Poor Export Revenue Demands Diversification

Despite the government’s endeavor to increase the country’s export earnings by pursuing concrete policy measures and incentive schemes, last week officials at the Ministry of Trade (MoT) reported a devastating export performance for the third time in a row  since the launching of the ambitious five-year Growth & Transformation Plan (GTP) three years ago.

The report released by the MoT stated that Ethiopia once again fails to materialise the ambition of policy makers, as outlined in the GTP document, which is increasing the share of export in the country’s gross domestic product (GDP) from 13.6pc in 2009/10 fiscal year to 22.5pc at the end of the five-year plan.

Export data from the MOT – one of the most powerful and important ministries, tasked with monitoring and evaluating the foreign trade activities of the country – reveals that Ethiopia registered 3.08 billion dollars in export revenue in the 2012/13 fiscal year.

Not only has the export revenue for the just ended fiscal year failed to meet the four billion dollar target set by the government at the beginning of the fiscal year, which is the case since 2010, it showed a decline of 2.27pc from previous fiscal year.

This decline in the export earning interrupted the 15.23pc average export growth rate the country had registered over the previous seven years.

This underperformance was exacerbated by the decline in coffee export, which is Ethiopia’s flagship export item. During the last fiscal year, export revenue from coffee has fallen by 10.4pc to 746.4 million dollars. This is despite the volume of export increasing to 199,104tns – 17.7pc increment from the previous year.

The export of commodities outside of their peak demand seasons and weak demand in the international market are cited, by the MoT, as being the major reasons for the poor performance.

“In the last fiscal year, we exported our commodities early, which was a mistake. We have learned from it,” Nuredin Mohamed, a trade practices and regulatory affairs advisor to the state minister, told Fortune.

The decline of coffee prices on the global market has continued since July 2012 with the International Coffee Organization (ICO) composite price indicator recording a 33pc drop, as released on Monday, August 10, 2013 by the Market Report. In July 2013, a kilogram of coffee traded at 2.6 dollars, unlike the 3.6 dollars a year ago.

A week negotiating capacity of exporters and poor product quality are identified by the Ministry for the low performance of the sector.

What the Ministry can do is to facilitate the export process by feeding exporters information about the market, said Getahun Bikora, Crop Products Marketing Directorate director with the Ministry.

However, for Abreham Getachew, a transit officer at Ethio-Ceft – a MIDROC subsidiary company that grows and exports flowers – it is the long chain to export that has hindered the overall profitability of the company. This leads to the presence of various middlemen in the export process, leading the company into deficit.

Despite its late entry into the Ethiopian economy, the flower industry is an example of a quick transition into a successful non-traditional export product. Ethiopia is now the second largest exporter in Africa, next to Kenya, overtaking Tanzania, Uganda and Zimbabwe. It is also the fifth largest non-EU exporter supplying the EU cut flower market.

It has taken Ethiopia five years to reach half of what Kenya achieved from the flower sector in three decades. At this rate, Kenya could be overtaken by Ethiopia in a decade. In the last fiscal year, however, the sector earned only 186.7 million dollars, which is five percent lower than the previous year.

“How can the sector make a profit with the existing levels of bureaucratic red tape along the transit system,” questioned Abreham.

“Our company would not have survived if it were not supported by its sister companies,” he claims.

Although the sector is regarded as one of the top five foreign exchange earners, its performance is below expectations. While the government planned to collect 457.4 million dollars in revenue from the horticulture sector during the last fiscal year, it in fact collected only 246.5 million dollars.

In order to minimise the problems encountered by the flower exporters, the government issued a directive in 2011 that changed the unit of measurement in calculating repatriated foreign exchange to kilograms, rather than stems. For this purpose, the directive has changed the unit of measurement of flowers, which is estimated after counting those in selected sample boxes.

Regardless of the changes, horticultural exports, which the government has prioritised in the GTP, have not only failed to meet the 2012/13 target, but have also declined from that of the 2011/12 fiscal year. The sector, which should have earned 457.49 million dollars according to the plan, only secured 264.52 million dollars this past year.

Solomon Amedie (PhD), a marketing officer at the Ethiopian Horticulture Agency (EHA), has doubts over the claim that the performance actually declined.

The documentation system in the sector is not well organised, according to Solomon.

“The Agency, the Ethiopian Flowers Producers & Exporters Association and the Ethiopian Revenues & Customs Authority compile different data. It is, thus, difficult to assess the real performance of the sector.”

In fact, Solomon contends that the productivity of flower growers in the country has increased, although they are not competitive in terms of quality.

The international market fluctuations and the European economic crisis were also challenges for the sector, said Solomon.

The export of khat is among the few subsectors where the country witnessed an improvement when compared to the previous fiscal year, recording 271.5 million dollars, up from 240.5 million in 2011/12. Currently, the country exports the leafy stimulant to 13 countries across the globe, with Somalia and Djibouti being the major destinations.

