NARROWING TRADE DEFICIT THROUGH INCREASED IMPORT SUBSTITUTION

1. Background

Ethiopia’s foreign trade performance has been shown increasing trends both in value of exports
and imports since 1993 EC t0 2009 EC. According to the Annual Report of the National Bank of
Ethiopia, during the period 1993 to 2009, the value of the country’s export ranged from Birr
3.85 Billion to Birr 63.69 Billion, while import varied from Birr 12.78 to 352.45Billion over the
same period. As a result the trade deficit of the country over the period increased from Birr 8.92
Billion to 288.77 Billion. The trade deficit thus appears to be the single most important cause
for Ethiopia’s current account balance has consistently been negative over the past 14 years
reaching..

The years expanding trade deficit depletes the country’s scarce foreign exchange, forcing the
country to implement strict foreign exchange control measures and procedures to avert the
situation.

የወጪ እና ገቢ ንግድ (በቢሊዮን ብር)

1993-1997 1998-2002 2003-2007 2008-2009
ዝርዝር አማካይ አማካይ አማካይ አማካይ
(SDPRP) (PASDEP) (GTP 1) (GTP 2)
1. የውጭ ንግድ (Export) 6.13 30.80 55.45 61.71
2. የገቢ ንግድ (Import) 25.71 121.12 212.71 314.19
3. የንግድ ሚዛን (Trade Balance) (ወጪ-ገቢ) (19.58) (90.32) (157.26) (252.48)

As a result of the fiscal policy measures, firms relying on imported inputs and capital goods
have been negatively affected due to delays in importing essential materials or machinery and
sometimes due to the impossibility of importing them altogether. Furthermore, the foreign
exchange controls and procedures which have been established by the government in response
to the shortage caused additional costs and delays for all firms, including Ethiopian exporters in
their dealing with foreign trade partners.

The trade deficit and its economic and social implications are a matter of concern to both the
public and private sectors. Thus, it is important for both parties to work together on an in-depth
review of the contents of import and export items. There is an urgent need to address the trade
deficit not only on the income side (i.e. export), but also on the expenditure side (i.e. import) by
identifying products that can be locally produced to reduce foreign exchange
outflows/expenditure for imports. Similarly, additional possibilities for expanding the volume
and range of export products need to be investigated in detail.

Thus, the Private Sector Development Hub program, having a firm belief that the private sector
can contribute to narrowing the trade deficit through investing in import substituting projects
and export products, decided to conduct a study that provides directions and strategies to narrow
the trade deficit of the country by addressing the above mentioned issues.

2. DATA SOURCES

a) External Trade Statistics: Export and import data covering at least the latest 14 years
(1993-2009 EC) has been collected, compiled and disaggregated. The major destinations
for the country’s export and origin of imports are also compiled.
b) Policy Issues: Available incentive schemes that the Ethiopian government availed to new
investment, expansion, export trade, import substituting schemes have been compiled
from relevant secondary sources.
c) Approved Investment Projects: A list of projects currently at different stages of
promotion have been compiled at sub-sector level to analyze their contribution to import
substitution efforts of the country.

3. COMPILATION, COLLECTION AND ANALYSIS OF DATA

Primary data, focusing mainly on constraints and opportunities, have been collected from value
chain actors and support providers to carry out the value chain analysis component of the study.
Key constraints of political, economic, social and technological nature have been identified
through discussions with relevant chain actors and support providers. Opportunities of similar
nature have also been identified in selected value chains.

3.1. Data Analysis: The external trade statistics data for selected commodities and in aggregate
have been analyzed as follows:

3.2.Export and Import Performance:

Calculation of average exports and imports (1993 – 2009 EC) l;
Calculation of average growth rate;
Graphical and tabular presentation of the share of major trading partners;
Highlighting the major production, marketing, financial, technological etc.
constraints/opportunities lead operators in selected value chains face.

3.3. Export versus Import:

Percentage comparison of export with import for selected value chain commodities;
The average trade deficit for selected commodities;
Overall trends of the country’s trade deficit;
Competitive position of domestic industries compared to importing companies (product
quality, product price, market share etc.);
Graphical and tabular presentation of the trade gaps for selected value chain
commodities;

3.4.. Analyzing Import Substituting Value Chains: Import substituting commodities have been
selected based on several criteria such as growth potential and competitiveness, poverty
reduction potential, social benefits, prospects of success and outreach. The commodities selected
are analyzed in the light of the following factors:
The task of chain mapping at micro, messo and macro level, describing the basic functions
at each level, has been carried out for each selected import substituting value chain;
Opportunities and constraints that prevail in the primary and support activities along the
different value chain stages of selected import substituting value chains have been
identified to recommend appropriate strategies;
The possibility of horizontal and vertical linkages among value chain business operators
has been carefully analyzed to recommend strategies for improving the competitiveness of
selected import substituting value chains;
The cost factors (economies of scale, capacity utilization, interrelationships among
business units, degree of vertical and horizontal integration, geographic location,
institutional factors, etc.) related to value chain activities at subsequent stages of the value
chain have been carefully examined to develop and recommend cost effective strategies
for selected chains in accordance with global trade norms.
Finally upgrading strategies have been recommended to overcome the major constraints
that main chain actors are facing and rationally exploit the opportunities.

II. GOVERNMENT INITIATIVES FOR PRIVATE SECTOR DEVELOPMENT

The Ethiopian government recognized the private sector as a leading agent to bring sustainable
economic growth in the country, and to this effect it has formulated and issued several
development policies, strategies and directives to unleash the potential of the private sector since
it came to power in 1991. An increased participation of the private sector in all spheres of
development endeavors has remained crucial to bring about a fast growth in the economy of the
country. Thus, cognizant of this fact, the government has taken several measures to develop the
private sector. During its early years the government focused on political reconstruction,
macroeconomic stability and rural development. The following are the major reforms that the
government implemented in light of its overall development objectives (World Bank, 2009):

Devaluation of the Birr;

Reduction of import tariffs and streamlining of export and import procedures;
Reformation of interest rate structures toward more positive real rates;
Tax policy reform; ▪ Rationalization of public expenditure;
Privatization of public enterprises;
Enactment of a new investment; and
Reduction of price control and liberalization of domestic trad

