The Government of Ethiopia has banned the import of all non-essential luxury goods in a bid to stabilize the economy, so it says. No more jam, no more chocolate, whisky or vodka, not even calendars… (or is it caviars?)
Why such measures?
Consider Ethiopia’s trade deficit, it has been on an upward trajectory for many years owing to the liberalization of the import regime, while exports continue to remain stagnant. In 2021 Ethiopia imported USD18 billion in goods and exported around USD 3.95 billion in commodities and agricultural products. With the ban, the Central Bank of Ethiopia assumes that there will be saving close to 100 million dollar per year. Compare this to the country’s official import bill, the 100 million dollar saving is peanut.
In any case, how effective is banning consumer goods like hairdryers and cornflakes, while ignoring the elephant in the room? Indeed, consumer goods, excluding automobiles, comprise a fraction of the total imports, and aren’t even in the top 10 list of imports. By far the biggest imports of Ethiopia are fossil fuels, industrial goods, and in the past 3 or 4 years defense related imports. Yet there is not a peep about reducing any of these.
Surprisingly, the ban excludes electric vehicles. I ask why, when the cheapest Tesla Model 3 starts now at $46,990 in the U.S., whereas in Europe, it can cost as much as 54,990 euros ($59,000). Keeping with the U.S. statistic, the average electric vehicle price was $51,532 in April 2021 (Kelley Blue Book). This was before recent price hikes, inflation, and raw materials scarcity came into play, so it may be at least 10% higher now. Obviously, this will be done by spending more money, not less.
Anyway the jury is still out on how clean or dirty or cheap or expensive electric vehicles are. Different studies reveal different findings. Assuming electric vehicles are allowed in, is this going to help the country’s balance of payment? Is this going to increase workers access to transport? Sadly, this is a policy that naively ignores the lives and needs of real Ethiopians.
Insofar as the ban on electronic devices is concerned, it is unclear if this includes laptops and PCs. This will be a big setback for the local tech industry. It’s also not clever to ban smartphones which increasingly enable access to training and information. Instead of adding even more hurdles, this sector should have been assisted, which not only has the potential of exponentially increasing exports, but will simultaneously reduce fuel imports, and make better use of our human capital.
Anyway, the great majority of Ethiopians will not be concerned by the ban. Only the rich and the elites would feel personally ruined. These groups don’t realize the most important component of our economy (or any economy for that matter) – energy – has become scarce and costly, they don’t realize that economies that can only function if energy is cheap break down. That’s why we need to reflect on a new economic model that reduces dependence on goods and services (luxury or not) sourced from thousands of miles to markets near us. We need to ponder over an economic model that favors local producers and consumers, an economic model that encourages less consumption and waste. The fruit juice flown in from thousands of miles away require jet fuel, air or ship cargo containers, refrigerants and spare parts for jet or ship engines. Surely, we (as a community and as individuals) should embrace a new paradigm of self-reliance to reduce our dependence on long supply chains and build an economy tailored to our unique circumstances. This should be one of our major projects of the 21st century.
Can we count on this government to move our precarious economy to self-reliance? The answer for now is no…. just look at the government’s “Homegrown Economic Reform” agenda. An agenda that pushes the country into the discredited liberal democracy process, an agenda that promotes the endearing fantasy of infinite expansion of consumption. An agenda that does not take into account that globalization has not been win-win; but win-lose: the reality is the benefits flowed to the few multi-national and large corporations at the expense of the many. But more importantly it’s an agenda that does not recognize the foundation of the global economy – cheap energy – has reached an inflection point: from now on, energy will become more expensive. The idea that cheap, easy-to-get resources will remain abundant is not realistic. What’s realistic is to start reducing our dependence on long supply chains by relocalizing our production of life’s essentials. In short globalization is no longer a solution; it is the problem.
So you see it’s essential that we navigate intelligently the unprecedented transition from excess consumption to securing essentials by increasing self-reliance. Today we have an opportunity to redraw Ethiopia’s grand strategy from the ground up. Fortunately, our country is well placed to meet these challenges, if for no other reason than the public will demand it and that the great majority is already operating in a localized economy.
Are our leaders ready for tomorrow?
Where are our leaders of tomorrow?
Global exhibitors flock in Addis for the Africa Sourcing and Fashion Week
The 8th edition of the Africa Sourcing and Fashion Week (ASFW), Africa’s largest meeting for fashion, sustainability, and innovation, opens its doors from November 4 – 7, 2022 at the Skylight Hotel.
The event attracted different exhibitors from Africa, Asia and Europe drawing in over 5,000 international trade visitors.
The Ethiopian Ministry of Industry (MoI) and the Ethiopian Investment Commission (EIC) joined forces with GIZ to support 11 Ethiopia-based companies under the theme of ‘Ethiopia Tamrit’ to catalyze and sustain stronger business linkages between local companies and international buyers, in the framework of the Sustainable Industrial Clusters project.
