THE EFFECT OF EXPORT TAX ON THE COMPETITIVENESS

OF ETHIOPIA’S LEATHER INDUSTRY by Wegayehu Fitawek

A dissertation in partial fulfilment of the requirements for the degree of
MSc Agric (Agricultural Economics)
in the
Department of Agricultural Economics, Extension and Rural Development

Faculty of Natural and Agricultural Sciences

University of Pretoria
Pretoria, South Africa
November 2015
Most countries have implemented export-oriented development strategies with the objectives of
improving their economic stability and improving resource allocation efficiency. Export tax, which
has been an integral part of trade policies for centuries, has not been given adequate attention by
the World Trade Organization (WTO) or the economic literature. Export taxes on primary
commodities serve as indirect subsidies to manufacturing and processing industries by lowering the
domestic price of inputs, and also have a positive effect on government revenue. Conversely, export
taxes can have a negative impact on the producers of raw materials and externalities for trade
partners. The government of Ethiopia applied a 150% export tax on raw hides and skins (RHS) and
semi-finished leather products in 2008, and another 150% export tax on crust leather in 2012 in
order to encourage the leather manufacturing industry. The aim of this study is to examine the
export trends of Ethiopia’s raw hides and skins and finished leather products, and to analyse the
effect of export tax on Ethiopia’s leather industry’s export competitiveness.

A linear trend analysis model was used to analyse the export trends of raw hides and skins and
finished leather products. This study evaluated export volume data from 1997 to 2014 in order to
estimate the trend coefficients. The results of the model showed that Ethiopia’s RHS and semi-
processed leather products export had declined by -38.06% and significant at 1% significant level;
this is due to the heavy export tax imposed by the government to increase the production and export
of finished leather products. Meanwhile, finished leather products and footwear have increased by
75.34% and 44.37% respectively, and significant at 1% significant level.
The comparative advantage analysis was used to examine the revealed comparative advantage
(RCA) of Ethiopia by comparing selected countries. The results indicated that Ethiopia was a RCA of
raw hides and skins and semi-processed leather products more than one (RCA > 1) before 2008;
after the export tax implementation in 2008, the RCA became decreased, conversely, the RCA of
Ethiopia’s finished product more than one for the period 2006 to 2014 and increased more after
2008. South Africa has comparative advantage only on the export of raw hides skins and semi-
processed leather product (RCA>1). Nigeria was not stable RCA for both raw hides and skins and
finished leather products and in most year revealed comparative advantage greater than one (RCA
>1). The RCA indexes of footwear for all three countries were less than one except Ethiopia in
(2007, 2008 and 2012). The RCA provides information on advantage to exports, such as product
comparisons with other competitive countries. However, the RCA does not show the sources of
advantage (growth), therefore the constant market share (CMS) model was used to indicate the
source of advantage. The CMS model has been used to evaluate the competitiveness of Ethiopia’s
leather products. The export value data of 2007 were used as the base year, whereas data in 2013
were considered as the year after the export tax implementation and increase. The results indicate
that the implementation of the export tax has reduced the competitiveness of raw hides and skins
and semi-processed leather products, but increased the competitiveness of the finished leather
products in the world markets. The overall results showed positive export growth (2.55), which is
most likely achieved by an increase in the export competitiveness of the leather industry of 2.25.
The positive competitiveness value indicates that Ethiopian finished leather products are
competitive with other exporters in selected markets (Italy, China and Hong Kong). Conversely,
Ethiopia’s leather products have negative commodity composition effects and market composition
effects (-0.132 and -0.262, respectively). The negative commodity composition effect shows that,
because of the export tax, the export of Ethiopian raw hides and skins and semi-processed leather
products have decreased, while the imports of these products have grown faster in selected
markets. The same is true for negative market composition effects; because of the export tax, the
demand for raw hides and skins and semi-finished products decreased in selected markets. Even
though the government imposed the export tax to reduce the export of raw hides and skins and
semi-processed leather products to encourage the finished-product manufacturing industry, there
is a shortage in the supply of raw materials. This need highly improved the supply of raw hides and
skins and the quality of the leather-processing enterprises by constructing a new policy on livestock
management and hides and skins collections. In the short run, the export tax may enhance the
competitiveness of the leather industry. However, in the long run, it may lead to efficiency losses,
lower welfare, and lower growth, because a temporary measure can have long-lasting effects. The
Ethiopian government should consider reducing the export tax in the long run to make the industry
as competitive as South Africa and other exporting countries.

The study has investigated those factors, both external and internal, that affects the export
performance of textile and garment sector in Ethiopia using both quantitative (OLS regression and
Questionnaire) and qualitative (FGD) method of analysis. The study has revealed that previous
years’ economic growth measured by GDP and FDI made has positive impact on the export
performance of the sector and the impact is also statistically significant. Furthermore, REER has
significant and positive effect on the export performance. The cost of exporting products to various
market destinations is costly and as a result the price they set at international market is becoming
less competitive. The domestic price for their product is high and profitable. As a result, exporters
are reluctant to export their product into international markets. They prefer to sell their product at
home than exporting to the rest of the world. Trade and FDI are considered as the main channels of
introducing new technology and new knowledge. As a result firms should consider this as an
opportunity to adapt new technology and diversify their production. Price adaptation and ability to
offer lower prices can positively affect the export performance of firms. Firms should learn from the
best performers domestically and internationally.
The apparel (clothing or garment) industry is considered as one of the most important export
sectors in the world, particularly for the developing and least developing countries (LDCs). In 2013,
world apparel trade was valued at US$460 billion which represents 7% of the world’s tradable
manufactured products and nearly 70% of the world apparel exports come from low and middle-
income economies (WTO, 2014). Moreover, the industry is the oldest and the most globalized
industry that has shifted rapidly to different parts of the world since the early 1970s. Furthermore,
many developing countries have started apparel exports, which have been playing a significant role
in the initial stage of their industrialization and economic development (Gereffi and Frederick,
2010). In many developed countries such as the United Kingdom (UK) and other West European
nations, the United States (US), Japan, and newly Industrialized Economies (NIEs) including Hong
Kong, Taiwan and South Korea, the apparel industry was developed at the first stage of their
industrialization and was also the first export industry (Yang and Zhong, 1998; Dickerson, 1999).
Following almost the same pattern, the less developed countries in Asia and Africa, such as
Bangladesh, Vietnam and Kenya, have also emerged as important apparel exporters. The transition
of the industry has made developing countries as dominant exporters in the world apparel market.
For instance, developing countries contributed only 25% of worldwide apparel exports in the mid-
1960s, which has increased to more than70% by 2013 (WTO, 2014). Moreover, the industry has
created 40 million direct employment opportunities, especially for women, which comprises a
significant portion of total manufacturing employment in some developing countries (Gereffi and
Frederick, 2010).
Exporting has been one of the fastest growing economic activities in the world especially over the
past two decades. It is important as it accelerates the pace of economic growth, creates new jobs
and improves living standards of the people on the macro-level, as well as increases the profitability
and competitiveness of the firms at the micro-level. Export is an activity in which products are made
or grown domestically but shipped and sold abroad (Griffin & Ebert, 1995). Export is an activity of
sending goods to another country for sale (Dictionary). The firms can consider export under
circumstances like when the cost of production in the foreign market is high, the volume of sales in
the foreign market is not enough to break even, the foreign market is not a long-term market, the
product may not have enough life to justify huge direct investments and the political factors are not
conducive (Cherunilam, 2005). Exporting allows firms in developing countries to enlarge their
markets and benefit from economies of scale. In addition, several scholars have pointed out the
importance of exporting as a channel of technology transfer (Pack, 1993). In order to formulate
trade and industrial policies aimed at stimulating exports, it is important to understand which
factors stimulate or deter firms to enter to the foreign markets.
Textile and garment sector is among the priority subsectors 1 identified by the Ethiopian
government in transforming the country’s traditional agricultural based economic activity to
industrialization lead rehearsal. Currently, Ethiopian textiles and apparel industry encompasses
spinning, weaving, finishing of textiles, manufacture of cordage, rope, twine, netting, knitting mills,
and manufacturing of wearing apparel. The firms in the industry produce products such as cotton
and woolen fabrics, nylon fabrics, acrylic and cotton yarn, blanket, bed sheet, shirts, carpets, gunny
bags, wearing apparels, and sewing thread. Currently Ethiopia has above 190 Textile and garment
firms including ginning, spinning, weaving and knitting, and integrated and traditional clothing-
making companies out of which 80 are involving in manufacturing of export goods (ETDI Company’s
profile, 2017)

In recent years, Ethiopia has given special attention to the investment activity. This special attention
given to the manufacturing sector has enabled foreign investors to look into the country. This is
witnessed within the past ten years in which the total FDI of the country has increased dramatically
and makes Ethiopia to become the first in Africa and the second in its remarkable growth in the
world (Ethiopian Investment Commission report, 2016). Particularly the establishment of industrial
parks in different regions are witnesses how the country give special attention for the manufacturing
sector.
Ethiopia, one of the fastest growing economy country (WB report, 2016) in the world has a
comparative advantage on textile and garment sectors because of suitable climatic conditions for
production of raw-materials of the sector, abundance and relatively lower cost of labour force and
the demand of developed country shifted to use products of least developing countries like
Ethiopia.

The country is striving to make the manufacturing sector to play a great role in GDP growth, job
creation, foreign exchange earnings and SME development. The Government of Ethiopia is
supporting the privates sectors which are engaged in the manufacturing sector with different
incentives and support to ensure accelerated industrial growth and improve foreign exchange earning
needed for development and investment. These incentives and promotion are used as tools of
achieving transformation into industry led economy and improving the business environment for
domestic products to be competitive in the international markets.( GTP I 2009-2015)
Furthermore in the fall of 2015, the government finalized and published the current 2016-2020 five-
year plan, known as the Growth and Transformation Plan II, which emphasizes developing
manufacturing sectors where Ethiopia has a comparative advantage, such as textiles and garments,
leather goods, and processed agricultural products.
However, as in the case of many developing countries, Ethiopia’s export has been limited to few
products, which are mainly agricultural commodities. Even though service sector has the highest
share for the economy, the foreign currency earning depends mainly on primary products export that
cannot compensate the foreign currency requirements for import. The Ethiopian export sector in
general registered a 19.2 percent average growth but the growth does not enrich the target set by the
Government. The manufacturing sector of the country also did not meet the targeted objective of the
government as the total export didn’t fulfill its target set in revenue generation expectations (Emagne
Yetsedaw, 2014) unpublished paper. According to the World Bank fact book report (2017)2
manufacturing represented less than 8% of total exports in 2016, but manufacturing exports should
increase due to a growing international presence. Accordingly the textiles and garments exports
haven’t seen a significant increment and it constitutes just about only 2% of total exports in 20153.
For the aforementioned export performance target gap most of the findings of the study consider
the supply side factors than demand side but this study will take into account both the demand and
supply side factors that can affect the export performance.
Statement of the problem
The government of Ethiopia has put in place different incentives and engaged into economic, social
and political reform activities that enable the country to attract textile and garment industry.
Ethiopia's Industrial Development Strategy issued in 2002 emphasizes the need to follow export-led
growth, pursue Agriculture Development Led - Industrialization (ADLI), create linkages between
internal and external investors with the purpose to develop the industrial sector and enhance its
contribution to the overall economic growth. The strategy also depicts that the textiles and garments
sector is one of the strategically selected priority export- oriented sub-sectors (FDRE Strategy, 2002).
The export performance of textile and apparel industry geared up from USD 62.2 million in 2010/11
to USD 85 million in 2011/12, USD 111.353 million in 2013/14 and USD 160 million in 2015/16
(MOFEC, 2017) . Despite Ethiopia's ambitious plan to earn 1billion USD in the GTP I (2009-2015)
from the textiles and garments sector, GTP I implementation report of MOFEC (2015) revealed that
the actual performance of the sector was only about 456 million USD 46% of the plan which far
behind the target. This shows that even if the export performance of the sector increases from year
to year, comparing to the targets set in GTP-I was not very encouraging. Hence, it is very imperative
to comprehend well the reason why the export performance far behind from the target.

