Friday, August 19, 2022
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    Interview“We can no more rely on import with global situation getting unpredictable.”

    “We can no more rely on import with global situation getting unpredictable.”

    Date:

    Melaku Alebel is one of the prominent figures in PM Abiy’s administration. Rising from the ranks of the Amhara Prosperity Party, Melaku was in charge of the Ministry of Trade and Industry before the office split in two upon the formation of the new cabinet in September 2021 when he took charge of the Ministry of Industry. Now, Melaku is faced with the daunting task of transforming the manufacturing sector, which remains the soft underbelly of Ethiopia’s economy.

    In his previous post, Melaku proved himself to be an active and zealous leader. Yet, he failed to bridge a historic gap in the country’s demand-supply, and put the reins on the ever-rising inflation. To meet these challenges, Melaku has set himself the task of revising the country’s industrial policy, in place for the past twenty years. He also launched a campaign dubbed, “Let Ethiopia produce.” Deputy Editor-in-Chief of The Reporter, Ashenafi Endale, sat down with the Minister. Excerpts:

    The Reporter: You are launching a new campaign, dubbed “Let Ethiopia produce.” What are the major objectives? Is it a campaign or a policy? Manufacturing is a long-term goal, usually. Do you think the campaign can last long, with its initial momentum?

    Melaku Alebel: The target of this holistic campaign is to solve all problems the manufacturing industries are facing. Apart from making existing industries to utilize their full production capacity, the campaign also aims at attracting new investments into the manufacturing industry.

    This campaign will last for the next ten to fifteen years.

    The campaign will take place in all administrative areas where there are manufacturing industries. In these areas so far, we have identified challenges manufacturing industries are facing. We also found out that 446 manufacturing industries have stopped operation due to different problems. We enabled some 118 entities to get back into operation.

    A society cannot remain viable if it cannot produce. Human history has passed the Stone Age, agricultural and industrial revolution civilization stages. Now we are in digital civilization stage. In all these, society’s production styles and volume has been changing.

    If we have to control inflation, create new jobs and income, and create strong economy, we must increase productivity.

    Is there policy change tailored to the campaign?

    We have prepared a detailed document for the campaign. Policy reforms are also undertaken.

     For instance, we have finalized revision of Ethiopia’s industrial policy, which has been in place for the past 20 years. Stakeholders’discussion is already underway. Investment policy and regulations are also amended and will be introduced in the next few weeks. A new strategy dubbed ‘Linkage Strategy’ is also being finalized. This will help linking industries horizontally and vertically, backward and forward.

    One of the reasons our industrial parks failed is because they lack forward and backward linkage. They exist isolated as islands, using imported inputs. The agroindustry parks which stared operation just last year, have good linkage with farmers. For instance, two avocado processing factories in Yirgalem, one local and another FDI, created linkage with 135,000 farmers already. This in turn is initiating use of new farming technologies and commercial farming.

    The document on industry linkage also states how the financial industry and other stakeholders contribute. This campaign is not made for just propaganda consumption. It is backed with policy changes and will continue for times to come.

    Ethiopia implemented export-led industrialization for the past two decades. Does the new policy focus on import substitution or similar goals?

    We now understand how critical import substitution is. The new policy has captured it very well. For instance in the past, we assumed we can generate much from textile and apparel industries, because we assumed we had comparative advantage and also targeted to hire more people.

    In the past five years, we imported textile products worth 5.4 billion dollars, excluding over-invoicing and under-invoicing. To the contrary, we exported only 1.14 billion dollars. This is a 4-billion dollar difference. We failed in other sectors too. With its 120 million people, Ethiopia is a huge market.

    So we must focus on import substitution now. We already started by locally manufacturing uniforms for law-enforcement officers. Next, we will embark on import substitution of furniture. We have already studied and proved there are sufficient industries to completely substitute import of furniture products. Then we will move to export.

    Recently, the government stated retail market will be opened to foreigners, to increase supply and solve the inflation problem. Does not this contradict with the new industrial policy that focuses on import substitution? Do not you think local industries need a degree of protection?

    The new industrial policy and incentive regulation has captured this. For items locally produced, we discourage import by raising tax and vice versa. So we will protect local manufacturing industries using tax and incentive tools. The policy is not blanket. We identified which items should be discouraged for importers.

    What are the major targets of the new industrial policy?

    We will introduce it to the public very soon.

    Industrial parks were built with AGOA in mind. Now Ethiopia has lost AGOA benefits. Do you think the industrial parks policy is successful given it relied on AGOA? Will the  government develop new industrial parks in the future?

    The industrial parks policy was successful in creating new jobs and in encouraging technology transfer. Many Ethiopians formerly employed in foreign companies that set up shop inside industrial parks are now establishing their own small industries after acquiring the necessary skills.

    Whether the government will build new industrial parks in the future, will be decided based on studies. We will conduct studies on the strength and shortcomings of the industrial parks built before. AGOA is not a major headache for us now.

    Are you planning to re-purpose industrial parks initially built for garment, textile, apparel and leather as agro-processing plants?

