity of AGOA. With sixteen production lines inside HIP, Epic exports 100,000 garment and apparel pieces monthly to Walmart and The Children’s Place (TCP), an international aid organization which runs retail shops in the USA.

Nonetheless, investors in the industrial parks, factory workers and the government of Ethiopia are nerved following rumors that President Biden’s administration is considering delisting Ethiopia from AGOA privilege. Rumor has it the US government will pass the decision by January 2022. The American chamber (AmCham) office in Addis Ababa also expressed its frustration over the possible ban.

A couple of days ago, U.S. global trade representative, Katherine Tai said Washington would “soon” decide on Ethiopia’s status under AGOA. Tai was quoted as saying: “Reports coming back to us through official channels and civil society are not encouraging. What is happening in Ethiopia is a humanitarian crisis.”

Insiders say Biden’s administration is ‘seriously considering’ revoking Ethiopia from AGOA as part of its measure to press on the government of Ethiopia into ending the conflict in Tigray. TPLF lobbying is said to be behind the move; however, the Ethiopian government is said to be trying to counter-lobby.

The terms and exit procedure of banning a country from AGOA has ambiguities since the US President can call it off for various reasons including turning the development opportunity into sanction recipe. Since AGOA is a unilateral agreement offered by the US government, beneficiaries have no power to negotiate. The US President has the mandate and power to evaluate eligible AGOA beneficiaries annually in the first months of the year.

“AGOA benefited US consumers more than exporting countries like Ethiopia. AGOA benefits America, not us. So I feel the US government is not going to touch AGOA. We are confident nothing will happen,” stated Raghavedra Pattar, CEO at Nasa Garment Plc which has 1,400 workers in two factories inside HIP. The company invested USD 7 million. “We export to the US and orders are overwhelming. We have no market problem so far,” he added.

On the other hand, CEO of Epic Group, Waseem Siddirui feels that the threat of delisting Ethiopia from AGOA is eminent and contains tangible danger that might end his business in Ethiopia.

“We were in the middle of expanding our factories here. Now the project has to wait until the fate of AGOA is known. The US market is an irreplaceable market for us. American retailers have strong purchasing power, and stable business continuity. They order in huge volume, they pay on time. Without AGOA, most of the foreign investors in Ethiopia cannot maintain their level of commitment and invest more. It will disrupt the continuity of our business. We might find other markets but no other market can be as big as the American market. If the American retailers lose the AGOA duty free import privilege, they may not continue working with suppliers in Ethiopia. Our products are designed exclusively for the US market and we cannot just shift to other markets. They are not available for open market,” said Waseem.

If the banning decision is eminent, it will have short and long-term impacts on Ethiopia. In immediate impact, the US buyers will lose appetite in Ethiopian goods, since the price hikes as Ethiopian goods enter the US market with taxes. Active contracts might also be in jeopardy. In the long term, Ethiopia might not maintain its track record as top FDI destination in Africa. Even existing foreign factories in Ethiopia might relocate to other LDCs that have the AGOA privilege. In the first place, they came to Ethiopia to exploit AGOA. In fact, the comparatively cheap labor in Ethiopia remains magic card for Ethiopia to capture the global light manufacturing industry relocating mainly from Asia, where high wage is purging them out.

But if AGOA stops, Ethiopia might repurpose its industrial parks from manufacturing exportable items like textile, garment and leather towards import substitution items such as medicine, spare parts and other industrial equipment.

The ban can also further deplete Ethiopia’s coffers to pay external debt. Most of the industrial parks are built with external loans; however, the foreign currency they are generating has not returned the investment so far. Total foreign currency generated from all the 23 IPs to date, stood at USD730 million, far less than the cumulative investment. Efficiency of the industrial parks remains at 60 percent of their capacity and it has been steadily picking up until the AGOA rumor.

“It is better if we are not delisted. If we are banned, we will have to explore other alternatives to diversify market. We might also shift our economic policy from garment, textile and leather manufacturing to other sectors like pharmaceuticals and import substitution items,” stated Dawit Feleke, Investment Promotion advisor at IPDC.

If the ban becomes an active decision, it can be the last sign for Ethiopia to end its economic ties with US, scaling up the political friction. “If we are banned, it does not mean the industry parks close the next morning. We will not go back to zero. We explore other alternatives and exploit our comparative advantages in the international market. We will shift to other markets, and we can also allow the factories to sell the products in the domestic market, which has been prohibited so far. Of course, the ban will be devastating as Ethiopia’s economy is struggling to recover from the COVID-19 blow. Most of the industrial parks, which have been commissioned since 2018, are now entering full capacity operation. We are at a critical moment and we cannot afford to lose it. It will take time to find other markets. We cannot even talk about alternative markets at the moment,” explained Hibret Lemma, general manager of Investors Association at HIP. “Banning AGOA will be devastating for investors in HIP, financially,” she asserted.

For Sandokan Debebe, CEO of IPDC, the probability of being delisted is high but it is completely ill-advised. “Banning Ethiopia from AGOA will not affect the government of Ethiopia. Rather, it will seriously affect the Ethiopian public, especially women. It has social impact, not political. It is 85,000 workers, largely girls, who will lose their jobs. The families they support will bear the brunt as well. The forces in Tigray completely damaged two IPs in the region. Despite all the political and economic danger this force is casting, foreign investors in Ethiopia have been operating with strong commitment because they have trust in Ethiopia’s people. It is the public that protects industrial parks because it is the home of their children. For the US, stopping AGOA is simply walking a contradiction against its own values and a demonstration of its bias that emanates from completely irresponsible, one-sided lobbyists.”

According to Sandokan, the Ministry of Foreign Affairs (MoFA), the Ethiopian Investment Commission (EIC), the Ethiopian embassy in the US and other government institutions are trying to inform the US government of the possible impacts of the delisting on factory workers, especially women. “We are providing the facts and the actual situation. No decision has so far been made on whether Ethiopia will be delisted or left under AGOA. It is wrong to think that stopping AGOA will stop the industrial parks. Such privileges sometimes take political forms and they take economic shape some other time. The US will make the decision based not only on the interests of lobbyists but also its own interest. The US government must understand the bottom-line and make a righteous decision.”

The Investors Association in HIP and other foreign investors in IPs have also joined the effort to persuade President Biden’s administration to reconfigure the facts on the ground. “We pray and hope that Ethiopia remains in AGOA, and all the goodwill efforts we exerted may flourish. We came here for long term visions, to grow with Ethiopia. So it is our wish AGOA remains intact to the end,” hopes Waseem.

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