Tamiru Tadesse, an electrical engineer and a former university lecturer, decided to join the export business just two years ago, beginning with small shipments of coffee to newly emerging markets in china.
Though the demand for Ethiopian products has been encouraging for his business, Tamiru says he could not fulfill the full potential of his business as much as he should. These challenges could be categorized into three. The first is the proliferation of exporters, which created a supply scarcity in the domestic market.
The number of export licenses issued and renewed has dramatically jumped to 16,000 in the 2020/21 fiscal year, just from 6,000 in 2019/20 and 2,000 in 2016/17, according to data from the Ministry of Trade and Regional Integration (MoTRI).
However, the export revenue of the country could not exceed USD three billion on average over the past decade. In the past nine months, the export sector generated just USD two billion, up from the USD 1.7 billion registered last year in the same period. Only coffee has performed this year, jumping from the USD 406 million registered in last year’s nine month period to USD 746 million in this year.
Tamiru attributes the surge in coffee export revenue to international price escalations.
“Of course, there is encouragement amongst Ethiopian coffee exporters, as the price of coffee improves. Growers are now motivated to plant new coffee trees. However, there is no increment in coffee volume in the domestic market so far,” said Tamiru.
Yirga Tesfaye, general manager of Will Consult, who presented “Problems and key issues of shortage of forex and its impact on businesses,” on June 9, 2022, in collaboration with the Addis Ababa Chamber of Commerce and Sectoral Association (AACCSA), underlined that the forex demand, supply and management has been faltering for long.
The study underlined that the number of export licenses in Ethiopia has dramatically increased, because becoming an exporter is the only way to access foreign currency and use it for import businesses. The black market and diaspora accounts are also other alternatives businesses use to ease the chronic forex shortages, according to Yirga.
“Previously, only businesses who have adequate capital take an export license. But since recently, many people are taking the license whether they are real exporters or not. The majority of them export 20 kg to 100 kg of goods, usually household items including Enjera, and chilli, for Ethiopian diaspora living abroad,” said Tamiru.
Tamiru stated that the shortage of exportable commodities is becoming chronic in the domestic market, as too much exporters are praying on limited commodity sources. For instance, there are close to 1,600 exporters in the coffee sector alone.
The second big challenge exporter’s face is the tight forex regime recently introduced by the National Bank of Ethiopia (NBE). Months back, the NBE ordered exporters to surrender 70 percent of the forex they generate to the government and 10 percent to commercial banks. This leaves exporters only with 20 percent of the forex they generate.
The majority of the forex is being used to cover import bills of capital goods mainly for government projects. On the other hand, industries and businesses that need imported industrial inputs remain idle for long period now. Agriculture, which generates the majority of the country’s forex, is getting less than two percent of the forex allocation.
“The 70 percent surrender is highly devastating and discouraging for exporters. The only incentive of being an exporter is the privilege to get the forex for an import business,” said Tamiru.
The chamber’s study also showed that Ethiopia’s import bill is slightly dropping over the last few years, as the private sector’s access to foreign currency drops. Ethiopia’s official import bill reached a record high USD 16.5 billion in 2015/16 to USD 14 billion in 2020/21, according to the study.
“Currently, there are piles of LC backlogs at commercial banks,” said Yirga.
Importers have to wait for more than a year to get a Letter of Credit approval from the NBE, according to the chamber’s study. As a result, many importers are shifting towards the black market to source foreign currency.
“The NBE approves a very small amount of forex for importers, usually covering around 70 percent of the price of the import bill. The importer’s, who can afford the black market price, fill the gap from this market. Then, the shipment is imported with under invoiced documents, just to fit NBE’s LC document,” Yirga said.
“The Customs Commission has the exact price data of the imported items and charges import duty with the right price. So the NBE and the Commission are implementing completely different laws. Under-invoicing is illegal by NBE laws but the Commission is accepting it,” added Yirga.
The other hurdle Ethiopian exporter’s face is new requirements particularly from China. Since January 2022, Chinese Customs Authority introduced stringent requirements, especially for agricultural commodity exporters, including owning a processing plant and a documented product traceability, which only 10 percent of Ethiopian exporters managed to meet.
“The Chinese requirements have already caused a big damage to us. Our shipments are already returning from Chinese ports,” said Tamiru.
Mesenbet shenkute, president of AACCSA, stated that Ethiopia’s forex demand and supply imbalance has become a headache for the private sector as well as the national economy.
“Various measurements, including devaluation of birr, could not improve exports,” said Mesenbet.
Experts stress there is no magic bullet for Ethiopia’s forex crunch, but rather a holistic approach of solving structural problems in the national economy. This includes recommendations ranging from changing the forex regime into float, to elevating the supply side of the economy.
“The exchange regime must shift to float at least in five years, from the current crawling pegged regime. But before floating, government must raise the forex reserve. It must also reduce the 70 percent forex surrendering, in a bid to encourage exporters,” said Yirga.
“The government must reprioritize the forex allocation, raising the level of forex flow to manufacturing and agriculture. Most importantly, it must raise productivity and supply of exportable commodities. Otherwise, the dramatically increasing number of exporters will further inflate price of export commodities in the domestic market,” added Yirga.
Alemayehu Geda (PhD), professor of economics at Addis Ababa University and who conducted various researches on the topic, underlined floating while the reserve is low, will result in catastrophe.
“But the government must float the remittance segment at least now. Remittance is completely feeding the black market. If floated, it can come through the official channel,” said Alemayehu.
But regarding the government’s devaluation policy, Alemayehu stated it must be reversed. “The devaluation of birr neither encourages export nor discourages imports. So the value of birr must be returned to where it was three years ago.”