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Representatives from Ethiopia’s manufacturing industry claim that a shortage of hard currency has led them to produce under their capacity which has caused a chain reaction where production costs have risen, prices have increased and the economy has slowed down.
The nation’s Forex shortage over the last few years has seriously affected private sector activity. This has not only negatively affected import businesses in all areas, but is especially true in the manufacturing sector with small scale businesses and heavy industries.
In the past, to address the problem the state owned financial giant Commercial Bank of Ethiopia (CBE) allocated a limited amount of hard currency so the manufacturing industry could import inputs and spare parts.
Last week CBE released USD 300 million to the private sector leaving investors puzzled when they learned of the amount during the latest letter of credit (LC) process. This is the first time in a year that any significant amount of hard currency had been released by CBE.
Over the past several months some industries were forced to suspend production as they could not get adequate materials to manufacture their products while others were producing far less than their potential, according to people working in the industry.
“We have a company which makes construction materials but it hasn’t been able to operate as usual because we don’t have enough of the imported materials, such as chemicals, that we need,” said one investor. He claims has been forced to pay salary to his employees for over two months now without operating.
Experts in the banking industry stated that the long awaited LC approval from CBE has shocked the private sector. They think that USD 300 million is a very small amount to be shared among investors who for instance manage over 3,000 employees in a single factory.
The foreign exchange application is said to be in the billions at the CBE but only USD 300 million has been offered as of last week. “The highest amount awarded per applicant is no more than 100,000 USD; many could only get as much as 30,000 to 40,000 USD for their long standing application for foreign currency,” a financial institution source added.
Experts said that some of the companies need more than one billion birr in hard currency (one USD is equivalent to around 27.5 birr) for a single industry, and the current forex is allocated to the manufacturing industry only.
Investors in the sector told Capital that the current hard currency allocation will only allow their plants to run for not more than two weeks.
“What is happening today is that people who rely on imports for their primary business are entering the export business simply to secure foreign currency, which they can use for their imports,” a financial sector expert said.
“This dire need has led to corruption in the banking sector because people are selling their forex for at least 5 birr per dollar in addition to the standard exchange rate. People with dollar accounts in the country are said to be selling their foreign currency just like on the black market,” he added.
Investors say that the hard currency shortage is affecting the entire economic structure. “The shortage of inputs has forced us to operate under capacity which has escalated the production cost,” a manufacturing plant owner told Capital.
“We are running up to ten percent of our capacity, it is better if we at least run at half of the capacity,” he added.
Experts said that the current LC approval from CBE would allow factories to run from one to ten percent of their actual capacity.
“The production cost for a factory run at ten percent capacity or 100 percent is similar since it uses the same machines, manpower, energy, spare parts, bank interest and other operational expenses, that lead to high production cost when companies run under their capacity and this makes the end product very expensive,” they said.
“As a state we are losers if we do not operate our industries at least by 75 to 50 percent of their capacity,” an expert said.
Producing under capacity will create high inflation. Meanwhile the central bank has taken several measures to reduce the money circulation from the market. It introduced various policies and rules like the recently applied directive that forced the outstanding loan disbursement of banks to grow by only 16 percent compared with the performance a year ago.This occurred after the devaluation that the government applied on October 11 to control potential inflation that might follow the reduction of birr value by 15 percent against major hard currencies.
At the same time experts argued the devaluation is being implemented at the wrong time. “It has been applied when there are not sufficient resources or inputs for industries,” said an economist requesting anonymity. He argued that devaluation would work when there are ample inputs or resources like intermediate goods and capital goods in the country. “The manufacturing industry that engages in import substitution can cover about 60 percent from local sources because the resources from local sources are very limited. The balance of resources may still need hard currency to import,” he added.
Effect on industries
“The country is experiencing a dire problem, business is really strangled,” said Zafu Eyesuswork Zafu, founder of the United Bank and the United Insurance Company. But none of this is a surprise; it has been forecasted for a long time now, he said.
Many businesses are now returning back their licenses, as they are not able to sustain the situation, according to the financial expert. “This situation is symptomatic of a very critical juncture in Ethiopia’s foreign exchange situation,” Zafu said. It is very sad and cannot continue like this. It is very concerning for the country.