In his opening remarks, Melaku Alebel, the Minister of Industry, noted that, “The Government of Ethiopia has engaged in prominent reforms and demonstrated its support to textile and garment companies. Despite the challenges, Ethiopia acquired a favorable position in the global value chain, and remains one of the African countries offering the largest production capacities, which could match with buyers’ requirements. We wish to channel the driving forces to increase exports to international markets both in quality and quantity.”
Complementing the Minister’s remarks, Daniel Teresa, Deputy Commissioner of the Ethiopian Investment Commission added, “Our ambition is to build on previous fair operations and show that Ethiopian institutions and private sector are committed to join forces, hence, to promote the ‘Ethiopia Tamrit’ in Africa and beyond. Ease of doing business, legal and sectorial reform works and opening the economy to Foreign Direct Investors depicts commitment of the government to attract more investment and private sector led growth.”
The visitors in the fashion and manufacturing industry, including international investors, brands, wholesale, and retail will have further opportunity to attend a series of ASFW conferences gathering over 100 experts in the field with over 800 participants.
Trade ministry re-instates price caps to tame hikes
The Ministry of Trade and Regional Integration (MoTRI) re-imposes a price cap on sesame seeds trading at the electronic trading floor after only a few weeks of its public market debut. The ministry has strongly underlined that it will closely monitor contract farming trading as some experts express concerns over scheme abuse by illegal actors.
It can be recalled that the ministry had lifted the price cap a few weeks back for commodity trades at the Ethiopian Commodities Exchange (ECX). At the time, it was stated that it lifted the cap due to the decline in hoarding.
However, at the time experts had raised concerns that the decision would have an effect on the export business.
They said that when the government applied the cap about a year ago it was aimed to harmonize the local trading with international markets and in making sure the export business remained profitable rather than targeting to generate foreign currency.
The government similarly bashed exporters citing their involvement on the export business was on the motive of supporting their major business, which is import.
Before the application of price caps, exporters offered high values, much higher than the global market at the trading floor to get the commodity and export it at lesser rates, while using the foreign currency they secured to import commodities that would cover their loss on the export.
Experts said that the hard currency shortage for accessing the letter of credit was the reason that attracted traders to be involved in the export business which allowed them to use the foreign currency to import whatever they wanted.
Following the introduction of the caps, the ministry in consideration of the international market has been providing weekly upper caps on the prices for major export commodities such as oil seeds and pulses trading.
Experts recall that price caps were rolled out because exporters were aggressively focused on the foreign currency that they were earning without really paying attention to the market.
“Exporters were giving their own prices left right and center against the international market to get the foreign currency which has affected the market expanding unethical practice on the export business,” experts said, adding, “They exported at lesser prices than they paid at the local market. Exporters major goal was securing hard currency for their import business.”
Experts opined that such erratic practices had contributed to value loss and hoarding, “the export business has not been profitable because of exporters shipping their commodity at lesser price points than they paid at the trading floor, but the cap has been changing this narrative.”
Experts told Capital that ever since the government lifted the caps, the price at the trading floor has shown a spike on some commodities.
Mid October Kassahun Gofe, State Minister of MoTRI, told Capital that the government introduced the price cap when hoarding was taking place at its peak, “we lifted the caps since the hoarding behavior was eroded.”
On Friday November 4, he told Capital that now the ministry reinstated the price cap on sesame seeds due to price hike occurring in the local trading against the global market.
When the cap was lifted the price of sesame seeds reached up to 2,500 birr per quintal while it was 1,700 birr for Humera and 1,600 birr for Welega types of sesame seeds at the global market.
“The difference of the local market price is very wide compared with global rate due to that we re-imposed the cap,” the minister cited.
“Exporters must not trade on loss, therefore the cap has been re-applied to the seeds,” Kassahun added.
However some experts claimed that other commodities price is also showing an increment at the local market, however the State Minister, who is responsible on the follow up of the export sector, said that other commodities’ trading is pushing on accordingly.
“We have 16 oilseeds and pulses that trade at ECX, the trading of pulses is run as per the demand and supply driven scheme,” he added.
“The price cap is a policy instrument that the government can impose at any time if price hikes occur on other commodities,” he added.
Regarding the contract farming trading scheme some experts and market players expressed their concern that illegal traders and lower government officers may abuse the system.
However, Kassahun said that the ministry has concluded its preparation to manage the scheme smoothly.
“On Thursday November 3, we concluded the registration of contracts that buyers got with farmers. On the registration process, significant number of contracts has been registered by the ministry,” he said, adding, “the registration will allow for the control and supervision of buyers using source-able commodities.”
Besides that he said that 25 ECX facilities will manage the calibration and quality measurement, while additional facilities are also being opened.