As cited from Abay and Zewdu (1999) distinctive structural problems, weak policy frameworks and
institutions, protection at home and abroad (IMF and World Bank, 2001), and the structure of
African exports, which is characterized by dependence on primary commodities (Alemayehu, 2006;
UNCTAD, 2004) are considered as the reasons for Africa‘s as well as Ethiopia's poor general export
performance.
Having these unsatisfactory performances and given the Government's endeavor to increase the
country's foreign exchange earnings by tracking concrete policy measures and incentive schemes
calls for specific studies anxious with systematic identification of factors affecting the export
performance of Ethiopia’s textile and garment industries. More precisely, this study has investigated
the effect of Gross Domestic Product, Real Effective Exchange Rate, Foreign Direct Investments and
Market Opens by specifying an econometric model as well as Firm characteristics and marketing
strategy using qualitative data analysis so as to provide recommendations for policy and firm level
strategy with regard to export performance enhancements of the sector under the case..
In addition those different studies conducted on the same subject area were merely either using
econometrics model or qualitative method of data analysis. Whereas, this study paper has
employed the combination of both techniques. That is, qualitative data analysis is used to support
the findings drawn from the specified econometrics model and to analyze the data gathered using
different data collection instruments including Focus Group Discussion and Questionnaire.
Import is one of the major component of output in less developed countries like Ethiopia with
share around one third of their national income. Therefore, this study focuses on inflation of
import goods and assesses and identifies the major determinants of import goods inflation in
Ethiopia. Findings of the study suggested that import price in Ethiopia is significantly
determined by real effective exchange rate and world oil price. Therefore based on this result
revaluation of currency and finding another sources of energy and cooperating with other
countries in stabilizing world oil price is recommended for government of Ethiopia.
1.2STATEMENT OF THE PROBLEM
Inflation is sustained rise in general price level of goods and services. The definition of inflation
concern, not increase in price of a particular product nor for a short period of time.
(Mishkin, 2007)
Inflation is bad not because people hate it but because of its serious economic and social
effects. It reduces the real income of people especially of those fixed income earners and
redistributes income from one group of people to the other group and creates income
inequality. Inflation also hinders foreign direct investment because itraises cost of materials
and inputs and makers FDI less profitable. Uncertainty about prices and increase in production
costs also reduce production. Inflation also results in reduction of exports because of decrease
in production and expensiveness of domestically produced goods in international market. At
the same time it also results in imports, which adversely affects balance of payment (BOP) of
the country. (Jhingan, 1997) sited by (Sisay M, 2008).
Structuralists explain the long run inflationary trend in developing countries in terms of
structural rigidities, market imperfection and social tension relativeinelasticity of food supply,
foreign exchange constraints protective measures, rise in demand for food, falling export
earnings, hoarding import substation, industrialization and political
instabilities.(Ayinde O.Eetal, 2010)
Lim C,H.and papi L. (1997) by using econometric analysis finds that inflation in Turkey is
determined by monetary variables (i.e. money and exchange rate) and public sector deficits.
Koech J. and Wynne M.A, (2012) finds that core import prices inflation estimators (excluding
oil price) provide little or no predictive power for head line US import price inflation.
There is no agreement on the causes of the high inflation experienced in recent years in
Ethiopia. The government state supply bottlenecks, market structure, increased income in the
rural sector and international price development especially of petroleum to be the cause of
inflation. On the other hand IMF and most economists argue that inflation in Ethiopia is caused
due to increased demand caused by expansion in money supply and increased remittance. In
addition deficit is also regarded as a cause of the inflation. In short the government attributes
inflation to supply factors while international organization and most economists attribute
inflation to demand factors (Sisay m., 2008)
Sisay M. (2008) finds that inflation in Ethiopia is in the long run due to structural, monetary
expansion lending rates and expectation. On the other hand exchange rate one quarter lagged
money supply; gas oil prices and deficit have been found to have no significant impact on
inflation in the long run.
Asayeheng D. (2009) finds that main determinant of inflation in Ethiopia are real GDP,
exchange rate, domestic landing in ternate rate.
Kibrom T. (2008) states that the most important determinant of inflation in the long run are
mainly domestic monetary development while cost push factors are the force behind short run
inflation. He also stated that in the long run domestic food price influenced mostly by income
growth, inflation expectation, money supply growth and increase in international food price.
While he finds determinant of non-food inflation are found to be inflation expectation, money
supply growth and interest rate. He also states in the short run, both demand and supply
appear important in the current inflationary process, with supply factors having the edge over
the demand factors.
Imports share of GDP is increasing in Ethiopia in high rate from 15% in 1988/89 to 33.3% in
2012 by amounting $9.498 billion. Ethiopia imports food, live animals, petroleum and
petroleum products, chemical,machines, motor vehicles, cereals and textiles. (Indexmundi,
2013)
Due to small economic size, production in developing countriesis heavily dependent on
imported raw materials and no reasonable domestic substitution because of this reason it is
one of the major component of their output (Porter and Ranney, 1982). They are facing the
problem of BOP deficit due to their high import and inability of their export to subsidize this
import. Subsiding this leads to high public debt and budget deficit.
However,amazingly there is no research on determinants of inflation on import component of
output in Ethiopia unlike other components of output like food, agriculture, etc. And this
appears to be relatively under researched topic, which is a bitsurprising as most of the relative
price shocks that seem to necessitate the construction of core inflation measure are to the
prices of goods that are traded in global market. Therefore this research try to fill this gap and
it is pioneer in this regard.

ASSESSMENT OF PRACTICES AND CHALLENGES OF COFFEE

EXPORT MARKETING: IN THE CASE OF ETHIOPIAN COFFEE &
TEA AUTHORITY By Hana Mulugeta
May, 2018
Addis Ababa

The purpose of the study is to assess Practices and Challenges of Coffee Export Marketing in
the case of Ethiopian Coffee & Tea Authority. The study is descriptive type of research in its nature
and employed quantitative research methods. From top ten coffee export companies, by using
purposive sampling techniques top three coffee export companies were selected as target
population. Namely Kerchanshe Trading plc, Mullege plc and Horra Trading plc. The study uses both
primary and secondary data sources. Primary sources of data were collected from respondents
through questioner and the secondary data were collected from published & unpublished sources.
To analyze the data gathered quantitative techniques were used. Descriptive statistics such as
percentage, mean, and standard deviation were used the study. The finding in this study shows that
the practices of coffee export are not limited to the seasonal market & the coffee is also not
exported for yearly round consumption. The descriptive analysis shows that most of the respondents
strongly agree that the price and quality of coffee have an impact on the export marketing. The
research also shows that both price and quality are influential variable to affect the practices of
coffee export marketing. In addition to exporting reliable and consistent quality coffee the
government should offer price risk management services for producers to further reduce
vulnerability due to fluctuation of international market prices. To improve the competitiveness of the
country in its coffee export according to the target markets preferences, supporting participants in
the domestic coffee production, improving the exporters capacity in market information usage,
international sales capacity, and negotiation skills are crucial. Other factors like increasing
productivity and reducing costs of marketing should also be considered.

Coffee is one of the most important traded commodities in the world. The sector’s trade structure and
performance have large development and poverty implications, given the high concentration of
production by small-holders in poor developing countries. Coffee’s global value chains are quickly
transforming because of shifts in demands and an increasing emphasis on product differentiation in
importing countries (Ponte 2002; Daviron and Ponte 2005).
Coffee supplied and traded in the local market usually has a lower quality. Coffee on the local
market is mainly coffee destined for export through the Ethiopian commodity exchange(ECX)
market but was rejected for failing to meet ECX’s quality standards. In spite of the fact that coffee
supplied to the local market has low quality, the price of coffee in the local market is usually higher
than export prices. As a result of this price disparity, some coffee shops in most large cities have
started mixing coffee with barley grain to get more profit. (ECX 2011)

Coffee the most important export earner of the country, accounted on average for about 60% of
the total export revenues over the last two decades. Moreover, export tax from coffee was a
significant proportion of government revenues. Approximately about 1.2 million households are
involved in coffee production, and it is estimated that 15 million 3 people, that is, around a quarter
of the country's population, are dependent on coffee for their livelihood. (ECX, 2013)

Statement of the problem

As Teressa (1987) explained in his study, the variation in Ethiopia’s total merchandise export
proceeds were better explained by fluctuation in export receipts from two or three commodity
groups, namely; coffee, pulses and hides and skins.
World coffee market condition was the predominant source of the instability of coffee export
earnings of Ethiopia (Teressa, 1987). This suggests that, there are a number of affecting factors in
the world coffee trade, which in turn contribute to the determination and evolution of coffee
prices. The key determining factors continue to be production, consumption, and stocks. As to
consumption, coffee consumer tastes are known to vary a lot among importing countries. Other
economic, social, political, and natural factors sometimes profoundly change the impact of
fundamental factors on the determination of prices and their evolution (USDA,1999). Belay (1998)
also stated that coffee accounted for 57% of the fluctuation in export earning of the country for the
period 1962 to 1990.

Ethiopia is the country where coffee was first discovered and spread to the world. The crop plays an
important role in the country’s economy even today. It is heavily exported and it is estimated that
25% of the population depend directly or indirectly on coffee for their livelihood. Coffee has
remained the main export of the country; however, other agricultural products are currently being
introduced on the international market. Despite decline in the international coffee price, coffee still
remains the country’s dominant export commodity. In rural areas, smallholders are often
geographically dispersed; roads and communications are poor, and the volume of business is
insufficient to encourage private service provision. In other words, there are high probabilities of
market failure. Inefficient and underdeveloped markets, results in low and variable prices thereby
reducing the profitability of farmers (Mulat and Tadele, 2001)
In the activities of coffee export marketing practices there are many challenges. This challenges in
the practices coffee export marketing include: volatile international market coffee price, extended
coffee marketing supply chain(ECX), low coffee productivity, inconsistency coffee quality, low
value addition and climate change.
Besides, there are certain set of challenges where on the practices of coffee export marketing face
deforestation and land degradation, loss of genetic diversity; gen erosion, crop replacement by more
profitable cash crops, little market promotion and incentive mechanism, inadequate service (credit,
inputs, seeds, equipment’s….) (Ethiopia coffee & tea authority, 2017)
Few research activities have been undertaken on coffee marketing focusing on export.
Nevertheless, in the past no empirical research was undertaken on the challenge and practices of
coffee export marketing, with full coverage of current conditions. All these imply that knowledge of
identifying the current challenges that influence the export earnings performance and demand for
Ethiopian coffee in the sub-sector are some of the research gaps that should be addressed.