However, even that sector is threatened. While the MoT works to expand its export destinations, the number of countries prohibiting the drug from crossing their borders is growing. China, once among the major export destinations, has already officially banned it, while the UK, currently a country where khat is heavily consumed, seems to be on the verge of following in China’s footsteps.

Yet, the khat export performance will continue to be promising, says Tesfaye Amare, khat marketing team leader at the MoT.

“Even if countries ban it, it will continue to be consumed across the globe,” he contends.

Although khat is not a commodity supported by the government at the production level, its production as well as export performance are both increasing. This is especially true in comparison with other commodities, such as coffee, that have long enjoyed government support for their status as the backbone of the economy. Khat’s export performance has shown an increase of 31 million dollars from the previous year’s performance. In order to discourage local consumption and export at least 80pc of production, the government enacted a regulation in 2012 to increase the excise tax on local consumption to five Birr per kg of khat.

However, for a macroeconomist who has been teaching at the Addis Abeba University (AAU) for the past 17 years, such an unsatisfactory performance, given the country’s huge potential for more diversified production and exports, signifies the existence of constraints both on the supply and demand sides.

Ethiopia is still highly dependent on non manufacturing exports, according to the macroeconomist.

“A high dependence on traditional exports have been dominated by declining terms of trade. This has meant that export earnings have failed to increase despite increased export volumes,” he claimed.

Export revenue, according to MoT data, has been highly dependent on only a few commodities. Coffee, Khat, oil seeds and flowers accounting for 53.4pc of the total export revenue in 2012/13.

The overall performance of Ethiopia, in terms of export diversification has been far from satisfactory, according to the expert.

“Export diversification has been in the development plans for more than 40 years, while the export structure remains fixed, with greater concentration on a few traditional exports such as coffee,” he explained.

The failure to diversify export commodities is another factor for the low export performance, a private consultant who has been working with exporters agrees.

“The export commodities have been the same since the regime of Haile Selassie. To date, the only newly-added commodities to the export sector have been green mung beans – a crop used to make soup – and flowers,” he pointed out.

“Even the green mung beans are exported simply because the local community is not familiar with them,” claims Getahun from the MoT, who mentions that green mung bean seeds were initially imported from Pakistan, but the legume is now exported back to the same country. “We do not increase the number of export commodities simply because we do not want to, not because we cannot,’’ he went on to contend.

Manufacturing exports are showing a lingering growth in Ethiopia where their share in total exports declines from 14pc in 1981 to nine percent in 2012/13 fiscal year while agricultural exports accounted for 71pc of the total export in the same year.

This imbalance, for the macroeconomists, indicates the continuing concentration of the country’s exports on few traditional exports and the vulnerability associated thereof.

The important lessons to draw from this, according to the macroeconomist, is that Ethiopia must increase its manufacturing exports and, hence, diversify its export base. This will both reduce export earnings volatility and increase the export revenue.

Export performance data obtained from the MoT, however, reveals the country still has a long way to go before reaching that level.

In the manufacturing sector, textiles and garments are one of the major areas of focus in the GTP, aiming to increase export earnings to one billion dollars by 2014/15. The textile and garment sector brought in 97.8 million dollars in 2012/13, which is 15.6pc higher than the previous year performance but far short of the planned 171.4 million dollars for the fiscal year.

The other sector within manufacturing that has been given priority under the GTP, leather and leather products, also underperformed. It managed only 63.3pc of the targeted 206 million dollars, with 121.9 million dollars.

The macroeconomist, however, criticises the plan set by the government for the manufacturing sector as being too ambitious and not based on a planned assessment.  Rather, he claims, it is built on the figures of other middle-income countries.

Despite notable growth trends in basic manufacturing figures recorded over the past several years, the Ethiopian manufacturing sector remains essentially weak, according to the findings of a draft study conducted in January 2012 to look into the competitiveness of Ethiopian firms for participation in the Common Market for Eastern & Southern Africa (COMESA) Free Trade Area.

The contribution of the manufacturing sector in 2009/10 was less than five percent of the GDP, while its share of manufactured exports was around 0.5pc, the study found. Under the GTP, the plan is to increase the contribution of the manufacturing sector from 3.6pc, as of 2010/11, to 10pc, by 2014/15.

The mining sector is also among the sectors that fell short of the target by a large margin. In securing only 596.4 million dollars, it declined by 31 million dollars when compared to the previous fiscal year. This was 26pc short of what was planned.

Yet, officials at the MoT are still optimistic about the future.

“With the support of small-scale enterprises, we will meet the export performance targets of the current fiscal year, as well as those set in the five-year plan,” said Nuredin.

Close to five billion dollars are expected from the export sector in the current fiscal year, according to the Ministry.

However, experts and industry observers have major doubts about the plan set by the government and its achievability.

The government needs to “walk the talk” by accelerating reforms and pushing policies, in order to accomplish the plan, the macroeconomist concluded.

 

 


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