The Government of Ethiopia has launched three different development programs since 1991. In
the mid-1990s, the Agricultural Development Led Industrialization (ADLI) strategy was
introduced as the overall strategic vision for industrial development. The ADLI aimed at raising
the productivity of the agricultural sector, mainly composed of private small-holder farmers, to
generate investment capital in order to invest in downstream industrial activities, which would in
turn generate markets for agricultural produce, thus creating a virtuous cycle.
The second development program, which included a basic platform for infrastructure and human
capital investment, gradual privatization of state enterprises and introduction of a Trade Practice
Act, was articulated in the 2001 Poverty Reduction Strategy Paper (World Bank 2009). A
number of different sectoral strategies were developed since then. One of them, which has strong
relevance to the interest of the private sector, is the Industrial Development Strategy of the
country. The strategy was developed in 2002/03 and addressed the following development
issues:

Elimination of obstacles to the growth of investors, both foreign and domestic;

Provision of adequate support to enable entrepreneurs to compete globally;
Determination that industrial development should leverage on abundant factors; and
hence
Focuses that the industrial strategy should follow and support agricultural development in
order to achieve efficiency in resource use and attain rapid development.

The strategy further identifies supporting factors such as the creation of a stable macroeconomic
environment, transparency, infrastructure and an efficient financial sector.

The Ethiopian government has launched a third generation of reform to bring an accelerated and
sustained development to end poverty over the period 2005/06 to 2009/10. The initiative known
as the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), prepared by
the Ministry of Finance and Economic Development (MoFED), was a national program
advocating the principle of a pro-poor economic growth. Strategies and action plans to end
poverty were developed and implemented in all economic and social sectors by all sector
organizations and line departments at both the federal and regional levels.

The initiative was expected to contribute directly to the development and integration of trade at
regional, national and global levels. The government streamlined areas of focus along this
perspective. This included promoting and fostering the commercialization of agriculture, private
sector development, export development, tourism development, and infrastructure development
(water resource, water supply and sanitation, road and transport, power and telecommunication).
The private sector development initiative in the context of PASDEP aimed to address major
problems inherent in all the economic and social sectors of the country.

As it is clearly stated in the PASDEP document, in order to generate a massive push to accelerate
growth in agriculture and rural development there is a need to focus on the commercialization of
agriculture and promotion of much more rapid non-farm private sector growth. The rational for
the commercialization of agriculture lies in the fact that the transformation from subsistence
practice to a more business/market-oriented production system, while protecting the essential
agricultural base on which the poor depend for their livelihoods, would bring sustained economic
development.

Furthermore there was a need for a systemic approach to realize the greater involvement of the
private sector in the rural economy in value adding and processing activities. It was recognized
that it would be difficult for the government to address all the development challenges
confronting the agricultural sector. Therefore, as clearly stated in the PASDEP, the majority of
the response in achieving fast growth in the rural economy had to come from the private sector.
If the dynamism and entrepreneurial talent of the private sector is synchronized within a rural
economic framework, then it will be easier to achieve fast economic growth.

The principles underlying the PASDEP strategy included a commitment to create conducive
environment for private investment and business activity, to replace the hitherto significant role
of the state with greater domestic and foreign private participation, and to strongly support the
growth of export industries by finding all round solutions to the following major problems:

Most Ethiopian industries are not competitive. Productivity is low, and quality often does
not meet international standards;
The technology used is often old and obsolete. Technological information is not easily
available to entrepreneurs;
The skills and qualification of the workforce are often inadequate for modern industrial
production;
Most owners/managers of manufacturing industries do not have a modern management
qualification and background, but come from a more traditional crafts background.
Entrepreneurship is not firmly rooted in Ethiopian society and moreover suffered greatly
under the former socialist regime;
Entrepreneurs complain about the difficulty of access to finance. Start-up finance for
micro and small businesses, particularly for cooperatives, is to some extent available
through a limited number of microfinance institutions. Long-term investment finance is
hard to obtain although some financing is available for export-oriented sectors from the
Development Bank of Ethiopia;
Finding land and premises for business operations is described as cumbersome, partly
due to the fact that private landownership does not exist in Ethiopia. Therefore, land
allocation goes through public sector channels and can involve long bureaucratic
procedures.

A recent study of the World Bank (2009) concluded that the approach that the country followed
to revitalize industrial development has not yet worked. The study suggested that “the main
issues holding back investment and productivity growth are to be found in the policies that
constitute the investment climate.” According to information obtained from the data base of the
Ethiopian Investment Agency, a total of 7,816 projects were licensed during the period July 2005
to July 2010, of which only 3.6% of them (278 projects) were under implementation and 5% of
them (390 projects) started operation. The remaining 91% of them are still under pre-
implementation. The progress over the last five years appears to be lagging far behind in view of
the time it takes to become operational after approval. At least those projects which were
approved in 2005 - 2007, numbering about 3,318, should have started implementation and
operation.

The government has initiated the Growth and Transformation Plan (GTP) to carry forward the
important strategic directions pursued during the PASDEP period. The plan envisages, besides
maintaining a fast growing economy, to achieve better results in all sectors. The role of the
private sector in this context has been pinpointed to make greater contribution for the realization
of the plan. The government pledged to make more effort to improve and increase the role of the
private sector in the agriculture and industrial sectors of the economy. The participation of the
private sector in horticulture and large scale farming development shall be encouraged through
addressing the major constraints that dominantly hinder development in the agricultural
sector.The plan states that necessary arrangements will be made to increase the private sector’s
participation in large scale farming by identifying potential areas for agricultural development.

Similar commitments have been pledged by the government to encourage private investment in
medium and large scale manufacturing industries. Thus the government’s five-year Growth and
Transformation Plan is expected to address some of the inherent obstacles that hampered new
investments from taking place at a fast rate.

III. INCENTIVE SCHEMES FOR EXPORT PROMOTION AND IMPORT

COMPETING INDUSTRIES

3.1 Contents of the Incentive Schemes

In the face of the strategic challenges that prevailed in the country, the government made
relentless efforts to curb development constraints. As a step forward to attract potential investors
and pave the way for private investors, the government issued a liberalized investment code
(Proclamation No. 37/1996), and later made a series of amendments (Proclamation No.
116/1998, 280/2002, and 375/ 2003) to make the environment more conducive for both foreign
and domestic investors. Following the issuance of these liberalized investment codes, focal
points both at national and regional level for promoting, coordinating and facilitating investment
in the country were established. The Ethiopian Investment Agency (EIA) and regional
investment bureaus are entrusted to facilitate the investment process.