Therefore, this study was focused on the current challenge that affect the practices of coffee export
marketing with respect to price and quality. This is due to the fact that this researcher believes that
currently both are the most contributory and influential variable to the Ethiopian coffee export
marketing.

Coffee marketing activities make coffee one of Ethiopia’s most important sources of farm income
and government revenues. There is a need to address the challenge on the practices coffee export
marketing. This study was focused on the challenge that affect the practices coffee of export
marketing. Therefore, the finding of this study useful to encourage the exporters to practice the
coffee export marketing with respect to economic growth of the country and policy makers. The
notable significance of this study is the possibility that other researchers may be able to use the
findings in this study for future studies that will create an impact in export marketing.
Moreover, this study’s findings can also be used for student as a reference material in library who
will conduct detailed research on the issues
This study was delimited to the city of Addis Ababa especially focused on Ethiopian Coffee & Tea
Authority residing at Mexico and this study was also covered those top three coffee exporter companies in
Addis Ababa. These were: - Kerchanshe trading plc which is located at Bisrate Gebriel, Mullege plc
which is located at Saris and Hora trading plc which is located at Lebu.
The study thematically was also focused on the challenges and practices of coffee export marketing
and identifying the factors that affect the practices of coffee export marketing.

Export Performance and Its Determinants

 Export performance is a relative success or failure of the efforts of a firm or nation to sell
domestically produced goods and services in other nations. Determinants of export performance
can be split into external and internal components. External components include market
access/entry conditions and a country’s location, which include international markets. Internal
components are related to supply-side conditions. Foreign demand is influenced by various
elements. Firstly, it is strongly linked to geography (the structural component). Typically, countries
at the center of a fast growing region are more likely to benefit than countries situated outside that
region. Second, it is likely to be related to competition and trade policy (the market access/entry
component), which could have, in principle, a similar impact on trade than geography.

Finally, both the quantity and quality of physical infrastructures (the development component) are
expected to play important roles (Lages et al, 2004).
Access to foreign markets is a critical determinant of export performance. It relates directly to the
characteristics of the trading partner countries, such as the size of their market and transport
facilities, and inversely to their own internal transport costs. It also depends positively on the size of
the export basket and the number of differentiated items and their prices, which in turn are
affected by market entry conditions. Trans border costs, which also include tariff and non-tariff
barriers, have the expected negative impact on foreign market access (Anderson, 2004; Fugazza,
2004).

The other major factor that affects export supply capacity is the real exchange rate. The real
exchange rate can be an important element in determining export growth, diversification and
international competitiveness of goods produced in a country (UNCTAD, 2005). It is a key variable
that requires close government supervision in any programmer to expand and diversify exports
(Biggs, 2007) since its management can influence export performance over a large number of
different product groups (Mouna and Reza, 2001).

Export Marketing Strategies

Export marketing strategy had significant influence on Export performance, and it was distinguished
as one of the most frequently used determinants previously (Abdul Adis and Md. Sidin, 2010).
Previous research on the significance of the marketing showed the strong association between export
marketing strategy and export performance. Marketing strategies is a procedure by which companies
react to situations of competitive market and forces of market or react to environment forces and
internal forces to enables the firms to achieve its objective and goals in target market, through all
aspects of the marketing mix, that consist of products, prices, promotion, and distribution (Slateret
al., 2009; Lee, Griffith 2004). Cavusgil and Zou, (1994) have complete definition of export
marketing strategy and explained that ''export marketing strategy is the means by which a firm
respond to the interplay of internal and external forces tomeet the objective of the export venture. It
involves all aspect of marketing plan that including product, promotion, pricing, and distribution”.
Traditionally, marketing strategy is a plan for pursuing the firm’s objective or how the company is
going to obtain its marketing goals within a specific market segment (Orville and Walker 2008;
Theodosio, Leonidou, 2003; Kotler, Amertrong, 2009). The scope of marketing strategy is specifying
the target markets for a special product or product line.
Firms seek competitive advantage and synergy through a well- integrated program of marketing mix
elements (Orville, Walker 2008). Brodrechtova, (2008) explained that marketing strategy is a
roadmap of how a firm assigns its resource and relates to its environment and achieves corporate
objective in order to generate economic value and keep the firm ahead of its competitors. Hill and
Jones (2007) have explained that marketing strategies have a major impact upon the efficiency and
cost structure of an enterprise. The researcher concluded that export marketing strategy is the road
map of how firm responds to internal and external forces by the use of marketing mix elements that
include product, price, promotion, place in order that supply and achieve firm’s objective.
Adaptation of marketing strategy is one of major elements of export performance and one of key
factors impacting export performance is export marketing strategy (Cavusgil, Zou, 1994; Thirkell,
Dau, 1998; Lee, Griffith, 2004; Brodrechtova, 2008; Salavou, Halikias, 2008).

Traditionally marketing strategy was identified as an antecedent and determinants of export

performance (Mavrogiannis et al., 2008; Lages, 2003; Leonidou et al., 2002; Cooper, Kleinschmidt,
1985; Baldauf et.al, 2000). Export marketing strategy had significant influence on Export
Performance and it was distinguished as one of the most frequently used determinants previously
(Abdul Adis, Md. Sidin, 2010).
Previous research on the significance of the marketing showed the strong association between
export marketing strategy and export performance also, a positive and direct impact of marketing
strategy on export performance was found in the studies (Mohamad et al., 2009; Mavrogiannis et
al. 2008; Lages, lages, 2003; Julian, O’Cass, 2003; Leoniduo et al., 2002; Cavusgil, Zou, 1994;).

Salavou and Halikias (2008) had found that the majority of exporter companies that obtaining higher
export profitability belonged to their marketing-based strategists. Also, evidences in this survey
explained that the marketing-based strategist’s firms acquired higher export profitability. In contrast,
researchers such as Julian, (2003); Julian and O’Cass, (2003) concluded that export marketing strategy
had not effect onto export performance.

Determinants of Ethiopian Export Performance

Mekbib (2008) classified factors affecting export performance into two broad categories. These are
domestic and external factors. According to Mekbib, external factors are factors that are related
with international/regional and individual country’s trade and related policies. For instance, the
rules established by different international organizations such as world trade organization may
probably promote external trade in the long run.

Even though the rules established by international organizations such as the World Trade
Organization (WTO) may in the long run promote external trade, in the short run, the degree to
which globalization pressurizes developing economies to open-up without allowing enough time to
prepare for the challenges, could have a serious impact on their export performance. In addition to
the above constraints the tendency of some regional organizations to protect their markets from
external competition may minimize the developing countries access to the external market.
Protective policies of countries (through tariff and non-tariff barriers), such as, for instance, the
agriculture policies of some European countries, under pressure from internal industries, constrain
exports of developing countries.

The second one is domestic factors which Mekbib classified again in to two categories. Such as,
factors internal and external to the firm. When we look at specifically the factors affecting export
performance of Ethiopia, different researchers have put their effort level of industrialization is also an
important determinant of external competitiveness and export performance through externalities. The
level of development of infrastructure, the overall institutional framework for economic
management, level of education of the workforce, the efficiency of transportation and
communication system in the country, the availability and degree of domestic supply of inputs to
exporting firms, the nature of home demand for export commodities, etc., influence the performance
of a country’s exports (Mekbib, 2008). Mekbib also underlined that the level of the economy, its
resource endowments, policies and development strategies pursued are the some of the factors
determining the export structure of a country.
World Bank (1987) report also indicated that, exchange rate overvaluation, low level of investment,
the coffee surtax, inadequate marketing infrastructure, high raw material imports tariffs,
unfavorable terms of trade, and insufficient adjustment of producer prices were the major
obstacles of Ethiopian export performance.

Towards identifying and addressing these constraints. According to Abay and Zewdu (1999), the
major constraints of the Ethiopian export sector could be seen from demand and supply sides. The
demand side constraints include: low level of demand for agricultural products due to very slow
population growth rate in industrial countries, low income elasticity of demand for primary exports,
production of synthetic products, and restrictive trade policies followed by importing countries.

On the other hand, the type and composition of products, concentration of export markets in few
countries, natural factors, like: drought and diseases, and poor domestic policies are among the
supply side challenges of the Ethiopian export trade.

Coffee Market and Quality

Ethiopia’s role in the global value chain lies not in the volume of its exports; but, in the fine quality
of its coffee (Ponte and Daviron 2005). In order to understand the relationship between domestic
and international chain actors, it is important to first understand how, where and by whom coffee is
produced in a country. Ethiopia, as mentioned earlier, produces only Arabica coffee, which is
believed to have originated in the Kaffa region. Coffee-farming systems in Ethiopia can be classified
into four categories: forest coffee, semi-forest coffee, garden coffee, and semi-modern plantation.
Most farmers cultivate without the use of fertilizers, pesticides and herbicides, that is why yields
per unit area are fairly low in Ethiopia compared to other countries

Geographically, coffee districts (woreda) are classified by their extension into major, medium and
minor producers. Coffee production is concentrated in the Oromia and the Southern Nations,
Nationalities and People’s Region. Each woreda produces coffee varieties with distinct
characteristics, the most popular of which internationally being Yirgacheffe, Limu and Harar
varieties.
Dry and wet processing are the most widely used methods in Ethiopia. Historically, about 90% of
production used to be sun-dried; but, washing has become more popular in recent years because of
significantly higher premiums in the market. Petit (2007) Ethiopia known to be the home of coffee
Arabica mainly produces washed and sun dried unwashed coffee types demanded in the world
market for their flavor, acidity and diversity of taste.

Even before the new Coffee Proclamation (Proclamation no. 602/2008, also known as ‘the Coffee
Quality Control and Marketing Proclamation’, and its Directives 159/2009 and 161/2009),
regulations mandated coffee to be sealed by government officers at the production area before
delivery in Addis Ababa or Dire Dawa and checked for moisture before the auction and prior to
export. However, coffee has been bought at one price and without incentives for different qualities.
The new quality control system, in which coffee is graded according to its agro-ecological zone, type
of processing and physical attributes, has helped to increase awareness about price differentials in
relation to quality. Throughout the years’ Ethiopian coffee by types have maintained their place in
the world market due to their rich genetic varieties and the low use of agrochemicals, which makes
them naturally organic. Yet, two important factors are to be considered regarding quality.

