Officials at Ethiopia Customs Commission have ordered regional authorities to dismantle illegal checkpoints that have been collecting taxes on khat exports.
Addis Ababa’s order for regional officials to dismantle illegal checkpoints collecting “khat taxes” targets a constraint that has strangled khat exports to Somalia for the past four months.
In a circular signed last month, Revenue Commissioner Debele Kabeta instructed all regional administrations and city governments that it is “strictly prohibited” to impose taxes on exportable goods — in this case, khat shipments bound for Somalia and other border economies.
Ethiopia’s khat shipments to its northern neighbor ground to a halt for over four months after regional governments with major khat farming imposed their own tariffs on traders, authorities say. The taxes have choked off the flow of khat — a leaf chewed as a mild stimulant — into Somalia and other border markets.
The illegal checkpoint taxes have cost Ethiopia’s khat growers and exporters dearly, hitting family farm incomes and revenues hard.
The country lost USD 20 million due to the four-month export halt to Mogadishu, Somalia, according to the Ministry of Trade and Regional Integration.
Khat generates USD 392 million annually for Ethiopia, making it the fourth largest export after coffee, gold and flower.
There are 4,991 licensed khat exporters in Ethiopia. Of these, 499 are authorized to export to Somalia, a market directly impacted by the trade halt.
Regional authorities are blamed for illegally taxing khat exports, forcing federal customs officials to order regions in a letter to dismantle illegal tax checkpoints and cease what they called an unlawful practice.
Regions including Harari, Oromia and Somali have begun imposing taxes on khat being exported to neighboring nations since October last year. While consumers in Somaliland and Djibouti were little impacted initially, the rule now applies to all khat exports.
“This is against the law that exportable products are not taxed and has made Ethiopian khat exporters uncompetitive in the market,” said Kassahun Gofe, State Minister of Trade and Regional Integration.
The new tax coincided with Kenya granting khat traders permits to export to Somalia as the two countries rebuild ties following the election of Hassan Sheikh Mohamud as Somalia’s new president.
Kenya has been offering khat at a lower price, making it more competitive as Ethiopia’s lucrative khat trade, earning hundreds of millions annually, is threatened by taxes enacted by the regional states.
“Kenyan exporters have a comparative advantage as they are not taxed,” Kassahun added. Previously, Ethiopia was the only supplier to Somalia but Kenya’s return to the market has shifted dynamics, he said.
However, since Ethiopia also exports khat to Hargeisa and Djibouti in addition to Mogadishu, Somalia, foreign exchange from khat is not said to have completely dried up, according to Kassahun.
Discussions are being held with large khat-growing regions like Oromia, Somali, Harari and Dire Dawa, including the Customs Commission, so overlapping taxes imposed in each region can be lifted, Kassahun said.
Not only khat exporters but also farmers growing the crop have faced huge losses due to the new tax rules which halted exports to Somalia.
Farmers have been forced to sell their harvest into the domestic market at suppressed prices. The illegal checkpoint levies have inflicted losses not just on exporters but also on khat farmers.
Yadata Junedi’s Khat Export Company is one of the exporters hit hard by the tax rule introduced by the regions. The company previously shipped 20,000 to 40,000 kg of khat per day to Mogadishu. However, it hasn’t exported anything for the past four months, according to its owner.
“As a result, the firm has lost out on up to USD 500 in daily revenue,” the owner, Fahmi Abdulmajid, said.
“When we export khat, checkpoints everywhere collect taxes. It’s a chaotic situation. We increased the price of exported khat to compensate for the duty. But Mogadishu does not buy high-priced products,” Fahmi added.
The Ministry of Trade acknowledged the problem.
“It’s true and we are discussing with regions to solve the issue,” said Kassahun.
Prime Minister Abiy Ahmed (PhD) echoed Kassahun’s view during questions from parliamentarians who had raised the issue of why regions are taxing khat exports.