    It is not a shifting but we are doing it side by side. Though they started late, agro-indusial parks are very successful. So we will direct more investors towards agro-industry now. Big investors can develop their own agro-industrial parks.

    Prices of imported industrial inputs are rising since the government embarked on a continuous devaluation of the birr three years ago. Industries need more birr now than ever to import the same raw material. What kind of remedy do you plan regarding the impact of the ongoing devaluation?

    All the way to now, it is the end consumer that has borne the brunt of inflation. The end consumer is also affected not only by the high production cost of local industries, but also the inefficiency of local industries.

    With the existing inefficiency, domestic industries cannot compete with Malaysian or Vietnamese industries which are utilizing over 80 percent of their installed capacity. So their production cost is very low. To the contrary, production cost of our domestic industries is very high. They utilize a fraction of their installed capacity. They produce less but they sell at a higher price. So the consumer has been affected by the inefficiency of local industries.

    Foreign products are cheaper but there is a dearth of foreign currency to import these. The alternative is buying local products whose production cost is high.

    What are the new packages included in the new incentive regulation? Almost every kind of incentive is tried in the past but manufacturing could not take off. What are you trying this time?

     The new regulation on investment incentives will be introduced in the next couple of weeks. There are plenty of new packages.

    One of the challenges SMEs have been facing is lack of financing, which resulted in the ‘missing links’. Is there a plan to establish a SMEs bank or force conventional banks to allocate certain portion of credit for SMEs?

    One of the recommendations stated in our new industrial policy is establishment of a bank that will serve exclusively manufacturing industries. Next step is deciding on how it will be established. Will the new bank serve micro, small, medium or large industries? The nature of the manufacturing industries will determine the operation of the bank.

    Manufacturing proved to be the most difficult investment in Ethiopia and this trend has only worsened since the advent of Covid 19, war in northern Ethiopia and now global value chain fluctuation due to the war in Ukraine. What is the status of manufacturing industry in Ethiopia currently?

    The status of manufacturing industries in Ethiopia is not in good situation. Most of them have been utilizing a very insignificant portion of their installed capacity. The average capacity utilization in the industry is 50 percent, in some sectors it is down to 10 percent. Lack of input, finance, infrastructure, skilled manpower, government service and support are the underlying factors. Many industries are already closed. The government could not identify the problems and act on time.

    “Let Ethiopia produce” is necessitated because the Ministry of Industry cannot solve these problems alone. All stakeholders must cooperate.

    Ethiopia has already planned to create 5 million manufacturing jobs in the next ten years i. Export revenue from manufacturing industry is also planned to be 9 billion dollars by 2030 (2022 E.C.) per year. So far, average annual revenue from export of manufacturing industry stood at 400 million dollars. Capacity utilization is set to increase from 50 percent to 85 percent. Share of manufacturing in GDP is planned to increase from 6.9 percent currently to 17.2 percent.  Share of local manufacturing industry products in Ethiopia’s market stood at only 30 percent. We plan to double this to 60 percent.

    Structural transformation and attaining the target of becoming Africa’s manufacturing hub by 2025 failed before. What is the new approach?

    If we do not solve the problems manufacturing industries are facing, the fate of the Ten Years Perspective Plan (TYPP) will be similar to GTPI and GTPII. The GTP editions targeted to make Ethiopia a light manufacturing hub of Africa by 2025. But it failed. Share of manufacturing in GDP remained at around six percent for over a decade now.

    In a bid to achieve structural transformation in the economy, a national campaign is a must. We have drawn lessons from countries who succeeded in such campaigns, including Vietnam, Malaysia, Singapore. We also drew lessons from countries who failed in such national campaigns, including Botswana. Those countries with strong leadership, institutional collaboration, and efficient institutional reform succeeded. Countries lacking these failed in structural transformation after going through such campaigns.

    Non-governmental development partners like GIZ, JICA, UNIDO and others have already promised to finance the campaign.

    Agriculture, logistics, education system and all other sectors must be productive if the manufacturing sector is to be productive. Ethiopia’s strength will be determined by its productivity. Creating jobs for youth and fulfilling basic necessities will also bridge our political and religious differences.

    One of the major obstacles in the past was access to land.  Land is in the hands of regional states who usually do not comply with the federal government’s investment targets. How could this be solved?

    I believe we have reached good consensus with the lower administrative structures in regional states. For instance, 1,458 projects waiting for land for a long time are now granted land and are now starting their projects. On the other hand, we revoked rights to land from245 investors who took a long time before embarking on a project. This is just a tip of the iceberg. Solving finance, input, infrastructure, power, skill, market and support problems will be decisive. Industries need continuous supports tailored to their growth momentum. If you solve their problem today, they will need more expansion support tomorrow. Some industries need visa processing to market their products abroad.

    Ethiopia has much potential but not using it in full. For instance, last year leather producers asked us for space to sell products inside Bole Airport, targeting foreign travelers. The former CEO, Ato Tewolde, provided 300 sq. meters to eight leather companies. They recently started operations, selling their wares in dollars, duty free. The transaction volume per day is unbelievable.