The first is that, there is still room for improvement when it comes to processing. A common
problem is that farmers are not used to see more compensation for more effort made for picking red
cherries. Because of this, they pick coffee beans either early or from the ground. Institutional
extension services aim to teach farmers the link between good processing techniques and final
quality, but institutional capacity is limited for implementation.
The second factor is, the issue of traceability, which is lost once coffee is graded and warehoused.
The new system allows for differentiation between coffee seed types coming from different
regions; but, not from individual producers or farms. This is one basic requirement for specialty
markets, which offer higher price premiums. Despite Ethiopia being “naturally endowed” for the
specialty market, in the current circumstances only commercial growers and cooperative unions are
able to offer full traceability. Hence, Ethiopia’s specialty market share is only 20%, compared to
Kenya’s 40% (the highest in Africa), Guatemala’s 60% (the highest in Central America) or Colombia’s
33% (the strongest in terms of specialty volume) (ECX 2010b). Estimates suggest that, Ethiopia has
the potential to increase its specialty coffee production to two thirds of its total production, or even
to 80% of the total production adding organic or rainforest certified coffee produce.

EXPORT INSTABILITY AND ECONOMIC

GROWTH IN ETHIOPIA by Yohannes Ayalew
Export instability means instability of export earnings, export prices, and export quantities,"
Exports of developing countries are concentrated in a narrow range of primary commodities and are destined to few
markets. Thus, fluctuations in earnings from one commodity or market are not offset by compensating changes in
proceeds from another product or trading partner [Love 1975: 35]. This implies that total export earnings are highly
sensitive to changes in the prices and/or quantities of the dominant export commodities, with the elasticity of
earnings with respect to prices/quantities accounting for a significant share of the sum total. It can, therefore, be
argued that as a country diversifies its exports more and more, the elasticity of each export commodity will get
smaller and smaller.
As far as the structure of Ethiopia's exports is concerned, only three commodities (namely, coffee, hides and skins,
and oilseeds and pulses) accounted for more than 80 per cent of the total export earnings for the period 1984/85 to
1988/89. Of the earnings from these commodities coffee alone accounted for about 80 per cent, on the average,
during the same period.' The country's export earnings are, therefore, likely to be sensitive to changes in the
prices/quantities of these commodities.

Journal of Advanced Research in Economics and International Business

volume I, 2013
Competitiveness and Determinants of Coffee Exports, Producer Price and
Production for Ethiopia

Coffee Supply Chain of Ethiopia The supply of coffee for Ethiopia is characterized by a long-chain with
several intermediaries. Primary suppliers of the coffee berries are of two forms namely, small-holder
coffee farmers (who actually grow coffee in gardens close to their residences or in mini-plantations) and
collectors of forest and semi-forest coffee. In considering the two forms of primary suppliers, the small-
holder farmers make use of vital inputs of production like land and labor although coffee production in
Ethiopia is generally a low input activity. On turning bright red on the trees, coffee berries are picked by
farmers and collectors of the forest and semi-forest coffee. Most of the growers who are affiliated to
coffee cooperatives send the picked berries to the cooperative organization for washing or sun-drying
and de-pulping. Figure 6 is a summary of the supply chain of coffee in Ethiopia. Farmers who reside in
distant villages far from pulpery or any cooperative organization mostly sundry the beans themselves,
remove the husks, and transport them to the primary market centers. Collectors of forest and semi-
forest coffee also take their sundried beans to the primary market centers. In the primary market
centers, the sun-dried beans are sold to the licensed collectors (Sebsabys), who in turn are required to
sell the sundried beans to the wholesalers (Akrabies) or the Ethiopian Coffee Purchase and Sales
Enterprise (ECPSE) wing of the former Ethiopian Coffee Marketing Corporation (ECMC). Sebsabys are
permitted to buy from farmers but can only sell to Akrabies or the ESPE, and cannot take coffee directly
to the auction because Akrabies, Sebsabys and exporters have separate and different licenses. Akrabies
are permitted to buy coffee from Sebsabys (but not from farmers) and deliver it to the processing
centers and to the auction thereafter, but not export it. Exporters are only permitted to buy coffee from
the auction and not from Sebsabys or farmers (ICO/CFC, 2000).
Sebsabys have a monopoly on primary marketing of sub-dried coffee in the private sector (except for
the production handled by cooperatives) since producers are not permitted to deliver unwashed coffee
directly to Akrabies. After the preliminary activities of washing and de-pulping berries brought to them
by their members, the cooperative organizations send the washed coffee to Cooperative Unions, who
together with the Akrabies or the ESPE have right to send the beans to processing centers from whence
they are delivered to the central auction markets in Addis Ababa and Dire Dawa. Since the year 2001,
Cooperative Unions have been given permit by the government to engage in direct sales without
necessarily involving parastatals; unions with sufficient capital export directly without necessarily
getting their produce to the auction markets (Dempsey and Campbell, undated). Such actions however
have quality implications in the long run. At the auction markets, exporters purchase coffee, process it
to export standard and then export it to destinations abroad. Some of the processed product are
however sold to local wholesalers and retailers and then to consumers from there. As of the year
2010/2011, 32.61% of processed coffee from Ethiopia was exported to Germany, 11.43% to the United
States of America, and 11.38% to Saudi Arabia. Belgium, Italy, France and Sweden were as well major
destinations for Ethiopian coffee exports.
In the international market, the imported product is distributed to wholesalers (large supermarkets), to
retailers and then to consumers. A report by the European Commission (2011) has shown that Ethiopia’s
Specialty Coffees (Sidamo, Yirgacheffee and Harar) are sold from US$5-9 per kg FOB whereas the retail
market price of these Specialties is above US$ 50 per kg. The share of the small scale producer has also
been revealed to be on average 2.8% of the retail price.
Although a major exporter of coffee, data sourced from the agricultural production database of the FAO
indicates that in the years 2006 and 2008, Ethiopia imported respectively 40,928tons and 27,103 tons of
coffee green at values of approximately $88million and $85m. This implies that Ethiopia engages not
only in inter-commodity trade, but also in intra-commodity trade. Nonetheless, the country remains a
major net exporter of coffee given that its meagre imports are even irregular.

Competitiveness of Ethiopia’s Coffee Green Exports Results of both Revealed Comparative Advantage
and Revealed Symmetric Comparative Advantage show that Ethiopia has comparative advantage in
export of coffee green. Its performance in export of the crop was lowest under the imperial regime
(1961-1973) and generally unsatisfactory for the entire period (1961 – 2010). Characterized by a free
market system where traders bought and directly exported coffee beans at any time along the supply
chain, the local coffee industry under the imperial regime lacked a well-developed market structure and
had quality problems with the beans exported from the country due to the minimum emphasis placed
on quality under this regime. Growth in production of coffee during this era was as well hampered by
low yields. These factors hindered any improvement in the performance of the country in coffee exports
and at the latter stage of the regime, led to a decline in the country’s performance between the years
1971 and 1973 when RCA decreased from 12.43 in 1971 to 8.89 in 1973, with RSCA also decreasing from
0.85 in 1971 to 0.80 in 1973. A move from the imperial to the military regime led to a high state
involvement in coffee marketing. Under the military rule, private traders were constrained in their
activities through licensing requirements, high fees and taxes levied by the government, and growers
were not left out: they were heavily taxed. In addition, prices of the produce were fixed by the Ministry
of Tea and Coffee Development giving no flexibility in terms of time and prices to the growers. These
inhibitions in the trading environment limited competition on the market, led to drifting of most farmers
from coffee production into the production of ‘Chat’, and triggered large scale smuggling into
neighboring countries. These responses precluded improvement in the country’s competitiveness in
export of coffee in the early years of the regime. In addition, the world price of coffee was on a decline
for most years under this regime, thereby further reducing incentives for most growers and private
traders to engage in trade under the military regime. The early years under this government system
between 1974 and 1980 saw no major improvements in the country’s performance. Relatively low
transaction cost in coffee trading under the military government and greater emphasis placed on quality
control at the latter years (1986-1991) helped improve the country’s performance in exports of coffee,
as mirrored by increase of the RCA from 12.20 in 1985 to 36.09 in 1991, with the RSCA also increasing
from 0.85 to 0.95. The military government following the short improvement in export performance
between 1986 and 1991 was however replaced by the federal (reformist) government in 1991.

Partial liberalization, reduction in export and farm taxes, abolition of farmer’s quota and withdrawal of
constraints on trading activities of private traders under the reformist government attracted more
exporters and intermediaries into the sector. Most farmers returned into production of coffee due to
the relatively more favorable environment created under the reformist government, and smuggling was
minimized due to the price incentive created through reduction in farm taxation. These factors boosted
the country’s performance in export of coffee in the early years of the reformist regime (between 1995
and 2001). During this period, RCA increased from 25.82 in 1995 to 53.45 in 2001, with RSCA also
increasing from 0.93 in 1995 to 0.96 in 2001.

Authorizing Cooperative Unions to engage in direct exports and sales without necessarily involving
parastatals, and private exporters to engage in domestic marketing of coffee at market prices triggered
an increase in the number of exporters and intermediaries in the supply chain from the year 2001
onwards. This led to an extensive supply chain involving numerous actors and processing activities,
thereby widening the gap between time of purchase of beans from buyers and sales to exporters at the
auction. Along with this wide gap resulted a challenge with management of price risk due to the highly
volatile nature of coffee prices. Quality control also became a challenge as interior control of quality was
no more under the control of exporters as they were in the latter stages of the military regime. With
minimum state supervision and increased ability of Cooperative Unions to engage in direct export,
competition became unnecessarily high in both the primary and auction markets. The increasing
number of actors and processes in the chain also led to increasing transaction costs. These resulted in a
gradual decline in the country’s export performance from the high RCA value of 53.45 in 2001 to 22.83
in 2010, with RSCA also decreasing from 0.96 in 2001 to 0.92 in 2010. The performance of the country in
export of coffee has since the year 2002 taken on a declining trend in spite of the increases observed in
world price of coffee between the years 2002 and 2007). By these changes, it is noted that the
performance of the country in export of coffee has under the various regimes been generally
unsatisfactory. It was hindered by poor market structure, low productivity of grower’s fields, and poor
quality control under the imperial regime. Under the military regime, it was hindered by limited
competition on the market, smuggling and drifting of most farmers from coffee production into the
production of ‘Chat’ due to high taxes on farmers’ incomes, and by the collapse in world price of coffee.
Under the imperial regime, it is hindered by challenges in management of price risk due to the wide gap
between time of purchase of beans from growers and sales to exporters, quality control problems,
unnecessary competition in both primary and auction markets due to the numerous players in the
extensive supply chain, and by increasing transaction costs.