Experts said that the underproduction in the manufacturing sector may not only influence the market price but can also affect the country’s general economic activity.
Company owners said that they are undertaking their business with a large amount of capital they have secured from financial firms. “If we cannot manage the business as per the expected capacity the effect will force us to fail to settle the huge amount of bank loans,”an expert on business administration explained.
The expert said that the supply of capital goods has been suspended in the past several months which affects the supply of intermediate goods from heavy industries for some factories, including small scale industries that use what they make as an input for their final product.
“It will hence be difficult for manufacturers to settle their debt without production,” he added. He explained that this would force banks to foreclose on the industries but they won’t get potential buyers because there will not be a capacity to buy such kind of industries and no one will be interested since the situation would be similar for the new owners.
If banks are unable to collect loans, financial institutions could end up operating in the red. If industries that owe a lot of money to banks run under production it will transfer to an industry crisis – financial crisisand country level economic crisis in the near future unless the government provides adequate attention and solutions for the situation,” experts said.
“Besides effects on companies, the government’s tax collection would be significantly affected because most of the manufacturing industries contribute significantly to the economy,” a person who manages over ten businesses said. “The effect is not only seen in the manufacturing sector; it has also been observed in other areas; for instance, if you see the number of companies that are not renewing their business licenses the number is not small,” he noted.
“The government has to give recognition to the private sector and facilitate conditions as one of the economic pillars for the country; the same attention that it gives industries,” a part-time management lecturer and business owner said.
Most experts and the private sector actors agree that the current challenge may continue at least for the coming couple of years unless the government takes immediate action.
“The situation is so bleak there doesn’t seem to be any light at the end of the tunnel,” Zafu opined.
He said that the solution to start with is for the government to support the private sector development and make it a partner. “Its role (private sector) is minuscule today. It needs to be supported to enter the export business,” he added.
The private sector has played a significant role in boosting the economy and creating more jobs, in this regard it shares the government’s burden.
An expert in the manufacturing sector also claimed that the public projects are taking the major portion of the regular hard currency earnings of the country. “As we understand most of the public projects are not finalized as per the schedule or with very significant delays, while they have consumed an overwhelming amount of capital resources,” the expert said.
He recommended that the government evaluate its policy on public projects and reconsider the expenditure and allocation of hard currency based on the required priority.
“It (Government) could postpone some of the projects and sustain the private sector before the current hard currency problem transfers to a bigger crisis,” he recommended.
“I have always said you cannot do everything at the same time,” Zafu told Capital. “As the old saying goes, ‘you do not try to go up two trees because you have two legs.’”
Zafu explained that the public projects have played a major role in the economic growth that the country registered in the past, but the private sector that has the capacity to contribute its part is not getting the required attention.
“State led projects such as in the energy sector contribute significantly to the country and economy but it would be difficult for the government to run all of them on its own. We believe that the government has to give a stake in the economic growth to the private sector,” he said.
Experts said that the government needs a policy shift to settle challenges on hard currency earnings and disbursement. They say the recent CBE hard currency distribution is ‘peanuts’ compared to the demand.
If the government can’t postpone some of its projects it could also look at other options based on other countries’ experiences.
Experts also argued that the government’s behavior of getting involved in different economic areas has to be stopped. “It has an interest to engage in all areas of investments like the assembly of electronic materials and some other sectors that only need a little effort and can be handled by small scale industry operators,” the business administration expert explained.
An economic expert gave the example of Turkey. “When turkey faced a crisis in 2001 it used the resources from the International Monetary Fund to recover again. Ethiopia should use such kind of sources instead of retreating,” he said.
The government is not afraid to negotiate about such kind of capital injection from international sources, according to experts in the manufacturing industry. “It’s all about negotiation and coming up with a better understating with international financers to use foreign money instead of getting into a crisis,” the economic expert added.
Sources said that recently some international financial firms have approached the government to provide credit to alleviate the hard currency shortage but the government’s response is unknown.
Most experts and business operators also place a priority on political stability. They said that the recent instability has played a crucial role in slowing down the business transactions and affecting the economy.