The EIA, the focal point at national level, provides one-stop investment services such as the
provision of all necessary information required by investors, approval of investment applications
and issuance of investment permits, trade registration and operating licenses for private
investors, granting of work permits to expatriate employees, approval and registration of
technology transfer agreements between local companies and foreign technology suppliers, and
facilitating the acquisition of land as well as utilities by private investors in accordance with the
relevant federal and regional government laws and regulations.

Within the framework of the investment code, the government granted various incentives to both
domestic and foreign investors who are engaged in investment areas eligible for incentives. The
objective of the investment incentives is to encourage private investment and promote the inflow
of foreign capital and technology into Ethiopia.

Special incentive sectors and sub-sectors include agricultural development and agro-processing,
agricultural production, manufacturing of equipment and machinery, spare parts, components
and supplies, vehicle bodies, other products and assembly plants, and publishing of printed
goods, large-scale road and building construction and other related works. Rural transportation
facilities including the purchase of spraying machinery, trucks fitted with refrigeration facilities,
or other equipment for support services are also eligible for special incentive facilities. The
investment incentive packages as described in the Council of Ministers Regulation No. 84/2003
include the following:
 Exemption from payment of customs duties: One hundred percent exemption from the
payment of import customs duties and other taxes levied on imports is granted to all
investment capital goods, such as plant and machinery, equipment etc. Also exempted are
spare parts worth up to 15% of the value of the imported investment capital goods,
provided that the goods are not produced and not available locally in comparable
quantity, quality and price.
 Exemptions from payment of export customs duties: Ethiopian products and services
destined for export are exempted from the payment of any export tax and other taxes
levied on exports.
 Income tax holiday:Any income derived from an approved new manufacturing and agro-
industry investment or investment made in agriculture shall be exempted from the
payment of income tax for a specified period. Profit tax holiday of up to five years is
granted for investors based on industry type (new or expansion/ upgrading), level of
export-orientation. An additional one year profit tax exemption is given if the investment
is made in the under-developed regions like Gambela, BenshangulGumuz, Afar and
Somali regional states.
 Exemption from payment of taxes on remittance: Any remittance made by a foreign
investor from the proceeds of the sale or transfer of shares or assets upon liquidation or
winding up of an enterprise is exempted from the payment of any tax.
 Loss carry forward: All investors investing in areas eligible for incentives are entitled,
when their enterprises suffer losses during the tax holiday period, to carry forward such
losses following the expiry of the exemption period for half of the income tax exemption
period which could be from 3 to 5 years depending on the location and investment areas.
 Liberal depreciation rate:Depending upon the choice of the investor, either a straight line
or an accelerated method can be employed for the calculation of depreciation allowances.
 Provision/allocation of land: According to the Urban Land Lease Holding Proclamation
of 1993, the Government possibly will provide land with public tendering which is to be
utilized for investment;
 Remittance: Both foreign and domestic private entities have the right to establish,
acquire, own, and dispose of most forms of business enterprises with up to 100% equity
ownership. Capital repatriation and remittance of dividends and interest is guaranteed to
foreign investors under the Investment Proclamation. Any foreign investor has the right,
in respect of an approved investment, to make the following remittances out of Ethiopia
in convertible foreign currency at the prevailing rate of exchange on the date of
remittance:

Profit and dividends accruing from an investment;

Principal and interest payment on external loans;
Payments related to technology transfer or management; agreements;
Proceeds from sale or liquidation of an enterprise;
Proceeds from the sale or transfer of shares or assets; and
Compensation paid to a foreign investor.
3.2 Influence of Incentive Schemes on Export Promotion and Import Competing
Industries

The investment incentives together with the conduciveness of the country’s environment
for investment need to be adequately promoted to attract both domestic and foreign potential
investors and also to bring concrete measurable impact on the economic development of the
country. EIA recently launched a website with the objective of introducing the investment
regime and requirements for investment in the country and new developments to potential
domestic and foreign investors.

There is evidence that shows the economic benefits that the country generated from those
incentive schemes, though it is difficult to measure their direct impact on the economic
performance of the country within the scope of this study. For instance, the incentive scheme on
exports has partly played an important role in the performance of the country’s exports. The
scheme would certainly attract new exporters and encourage existing ones to diversify and
expand their activities. For instance, the export of the country grew from Birr 4,989.2 in 2003
when the incentive schemes were introduced to Birr 17,733.4 million (ERCA, 2009) in 2009,
corresponding to an average yearly growth rate of 23.5%. This is attributed partly to the
incentive schemes. The profit tax holiday granted to investors under certain conditions in
particular appears to be highly instrumental in attracting new investors.

As stated earlier any income derived from an approved investment in new manufacturing, agro-
industry and information and communication technology (ICT) development or agriculture is
exempted from the payment of income tax for a certain period. With the objective of increasing
the foreign exchange earnings of the country from export, the profit tax holiday puts more
emphasis on new investors in the export business. The duration of the exemption period ranges
from 2 to 8 years (see Annex 1) depending upon the volume of export and the location where the
investment took place.

The recent expansion of floriculture development in the country could be cited as one example in
this respect, though the contribution of other incentive packages could be equally cited. There
was another important momentous worth mentioning in this connection. Some years back the
country enjoyed an increase in earnings of foreign exchange from the export of staple food crops.
However, the venture resulted in shortages of supply for domestic consumption and as a result
the price of food crops tended to show sharp rises in the domestic market. The government,
being aware of the negative impact it brings on the livelihood of the society, decided to
temporarily terminate the exporting of staple food crops. Although it was difficult to tell whether
the export business was undertaken by new exporters, the incentive scheme could have played
some part in initiating new exporters to be engaged in the export of staple food crops.