Determinants of Coffee Export, Production and Producer Price As a vital step in the data generation
process and in choosing the appropriate estimator, the whole set of data (with all variables in log except
nominal rate of assistance (NRA) and foreign direct investment (FDI)) was verified through the Phillips-
Perron unit root test. Output of the test shows that with the exception of the variable ‘exchange rate
(EXR)’, all the other variables specified in the three regression equations are non-stationary at level, but
become stationary on first difference at the 1% level. The variable ‘exchange rate (EXR)’ was found to be
an I(2) variable, implying that it becomes stationary on second difference, and is in the current study
found stationary at the 1% level. To help capture its effects on coffee exports and prices however, the
variable EXR was replaced with its first difference (Δ ln EXR). Having made all the variables I(1) through
this replacement, the respective equations were then estimated using the Ordinary Least Squares and
tested for appropriate standard Gaussian properties. Results of the diagnostic tests on the Gaussian
assumptions for the respective models indicate that the residual series for the respective models are
normally distributed homoscedastic and free from the problem of serial correlations.
Determinants of coffee exports (EX) The volume of coffee exported from Ethiopia is found to be
significantly dependent on lagged domestic producer price, lagged world price (Brazilian Natural) to
domestic producer price ratio, nominal rate of assistance, domestic consumption of coffee, foreign
direct investment, and on lagged exchange rate. The intercept term had a positive coefficient significant
at the 1% level, indicating that should all the other variables remain constant, Ethiopia will continue to
export significant volumes of coffee green unto the international market.
Lagged domestic producer price has a coefficient of 0.635, significant at the 1% level. This implies that
export of coffee green in time t increases by 0.635% for a unit increase in domestic producer price in
time t-1. With coffee production in Ethiopia being a low input activity (use is made mostly only of land,
seed and labor), increases in producer price would help increase output through employment of more
hands at harvest to ensure timely picking of adequate amount of berries and to expand current area
under production (with accumulation of enough funds). More importantly, prices offered producers by
buyers influence their decision on selling of the produce either on the domestic market or smuggling it
into neighboring countries for better prices. With smuggling having been identified as a major problem
in the Ethiopian coffee industry by previous researchers (including Petit (2007), AMPD (2006), and
ICO/CFC (2000)), increasing producer price could help minimize incidence of smuggling, thereby making
more coffee beans available for processing and export.

A unit increase in lagged world price to producer price ratio of coffee green leads to an increase of
0.570% in exports of coffee green, significant at the 1% level. A priori, the effect of an increase in this
ratio was believed could go either way due to the fact that such increases are possible under four
different scenarios (Boansi 2013): Increases in world price, whiles domestic price is held constant,
Decreases in domestic price, whiles world price is held constant, Increases in both, but more in
world price than in domestic price, Decreases in both, but more in domestic price than in world
price. The positive and significant coefficient observed for the price ratio indicates that in as much as
exporters would respond positively and significantly to increases in this ratio, any negative response on
the part of growers (when victimized) is not significant. This reflects a high dependence of farmers on
the crop for sustenance. Nominal rate of assistance (government support to coffee producers reflected
by the level of farm taxation) has a positive association (1.24) with export of coffee green, significant at
the 10% level. Increasing government assistance to farmers through this variable reflects in decreasing
taxation of farm incomes. Knowing they would earn a relatively higher income from sales with reduction
in farm taxation, both garden coffee and plantation coffee growers, as well as forest and semi-forest
coffee collectors are given a reason to invest much time and money in their fields and on labor to pick
larger volumes of berries, thereby increasing supply on the market for both domestic consumption and
exports. Decreasing farm taxation also helps in minimizing incidence of smuggling of coffee into
neighboring countries. A unit increase in domestic consumption leads to a decrease of 0.658% in exports
of coffee, significant at the 5% level. With Ethiopia regarded not only as a major producer and exporter
of coffee, but also a major consumer in Africa, a unit increase in domestic consumption significantly
decreases the volume available for both export and stock (to make up for future deficits). This effect of
domestic consumption on exports could be mitigated by increasing domestic production at equivalent
rate or above domestic consumption. Increasing domestic production at such rates does not necessarily
translate into significant increases in export as export decisions of exporters depend not only on such
rates but also on other vital local and international factors. This statement is made in support of the
positive (0.007) yet insignificant coefficient observed for coffee production in the current study.

Foreign direct investment (FDI) has a coefficient of 0.001, significant at the 5% level. This implies that
increases in foreign direct investment stimulate growth in export of coffee green. With Ethiopia’s coffee
production been considered a low input activity, foreign direct investment plays quite minimal roles on
the input and production side, but on the broader perspective through international relations leads to
trade creation. Investments in developing countries by foreign investors are mostly made in areas
(sectors) in which the recipient countries have comparative advantage and such advantages are mostly
exploited to further develop the areas/sectors (this however holds in cases where investments are made
with an export-oriented motive as against a tariff jumping motive). Increasing foreign direct investment
therefore serves as a greater opportunity for Ethiopia to increase its exports through benefits from
trade creation resulting from such investment. Devaluation of the Ethiopian currency through increases
in the exchange rate is observed to stimulate growth in exports. Depreciation of the Ethiopian Birr
against major international currencies makes exports cheaper and with such condition comes increased
incentive to export larger volumes of the export commodity of interest (coffee for the current study). A
lagged instead of current exchange rate is used in this study due to the auction system for sales of
produce to exporters in the country under study (Ethiopia). An increase in the exchange rate in year t-1
may stimulate growth in export if exporters are able to access enough coffee beans at the auction in
that year. Success in accessing and exporting enough beans may result in increased profit for them and
put the exporters in a better position to bid in the auction for higher volumes in the subsequent year. A
unit increase in lagged exchange rate leads to an increase of 1.121% in Ethiopia’s coffee exports. Of the
total variations observed in exports of coffee green from Ethiopia, a total of about 63.62% are explained
by variables specified in the equation on determinants of coffee exports, and the joint effect of these
variables is significant at the 1% level.

Determinants of domestic producer price (PPR) Domestic producer price of coffee is found to
be significantly dependent on lagged domestic producer price, world price, lagged domestic
consumption, lagged exports of coffee green, exchange rate, and on production of coffee in the current
year. In contrast to observation on the intercept for equation 1 (determinants of coffee exports)
however, the coefficient of the intercept for Table 7 is not significant.

This implies that, without a significant change in any of the other variables, there would be no significant
change in the domestic producer price of coffee green. With buyers (Sebsabys) having no idea of the
price they would receive for the coffee they sell later to the wholesalers (Akrabies), and by virtue of
determination of market prices through a market mechanism instead of price fixing, prices received by
growers from buyers are usually based on previous producer price and on the prevailing world price of
coffee. These are the reasons why lagged producer price and current world price are used in equation 2
of section 2.3. A unit increase in lagged producer price leads to a 0.864% increase in current producer
price of coffee, significant at the 1% level. A unit increase in world price of coffee green leads to a
0.268% increase in domestic producer price of coffee green, significant at the 10% level. The lower
transmission of price increment in times of increasing world price reflects the extensive nature (many
intermediaries) of the supply chain for coffee in Ethiopia and the strong effect of transaction cost. A unit
increase in exchange rate leads to a 3.019% increase in domestic price of coffee, significant at the 1%
level. An increase in exchange rate makes exports cheaper and results in increased demand for coffee
beans for export. With increase in demand according to the theory of demand and supply, comes
increase in price. In order to exploit benefits from devaluation of the currency (which signals likely
increase in demand and higher prices from wholesaler (Akrabies) and exporters) buyers increase the
price they pay growers by 3.019%. Increases in demand reflected by both lagged domestic consumption
and lagged exports have significant positive effects on producer price. An increase in lagged domestic
consumption signals likely increase in conflict between domestic consumption and exports in the
current year. To secure higher volumes for sales to the Akrabies and later to exporters, buyers increase
the price they pay to growers by 0.525% and 0.976% respectively for unit increases in lagged domestic
consumption and lagged export of coffee. Increase in supply ceteris paribus results in a decrease in
producer price by 0.835%, significant at the 5% level. This observation is attributed to the market
mechanism used in determining prices paid to growers by buyers in the country. In times of good
harvest, buyers reduce the price they pay to growers due to the surplus of berries on the market. The
opposite however may be observed in times of scarcity to ensure securing sufficient beans from
growers. Of the total variations observed in producer price of coffee in Ethiopia, a total of about 85.96%
are explained by variables specified in the equation on determinants of domestic producer price of
coffee, and the joint effect of all the variables on producer price is highly significant.

This implies that, without a significant change in any of the other variables, there would be no significant
change in the domestic producer price of coffee green. With buyers (Sebsabys) having no idea of the
price they would receive for the coffee they sell later to the wholesalers (Akrabies), and by virtue of
determination of market prices through a market mechanism instead of price fixing, prices received by
growers from buyers are usually based on previous producer price and on the prevailing world price of
coffee. These are the reasons why lagged producer price and current world price are used in equation 2
of section 2.3. A unit increase in lagged producer price leads to a 0.864% increase in current producer
price of coffee, significant at the 1% level. A unit increase in world price of coffee green leads to a
0.268% increase in domestic producer price of coffee green, significant at the 10% level. The lower
transmission of price increment in times of increasing world price reflects the extensive nature (many
intermediaries) of the supply chain for coffee in Ethiopia and the strong effect of transaction cost. A unit
increase in exchange rate leads to a 3.019% increase in domestic price of coffee, significant at the 1%
level. An increase in exchange rate makes exports cheaper and results in increased demand for coffee
beans for export. With increase in demand according to the theory of demand and supply, comes
increase in price. In order to exploit benefits from devaluation of the currency (which signals likely
increase in demand and higher prices from wholesaler (Akrabies) and exporters) buyers increase the
price they pay growers by 3.019%. Increases in demand reflected by both lagged domestic consumption
and lagged exports have significant positive effects on producer price. An increase in lagged domestic
consumption signals likely increase in conflict between domestic consumption and exports in the
current year. To secure higher volumes for sales to the Akrabies and later to exporters, buyers increase
the price they pay to growers by 0.525% and 0.976% respectively for unit increases in lagged domestic
consumption and lagged export of coffee. Increase in supply ceteris paribus results in a decrease in
producer price by 0.835%, significant at the 5% level. This observation is attributed to the market
mechanism used in determining prices paid to growers by buyers in the country. In times of good
harvest, buyers reduce the price they pay to growers due to the surplus of berries on the market. The
opposite however may be observed in times of scarcity to ensure securing sufficient beans from
growers. Of the total variations observed in producer price of coffee in Ethiopia, a total of about 85.96%
are explained by variables specified in the equation on determinants of domestic producer price of
coffee, and the joint effect of all the variables on producer price is highly significant.

