Friday, June 14, 2024
Money TalksPoor export performance aggravates forex stress

Poor export performance aggravates forex stress

Officials’ euphoria over the country’s export performance is starting to wear off. Even Prime Minister Abiy Ahmed (PhD) boasted in Parliament last year about his administration’s export performance, with USD four billion in record-high proceeds generated during the previous fiscal year. No one anticipated a reversal of events this year. Many years of efforts to provide facilities such as Industrial Parks, introducing regulations, and a multitude of other incentives for exporters have not been able to enable them generate the much-needed foreign currency.

Whether or not the export trade improves in the next five months of the fiscal year remains to be seen, but reports from the first seven months indicate that things are looking bleak. Any further drop in the much-needed currency would be detrimental for the economy. Yet throughout the course of the past half year, revenue from exports fell by more than a quarter in comparison to the annual plan and by seven percentage points from the performance of the previous year over the same time period, not good news for the policymakers who are already struggling to finance the import of basic necessities such as medications and service the country’s debt.

The government had planned on bringing in USD 2.7 billion from exports of goods over the last seven months, performance was down USD 700 million from the same period in the previous year, according to data compiled by the Ministry of Trade and Regional Integration. Disaggregated data reveal how each sector underperformed over the reporting period.

The agricultural industry raked in USD 1.5 billion, or 81 percent of the expected revenues, making it the export leader. In comparison to the projected USD 289.3 million, manufacturing only brought in USD 197.5 million. Meat and dairy products have brought in 72 percent of the USD 78.6 million that was expected to come in from exports.

For the past few years, Patrick Heinisch, an economist and expert on capital markets, has been keeping a close eye on the Ethiopian economy. He agrees that the government is making an effort to attract new investors in a bid to boost the manufacturing sector’s contribution to the economy, despite the fact that it is not the country’s primary economic driver.

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For him, the lack of foreign currency by itself had hurt the export of manufactured products.

“Many businesses require urgent supplies that must be imported,” he explained. Heinisch argues that the extended wait time for processing companies’ foreign exchange requests may have discouraged them.

Mining has been the weakest point of export this year, with a 65 percent revenue drop from the projected income of USD 388.6 million. Overall, it brought in just USD 138 million.

Even in the first half of the previous fiscal year, the industry generated close to USD 300 million. Heinisch blames the mining industry’s poor performance for this year’s lackluster export numbers. “Beginning in the year 2020, gold was one of Ethiopia’s most important export commodities,” he stated.

In an interview with Fana Television, the Minister for Planning and Development, Fitsum Assefa (PhD), highlighted why the export sector has been struggling. She listed as the causes the export of contraband, low production of exportable goods, instability, and security concerns in mining areas.

“There is also more to be done in terms of synchronizing export regulations across the federal and regional administrations, as some regions tax Khat but exportable products are tax-free,” she added.

Fitsum also said that a decline in international prices for several agricultural items has contributed to the low exports because the products are valued more in the domestic market than in the foreign market.

The main cause of the decline in gold export trade, according to her, is security concerns in mining areas located in Benshangul, which is home to Ethiopia’s greatest gold reserve area. “Mining gold in such regions is difficult, and even if it could be mined, it would be smuggled out,” she explained.

Reports show that the economy has already begun to feel the effects of export underperformance. That is already reflected in the country’s payment account balance.

A recent macroeconomic handbook for the year 2023 put out by Cepheus Growth Capital, a local equity firm known for its research and analysis on Ethiopia’s economy, suggests that a deficit in the balance of payments, caused in part by a drop in export earnings, is draining the country’s foreign exchange reserves.

The payment imbalance caused a USD two billion shortfall in fiscal year 2021–2022, according to the handbook. “The imbalance was met by drawing USD 1.4 billion in central bank reserves and an additional USD 0.5 billion in commercial bank reserves.”

The National Bank of Ethiopia (NBE) had a USD 1.5 billion foreign currency reserve as of June 2022, the end of the previous fiscal year, while commercial banks had a USD 1.2 billion foreign currency asset. This year has also been difficult for the government in terms of boosting its foreign currency reserves.

Cepheus’ guidebook asserts that the balance of payments has been squeezed again after analyzing currency outflows versus inflows over the first six months of the current fiscal year.

“We think the reserves have fallen slightly over the last six months and are expected to be in the range of USD 1.2 billion to USD 1.5 billion,” it said.

Heinisch believes that even though the current state of the world economy makes the work of government officials tougher, import expenses will likely be lower than they were the year before because commodity prices on a global level are falling. He expects the deficit to be reduced as a result, but it will still be considerable.

In terms of what the government should do to reverse the situation, Heinisch emphasizes seeking assistance through grants and International Monetary Fund (IMF) programs to increase foreign exchange and relax existing restrictions.

“This would assist industries such as manufacturing to obtain imported items, which are then needed for exports,” he said. He also suggests conducting a thorough analysis to identify and eliminate impediments in export sectors such as gold.

Getachew Asfaw, a seasoned economist who formerly served at the Ministry of Finance and the former Planning and Development Commission, continues to be highly critical of the priorities set by government officials. He says that the macroeconomic committee and sectoral leaders are not paying enough attention to the country’s economic crisis.

“The government appears to be preoccupied with counting parks and discussing microeconomic matters. I don’t think anyone is paying attention, not even the macro committee,” he said.

Apart from focusing on commodities that contribute to exports, Getachew advocates focusing on the service sector, which he says is the biggest source of foreign currency.

“We appear to be doing better in aviation, but we need to focus more on tourism given the greater benefit it offers in terms of generating net foreign exchange,” he said.

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