In general, the recent high export performance of the country has been attributed partly to the
export incentive schemes which include the profit tax holiday, duty draw-back scheme, voucher
scheme and bonded manufacturing warehouse scheme. In addition, all Ethiopian products, with
the exception of few products (e.g. semi-processed hides and skins), destined for export are
exempted from the payment of any export and other taxes levied on exports.
The incentive schemes were launched with the objective of bringing increased investment into
the country. The number of medium and large manufacturing establishments was estimated at
909 (CSA, 2006/07) when the investment code was issued. The number increased to 1,900
(CSA, 2009) over a period of six years, corresponding to a yearly average growth rate of
13%.The result indicated that, on average, about 164 new medium and large manufacturing
establishments became operational every year during the period 2002/032007/08, while new
investments before the issuance of the investment code were deplorably small. For instance,
prior to the issuance of the code i.e. between 1999/2000 and 2000/01 only 9 (CSA) new
establishments joined the industry.This clearly indicates that the investment incentive schemes
have brought remarkable positive changes in the investment regime of the country-

However, in spite of the progress made in the number of new project applicants and project
approvals, the implementation status is very much far from being satisfactory. Investors’ data
base from EIA indicated that a total of 7,816 manufacturing investment projects were approved
over the last six years (2005 - 2010). The expected employment creation capacity of these
projects has been quite significant. A total of 524,675 permanent employments and 479,380
temporary employments were expected to be achieved from the implementation of the approved
projects. However, out of the total approved projects only 390 (EIA) were operational so far,
while 278 remained under implementation. The two together accounting for no more than 9% of
the total approved projects, created permanent and temporary employment for an estimated
number of 38,622 and 37,307(EIA) persons, respectively.
The increase in the number of applicants for project approval could be attributed to the various
incentive schemes that the government made available to all new potential investors. The slow
nature of the implementation could have been due to failure on the part of government offices in
charge of administering the various incentive schemes. For instance, the investment code
(Proclamation No. 280/2002) stipulates that the respective government office in charge delivers
land required for an investment to approved projects within 60 days after receiving application
for land allocation. However, a recent study of the World Bank (2009) indicated that a sizable
number of investors reported access to land as a constraint to business operation and takes much
longer time than stipulated in the code.

Another equally important point that often attracts the attention of development agents has been
the issue of finance. Most investors usually do not have all the capital that a project requires.
Many of them come up with a certain portion of the capital the project requires in the hope that
the remaining amount could be financed by a bank loan. However, there are instances when
during the process of implementation of the project the expectation of the investors could not be
met for some reason and as a result the implementation of approved projects remains negligible.
The same study of the World Bank (2009) indicated that some 60% of the respondents in its
enterprise survey of the country in 2006 were constrained by access to finance.

The incentive schemes and the investment code as clearly indicated and discussed above have
been highly instrumental in attracting new investments, aimed at both the export and domestic
market. A further detailed study needs to be carried out to identify major constraints that
contributed to the slow implementation progress of approved investment projects.
IV. EXTERNAL TRADE PERFORMANCE OF THE COUNTRY

4.1 Export Performance

The country’s export performance during the period 2005-2009 showed consistent growth
in aggregate, though fluctuation was observed in certain export commodities. Export value
increased at an average annual growth rate of 23% over the five years to 2009 (see Table 1). The
growth is attributed to increased volume of export, rising export prices and diversification of
export commodities. Many of the export commodities are primary products of agricultural origin
and the contribution of the industrial sector still remained at a deplorable low level.

Table 1: Value of Exports by Major Export Commodities

በቢሊዮን ብር
1990-1994 1995-1999 2000-2004 2005-2009
Export Commodities Average Average Average Average
1. የውጭ ንግድ (Export) 3.77 7.73 30.80 60.33

ቡና (coffee) 2.01 2.61 8.76 15.64

የቅባት ሰብሎች (Oilseeds) 0.28 1.14 4.80 9.76
ወርቅ (Gold) 0.19 0.54 4.69 7.29
ጫት (Chat) 0.45 0.74 2.63 5.54
ጥራጥሬ (Pulses) 0.13 0.32 1.79 4.92
አበባ (Flower) - 0.17 2.17 4.19
ቆዳና ሌጦ (Leathe/Leather Products) 0.40 0.57 1.20 2.46
የቁም ከብት (Live Animals) 0.01 0.14 1.61 2.83
ሥጋና የሥጋ ተዋፅዖ (Meat Products) 0.00 0.67 0.66 1.78
ጨርቃጨርቅና የጨርቃጨርቅ ምርቶች (Textile Products) - 0.07 0.61 1.90
ሌሎች (Others) 0.21 0.23 0.46 1.54
አትክልትና ፍራፍሬ (Fruits and Vegetables) 0.05 0.12 0.39 1.00
ቅመማ ቅመም (Spices) - 0.08 0.33 0.58
ጥሬ እህልና ዱቄት (Creals and Flour) - 0.09 0.15 0.29
የተፈጥሮ ሙጫ (Natural Gum) - 0.04 0.15 0.22
መዓድን (Tantalem) - 0.04 0.21 0.13
ጥጥ (Cotton) - 0.08 0.08 0.04
ስኳር (Sugar) 0.04 0.05 0.04 0.02
መጠጥ (Beverage) - 0.00 0.03 0.09
ሠም (Bees Wax) 0.01 0.01 0.02 0.06
የተፈጥሮ ማር (Natural Honey) - 0.00 0.02 0.04
የከብት መኖ (Animal Foder) - 0.01 0.02 0.00
የፕትሮለየም ምርቶች (Petroleum Products) 0.00 - - -
ሆፕ (Hop)1 - 0.00 - -
ዝባድ (Civet) - 0.00 - -
እምነበረድ (Marbel) - 0.00 - -
Source: CSA

Coffee continued to dominate the country’s export, registering an average share of 34% followed by
oilseeds with an average share of 18%. Although coffee still remained to be dominant, its share in total
export of the country declined from 40% in 2005 to 24% in 2009; while other export commodities started
gaining popularity in the global market and their share in total export increased from year to year. For
instance, the share of flower jumped from 1% in 2005 to 9% in 2009, similarly the share of pulses
increased from 3% to 7%, oilseeds from 20% to 25% and that of chat from 8% to 11%.. The average
share of the major export commodities is summarized in Figure 1.
Figure 1: Average Percentage Share of Major Export Commodities in Total Export of the Country, (2005
- 2009)

0%
1% 0% Chart Title
0% 0% 0%
2%
1% 0%
1% 0%
0% 0% 1. የውጭ ንግድ (Export)
2%
2% ቡና (coffee)