A unit increase in yield leads to a 0.604% increase in output, significant at the 1% level. Increase in
output per unit area, reflects increased productivity of farmers’ fields and a likely increase in the number
of berries per tree. Increase in number of berries per tree (in times of low incidence of diseases and
pests attack) in times of increased yield would most likely result in increased volume of output. But as to
whether that increase is significant was initially not known. In the current study however, it is found that
a unit increase in yield leads to a significant increase in output. Therefore, to increase volume of berries
supplied for both domestic consumption and export, there would be a need to increase yield. Lag
domestic producer price has a coefficient of 0.092, significant at the 5% level. This implies that for every
unit increase in domestic producer price in the previous year, output in the subsequent year may
increase by 0.092%. Increases in domestic producer price help growers to secure more farm hands at
time of harvest in the subsequent year to help minimize loss of berries, expand the current area under
cultivation and to ensure effective control of shocks in the form of diseases and pests attack in their
fields. Lagged world price to domestic price ratio has a coefficient of 0.088, significant at the 5% level.
This implies that for every unit increase in the price ratio, production of coffee may increase by 0.088%.
Under normal circumstances, production would be expected to decrease as farmers are mostly
victimized in times of increases in this ratio. Their positive response through increase in output in times
of increasing world price to domestic price ratio once again affirms the high dependence of farmers on
production and sales of the crop for sustenance. A decrease in tax levied on farmer’s income through
increase in nominal rate of assistance stimulates growth in production, significant at the 10% level.
Decrease in farm taxation means relative increase in revenue for farmers from sales of their produce.
Increase in revenue for farmers offers them an opportunity to effectively meet any vital production cost,
most importantly control of diseases and pest. Increasing nominal rate of assistance also gives farmers
incentives to sell their produce on the domestic market rather than smuggling it into neighboring
countries.. As a reflection of better conditions for production and assured market for produce, the index
of competitiveness (the Relative Symmetric Comparative Advantage) has a coefficient of 1.437,
significant at the 5% level. This implies that to ensure continuous growth in production of coffee, there
is a need for Ethiopia to improve on its export performance, which would then translate into assured
market for produce at relatively fairer price. An improvement in the country’s competitiveness as well
reflects addressing of inefficiencies in the subsector and mitigation of influences that could have
significant negative impacts on production. In contrast to the initial expectation however, agricultural
labor force has a significant negative association with production. This reflects inefficient use of labor
available in the country. Agricultural labor force has more than doubled between the years 1981 and
2010, but not so with the low areas of coffee and other cash and food crops harvested in the country.
This phenomenon subsequently triggered off ‘a flower pot law’ effect (law of diminishing marginal
returns). To make better use of the increasing agricultural labor force, there is a need for area expansion
in agricultural production most importantly for the coffee subsector, on which over 15 million people in
the country depend for sustenance. Of the total variations observed for coffee production in Ethiopia, a
total of about 90.61% are explained by variables specified in the equation on determinants of coffee
production, and the joint effect of all the variables on production is highly significant.

Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PGD55
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A
PROPOSED DEVELOPMENT POLICY CREDIT
IN THE AMOUNT OF SDR 430.1 MILLION (EQUIVALENT TO US$600 MILLION)
AND A
PROPOSED DEVELOPMENT POLICY GRANT
IN THE AMOUNT OF SDR 430.1 MILLION (EQUIVALENT TO US$600 Million)
TO
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
FOR THE
ETHIOPIA GROWTH AND COMPETITIVENESS
PROGRAMMATIC DEVELOPMENT POLICY FINANCING

October 3, 2018
Macroeconomics, Trade And Investment Global Practice
Africa Region

Ethiopia’s total exports expanded by 13.1 percent in FY18 after years of underperformance. This
sharp recovery in exports was driven by the growth in the services exports – that accounted for half of
total exports and expanded by 26.6 percent, mainly due to a strong performance of Ethiopian Airlines.
Goods exports declined due to weak performance of coffee, which represented 30 percent of goods
exports and decreased by 5 percent in FY18 mainly because of a drop of more than 10 percent in coffee
prices. Export increases were recorded in the leather, textile and garments, chemical, and electricity
sectors, reflecting in part the coming on stream of the industrial parks. Ethiopia exported electronics
products for the first time in FY18. The compression of goods imports played an important role in
reducing the current-account deficit. (Table 1). Low levels of exports result in liquidity constraints in
relation to debt service obligations, despite overall relatively low external debt to GDP ratio of 32
percent. Over the medium-term, expansion of exports is critical to Ethiopia’s external debt sustainability
as discussed further in the next section.
Table 1. Ethiopia: Key Macroeconomic Indicators, 2014/15-2020/21

Real Economy 2015 2016 2017 2018(e) 2019(p) 2020(p) 2021(p)

Annual percentage change, unless otherwise indicated
GDP (nominal local 17.6 24.1 18.1 18.8 17.1 16.3 16.1
currency)
Real GDP 10.2 8.0 10.9 8.9 9.1 9.0 9.0

Imports of GNFS (in 25.1 2.9 -4.8 0.2 10.5 10.0 9.5
US$)

Exports of GNFS (in -11.2 -8.1 7.4 13.1 8.7 9.0 10.0
US$)

GDP deflator 10.8 10.3 6.3 8.6 7.3 6.7 6.5

CPI (end-of-period) 10.4 7.5 8.8 14.7 9.0 8.0 8.0

Fiscal Accounts Percent of GDP, unless otherwise indicted

Expenditures 17.3 18.4 18.3 17.7 17.6 17.5 17.7

Revenues and grants 15.4 16.0 15.0 14.4 14.5 14.6 14.8

General Government -1.9 -2.4 -3.3 -3.3 -3.1 -2.9 -2.9

Balance

Public Debt (end-of- 53.4 54.4 57.2 57.2 56.3 54.9 53.4
period)
Selected Monetary
Accounts

Base Money 15.2 16.3 22.7 19.1 - - -

Credit to non- 32.8 22.3 23.0 25.1 - - -

government

Balance of Payments Percent of GDP, unless otherwise indicted

Current account -10.2 -9.0 -8.1 -6.5 -6.7 -6.3 -5.8

balance

Imports of goods and 30.7 27.9 24.0 23.1 23.5 23.6 23.4
services

Exports of goods and 8.3 8.0 7.7 8.6 8.9 9.1 9.1
services

Foreign Direct 3.4 4.5 5.2 4.4

Investment

Gross reserves (in 3,249 3,402 3,197 2,847

US$, eop)

In months of next 1.9 2.0 2.0 1.8

year`s imports

External debt 29.4 29.7 29.4 32.3 30.2 28.5 26.7

Exchange rate 20.1 21.1 21.1 22.3 25.6

(average)

Sources: NBE, NPC, MOFEC, World Bank estimates, 2018.

To support export growth and encourage private-sector development, the National Bank of
Ethiopia (NBE) devalued the ETB by 15 percent in October 2017. The underperformance of exports
largely reflects structural issues, such as closed and uncompetitive factor and product markets, but also
an overvalued exchange rate. The exchange rate has been rigidly managed to achieve a nominal
depreciation path of 5 to 6 percent annually relative to the U.S. dollar, which resulted in an
overvaluation of the real exchange rate estimated at around 20 percent by the International Monetary
Fund (IMF) in FY17. Despite tightening of monetary policy, continuing inflation has significantly eroded
the real effects
of the devaluation over the past year.
11. Since November 2016, inflation has been increasing driven by base money growth and rising
credit. Base money grew on average by more than 20 percent annually during FY17-FY18. Inflation
began to exceed the NBE 8 percent target in March 2017 and reached double-digit in September 2017.
In the immediate aftermath of the October 2017 devaluation, the NBE tightened its monetary policy
stance to limit the pass-through effect on the inflation rate. It raised the floor on time and savings
deposits from 5 to 7 percent and reduced the FY18 growth of base money from 22 percent to 19
percent. Furthermore, the NBE introduced a limit of 16.5 percent on outstanding credit growth
extended by commercial banks to firms in the non-export and non-manufacturing sectors in FY18.
Despite these measures, inflation continued to rise in FY18 to peak at 14.7 percent in June 2008.
12. Excess demand for foreign exchange remains substantial. The exchange rate premium on the
parallel market rebounded to its pre-devaluation level of more than 30 percent in the last quarter of
FY18.
Official gross international reserves decreased to US$2.9 billion at end-June 2018 (below two months of
projected goods and services imports) while net international reserves fell below US$1 billion. Reserves
are below adequate levels and, taken together with the exchange rate and debt sustainability
assessments (DSA), the external position of Ethiopia is weaker than warranted by fundamentals.
13. The fiscal deficit remained stable at 3.3 percent of GDP in FY18 as the decline in revenues was
compensated by strong measures to contain public expenditures. Federal fiscal revenue decreased
both in real terms and as a share of GDP in FY18 due to weaknesses in tax administration, delays in
implementing tax revenue increasing policy measures, a decline in trade taxes due to import
compression, and a decline in non-tax revenues. With the tax revenue-to-GDP ratio at 11.3 percent,
Ethiopia ranks in the bottom third of SSA countries in terms of tax effort. To compensate for lower-than-
expected revenue, the Government cut spending during the year and continued to enhance debt
management. The authorities prioritized completion of ongoing investment projects, froze all new
projects and reduced nonconcessional borrowing. As a result, both current and capital expenditures
declined. External, largely concessional borrowing financed about 40 percent of the fiscal deficit, while
domestic borrowing, including direct advances from the NBE equal to 1.5 percent of GDP, financed the
remaining 60 percent (Table 2).

Ethiopia Key Fiscal Indicators, 2014/2015-2020/2021

2015 2016 2017 2018 2019 2020 2021

Overall balance -1.9 -2.4 -3.3 -3.3 -3.1 -2.9 -2.9
Primary balance -1.5 -1.9 -2.7 -2.9 -2.5 -2.2 -2.1
Total Revenues and 15.4 16.0 15.0 14.4 14.5 14.6 14.8
grants
Tax revenue 12.7 12.5 11.6 11.3 11.5 11.7 11.6
Taxes on goods and 4.0 3.7 3.5 3.4 3.5 3.7 3.7
services
Direct taxes 4.6 4.7 4.5 4.4 4.5 4.6 4.6
Taxes on international 4.1 4.1 3.7 3.5 3.5 3.4 3.3
trade
Non-Tax revenues 1.6 2.7 2.6 2.2 2.1 2.0 2.2
Grants 1.0 0.9 0.7 0.8 0.9 1.0 1.0
Expenditures 17.3 18.4 18.3 17.7 17.6 17.5 17.7
Current expenditures 8.3 8.9 9.8 10.0 10.1 10.2 10.1
Defense Spending 0.7 0.6 0.7 0.6 0.6
Poverty Reducing 4.3 4.7 5.0 5.2 5.4
Expenditures
Interest payments 0.4 0.5 0.5 0.5 0.6 0.7 0.8
Other current 2.9 3.1 3.7 3.5 3.5
expenditures
Capital expenditures 9.1 9.4 8.5 7.6 7.4 7.4 7.6
Domestic sources 7.1 7.1 6.4 6.0 6.0
External project grants 0.8 0.8 0.7 0.6 0.7
External project loans 1.2 1.4 1.4 1.2 0.8
General government 1.9 2.4 3.3 3.3 3.1 2.9 2.9
Financing
External (net) 1.4 1.7 1.6 1.4 1.2 1.0 0.9
of which: privatization 0.0 0.0 0.6 0.5 0.4 0.4 0.3
Source: MoFEC, 2018.

14. The macroeconomic outlook projects continued growth for the Ethiopian economy, as well as
the gradual mitigation of its vulnerabilities. A GDP growth rate of 9.1 percent is projected for FY19,
and growth is expected to remain robust over the medium term, albeit somewhat below the levels
observed during the past decade (Table 1). While the authorities’ resolve to tighten monetary and fiscal
policies going forward may have a contractionary impact on aggregate demand, this is expected to be
compensated by the growth effects on the private sector of the structural policies announced by the
Government and supported by this DPF.

