Normalising Owning a Car in Ethiopia

At the Diaspora conference in Bahir Dar held this past summer, one of the most pressing and urgent issue discussed was the tariffs on automobiles imported to Ethiopia. The government has promised to look in to it.

The Bentleys were the first automobiles Ethiopia imported in the 20th Century during the reign of Emperor Menelik. As the country experimented with socialism and affiliated itself with the Soviet Union in the Derg era, it became a recipient of many Russian made automobiles and surprisingly, these aging and battered cars are still on the road as white and blue taxis. Ethiopia is now in transition – aspiring to transform from a society of extreme poverty to one that is an industrialised nation. It is determined to reconstruct its dark past and embrace a modern mechanism to help move it forward and achieve its ambitious goals by 2025.

In all that has changed, as a potential middle-income country, what needs to change is also old ways which must make way to the new reality. The nascent middle class of the country is growing and now stands at 20pc; in the last five years, the per capital income of citizens has tripled from a little over 200 dollars. There has to be a better way to help expand the Ethiopian middle class to a new high and continue to help produce the remarkable result that is helping change the Ethiopian narrative.

The country is best to continue to be an investment hub rather than a poster child to the global aid community, an attractive tourism destination rather than a favourite arena of charitable institutions. Equity and fairness to citizens are good qualities to embrace and a cordial and progressive transformation of the country is what will ultimately produce a prosperous population well enough to afford social safety nets to its vulnerable.

The new Ethiopian reality has shown that cars are no longer a sign of wealth but a vital mechanism needed to make people function effectively. In urban areas of the country, 40pc of the population uses motorized modes of transportation, showing the importance automobiles have become to the population. Ethiopia is not however a place where essential automobiles are affordable, not because they are expensive but as a result of a slew of government initiated tariffs. While the amount of tax paid to imported vehicles depends up on the vehicle’s engine power or cylinder capacity, year of manufacturing and the amount of cars bought. The tariffs are not as friendly to the local automotive industry as assumed.

The price of used cars ranges from 125,000 Br to 840,000 Br whiles the price of new cars varies from 250,000 Br to 2.5 million Br, according, an electronic commerce which connect car sellers and buyers.

Taxes in Ethiopia are cumulative, excise tax is calculated on the customs duty, surtax is charged on top of the excise tax, and customs duty and final VAT is calculated once the surtax, excise tax and customs duty have been added. Imported vehicles may cost as much as three times the retail price of the vehicle outside of the country. At least eight out of 10 imported are used vehicles.

Vehicle affordability is further locked up by prohibitively high vehicle taxes in Ethiopia, sometimes more than 220pc depending on engine size, a study by Deloitte, an international consulting firm, indicated last year.

In Kenya, tariffs on vehicles are a minimum 44.7pc, plus 175,000 Br.

If Ethiopia fails to make entrepreneurship and ingenuity, can it then be possible to become a middle income country by 2025?

The Ethiopian Investment Commission (EIC) reports that 31 foreign vehicle investment projects (largely Chinese but with also some involvement of European companies). Since 1998, 73 domestic assembly projects have been licensed. A total of 104 companies have been licensed for vehicle assembly over the past two decades. However, only 18 of these are operational, a reflection of lack of interest from consumers in buying Ethiopian made cars as there are no incentives.

These tariffs have forced many to import used cars with small engines, rather than purchase new ones assembled in Ethiopia. With Ethiopia’s tax system that is relatively high and subjects tax based on engine sizes instead of the value of the automobile, it has become more affordable to import used cars than buy made-in-Ethiopia cars, even while the import tariff that are slapped on each imported vehicles are very high.

The average age of Ethiopia’s fleet is 15-20 years. Vehicles are considered to be second-hand 10 years after their production date, compared to the global norm of four years after production.

In everything that has changed – better infrastructures, needed constructions and a small but growing middle class – some of the Ethiopian mechanism is pushing many citizens to struggle to accommodate a vehicle, and when they do, the better option is a used car. More than 80pc of the cars imported to Ethiopia are second hands. Over the past three years, on average 25,600 vehicles were brought into Ethiopia each year and these cars have a number of side effects.

For instance, they force the Ethiopian economy to use its scarce foreign exchanges to import spare parts at a cost of more than one billion Birr. Used cars continue to be hazardous to the environment and consume more gas. While there are noted arguments that the government is likely to lose needed resources by way of a reduction of tariffs, the reality is, the more affordable a product becomes, the more customers that it will attract. The loss might not be as much as assumed.

In 2009, import of vehicles amounted 231.4 million dollars. Then six years later, it reached 845.8 million dollars, which is 60pc higher compared to 2014. In the same year, an import tax of 417 million dollars was collected, a jump of 40pc from the previous year.

The average tax levied in Ethiopia is at the minimum five times higher than average tariff rates of the country while in the 10 years beginning with 2005, total vehicles use grew at two percent in Ethiopia and 7.6pc in Kenya.

Looking at the taxi industry, the government is to be commended for allowing organised groups to import duty-free cars and help retire the ancient cars out of circulation. Like the privilege that was extended to them, private citizens should also deserve the similar privilege and be offered to import cars at an affordable tax burden. Ethiopia has come to a junction of its civilisation as it finally realises that cars are normal everyday achievements, not just for the rich and elitist but the ordinary.

In Africa, there are 50 million cars on the road for a population of more than one billion people. The average in the continent is 44 cars per 1000 people, well below the global average of 180 cars per 1000 people. In Ethiopia, that is on the road to economic recovery, it is just six cars per 1000, well bellow the African minimum standard.

Ethiopia continues to have one of the lowest motorisation rates in the world. There has to be a better mechanism to help change that reality as it rushes to move the nation to the 21st Century and embrace the ideals of an industrialised vision.

Published on Dec 06,2016 [ Vol 17 ,No 866]



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