3% የቅባት ሰብሎች (Oilseeds)

4%
ወርቅ (Gold)
5%
ጫት (Chat)
50%
6%
ጥራጥሬ (Pulses)

አበባ (Flower)
8%

ቆዳና ሌጦ (Leathe/Leather
Products)
13% የቁም ከብት (Live Animals)

ሥጋና የሥጋ ተዋፅዖ (Meat

Products)
Source: NBE annual Report

The contribution of the non-coffee export commodities, although their share appeared relatively low
compared to coffee, appeared to show outstanding performance over the period under review. For
instance, the export value generated from export of fresh cut flowers increased from a value of Birr 85
million in 2005 to Birr 1,527 million in 2009, registering an average annual growth rate of 106%.
Admirable export performance was also observed in other export commodities such as pulses, which
grew at an average annual growth rate of 49%, live animals at 39%, chat at 36%, oilseeds and gold
growing at 31% and 29%, respectively. There are quite a large number of other commodities from the
agriculture as well as the manufacturing sectors that contributed to the aggregate growth of the country’s
export during the period under review. A summary of the trends and the magnitude of export of the major
commodities are presented in Figure 2.
 Trendsand Composition of Export of Ethiopia
25.00

ቡና (coffee)

የቅባት ሰብሎች (Oilseeds)

20.00 ወርቅ (Gold)

ጫት (Chat)

B ጥራጥሬ (Pulses)
i
l 15.00 አበባ (Flower)
i
o
ቆዳና ሌጦ (Leathe/Leather
n Products)
የቁም ከብት (Live Animals)
B
i 10.00
r ሥጋና የሥጋ ተዋፅዖ (Meat
r Products)
ጨርቃጨርቅና የጨርቃጨርቅ
ምርቶች (Textile Products)
አትክልትና ፍራፍሬ (Fruits and
5.00 Vegetables)
ቅመማ ቅመም (Spices)

ጥሬ እህልና ዱቄት (Creals and

Flour)
ሌሎች (Others)
-
1999
2000
2001
1990
1991
1992
1993
1994
1995
1996
1997
1998

2002
2003
2004
2005
2006
2007
2008
2009

Source NBE annual Report

As indicated earlier the export commodities of the country are mainly of agricultural origin with only few
of them having gone through a value-added process. Primary products will obviously generate more value
if they are processed in domestic manufacturing industries. The question still remains whether they still
attract the export markets after being processed here in the domestic industry. This entirely depends on
the technological capacity and competitiveness strength of the domestic industries. There are domestic
industries that are already exporting manufactured products but not operating at the required levels for so
many reasons. Many of them are promoted on the basis of local resource based criteria without giving due
attention to other factors such as productivity, technology, competitiveness etc. Comparative advantage
alone does not create access to global market, but when combined with cost advantage factors it certainly
brings sustained economic growth and more foreign exchange to finance capital that the country needs.
Price Comparison of a Primary Product Export and the Processed Products
Although it is not the objective of this study to compare the margin of profit between enterprises engaged
in primary product export and processed products export, the advantage of the latter in generating more
value to the economy of the country can be easily demonstrable from the following examples.

For instance, the unit export value of pickled goat/sheep skin in 2009 was Birr 113.00 per kg and that of
tanned/crust and finished leather of goat/sheep skin stood at Birr 287.00 per kg and Birr 721.00 per kg,
respectively. The total value of export earned from each commodity in 2009 was about Birr 34 million,
Birr 234 million and Birr 11 million, respectively and bringing the total value to nearly Birr 279 million.
In volume terms the country exported a total volume of 1,129,784 kg, of which 301,406 kg is from export
of pickled goat/sheep skin, 813,054 kg from tanned/crust goat/sheep skin and 15,324 kg from finished
leather of goat/sheep skin. If this total volume was exported in its finished form, provided the market is
there, the total export value would have been Birr 815 million, nearly three times more than the actual
export value.

The government, recognizing the benefits to be drawn from the value added venture, levied a much
higher duty on exports of hides/skins in wet-blue and pickled stages to discourage exporters (Regulation
No. 25/2009), thereby issuing an instruction to existing tanneries to convert their tanning industry to the
next higher stage of processing (crust and finished stage) with the objective of adding value to the product
and eventually increasing foreign exchange earning of the country.

Ethiopia’s exports are destined to different countries across the globe. China became the major market
for Ethiopian export commodities, commanding a share of about 14% in 2009 (see Table 2). China’s main
import during the year from Ethiopia included oilseeds, hides and skins, titanium ores and chat. These
four major products alone constituted 97% of China’s import from Ethiopia. The second important market
was the Netherlands, whose total import from Ethiopia reached Birr 1,618.3 million in 2009, of which
flowers, coffee and oilseeds took the largest share. In fact the Netherlands has been the major market for
Ethiopian flowers. Its import of this commodity reached Birr 1,372.6 million in 2009, constituting about
85% of its total import from Ethiopia. Ethiopia’s export to Somalia, a country which remained politically
unstable for many years, is surprisingly better than the exports to other neighboring trade partners such as
the Sudan, Kenya and Djibouti. Somalia’s total import from Ethiopia in 2009 reached Birr 1,564.2
million, while that of Djibouti and the Sudan stood at Birr 558.7 million and Birr 850.1 million in the
same year.