A policy of fiscal consolidation will be implemented in FY19 that includes no new nonconcessional
external borrowing and proactive debt management. The FY19 budget law envisages a reduction in
the fiscal deficit to 3.1 percent of GDP. The overall level of expenditure is expected to remain broadly
unchanged as a share of GDP. The ongoing reform of SOEs including privatization, implementation of the
government’s non-concessional borrowing policy, and pro-active debt management aim to create fiscal
space over time. The authorities have initiated discussions with creditors to re-negotiate non-
concessional debt to reduce interest rates and extend the maturity profile and have already been able
to secure improved terms on a portion of the outstanding debt. Over the medium term, the authorities
are expected to pursue a gradual fiscal consolidation path to achieve a fiscal deficit below 3 percent of
GDP by FY21. The tax revenue-to GDP ratio is expected to increase gradually in sync with the
strengthening of tax administration. The Government aims to finance future infrastructure and energy
investments through alternative mechanisms including PPPs and direct private participation.
Inflation is projected to ease to about 9 percent in FY19 and continue to decline over the
medium term. Monetary policy is expected to keep the growth of monetary aggregates in line with the
potential economic growth rate. Given that the relationship between base money and broader
monetary aggregates has weakened with the ongoing financial deepening, the NBE is committed to
prudently manage all direct monetary instruments, including the direct advances to the budget, and to
strictly adhere to its annual financial programming to avoid the type of deviations that have occurred in
the past during implementation. The NBE is also working towards reforming available monetary policy
instruments and adopting more indirect instruments of monetary control in the context of the overall
financial system reform and modernization.
The management of foreign exchange will remain a key challenge in the coming years. While the
implementation of the tightened fiscal and monetary policies in line with policy announcements will
help reduce macroeconomic imbalances, the foreign exchange position will remain fragile and will
require the full vigilance of policymakers. As short-term measures, the US$1 billion deposit by the
United Arab Emirates at the NBE in July 2018, combined with successful efforts to reach out to the large
Ethiopian diaspora and enforcement measures to restrict the parallel foreign exchange market, have
significantly improved the foreign exchange situation. The exchange rate premium on the parallel
market fell from over 30 percent in June 2018 to around 6 percent at end-July 2018. Going forward, as
outlined in the Letter of Development Policy (LDP) (Annex 3), the authorities intend to gradually move
towards a more flexible exchange rate management regime to maintain the external competitiveness of
the ETB based on the inflation differential with main trading partners and taking into account the terms
of trade shocks.
The NBE has requested technical assistance from World Bank and IMF to support this process.
Assuming a supportive macroeconomic framework and sustained external global demand, export
growth should help rebuild foreign exchange reserves. Exports are expected to continue expanding in
the medium term as the export base expands and large investment projects become fully operational,
including the Addis Ababa–Djibouti Railway, as well as several large hydropower dams and industrial
parks. The railway will improve trade logistics and reduce transportation costs for imports and exports.
It will ship goods between Addis Ababa and Djibouti in just 10 hours, much faster than the three to-four
days required to ship goods by truck. Meanwhile, the recent commencement of operations at the
Hawassa Industrial Park and the second phase of the Bole-Lemi Industrial Park are expected to increase
and diversify manufacturing exports. Investments in hydropower, industrial parks, and export-
processing zones, as well as policies to encourage FDI and private investment in light manufacturing, are
expected to support export growth and diversification. The completion of power lines to neighboring
Kenya and Sudan and expansion of power-generation capacity are expected to boost electricity exports
and further diversify exports. As a result, Ethiopia’s external financing requirements are projected to
stabilize at around US$7.5 billion per year during FY19-FY21, allowing for a gradual build-up of foreign
exchange reserves
Ethiopia Balance of Payments Financing Requirements and Sources, 2016/2017-2020/2021

2017 2018 2019 2020 2021

In million US$, unless otherwise indicated
Financing requirements (in 7,485 6,582 7,249 7,504 7,624
US$),
Current account deficit 6,528 5,502 5,768 5,951 5,980
Short term debt amortizations - - - - -
long term debt amortization 957.0 1,079.3 1,481 1,553 1,645
(excl. IMF)
Multilateral 56.4 70.6 77.7 90.0 120.1
Bilateral 204.0 98.6 361.9 384.0 438.0
Paris Club 24.7 23.8 25.3 28.6 29.4
Non-Paris Club 179.3 74.8 336.6 355.4 408.6
Commercial 696.5 910.1 1,041 1,079 1,086
Other short term capital - - - - -
outflows
Financing Sources (US$) 8,041 6,599 8,017 8,179 8,179
Foreign direct investment (net) 4,170 3,723 4,584 4,927 5,124
Other flows (net) 492.4 -607.9 -768.7 -168.2 -146.9
Capital grants - - - - -
short term debt disbursements 0 0 0 0 0
Long term debt disbursements 3,377 3,483 4,202 3,421 3,202
(excl. IMF)
Multilateral 1,514 1,422 2,129 2,104 2,021
Bilateral 944.8 708.6 1,343 339.9 313.7
Paris Club 61.1 47.9 182.1 180.5 167.4
Non-Paris Club 883.7 660.7 1,161 159.4 146.3
Commercial 919.2 1,353.2 729.8 976.5 867.4
Change in reserves 555.6 17.4 768.7 675.3 554.4
IMF credit (net)
To improve debt sustainability the Ethiopian Government will maintain the policy of zero new non-
concessional borrowing and exercise pro-active debt management. The accumulation of structural
external imbalances in recent years caused Ethiopia’s risk of external debt distress to be downgraded
from “moderate” to “high” in the 2017 DSA. Weak export performance coupled with the maturation of
non-concessional loans contracted in the last five years caused debt-sustainability indicators to
deteriorate, and the net present value of the external debt-to-exports and debt-service-to-exports ratios
breached their indicative thresholds (Figure 1 and Annex 4). However, the Government has since
tightened control over non-concessional borrowing. The level of non-concessional borrowing decreased
from US$5.8 billion (9 percent of GDP) in FY15 and US$2.2 billion (3 percent of GDP) in FY14 to US$0.6
billion in FY18 (0.7 percent of GDP). In addition, the implementation of the FY17 Public Debt
Management and Guarantee Issuance Directive establishes strict oversight by the Ministry of Finance
and Economic Cooperation (MoFEC) of new non-concessional borrowing by SOEs. The Government also
continues to improve the quality and comprehensiveness of monitoring of its external and domestic
debt through regular quarterly publication of the Public Sector Debt Statistical Bulletin. MoFEC is also
tasked with monitoring compliance with the FY18 Budget Law and controlling import-intensive
investment projects financed on non-concessional terms.4 The Government is also taking proactive steps
to re-negotiate terms on the stock of non-concessional debt.
Debt Sustainability Indicators: Present value of debt to exports ratio (PVDE), and Debt service to exports
ratio (DSE)

Ethiopia’s recent achievements notwithstanding, future growth and further gains in poverty
reduction and shared prosperity are subject to significant downside risks. These risks relate to the
economic and financial sustainability of Ethiopia’s current economic model.
Ethiopia has also established a comprehensive legal framework for debt management that ranks among the best worldwide in
the World Bank’s Debt Management Performance Assessment (DeMPA), 2013

Ethiopia’s reliance on public-sector demand, especially SOE investment, and repression of market
forces, although instrumental thus far in building the infrastructure base of the country, if
continued at the same scale, will constrain the growth of investment yields and productivity. A shift
toward greater private sector participation will support diversification, competitiveness, and export
expansion from current low base of 10 percent of total export as a share of GDP. A dynamic and
competitive private sector will require greater access to finance and a more conducive business
environment. The reforms announced by the Government and supported under this operation aim to
support the needed transformation with an expanding role for the private sector, reform of SOEs and a
gradual shift towards more sustainable financing mechanisms.
Although the general government has maintained financial discipline, the broader public sector
evinces serious financial vulnerabilities. The Government’s mix of fiscal, monetary, exchange rate, and
structural policies has generated persistent inflation, the overvaluation of the ETB, large external current
account imbalances, foreign exchange shortages, and an elevated risk of debt distress. While the rapid
expansion of public infrastructure investment has boosted firm productivity, this approach is reaching its
limit in terms of external debt sustainability and the crowding out of the private sector in the credit and
foreign exchange markets. Notwithstanding recent improvements in public debt management, including
tighter control over SOE borrowing, persistent external imbalances have contributed to an elevated risk
of external debt distress. Two of the main credit-rating agencies assigned Ethiopia a single B rating and
one a B+ rating, as the country’s obligations are subject to high credit risk. The growth projections are
therefore subject to considerable downside risks. The steps by the Government to accelerate reform of
SOEs to improve governance, management, accountability and financial performance is an important
step towards strengthening overall financial sustainability of the economy.
Overall, while substantial downside risks remain and must be addressed properly, the
macroeconomic policy framework is adequate for the proposed operation. The Government has
already taken significant steps to deal with the country’s elevated risk of debt distress. It has prioritized
investment in the allocation of public funding and curbed non-concessional borrowing. The Government
intends to achieve and maintain sound macroeconomic policies. Over the next three years, the fiscal
deficit will be reduced to put total public debt on a downward path and monetary policy will be
managed prudently to restore a track record of single-digit inflation. To sustain inclusive and rapid
growth, as well as accelerating structural change, the Government will implement its program of
reforming major SOEs including privatization. While Ethiopia has emerged as one of the most attractive
investment destinations in Africa in the past few years, the policy announcements since the nomination
of the new Prime Minister are expected to further boost the country’s attractiveness for private capital.
The prior actions6, second tranche release conditions and indicative triggers selected for this
programmatic DPF are therefore designed to support the Government’s reform efforts and help
mitigate the identified downside risks to the outlook.
Ethiopia ranked 161st out of 189 countries in the 2018 Doing Business report, with major room for
improvement in protecting minority investors (176th), starting a business (174th), and getting credit
(173rd). Ethiopia also ranked 146th out of 159 countries in the 2017 Economic Freedom of the World
index, which identified the legal system, property rights, international trade, and domestic regulation as
major areas for reform.

