Ethiopia Throws Open Its Market Gates

Mekelle:  18 April 2024 (Tigray Herald)

Ethiopia Throws Open Its Market Gates

In a bold departure from its historical position on foreign investment, the federal government has opened the doors of the trade sectors, including export, import, wholesale, and retail, to foreign nationals. A new directive initiated in March represents a landmark shift from the protectionist policies that have long shielded domestic businesses from international competition.

For decades, successive administrations have been cautious about foreign participation in the domestic economy, especially in critical sectors like trade. An investment proclamation revised four years ago particularly reserved certain trading activities for Ethiopian nationals. Despite these measures, the growth and global integration expected from domestic businesses have not been realised to the anticipated extent.

This, coupled with issues of service quality, efficiency, and legality in protected sectors, prompted a reevaluation of existing policies, according to a directive the federal government issued last week.

The Ethiopian Investment Board, chaired by Prime Minister Abiy Ahmed (PhD), has approved a directive that seeks to rejuvenate the economy by allowing foreign investors into previously restricted areas. The Board comprises Mamo Mihretu, central bank governor; Ahmed Shide, minister of Finance; Fitsum Asfaw (PhD), minister of Planning & Development; Grima Birru, senior macroeconomic advisor to the Prime Minister; and Hana Arayaselassie, head of the Ethiopian Investment Commission.

Commissioner Hanna is finalising how the new investment directive will be enforced. According to Dagato Kumbe, deputy commissioner, licenses and permits from the Commission and the Ministry of Trade & Regional Integration (MoTRI) need to be worked out. However, he disclosed that foreign companies in the country can be eligible for the new modality.

“Outline of the implementation will be announced soon,” he told Fortune

Aspiring to boost domestic capabilities and integrate them into the global trade value chain, the policy is seen as an effort to increase the competitive terrain, ensuring both qualitative and quantitative growth in these sectors.

Under the new rules, foreign investors can trade key commodities such as raw coffee, khat, oilseeds, pulses, hides and skins, forest products, and livestock. However, they must meet specific prerequisites, such as demonstrating relevant experience, capacity, or market linkage in the sector and fulfilling particular financial thresholds and commitments. According to the draft, foreign investors can export raw coffee if they submit a purchase order contract of 12.5 million dollars or have a three-consecutive-year history of buying 10 million dollars of the beans from Ethiopia. The companies will also be contractually obligated to export 10 million dollars worth of coffee within the year.

Exporters must submit half their foreign currency earnings to the central bank and 10pc to the commercial bank facilitating the trade. Fikadu Digafe, vice governor of the central bank, believes foreign companies will likely be treated the same in terms of foreign currency management.

“Retention procedures will likely continue,” he told Fortune.

The import trade is now open to foreign participation, excluding sensitive commodities like fertiliser and petroleum. Here, the conditions are that foreign entrants substantially contribute to the Ethiopian market, either as manufacturers of the imported product, agents of a manufacturer, or entities committed to importing goods worth at least 10 million dollars annually. The wholesale and retail sectors also welcome foreign investment, focusing on modernising marketing infrastructure and providing streamlined logistics services. Retail trade investments now encourage the establishment of large-scale supermarkets and hypermarkets, aimed at enhancing the retail landscape.

The directive also delineates the roles of various government bodies, such as the Ethiopian Investment Commission and the Ministry of Trade & Regional Integration (MoTRI), in facilitating, regulating, and monitoring the enforcement of these new provisions. These agencies are tasked with ensuring compliance, issuing permits and licenses, and safeguarding against anti-competitive practices.

The authorities claim the directive’s effective date marks a critical moment in Ethiopia’s trade policy, arguing it signals a new era of openness and international cooperation.

“With these changes, Ethiopia aims to position itself as a key player in the global trade arena, encouraging an environment conducive to innovation, competition, and sustainable economic growth,” said the Deputy Commissioner.

The decision has been met with a wave of cautious optimism among local businesses. Coffee, Ethiopia’s primary export commodity, contributed nearly a third of the 3.6 billion dollars in export revenues last year and remains central to this shift. Exporters like Dejene Dadhi, general manager of the Oromia Coffee Farmers Cooperative Union, see potential benefits if foreign investment extends beyond just exporting to involvement at the production level.