Table 2: Ethiopia’s Export by Country of Destination (Billion Birr)

አማካይ

(1996-

ትስስር ከ… ዓ1996 ዓ1997 ዓ1998 ዓ1999 ዓ2000 ዓ2001 ዓ2002 ዓ2003 ዓ2004 ዓ2005 ዓ2006 ዓ2007 ዓ2008 ዓ2009 2009)

1.መዳረሻ (Detination)

1. ወጪ ንግድ (EXPORT) 5.18 7.33 8.69 10.46 12.86 15.22 26.12 44.53 54.49 56.12 62.24 59.82 168.93 - 40.62

ቻይና 0.11 0.36 1.17 0.53 0.58 1.97 2.84 4.02 5.67 4.66 7.59 7.38 21.90 - 4.52

ጀርመን 0.56 1.07 0.88 1.23 1.40 1.39 2.58 5.15 5.32 4.20 3.58 4.21 10.36 - 3.23

ኒዘርላነድ 0.08 0.26 0.33 0.50 0.85 1.28 2.07 2.67 3.72 3.03 3.73 3.59 10.74 - 2.53

ሳውድ አረቢያ 0.29 0.44 0.53 0.65 1.00 1.17 1.59 2.23 3.55 2.75 3.52 4.04 10.72 - 2.50

አሜሪካ 0.25 0.39 0.42 0.52 0.92 0.63 1.01 1.94 1.53 2.06 2.53 3.52 12.02 - 2.13
 አማካይ

(1996-

ትስስር ከ… ዓ1996 ዓ1997 ዓ1998 ዓ1999 ዓ2000 ዓ2001 ዓ2002 ዓ2003 ዓ2004 ዓ2005 ዓ2006 ዓ2007 ዓ2008 ዓ2009 2009)

ጅቡቲ 0.53 0.36 0.50 0.43 0.49 0.46 0.65 1.00 1.46 2.24 3.66 1.55 6.04 - 1.50

ሱዳን 0.08 0.15 0.22 0.46 0.51 0.72 1.50 2.28 3.01 1.68 1.55 1.65 2.43 - 1.23

የተባበሩት አረብ ኢሙሬት 0.08 0.23 0.25 0.27 0.52 0.60 1.00 1.21 1.33 1.43 1.51 1.97 5.33 - 1.19

ጃፓን 0.55 0.55 0.68 0.64 0.09 0.07 0.31 0.63 0.80 1.62 1.30 1.97 3.69 - 0.98

ጣሊያን 0.31 0.38 0.47 0.66 0.67 0.62 0.60 1.71 1.39 1.19 1.19 1.09 2.59 - 0.97

እንግሊዝ 0.18 0.22 0.24 0.30 0.31 0.62 0.57 0.92 0.98 0.86 1.03 0.70 2.67 - 0.72

ፈረንሳይ 0.10 0.13 0.18 0.21 0.23 0.17 0.31 0.76 0.93 0.60 0.69 0.72 2.00 - 0.53

ኬኒያ 0.00 0.02 0.02 0.03 0.03 0.03 0.06 0.13 0.18 0.19 0.38 0.59 1.48 - 0.24

ሩሲያ 0.01 0.02 0.01 0.03 0.05 0.04 0.10 0.13 0.21 0.22 0.38 0.31 0.60 - 0.16

ዩጎዝላቪያ - - - - 0.00 0.00 - - - - - - - - 0.00

I. እድገት (በመቶኛ) - 0.42 0.18 0.20 0.23 0.18 0.72 0.70 0.22 0.03 0.11 (0.04) 1.82 - -

2. መነሻ (Origion)

ቻይና 2.30 3.62 5.01 7.49 9.86 12.93 19.10 20.20 31.79 44.77 72.64 126.57 117.25 114.93 36.04

ሳውድ አረቢያ 1.88 5.35 7.34 6.83 8.32 12.78 13.83 11.63 26.66 20.46 21.23 16.72 7.96 10.73 11.82

አሜሪካ 2.62 3.32 3.18 1.70 2.76 3.51 6.73 4.39 7.83 7.08 13.44 15.04 26.69 22.89 7.32

ጃፓን 1.01 1.05 1.28 2.79 3.07 3.22 5.42 7.04 7.91 8.27 11.42 13.24 14.79 15.55 6.10

ጣሊያን 1.13 1.33 2.20 3.47 3.26 4.83 5.24 5.78 6.78 8.87 9.44 10.19 13.34 15.52 5.67

የተባበሩት አረብ ኢሙሬት 1.50 1.90 2.55 2.37 6.19 4.59 5.41 8.81 4.07 6.23 13.41 9.49 9.68 8.28 5.67

ጀርመን 0.84 1.04 1.50 1.66 2.07 1.77 2.49 2.96 3.13 3.64 6.65 6.92 7.85 5.71 3.15

ፈረንሳይ 0.53 0.65 0.78 0.81 0.83 1.27 1.05 2.14 2.57 3.38 2.48 3.42 4.18 4.51 1.79

ኒዘርላነድ 0.53 0.46 0.62 0.62 0.40 0.70 0.94 1.47 1.59 1.71 3.61 5.31 4.14 4.54 1.65

እንግሊዝ 0.77 0.87 0.87 0.78 0.90 0.73 1.12 1.50 1.77 1.48 2.79 4.39 4.28 3.75 1.64

ሩሲያ 0.22 0.37 0.29 0.43 0.97 1.98 1.29 0.37 6.21 0.40 1.01 2.40 3.98 0.95 1.51

ሱዳን 0.08 0.43 0.23 0.44 1.32 0.87 1.28 2.38 1.90 0.18 3.37 2.78 0.89 2.70 1.22

ኬኒያ 0.19 0.22 0.32 0.43 0.31 0.27 0.40 0.48 0.65 0.57 0.67 0.78 0.70 0.78 0.44

ጅቡቲ 0.49 0.47 0.73 0.49 0.00 0.00 0.00 0.00 0.00 0.01 0.01 0.01 0.00 0.00 0.11

ዩጎዝላቪያ 0.00 0.01 0.00 0.01 0.00 - 0.01 0.01 0.00 - 0.00 0.00 - - 0.00

I. እድገት (በመቶኛ) - 0.41 0.27 0.13 0.40 0.34 0.29 0.19 0.48 0.03 0.33 0.26 0.07 (0.00) (0.60)

Source NBE

4.2 Composition and Magnitude of the Country’s Import

The country imports different kinds of commodities which are not supplied in sufficient quantity by
domestic industries.
The country’s aggregate import over the last five years increased from Birr 32,612.8 million in 2005 to
Birr 90,555.7 million in 2009 (ERCA’s Data Base), registering a 29% average annual growth rate (see
Table 3). Consistent increases were not observed in all products, and imports fluctuated from year to year.
The largest share goes to importation of machinery and equipment, constituting on the average 31% of the
total average import of the country. Fuel appeared to be the second import product followed by organic
and inorganic chemical products, food and beverage and metallic products in that order of magnitude.

