Wednesday, February 21, 2024
In DepthManufacturing powerhouse: feasible or fantasy?

Manufacturing powerhouse: feasible or fantasy?

Two weeks ago, the head of the state-owned Ethiopian Sugar Industry Group told Parliament that sugar factories in different parts of the country require military protection. The Ethiopian National Defense Force has reportedly deployed a military division to the Fincha Sugar Factory, on top of the Federal Police forces already guarding the sugar estate.

CEO Weyo Roba informed MPs that machinery spare parts cannot be delivered to sugar factories like Fincha, while factory products are unable to be transported out without the protection of a military convoy.

The Group’s Metehara sugar plant, located only 200 kilometers from the capital, also faces similar security threats, disclosed Weyo.

Armed conflicts in more than one regional state have forced the Ministry of Finance to delay the privatization of eight sugar estates on several occasions, as safety risks prevented potential bidders from visiting the sites they were supposed to be bidding on.

The country’s protracted conflicts are affecting not only state-owned enterprises like the Fincha and Metehara sugar plants, but private industries as well.

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Herve Milhade, CEO of BGI Ethiopia, echoed similar concerns during a press conference on December 19, 2023, at Sheraton Addis.

The CEO, who recently took over the helm at one of the country’s oldest and largest brewers, mentioned that BGI’s Raya brewery, located in Maichew, has halted production since the two-year northern war broke out in November 2020.

Milhade considers BGI Ethiopia lucky, as the brewery’s security personnel and locals protected the plant during the fighting while many other investments in the area had fallen victim to the conflict.

Milhade says the forex shortage is the other big issue facing BGI.

“We’ve never paid dividends because it is difficult to repatriate capital in foreign currency,” he said. “Accessing forex to import inputs and equipment has become very difficult.”

Several manufacturing industries have been affected by the conflicts in Tigray, Oromia, Amhara and other parts of the country. While the nation still has to bear the brunt of rebuilding the damaged factories, the long-lasting impact of the conflicts in scaring away new investment inflows, persists.

The security challenges, coupled with a lack of access to inputs and finance, as well as the influence of cheap imported products, are casting a dark shadow on the nation’s aspirations to become a light manufacturing hub in Africa.

The Ethiopian government, and development partners like the UNDP, are also worried about the setbacks in Ethiopia’s long-standing efforts for structural transformation in the economy.

On December 8, 2023, Ethiopian and UNDP officials convened at the Hyatt Regency to address a familiar question under the theme “Can Ethiopia Become a Manufacturing Powerhouse?”

The security problems and the forex shortages facing BGI and the Sugar Industry Group were only two of a list of the obstacles in the shift to manufacturing. Access to land, high taxation, corruption, macro policy, exchange rate difficulties, lack of a unified market, lack of access to inputs, the AGOA suspension, high interest rates, logistics hurdles, high electricity tariffs, and challenges in governance are some of the other items on the list featured in a UNDP report.

Growing corruption in the judiciary and law enforcement, and among state auditors, is also a bottleneck hindering industrial policy implementation in Ethiopia, according to the report.

The problems have forced several (if not most) factories to either halt operations or substantially cut production. Others are resorting to different means in a bid to stay afloat.

Companies like Moha Soft Drinks Industry S.C. and BGI Ethiopia have employed distinct strategies.

Moha Soft Drinks, a PepsiCo bottler facing a foreign currency shortage, has temporarily ceased operations, resulting in the layoff of an estimated 8,000 employees. The bottler has an annual foreign currency requirement of USD 38 million for essential Pepsi concentrate imports, which it is unable to meet.

Tarekegn Bululta, a state minister of Industry, led the conference at Hyatt Regency.

He stressed that manufacturing remains the top priority of the Ethiopian government, despite the challenges. Tarekegn claims the federal government has introduced conducive economic and governance policies to meet its targets, and pointed to the 6.5 percent average annual economic growth recorded over the last three years.

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“Industrial development is central to Ethiopia’s development policy,” said Tarekegn.

Charu Bist, a UNDP deputy resident representative, acknowledged Ethiopia’s two-decade focus on manufacturing and the implementation of its industrial parks strategy, the benefits of which are supposed to include supporting local SMEs and strengthening export and import substitution.

Bist is hopeful Ethiopia can meet its potential to export goods worth USD 10 billion by 2030.