    The demand-supply gap in Ethiopia cannot be bridged, if we cannot produce. Tax collection also cannot improve, unless we create more investments and more jobs.

    The price of major import commodities is surging substantially due to the war in Ukraine. what is the impact on local industries? Are there opportunities you see in the Ukraine war?

    Global supply chain is completely disturbed due to the war. Ukraine and Russia are leading producers of edible oil, fertilizers, wheat, fuel, metal and other basic commodities. Import price of these products is rising. Production cost is increasing for Ethiopian industries, as a result. Import price in Ethiopia is increasing at its highest  for the past 50 years. If our industries could manage to utilize their full capacity, we can free ourselves from such external pressures. Even for the future, we can no more rely on import, since the global situation is getting unpredictable.

    For instance during Covid 19, we managed to cut import because some of our industries shifted to manufacturing face masks and sanitizer.

    After AGOA privilege is suspended, our focus shifted from textile and apparel to food and beverages. So we are managing to avert the catastrophe our industries could face due to the loss of AGOA privileges.

    Unless Ethiopia becomes self-sufficient in all kinds of production, the future of world stability is unpredictable. Usually, it is economic frictions that lead to global wars. Now the world is on the verge of using deadly weapons. We cannot predict the global future as of now. So we must start producing everything locally. That is why this campaign must succeed. We can no more rely on anything that is imported.

    What are the major issues crippling local industries?

    Shortage of foreign currency, lack of inputs, finance, power, skill, market, land, incentives, and many other factors are contributing. Domination of import and contraband are also problems.

    For instance, there are meat processing industries with capacity to export 200,000 ton of meat. But they are utilizing only 10 percent of this capacity due to lack of livestock supply. Edible oil factories are also utilizing a fraction of their capacity due to lack of local oilseed supply.

    Can the shortage of foreign currency be solved in the short run?

    As of now, we have much demand to import with little foreign currency. Basically, foreign currency is a product of what we produce and export. Unless we produce more and export it, we cannot generate more foreign currency. Foreign aid, external debt and grants will not solve our raw material problem. To have foreign currency, we must produce more than what we consume. A country that cannot produce more than what it consumes, cannot import technology, knowledge and compete globally.

    Wealth accumulation is also difficult without production. Currently, we are rationing every basic commodity. We cannot last long with rationing. We must produce more.

    This is why we are rolling out a new holistic campaign for all sectors, including manufacturing and agriculture. It is about making the whole economy efficient.

    Recently MOHA, which produces Mirinda, Sprite and Pepsi stopped production. Close to twenty water bottlers also stopped due to lack of foreign currency to import raw materials. Is it not better to return such industries back to operation first, before starting a new campaign?

    This is also part of the campaign. We will support all industries that stopped due to lack of input and other government supports. But sometimes, some industries cease operations because they cannot compete anymore. For example, Iif an industry using new technology produces 100 pieces per hour; an existing one that produces only 10 pieces per hour closes down. This is natural.

    We need new investments if we have to accommodate the thousands of fresh graduates coming out of higher education institutions. Service and agriculture sectors have been carrying much burden. Manufacturing sector also needs to share the burden.

    In the past, the government has been focusing on foreign investors. Who is the priority of the new industrial policy, domestic investors, FDI, SMEs, JVs?

    Both local and foreign investors are necessary. In some sectors, foreign currency and technology are critical, which local investors usually lack. Foreign investors can bring foreign currency and technology. So they can bridge the gap. We cannot achieve growth only with local capital. This is what other countries’ experience was, and Ethiopia is no exception.

    China was never the same before and after it opened up in 1979.

    So to bring foreign capital we must improve the ease of doing business. We compete with Rwanda, Kenya, South Africa, Malaysia and other economies. FDI is irreplaceable in the short run.

    However, we cannot develop industrial parks and provide for all foreign investors to come, plug and play. We provide land and they can develop the rest. In the past, we focused on garment and textile. We provided industrial parks so they can export immediately. But now, we need big foreign industries who can produce locally and sell in the domestic market. Such industries might not need industrial parks. Metal and fertilizer producers might not need industrial parks.

    We do not believe the government should waste its resources on industrial parks any more. If we can provide basic infrastructure, foreign investors can build their own industrial parks.

    If we are to realize social transformation, we must identify which farmers and traders must shift from agriculture and service to industry. Capital must shift from service and agriculture to manufacturing.

    New arrangement is also made under the new ‘linkage strategy’. SMEs will be subcontracted under big supply transaction contracts. SMEs provide components and semi-finalized products. Then large industries will make the final products.

    Existing industries must upscale themselves and transform to the next stage. New investors must join from agriculture, service, construction, mining and other sectors. We also need more FDI.

    Ethiopia is preparing to operationalize African Continental Free Trade Agreement (AfCFTA). How will it affect the new import substitution policy?

    If we can produce more, we can benefit much from AfCFTA as well as WTO and other regional economic blocks. If other African countries produce more than Ethiopia, we will lag behind and cannot benefit. This is why this campaign must succeed.

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