Table 3: Ethiopia’s Import by Major Sub-sectors (in million Birr), 1996 - 2009
አማካይ
(1996-
ትስስር ከ…
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009)

2. መነሻ (Origion)

ቻይና 2.30 3.62 5.01 7.49 9.86 12.93 19.10 20.20 31.79 44.77 72.64 126.57 117.25 114.93 36.04

ሳውድ አረቢያ 1.88 5.35 7.34 6.83 8.32 12.78 13.83 11.63 26.66 20.46 21.23 16.72 7.96 10.73 11.82

አሜሪካ 2.62 3.32 3.18 - 2.76 3.51 6.73 4.39 7.83 7.08 13.44 15.04 26.69 22.89 7.32

ጃፓን 1.01 1.05 1.28 2.79 3.07 3.22 5.42 7.04 7.91 8.27 11.42 13.24 14.79 15.55 6.10

ጣሊያን 1.13 1.33 2.20 3.47 3.26 4.83 5.24 5.78 6.78 8.87 9.44 10.19 13.34 15.52 5.67

የተባበሩት አረብ ኢሙሬት 1.50 1.90 2.55 2.37 6.19 4.59 5.41 8.81 4.07 6.23 13.41 9.49 9.68 8.28 5.67

ጀርመን 0.84 1.04 1.50 1.66 2.07 1.77 2.49 2.96 3.13 3.64 6.65 6.92 7.85 5.71 3.15

ፈረንሳይ 0.53 0.65 0.78 0.81 0.83 1.27 1.05 2.14 2.57 3.38 2.48 3.42 4.18 4.51 1.79

ኒዘርላነድ 0.53 0.46 0.62 0.62 0.40 0.70 0.94 1.47 1.59 1.71 3.61 5.31 4.14 4.54 1.65

እንግሊዝ 0.77 0.87 0.87 0.78 0.90 0.73 1.12 1.50 1.77 1.48 2.79 4.39 4.28 3.75 1.64

ሩሲያ 0.22 0.37 0.29 0.43 0.97 1.98 1.29 0.37 6.21 0.40 1.01 2.40 3.98 0.95 1.51

ሱዳን 0.08 0.43 0.23 0.44 1.32 0.87 1.28 2.38 1.90 0.18 3.37 2.78 0.89 2.70 1.22

ኬኒያ 0.19 0.22 0.32 0.43 0.31 0.27 0.40 0.48 0.65 0.57 0.67 0.78 0.70 0.78 0.44

ጅቡቲ 0.49 0.47 0.73 0.49 0.00 0.00 0.00 0.00 0.00 0.01 0.01 0.01 0.00 0.00 0.11

ዩጎዝላቪያ 0.00 0.01 0.00 0.01 0.00 - 0.01 0.01 0.00 - 0.00 0.00 - - 0.00

Source: NBE

4.3 The Magnitude of the Trade Deficit

Despite encouraging growth of exports over the five years, the trade deficit of the country continued to
remain wide as the growth of imports also accelerated fast during the same period. The magnitude of the
trade deficit increased from Birr 40,320.7 million in 2005 to Birr 72,822.3 in 2009, exhibiting a yearly
average growth rate of nearly 16%. A sudden increase in the value of import in 2008 and 2009
exasperated the path followed to maintain the level reached in the previous years, and resulted in a deficit
of nearly twice the 2007 and 2006 levels.

Table 4: Ethiopia’s Average Trade Deficit (in Billion Birr), 1996 – 2009
Year Export Value Import Value Trade Deficit
ዓ1990 4.11 9.36 (5.24)
ዓ1991 3.61 12.04 (8.44)
ዓ1992 3.93 12.08 (8.16)
ዓ1993 3.85 12.78 (8.92)
ዓ1994 3.37 16.48 (13.11)
ዓ1995 4.14 17.65 (13.51)
ዓ1996 6.64 23.87 (17.23)
ዓ1997 7.33 32.77 (25.44)
ዓ1998 8.69 41.49 (32.81)
ዓ1999 11.85 46.45 (34.60)
ዓ2000 13.64 65.05 (51.41)
ዓ2001 15.22 90.96 (75.75)
ዓ2002 26.12 115.15 (89.03)
ዓ2003 44.53 132.43 (87.91)
ዓ2004 54.49 202.02 (147.53)
ዓ2005 56.12 206.74 (150.61)
ዓ2006 62.24 267.44 (205.20)
ዓ2007 59.86 254.93 (195.07)
ዓ2008 59.73 275.92 (216.20)
ዓ2009 63.69 352.45 (288.77)
average 25.66 109.40 (83.75)
Source: NBE

The country’s industrial base has remained weak and failed to boost the export of manufactured products
or to produce commodities capable of substituting imports in order to narrow the ever widening trade
deficit. The export growth performance achieved in the past emerged mainly from the agricultural sector
and not from the manufacturing sector. The country’s trade deficit has been continuously increasing as
shown in Figure 3 due to the escalating cost of and high dependency on imports and the slow growth of
exports.

Figure 3: Trends of Ethiopia’s Trade Deficit, 1996 - 2009

 400.00

300.00

200.00

100.00
Export Value
- Import Value

average
ዓ1994

ዓ2006
ዓ1990
ዓ1991
ዓ1992
ዓ1993

ዓ1995
ዓ1996
ዓ1997
ዓ1998
ዓ1999
ዓ2000
ዓ2001
ዓ2002
ዓ2003
ዓ2004
ዓ2005

ዓ2007
ዓ2008
ዓ2009
Trade Deficite
(100.00)

(200.00)

(300.00)

(400.00)
Source: Figure drawn on the basis of data from the NBE

The country reported huge deficit even at individual agricultural commodity level where it has the
potential to narrow the gap. As shown in Table 5 some important agricultural commodities made
significant contributions to the aggregate trade deficit of the country, with the exception of sugar which
enjoyed a trade surplus. There is a possibility of local production to narrow the deficit, especially if
production of soya beans, wheat flour, dried peas and malt are increased.