“The manufacturing sector is intricately tied to a country’s dedication to fulfilling the diverse Sustainable Development Goals,” said the UNDP representative.

Nevertheless, the manufacturing sector’s contribution to GDP has declined from 5.9 percent in 2019 to 4.4 percent in 2022, partly due to domestic and external shocks, leading to the closure of no less than 446 firms in 2022.

The conditions are forcing investors to leave industrial parks, according to the UNDPs working paper.

It also stressed that despite policy interventions, there is limited product diversification, and 50 percent of production focuses on food, beverages, non-metallic minerals, and textiles. The economic policy framework favors importers and traders, resulting in a USD 14 billion import-export gap in 2022 and USD 13.5 billion in 2023. Light manufacturing primarily serves domestic markets, with insufficient progress in exports and job creation, according to the paper.

Tilahun Abay, executive director of strategic affairs at the Ministry of Industry, anticipates an enhanced influx of Foreign Direct Investment (FDI) into Ethiopia despite the multifaceted challenges faced by the sector.

This optimism is grounded in ongoing infrastructural investments and a recognition that the existing challenges are temporary in nature, according to Tilahun.

He believes the implementation of diverse strategies and policy changes, including those designed to bolster local manufacturers’ export capabilities, will help ease the foreign currency shortages.

Tilahun is partly referring to changes in the central bank’s forex retention policy. Manufacturers are now able to retain 40 percent of the forex they generate, double the previous rate. The remainder will be retained by the commercial bank that issued the LC, and the National Bank of Ethiopia (NBE).

“Previously, exporters objected that the central bank’s regulations did not prioritize the manufacturing sector. This is considered a positive step forward,” Tilahun told The Reporter.

The UNDP also reports a rise in FDI in Ethiopia, despite the shocks. The 2023 UNCTAD World Investment Report reveals a surge in FDI inflows, reaching USD 4.2 billion in 2021, up from USD 2.4 billion the previous year.

The overall FDI stock now stands at USD 31.6 billion, equivalent to approximately 31.8 percent of the country’s GDP.

Still, the country’s forex problems are exacerbated by global factors such as the impact of COVID-19, the conflict in Ukraine, and the ongoing military operations in Israel and Palestine, all of which directly or indirectly influence the Ethiopian economy.

Tilahun underscores a pressing need for an enhanced operational strategy to facilitate producers’ access to vital inputs using the foreign currency they generate. As it stands, the manufacturing sector only receives 12 percent of the total credit available.

However, recent reforms within the government’s medium-term development plan have resulted in a substantial increase in credit allocated to the private sector.

“Thanks to these initiatives, the private sector’s contribution to the manufacturing sector has doubled, rising from 12 percent to 24 percent in the current year,” said Tilahun.

Nonetheless, the currency crunch in Ethiopia has adversely impacted manufacturing industries, causing numerous factories to halt production. According to the latest UN report, this scarcity has led to the shutdown of 51 major factories this year, accompanied by a business exodus and the dispersal of workers.

According to Tilahun, “Ethiopia Tamrit” has received significant attention from the government, indicating its commitment to revitalizing the stagnant manufacturing sector. The movement has the potential to bring about substantial structural changes.

He says a systematic and organized approach is being adopted, with a focus on leading the institutional transformation. Six distinct clusters have been established, including one dedicated to addressing financial provisions, disclosed Tilahun. 

“Efforts are underway to address fundamental developmental issues and ensure a stable supply of resources. Overcoming challenges related to power supply is just one aspect, as building capacity in various areas is equally vital,” he said.

He recognizes the importance of harnessing mineral and raw material resources to create job opportunities and facilitate development.

The UNDP’s working paper proposes that Ethiopia should enhance its macroeconomic stability, strengthen security measures, ensure policy coherence, and refine sector-specific strategies to boost the manufacturing sector. Underscoring the crucial role of revitalizing public-private dialogue, this approach aims to stimulate economic growth, foster development, drive structural change, and create high-quality employment opportunities.

Tilahun also highlights the need for Ethiopia to address security concerns to enhance productivity in manufacturing industries. Progress is underway to address these issues, including the establishment of a new platform and the implementation of a cluster structure designed to tackle critical security problems.

“Peace and security are paramount issues requiring attention, and the new structural adjustment is expected to bring positive changes to the sector,” said Tilahun.

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Video from Enat Bank Youtube Channel.

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