Thursday, January 19, 2023

Ramping up government support for the industry sector

The policy decision of the Government of Ethiopia to effect a structural change in the economy whereby it un overgoes a transition from being agriculture-led to industry-led is now taking shape after fifteen years of ups and downs. In this regard Ethiopia has managed to attract foreign direct investment with major international players in the textile, leather, cement, pharmaceutical and other sectors establishing their presence in various parts of the country and generating much-needed hard currency. The companies which have invested billions of dollars come mainly from India, Turkey, India and the U.K.  

In the first 5-year Growth and Transformation Plan (GTP I) of the government, which ran from 2010-2015, the manufacturing sub-sector of the industrial sector registered a 20 percent growth. The government has targeted a 25 percent growth for the sector in GTP II (2016-2020). This said, the contribution of the manufacturing sector as a percentage of Gross Domestic Product (GDP) is still hovering around the 5 percent mark. This figure in no uncertain term demonstrates that there is still far to go before the sector takes the lead in the structural transformation it has been projected to take. On the contrary, the service sector has leapfrogged over the agriculture sector and now accounts for the lion’s share of GDP without a meaningful government support.

Several factors are to blame for the lackluster performance of the industrial sector. Chief among these is the inability of the government to duly implement on the ground the enticing policy and legal frameworks it has put on paper. The critical shortcomings identified by stakeholders as constraining manufacturing in Ethiopia include inadequate power supply and other infrastructures, poor logistics and customs services and the dearth of a disciplined workforce.  Though the government had pledged that it is committed to eliminating the challenges standing in the way of the sector, the prevalence of red tape, corruption and other forms of maladministration have prevented it from providing efficiently the services investors expect from it.

With a view to tackle the afore-mentioned drawbacks in an integrated manner and render the sector globally competitive, the government is pursuing the development of industrial parks as a key strategy. Two sprawling industrial parks have been developed in the past few years while several more are in the pipeline. The Bole Lemi and Eastern Industry Zone parks are soon to be joined by the Hawassa Industry Park with the Bole Lemi Two, Adama, Dire Dawa, Kombolcha, Bahir Dar and Mekelle industrial parks slated to commence operation down the line.

The government isfinancing the erection of the parks through the USD one billion it borrowed from the international market via the sale of sovereign bond as well as concessional loans obtained from donors. The parks have to commence operation within the shortest possible time and begin generating income so that the country does not default on the debt it incurred for their construction. Already major apparel companies like Phillips-Van Heusen and Vanity Fair have set up shop in the soon-to-be-opened Hawassa Industrial Park. The government is eyeing USD one billion and USD 500 million in annual export revenue from the textile and leather and leather products sectors, respectivelyby the end of GTP II.

It is quite disappointing to say the least then that the industry parks which have commenced operation are beset with a host of construction-related problems that not only cast a shadow over the manufacturing sector but also dishearten the overseas companies operating in the parks. The flaws in the delivery of water and other services identified in a report members of parliament submitted to Parliament following a recent visit to the Bole Lemi Industrial Park are good examples.

Moreover, the companies are paying dear as a result of faulty construction works. The report indicated that a Chinese company was asked to pay close to one million birr (around USD 43,000) for water that was wasted due to shoddy plumbing work. What is more dismaying, though, is the fact that the water utility company charged such an exorbitant fee without any qualms.The report further revealed that the local contractors at fault had rectified the problem, albeit after the company’s production was disrupted severely.

Meanwhile, pioneering textile companies like Ayka Addis are saying that they are finding it difficult to remain competitive on the international market. To make matters worse, they and similar other businesses are reported to be perennially in the red and on the verge of going bankrupt, forcing banks to foreclose their assets.

It is to be recalled that the development of the industrial parks had sparked a controversy with local contractors complaining that they were excluded from the construction of the parks. The government defended its decision saying local contractors lacked the necessary capacity to take on the kind of complexity the parks’ development represents. All this reaffirms that the manufacturing sector in Ethiopia is confronted with grave challenges putting a question mark over the government’s lofty goal of making Ethiopia Africa’s manufacturing hub.

 

It should be underscored here that if the problems afflicting the manufacturing sector are not dealt with posthaste, it is entirely plausible that the foreign investors operating in the country may well pack up and leave while deterring new investment in the nascent sector. Ethiopia can ill afford the dire consequences that would ensue if this scenario were to come to pass. Therefore, it is imperative to ramp up government support for the manufacturing sector.

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