Bankers caution for a stepwise sector open up
Bankers express concerns over the opening up of the financial sector despite acknowledging its merits. The financial gurus advise government to approach the opening in a stepwise phase outlook and not give shares through opening subsidiaries and branches.
In response, officials from the National Bank of Ethiopia (NBE) underscored that most of the expected risks and challenges will be answered in the detailed directives and other laws related with the opening up of the financial sector.
As policies and strategies [investment of foreign nationals in Ethiopian banking sector] was ratified by the Council of Ministers; a draft proclamation that will amend the current banking law has been tabled to the parliament. As the process follows track,the NBE hosted a discussion about the opening up of the sector for foreign actors with bank CEOs before last week.
During the discussion held at the HQ of NBE, leaders of the banking sector raised critical issues on the case questioning the timing; highlighting that the country is facing several economic challenges, to which opening the sector to experienced actors is not ideal.
“We are facing macroeconomic challenges, inflation, fiscal problems, trade balance deficit, internal challenges and weakness and many more economic problems. Therefore it will not be a proper time to open up the sector to foreign players for the country’s benefit,” bank presidents expressed their concern.
According to the policy, a direct and indirect shareholding of investment of nonbank foreign nationals as well as investment by Ethiopian organizations fully or partially owned by foreign nationals in a new or existing bank shall be limited to 5 percent, “Whereas, a single foreign bank, as a strategic investor, may own share up to 30 percent in an existing or new domestic bank. However, aggregate foreign ownership in an existing or new domestic bank shall not exceed 40 percent in a bank.”
The document further added that a single foreign bank, as a strategic investor, may be allowed to invest in a new, wholly or partially that is up to 100 percent owned subsidiary bank incorporated under the law of Ethiopia; or by establishing branches with full banking authority.
At the discussion, bank leaders underlined that the share of a single foreign bank taking on existing or new Ethiopian banks will be huge and will attract influence on other shareholders, “Most bank shareholders are scattered, so 30 percent in single share at this scattered condition will easily dominate the system. Allowing a 30 percent share may not pan out as what the government ideally expects.”
Bank presidents stressed that the current five percent maximum shareholding of Ethiopian investors needs to be revised; if foreign investors are to be allowed to take huge positions.
One of the president said that as per the commercial code a quorum is about 25 percent for general assembly so therefore by default the 30 percent share ownership shall fulfill the quorum.
Bankers also advised the government to rethink about the opening of the financial sector as a subsidiary and branch. They expressed that government should give priority to foreign actors to acquire existing or new coming banks first.
“If foreign players are to operate through the subsidiary and branch business, foreign direct investment shall primarily move to them, which will significantly affect Ethiopian banks activity and their IBD business,” the sector gurus said.
“When foreign banks start operation, their first duty would be approaching the foreign community to move their accounts to the foreign banks thus dominating the correspondent banking. It will not only reduce the correspondent banking business but foreign financial partners will not have interest to provide correspondent banking service for local banks,” Abie Sano, President of Commercial Bank of Ethiopia and Ethiopian Bankers Association (EBA), said.
They suggested that the subsidiary and branch opening up should be carried out gradually with another step, “after we get experience on the first stage of the opening up of the sector, allowing the other phase will make it beneficial to the country and the sector.”
One of the objectives as the policy document states, “The main rationale for the policy shift is to ensure sustainability of economic growth thereby achieving increased credit and foreign currency supply in the economy.”
However bankers argued that the foreign currency flow in connection with opening up of the financial sector will not be feasible since foreign investors are repatriating their earnings.
Regarding portfolio, Abie stressed that the government should have strong controlling instruments in which foreign banks operating in to give way for diversified businesses as opposed to focusing on their favorite area.
He added that the policy has appreciably identified possible risks regarding the opening up of the sector but mitigation strategies have to be considered.
According to the policy document, opening the banking sector for foreign investment would enhance supervisory capacity of the National Bank as cooperation and collaboration with foreign regulators are expected to be increased, upon foreign bank entry, and would positively contribute to regulatory and supervisory capacity of the Bank.
“In addition, the challenges coming from the sector upon entry of foreign banks with more sophisticated products and services may force the National Bank to upgrade its regulatory framework and supervisory capacity. To this end, it is found imperative to make policy shifts to allow foreign investment in Ethiopia’s banking sector,” it added.
Asfaw Alemu, President of Dashen Bank and vice president for EBA, stressed that the regulatory body, NBE, must be proactive to make sure it is fully prepared prior to the opening up of the sector, “I don’t accept that the capacity of NBE will be built in connection with the coming of foreign banks.”
The three Vice Governors of NBE in response expressed that most of the concerned issues will be clearly mentioned on the upcoming directives and regulation that will follow the amendment of the proclamation that has already reached parliament.
