Saturday, June 22, 2024
Money TalksNo Project Finance! Loan Freezing Leaves Manufacturers in Cold

No Project Finance! Loan Freezing Leaves Manufacturers in Cold

Import is where the interest of most Ethiopian businesses lies. That may seem reasonable. Operating in a country where everything – from fruits to capital goods – is imported, it is profitable to wait months and bring something from abroad to make a lot of money in a brief period of time. But the opposite is true for businesses involved in the manufacturing sector, which require a great deal of patience to breakeven, let alone declare a positive profit and achieve sound financial standing.

A long-term investment means months or maybe years of wait to make profit should anyone choose the path of being involved in the manufacturing sector. Knowledgeable about the nature of the business, the owners of Dagem Kennedy (DK) general trading chose that path when they decided to set up a manufacturing plant that produces metal and engineering products including transformer parts. The road was bumpy.

The owners had to raise over 180 million Birr to set up a manufacturing plant that produces different types of transformers on a 10,000sqm of land at Chercher – 110km away from the capital. It was not an easy decision. The task at hand was like moving a mountain. Facing myriads of challenges – from shortage of forex and a daily increase in the price of construction materials – the owners and managers of Dagem Kennedy had to spend a lot of sleepless nights to make their new project a reality. They were supposed to knock on the doors of banks to secure loan, not to mention the usual bureaucratic hurdles that everyone had to pass through when starting a new business initiative. 

Yet things went smoothly for years. None of the challenges match what the owners experienced due to the loan freezing placed three months ago. The company’s management described it as backbreaking. “Over 70 million Birr of secured finance remains undisbursed after the central bank ordered the suspension of loan. The money would have enabled us complete our project and begin production by now,” said Tewodros Woldegebriel, General Manager of Dagem Kennedy.

Though his company has already completed 88 percent of the plant that manufactures transformers, it is likely to suspend construction due to shortage of finance, precipitated by the loan freezing.  “Unless we are given priority, we would be forced to let go of daily labourers as we don’t have enough money to cover their salaries,” the General Manager added.

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The managers of Dagem Kennedy are not the only ones to feel the pinch of the loan freezing. Though it was felt across all segments of the economy soon after being implemented during August 2021, it has severely impacted players in the manufacturing sector, putting their liquidity and day-to-day operations under pressure.

Of course running a manufacturing plant without financial support, in the form of loans, from banks might be an impossible feat in any part of the world; but its importance is undeniably high in countries like Ethiopia where access to finance is limited and businesses have limited option to raise finance from non-banking sources, including equity and securities. Add this to the ongoing political and economic situation in the country, not to mention the troubles caused by global problems including the shipping crisis felt across the world, and you have the perfect recipe for disaster in the sector.

The war in the north led to a surge in sales expenses of manufacturers by increasing the cost of sourcing inputs and distribution expenses. The inflationary pressure boosted up their financial needs, particularly, for those undertaking expansion projects as cost of construction is soaring because of a surge in the price of building materials. And for those with a schedule to launch a new project, postponing seems to be the road ahead.   

“Though it did not impact my export business as I secured loan before the suspension, I had no choice but to postpone my expansion projects because of lack of finance,” said Eyuel Yohannes, General Manager of Gentiyem Trading, an exporting firm with plans to venture into manufacturing.

So if the loan suspension is causing significant damage to a sector that contributes seven percent to the economy and one that has been growing by 12 percent over the last five years, why was the suspension put in place? 

The officials have their own justifications.

Placed soon after the gap between the parallel and the official exchange markets reached a historic-high rate of 50 percent, the authorities have had a strong belief that the suspension would freeze actors that try to “sabotage the economy.” They are referring to actors allegedly trying to cause inflationary pressure by creating an artificial shortage or building an impression that there is a critical shortage of food and non-food supplies. The strategist behind major economic measures implemented under the administration of Abiy Ahmed (PhD), the State Minister of Finance, Eyob Tekalign (PhD) concurred with this sentiment from the get go, though he admitted the loan freezing is an easy pill to swallow.

“Obviously, there would be a trade-off; but it is acceptable as its repercussions won’t be as severe as the economic sabotage masterminded by some groups,” said the state minister, in a press briefing held at the Prime Minister’s Office almost a month after the government placed the freezing.

Many have no choice but to accept the new normal in the economy. However, luck was with some businesses that were able to win the hearts of the officials at the central bank and get preferential treatment.

Importers whose LC was green lighted by banks were the first to be exempted from the loan freezing based on an understanding that their inability to bring goods from abroad would worsen the inflationary pressure. They were soon joined by exporters of coffee and producers of edible oil, but for a different reason. The move was on the one hand meant to save foreign currency and on the other, boost export proceeds secured from the green gold. Even more exemptions followed thereafter.

Bank employees with pending housing loan applications were granted the right to access credit while similar privileges were given to buyers of foreclosed properties, businesses willing to buyout loans, staff members seeking emergency loans and lately for oil suppliers and khat exporters.

Among all exemptions made by authorities, the most surprising was the priority given for producers of sesame in Humera. Some may find it a paradox as a significant size of the farmers in the area and over half a million hectares of Sesame farms have been uncultivated due to the war in the north.

It is also right to ask why the hearts of officials at the central bank and policymakers known for following carrot & stick policy approach wanted to ignore the plea of manufacturers that have created over 1.2 million paid jobs across the country with potentials to double the figure in less than half a decade, if conducive business climate flourishes. “I would have created jobs for unemployed engineers and many other skilled and unskilled employees, had I the chance to access the loan,” said the General Manager of Dagem Kennedy.

Pundits are also concerned too. One of them is Shewaminale Mekonnen, a certified accountant with over 15 years of experience in the financial sector. He sees no benefit out of keeping the suspension longer as its repercussion is already causing more harm than good, especially for manufacturers, which are dependent on bank loans for working capital and to cover operating expenses.

“In a country where financing is about securing bank loans, the suspension is not helping to curb the inflationary pressure as the government hoped,” said the financial expert who believes the loan suspension is increasing cost of finance, thereby production expenses, further fueling the inflationary pressure.

Yet his warning seems to be an acceptable trade-off, at least in the eyes of Teferi Mekonnen, the President of Oromia International Bank. “We have to see the bigger picture and what would have occurred to the country if it was not suspended,” said the bank President, despite leading a bank with a track record of disbursing two billion Birr loans annually for industries and making an interest income of over 311 million Birr from the same sector in 2019/20 alone. Though such a sentiment may leave officials supporting the freezing upbeat, the opposite might be true for the management of Dagem Kennedy. “It must be lifted without any precondition, at least for genuine businesses, which can be identified easily,” Tewodros concluded. 

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