A growing middle-class population and rising disposable incomes appear to be driving the country's car market. Vehicle imports in the past fiscal year reached 117,032, the highest amount for the car industry. Despite the drastic vehicular growth rate, the import duty continues to be a major challenge for consumers and businesses. In a country where used cars dominate 80pc of the total car population, affordability of vehicles is complicated by heavy taxes, reaching as high as 300pc. This, however, does not seem to hinder consumers from buying vehicles with some help from auto loans, reports SAMSON BERHANE, FORTUNE STAFF WRITER.
The 29 years old Tsega Bonje has been working for the past six years at Zemen Bank, once as a junior personal banker and now as a customer service officer. He is one of the employees to have benefited from the credit program of the Bank.
Had it not been for the Bank, he would have needed more years to save a quarter of a million Birr to buy a vehicle. For a car costing 280,000 Br, the Bank lent him 250,000 Br to be paid in 10 years, helping him buy a vehicle in the short term.
“No one can loan me this much amount of money except Zemen,” said Tsega who covered the remaining balance of 30,000 Br for the vehicle’s purchase.
Nowadays, affordable and accessible auto loans have been one of the biggest contributors to the growth of vehicle sales in the country. Commercial banks such as Zemen, that are known for providing auto loans, usually require repayment of the full loan in no more than five years except for their employees. And, the monthly repayment amount should not exceed 35pc of the monthly income of the borrowers.
Even better, using recently introduced promotional offers by the commercial banks in partnership with selected vehicle dealers, businesses such as Behiwot Meat Supplier can access finance at a discounted rate for many types of vehicles and models.
Behiwot Michael, the owner of the meat supplier company, bought a Daewoo Damas Van a month ago with a cost of 230,000 Br from local suppliers located along Bel Air Street. He was not well aware of the provision of auto loans when he first approached the seller. But the reality contradicted what he expected.
“The loan helped me build the company’s liquid resources,” he said.
Not only Behiwot but people engaged in the transportation service are also beneficiaries of car finances provided by commercial banks in the country.
Last year, Berhan International Bank (BIB) made a loan agreement with Addis Abeba Meter Taxi Association to import 836 meter taxis in the country, where the Bank financed 70pc of the amount needed to introduce each of the vehicles with a loan to be repaid in three years.
“Default risk is too small to such businesses,” said a senior executive of Berhan. “Hence, these days banks are eager to engage in auto credit.”
Due to such reasons, the swing towards buying vehicles has become more pronounced in recent years, as more vehicles such as Toyota Vitz have entered the market, which is the most affordable to many, including Tsega, who wants to buy another car. It is now possible to buy new cars with as little as 300,000 Br.
Despite the high taxes imposed on vehicles, the car industry in the country is growing significantly in sales, some 16pc annually. Also, the total number of vehicles imported into the country have reached 117,032 in the past fiscal year, raising the car population to 825,448 – a record-growth in the history of the country.
“We find out that positive consumer reaction towards cars and the increase in disposable income are the major driving factors for growth in car sales,” said Yigzaw Dagnaw, communications director of the Federal Transport Authority (FTA).
The increase in population and disposable income, for many industry insiders, has made the auto sales business lucrative for companies.
Businesses that have seen heightened benefits from the drastic surge in vehicles are brokers, one of whom is Abdulqadir Mohammed, who has had a decade experience as a commission agent on vehicle sales for both buyers and sellers.
“High taxes do not seem to deter people from buying cars based on their choice,” said Abdulqadir, who used to sell no more than one vehicle a month, but now sells five cars in the same time frame. “Cars are no longer luxury items.”
Abdulqadir thinks that the surge in the renting business is also a major reason for the boom in car sales.
“People are making money renting their car as another source of revenue,” commented Abdulqadir, who also works dealing rental cars. In the city, cars are rented for as high as 2,300 Br from 200 Br a day.
Paulos Demeke, a shareholder of Ghion Addis Car Imports, agrees with Abdulkadir.
“People are not buying only for personal use, but rather to make a good chunk of money from it,” said Paulos, who sells between 60 and 70 vehicles annually with a price ranging from one million Birr to 2.5 million Br in his shop located on Atlas along Ghana Street.
Ever since the first car was imported in the 20th Century during the reign of Emperor Menelik II, it has become an important means of transportation for passengers and freights, where the road coverage almost tripled to 113,066Km over the past decade at the national level.
This, according to Yigzaw, is the primary reason for the three-fold increase in vehicle number over the last 10 years.
“The drastic growth in number of vehicles is fuelled by a rise in infrastructural development,” he said.
The growth in vehicles had not been without controversies.
The country satisfies 90pc of its automotive needs through imports although there is a moderate growth in the local automotive industry, with over 104 companies licensed to open a vehicle assembly line over the past 20 years.
Nevertheless, only a few of these are operational, with the majority at the stage of pre-implementation, forcing the country to rely on importing cars mainly. Industry insiders tie this in with the taxation system of the country.
“Vehicles are taxed depending on their engine size. This made importing a second-hand vehicle easier than assembling locally,” said Fekadu Girma, general manager of Belay Ab Motors, which assembles and sells 500 cars yearly.
The import duties and various taxes on vehicles coming into Ethiopia sometimes reach as high as 300pc of the base cost where as in Kenya, tariffs are not more than 50pc of the original car’s price.
In case of locally assembled and used cars, there is a 30pc reduction in duty tax.
To save foreign currency and encourage local assemblers, reconsidering the vehicular tax seems to be the best alternative for Fekadu, who has worked in the assembly industry for the past decades.
“The government should consider levying high taxes on used cars as they are toxic to the environment and businesses,” he said.
Anteneh Kibret, an automotive expert with 11 years of experience, shares Fekadu’s sentiment.
“Most of the old cars must be replaced with new ones,” he said. “Otherwise, people may gradually get fed up with traffic congestion and will prefer walking to buying cars.”
In the country, around 75pc of the emissions come from road transport, (chiefly cargo), construction vehicles and, to a minor extent, private passenger vehicles.
“This could worsen unless preventive measures are taken,” Anteneh underscored.
Shortage of foreign currency is also another headache for automotive suppliers in the country, hurting the business of many car suppliers, including Belay Ab and Ghion Addis, whose peak seasons are the holidays and the conclusion of the budget year.
“We need to wait for more than half a year to get foreign currency,” said Paulos. “The shortage forced us to not fulfil customer’s need on time.”
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