“The government may need to adjust foreign currency regulations to incentivise foreign investment,” said Dejene.

While he does not worry about multinational companies dominating the market due to potentially inflated prices, the involvement of foreign firms could expand market access and boost productivity. His Cooperative is a half-million-farmer strong. Local exporters pay farmers above international market rates, according to Dejene, making the profit margin unattractive for larger foreign companies.

“They will demand to own commercial farms,” he said.

The directive is not a one-size-fits-all approach; investment requirements vary across products, with minimum capital requirements set differently for oilseeds (five million dollars), pulses and khat (one million dollars), hides, skin, and poultry (half a million dollars), while no contractual obligations are laid out for livestock.

The swift enforcement of the policy has surprised some, like Edao Abdi, head of the Ethiopian Pulses, Oil Seeds & Spices Processors-Exporters Association. Most agricultural commodities are exported at a loss, with businesses compensating by adding hefty profit margins to their imports.

“Competition will be a healthy roast, driving down import costs and capital flight,” Edao told Fortune.

He sees that trade liberalisation could give Ethiopia more leverage in negotiations to join international organisations like the World Trade Organization (WTO) while gaining favour with multilateral financial organisations like the World Bank.

“A Starbucks or a McDonald’s branch does not seem far off,” he said.

Veteran exporter Sisay Asmare, the previous president of the Association, cautioned that boosting productivity is essential before reaping the full benefits of trade liberalisation.

“We are enough for the current production scale,” he told Fortune.

He stated the need for “adjacent changes,” such as maintaining law and order around farms, cracking down on illegal exports and imports, and improving agricultural incentives, potentially through subsidies or enhanced infrastructure.

“A secure environment is essential for consistent production,” said Sisay, pointing to the crucial role of regulatory and infrastructural support in making liberalisation a success.

His experience includes witnessing failed attempts at liberalisation in the past. According to him, regulatory roadblocks deter foreign investment in areas like cold chain transport and warehousing.

The draft directive’s authors believe that the lacklustre success of prior liberalisation reforms was one reason for the policy shift. Four years ago, a regulation approved by the Council of Ministers removed restrictions on foreign companies in the transport sector while reserving electric import exports, international air transport, and weapons manufacturing for joint investments with the government.

While international organisations like the IMF advocate removing restrictions on investment and express an aversion to the protectionist policy, economic growth stories over the past 100 years have been much more nuanced. In contrast, South Korean economist Ha-Joon Chan (Prof) argued in his paper “Kicking Away the Ladder” that the developed Western world relied on infant industry protection in its formative years despite counterintuitively pushing developing countries to adopt thoroughly liberal orientations. He argued that industrialised nations only adopted free trade policies after development.

However, some believe the policy change also allows domestic businesses to learn from foreign expertise and technology.

Seyoum Chane, research and advocacy manager at the Addis Chamber of Commerce & Sectoral Association, believes that while competition can drive quality, partnership is the key to success. He proffers the possibility of joint ventures that merge local knowledge with international capital and resources.

Others see consumers benefiting from the anticipated influx of foreign companies, which, with their economies of scale, can negotiate better deals with suppliers, potentially leading to lower prices for local shoppers.

“Consumers will benefit, particularly in the retail sector,” said Million Kibret, a business consultant.

He argued that domestic businesses have had nearly five decades to prepare for growing competition.

“The more we open up,” Million said, “the more the world opens to us.”

He envisions a future where foreign investment improves price competitiveness and elevates the quality of exports, particularly agricultural products. According to him, multinational companies might become involved at the beginning of the supply chain, working with farmers to meet international compliance standards. The draft directive extends the opportunities beyond exports, including retail and wholesale trade, opening a new chapter for consumers.

Tihitina Legesse, managing director of Waryt Plc, a successful household furniture brand, sees the shift in policy as an opportunity for growth. She believes a more efficient supply chain with foreign companies can offer domestic businesses better access to foreign currency. However, she believes competition from foreign retailers will push domestic businesses’ creative limits to improve their offerings, potentially leading to a wider variety and higher quality of goods.

“Consumers will have a choice,” she said.

Tihitina urged that regulations be placed to prevent capital flight.

Source: Adiss Fortue

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