Table 5: Trade Deficit in Some Agricultural Commodities (Billion Birr), 1996-2009

Commodities Import Export Trade Deficit/ Surplus
Soya beans 6,570.00 2,685.00 3,885.00
Wheat flour 99,968.00 57.00 99,911.00
Grain sorghum 69,770.00 - 69,770.00
Dried peas, shelled 42,944.00 17,816.00 25,128.00
Durum wheat 803,771.00 - 803,771.00
Spelt and common wheat 307,751.00 - 307,751.00
Malt not roasted 21,724.00 39.00 21,685.00
Raw cane sugar, in solid form 69,196.00 173,066.00 (103,870.00)

5. OPTIONS FOR NARROWING ETHIOPIA’S TRADE DEFICIT

5.1 General

There are two possible options for narrowing the prevailing trade deficit of the country. The first involves
the transformation of the export of primary commodities into export of high value-added manufactured
products through the development of proper upgrading strategies. The second option refers to the
introduction of new import substituting commodities and increasing the production volume and the
competitiveness of existing domestic manufacturing industries. In today’s highly dynamic global market
with reduced protection levels, competition is increasingly shaped by costcompetitiveness advantages.

There were and still are several instances where imported commodities become cheaper than their local
counterparts. The domestic manufacturing industries most often complain about being uncompetitive due
to importers tendency to under invoice commodities they import and poor quality of imported
commodities. On the other hand, Ethiopian manufacturing industries are reported to suffer from low
productivity, which contributes to their low competitive ability. A World Bank recent study (2009) shows
that the overall total factor productivity (TFP), that is the efficiency with which resources are used in
production, is lower for Ethiopian manufacturing industries than other sub-Saharan African countries.
Thus, existing manufacturing industries need to give proper attention to low productivity factors and the
government also apply strict legal measures and reforms to protect them from unfair trade practices if
import substituting actions are to be effective.

Nearly all of the imported products, with the exception of heavy machinery and equipment can be
produced locally.Quite a large number of manufacturing enterprises, which are expected to complement
import, have been licensed during the past five years, though manufacturing industries under operation
remained deplorably low as can be seen in Table 6. During the period a total of 7,816 projects at a capital
of Birr 236,835 million were licensed, of which only 278 are now under implementation while another
390 have become operational. Nearly 92% of the licensed projects are still under pre-implementation.

Table 6: Summary of Approved Manufacturing Investments by Sub-sector and Status, 1996 – 2009

5.2 Commodities for Promotion from the Food Sector

The country’s food supplies are mainly composed of primary agricultural products and manufactured
food products. The primary agricultural food products are mainly catered from domestic sources, with
some supplements coming from import. Manufactured food products, however, are supplied both from
domestic food industries and from imports, the latter comprising most of the aggregate food supply of the
country.

As shown in Table 7, the country imported food products ranging from Birr 3,595.6 million in 2005 to
Birr 9,872.5 million in 2009, including some primary products of agricultural origin. Importation of
cereals took the largest share, with a yearly average import value of Birr 2,826.7 million over the past five
years to be followed by animal and vegetable fats and oil products with a yearly average of Birr 1,485.5
million over the same period.
To provide a clear picture on the magnitude, trends and contribution of individual imported food products
and to further facilitate the identification of products for import substitution, some of the broadly defined
products in Table 7 are further sub-divided into their components as defined in HS 6 or 8 digit levels.

Table 7: Value of Food Product Imports (Billion Birr)

19 19 19 19 19 19 19 19 19 19 20 20 20 20 200 200 200 20 20 20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 4 5 6 07 08 09

ምግብና የቁም
እንሰሳ (Food
0.0 0. 0. 0. 1.3 1.7 1.9 1.5 2.1 1.8 2.5 7.2 7.7 3.9 12. 11. 9.1 14.
and Live - -
7 56 77 64 7 0 8 7 4 0 0 5 1 7 69 64 7 83
Animals)

እህል (Grain) 0.0 0. 0. 0. 1.2 1.5 1.5 1.3 1.6 1.3 1.9 6.2 6.1 2.7 10. 9.8 5.6 2.9 3.6 3.8
2 34 65 46 5 8 7 3 2 2 0 9 9 4 44 7 0 7 2 5
ሳሙናና
መወልወያ (Soap 0.0 0. 0. 0. 0.1 0.1 0.1 0.2 0.3 0.3 0.3 0.5 0.5 0.6 1.1 0.9 2.1 3.0
- -
and Polish) 8 10 09 14 3 5 7 4 4 3 8 5 3 9 3 1 9 9

መጠጥ
0.0 0. 0. 0. 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.2 0.2 0.5 0.7
(Beverage) - -
4 04 03 03 4 3 4 5 5 7 0 9 4 7 1 6 3 0

ትንባሆ
0.0 0. 0. 0. 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.2 0.1 0.0 0.1
(Tobacco) - -
2 03 03 03 5 4 4 5 8 7 2 0 8 3 7 9 9 2
4. ከውጭ
የተገዛ ምግብ 14
0.2 1. 1. 1. 2. 3. 3. 3. 4. 3. 4. 14. 7.7 24. 22. 17. 2.9 3.6 22.
ነክና የምግብ .2
3 06 57 31 82 49 80 25 22 59 99 75 9 73 86 58 7 2 59
እህል 8

5.2.1 Dairy Products

The aggregate yearly import of dairy products over the last five years ranged from Birr 48.9 million in
2005 to Birr 106.7 million in 2009, exhibiting a consistent growth except in 2007 where there was a
minor drop compared to imports in 2006. Milk and cream in solid form containing less and greater than
1.5% fat dominated the market for imported dairy products, holding on the average about 86% of the total
imported dairy products. The domestic production, on the other hand, showed a continuous growth over
the same period and increased from Birr 68 million in 2005 to Birr 143.8 million in 2009.

The apparent consumption of manufactured dairy products of the country, excluding the consumption by
the large majority of the rural and semi-urban segment of the population which do not have access and
purchasing power to buy manufactured dairy products, ranged in value from Birr 116.3 million in 2005 to
Birr 249.1 million in 2009. The share of import varied between 34.7% and 45.2%, with an average share
of 41.5%, as shown in Table 8. Consumption is expected to increase as urbanization and urban population
of the country continue to grow. The market share of imported dairy products is expected to increase
proportionally. In view of the country’s potential in livestock resources there appear to be ample
opportunities to expand and diversify the domestic dairy manufacturing industries. There is a wide market
opportunity to substitute the milk imported in powder form with locally processed liquid milk, provided
domestic industries adhere to hygienic and health requirements of processing and packing dairy products.

Table 8: Value of Dairy Product Imports and Domestic Production (’000 Birr)