On January 12, 2018, the Executive Board of the IMF concluded the 2017 Article IV consultation
with the Federal Democratic Republic of Ethiopia. The IMF Executive Directors commended the
Government’s impressive record of human development improvements and output growth over the last
decade, as well as its effective policy response to the recent drought. However, they also emphasized
that external imbalances and inadequate reserve buffers remain a key risk and urged the authorities to
maintain tight control over external borrowing. Staff from the IMF and the World Bank collaborate
closely to monitor macroeconomic development and analyze policy reforms in Ethiopia, holding regular
bilateral meetings to exchange information and coordinate activities. Joint recommendations by the
World Bank and IMF staff include: (i) promoting a more flexible exchange rate to enhance
competitiveness and foster export diversification; (ii) developing a broader range of indirect monetary
policy instruments; (iii) promoting an active interbank market; (iv) strengthening domestic revenue
mobilization and accelerating tax administration reform; (v) strengthening the legal framework for PPPs;
(vi) improving the business climate,
(vii) promoting financial inclusion; (viii) improving economic governance; and (ix) closely monitoring the
non-performing loan (NPL) ratios of public banks. During Prime Minister Abiy Ahmed’s visit to
Washington in July 2018, the IMF’s Managing Director commended the Prime Minister for his recent
policy announcements and ambitious economic reform agenda. She reiterated the IMF’s “commitment
to work with the Ethiopian authorities to ensure that the economy achieves high rates of sustainable
and inclusive growth to reduce poverty.” The 2018 Article IV consultation mission took place in
September 2018.
GOVERNMENT PROGRAM
The Government’s economic program is defined in the 2016-2020 GTP II, which aims to enable
Ethiopia to achieve lower-middle-income status by 2025. The strategy advances reform efforts
launched under the GTP I, which focused on boosting agricultural productivity and accelerating growth
through large-scale public investment in infrastructure. The GTP II emphasizes the need to maintain high
rates of economic growth achieved under GTP I, but it shifts focus to expanding the role of the private
sector. The strategy also calls for increasing domestic revenue mobilization through tax reform,
exploring alternative mechanisms for financing infrastructure, investment, and strengthening economic
governance. The GTP II is designed around four development objectives: (i) achieve an average annual
real GDP growth rate of 11 percent in a context of macroeconomic stability; (ii) boost the
competitiveness of the domestic economy and facilitating structural transformation; (iii) promote
organized public participation in development policy and enhancing public ownership of development
outcomes; and (iv) ensure stable democratic processes.
The GTP II encompasses nine strategic pillars: These include: (i) sustaining the rapid, broadbased,
and equitable economic growth and development observed during the past decade; (ii) increasing the
economy’s productive capacity, competitiveness, and efficiency, with a focus on the agriculture and
manufacturing sectors; (iii) accelerating the structural transformation of the domestic private sector; (iv)
building the capacity of the construction industry to bridge critical infrastructure gaps and enhance
infrastructure quality; (v) properly manage the ongoing process of rapid urbanization and leverage its
potential to promote economic growth and structural transformation; (vi) sustainably build human
capital and technological capacity; (vii) strengthen democratic processes and promote good governance
by enhancing the capacity of the public sector and mobilizing public participation; (viii) empowering
women and youth to participate in the development process and equitably benefit from it; and (ix)
enhance climate resilience and facilitate the growth of the green economy.

Objective 2.1: Streamlining business regulations conducive to private sector

development
43. Rationale: Ethiopia’s regulatory environment for business start-up and operation is restrictive,
complex and unpredictable. Doing Business 2018 ranks Ethiopia 161 out of 190 countries globally and 31
in Africa. Enterprise creation is constrained by burdensome cost for licensing and registration. Licensing
regulations also create undue compliance burden for operating businesses. These regulations impact
both domestic and foreign owned businesses operating in Ethiopia. The Investment Proclamation
contains barriers to investment entry with restrictions and prohibitions on FDI including
telecommunications and transportation. The Commercial Code was enacted in 1960 and it has not been
updated since and as a result does not provide legal framework for modern business operations
including legal structures, shareholder rights, and other aspects of business establishment operation and
closure. Many of its provisions in the areas protecting minority investors and dealing with bankruptcy
need considerable overhaul. The legal framework for competition needs to be revised with strong
provisions on anticompetitive agreements, abuse of dominance and merger and acquisitions that are
likely to harm competition.
Solutions: The transformational power of the private sector to generate employment and sustain
growth will be harnessed through cuts in the red tape and legislative improvements of the business
registration, competition, commercial relations and investment legislation impacting both domestic and
foreign businesses operating in Ethiopia. To address the licensing and registration constraints, the
Ministry of Trade has approved (i) the Directive that reduces by half the number of licensing categories;
and (ii) the Directive that eliminates the requirement for competence certificates requirements for at
least seventy percent of licensing categories (Prior Action #4). The Council of Ministers will then submit
a legislative package to Parliament comprising: (i) a new Investment Proclamation to allow for foreign
investment except for a negative list of sectors; and (ii) a new Competition Proclamation to account for
enterprises with mixed ownership, eliminate provisions that can be used to control prices, and fight
against anticompetitive practices (Indicative Trigger #5.1). To modernize the overall legal framework for
business in Ethiopia the Council of Ministers will submit a new Commercial Code to inter alia protect
minority shareholders and provide insolvency rules that allow rehabilitation of the debtor’s business
(Indicative Trigger #5.2).
DPF 1 Prior Action #4: The Ministry of Trade has reduced the number of licensing categories by half and
eliminated the requirement for annual competence certificates for at least seventy percent of trade-licensing
categories, to reduce regulatory burden and simplify business entry impacting over one million businesses.
DPF 2 Indicative Trigger #5.1: The Council of Ministers adopts and submits new proclamations on investment
and competition to Parliament enabling foreign participation in a broader set of economic sectors and enhancing
competition.
DPF 3 Indicative Trigger #5.2: The Council of Ministers adopts and submits a new commercial code to
Parliament modernizing legal framework for private sector.
Expected Results: Reform of the investment climate is expected to reduce the regulatory burden on
domestic and foreign owned businesses operating in Ethiopia and together with reforms linked to
investment and competition proclamation are expected to contribute to the increase in overall
investment including FDI. Streamlining of business regulations is also expected to have a positive impact
on poverty through job opportunities for employees and through self-employment. Streamlining of
licensing requirements supported by this program is not expected to have significant environmental
effects.
Taking actions to remove constraints to access to credit in private sector
Rationale: With total assets of 46 percent of GDP, Ethiopia’s financial system is shallow and does not
serve well the needs of a transforming economy. Access to finance is identified as the main obstacle to
business by 40 percent of firms13. While the share of adults having a bank account has increased
significantly in recent years, it remains at a low 35 percent in 2017 (as compared to 43 percent on
average in SSA). Credit to the private sector was at a low 12 percent of GDP in 2017. The banking sector
is highly concentrated in terms of market participants and asset portfolio composition. The two state-
owned banks, Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE), represent 63
and 6 percent of total banking assets respectively as of end 2017 and serve as a key source of finance for
infrastructure investments, SOEs and developmental projects. The banking sector is raising short term
retail deposits to finance long term infrastructure projects by purchasing SOE bonds (especially EEP) and
extending loans to the same sector. The resulting asset liability mismatch and a high portfolio
concentration in specific sectors and enterprises create risks in the system and limits financing to private
sector firms. In particular, the interest on EEP bonds that have been purchased by CBE has only been
partially serviced since 2015. Instead, interest has been capitalized, undermining the solvency and
liquidity of the bank. Private banks are required to buy 5-year NBE Bonds equivalent to 27 percent of all
loans disbursed (the “27 percent rule”), the proceeds of which largely go to fund the DBE and reduce
liquidity in private commercial banks. The banking system provides a limited range of traditional
financial products and services with mobile money or other fintech innovations virtually absent in the
market. The financial system also needs to introduce new financial products to support expansion in
export, incoming FDI and structuring of PPPs.
Solution: NBE has initiated a process of developing a roadmap for financial sector development which
will identify reforms that aim to deepen the financial sector and ensure that the system is stable and
supports the growth of the private sector. The roadmap will provide a vision for the long-term system
development aligned with Ethiopia’s commitment to join World Trade Organization (WTO). It will
include an action plan and timeline for aligning Ethiopia’s financial system with international practices in
the areas of financial sector regulation, bank and non-bank supervision, financial infrastructure and
capital markets development. A critical dimension of the financial system modernization and shifting
credit toward private sector is the role of the two state-owned banks and their business model going
forward. Some of the challenges faced by CBE and DBE include (i) large exposure of CBE to bonds issued
by EEP; (ii) asset concentration at CBE; (iii) high level of NPLs in DBE; and (iv) funding model of DBE
through the 27 percent rule. Current operating environment and funding modalities of CBE and DBE
contribute to constraints within the financial system and restrict the flow of financing to the private
sector. As a first step, the Public Financial Enterprises Agency has directed the CBE to undertake
International Financial Reporting Standards (IFRS) compliance audit by an international audit firm. Given
the significance of CBE to the financial sector, its asset concentration and risk profile, there is a need for
the scope of work of the audit to be enhanced to include an Asset Quality Review (AQR) that assesses, in
depth, loan and asset portfolio quality, provisioning adequacy, and provides data and information for
strengthening CBE going forward.
NBE plans to instruct CBE to expand the scope the IFRS audit to include an AQR. The CBE audit, will be
followed up with the approval of an action plan for the bank to improve its operations. The action plan
will be approved in year 2 (Indicative Triggers #6.1) and will include an operational, governance, and
financial plan. NBE and MoFEC will approve and implement a comprehensive reform plan for DBE
(Indicative Triggers #6.1 and 6.2) to address the challenges the bank faces and move towards a
sustainable solution in line with a broader vision for the financial system development. Addressing the
constraints within the banking system will also help shift more credit supply towards private sector
development.
DPF 2 Indicative Trigger #6.1: (i) NBE and MoFEC approve an action plan to implement recommendations from
CBE’s audit; (ii) NBE and MoFEC approve a comprehensive reform plan for the Development Bank of Ethiopia.
DPF 3 Indicative Trigger #6.2: (i) NBE and MoFEC implement policy reforms under an action plan for CBE; (ii)
NBE and MoFEC implement first-year reform measures under the comprehensive reform plan for DBE.
Expected results: Implementation of reforms in CBE and DBE will help reduce constraints in the banking
system and contribute to shifting credit flow towards private sector.
Establishing the government bond market and foreign exchange market
Rationale: A major element of Ethiopia’s state-driven development strategy has been to allocate
financial resources to the public sector, and to priority economic sectors, using administrative measures
and repressing interest rates. While the government’s current model of extremely restrictive financial
regulation may have been appropriate at the early stages of Ethiopia’s economic acceleration,
persistently high inflation, negative interest rates on loans to the public sector, and concentration of
risks in state-owned financial institutions collectively call its efficiency and sustainability into question.
To better serve the financial needs of the economy and limit the Government’s financial exposure to
SOEs and state-owned financial institutions, financial regulation must evolve towards a more market-
oriented approach that promotes the efficient allocation of scarce financial resources. The absence of a
market for government bonds impairs the deepening of the financial system. Similarly, to deal with the
shortage of foreign exchange, the NBE has issued a series of directives limiting the use of foreign
exchange and controlling its allocation. While these emergency measures may help manage short term
foreign exchange shortages, they do not constitute a long-term solution to Ethiopia’s chronic shortage
of foreign currency.
Solution: Recognizing the limits of its current financial regulatory model, the NBE has begun to adopt
corrective measures, including an increase in the interest rate applied on the “27 percent NBE Bill” from
the current 3 percent to 5 percent in September 2018. To avoid a piecemeal approach, the NBE intends
to prepare a comprehensive framework for the introduction of market-based priced government
securities and take steps towards the development of the bond market. The NBE has received IMF
technical assistance on the legal and technical requirements to establish such a market, including the
drafting of relevant directives. A proper domestic market for government securities could better align
the cost of government borrowing with the availability of domestic savings and encourage the
Government to improve the value for money of public spending, especially when financial resources are
scarce. To this end, the Macroeconomic Committee will endorse a market-based framework for issuing
and trading government securities and will implement first measures to introduce tradeable securities
(Indicative Trigger 7.1). Regarding the foreign exchange market, adopting monetary and exchange-rate
policies that gradually correct the overvaluation of the ETB could help resolve Ethiopia’s foreign-
exchange shortage.
The recent US$1 billion deposit by the United Arab Emirates at the NBE, combined with the
government’s successful efforts to reach out to the large Ethiopian diaspora, has improved the foreign-
exchange situation in the short term. In July 2018, the NBE also re-introduced the gradual depreciation
of the ETB, which had been suspended following the October 2017 devaluation. The NBE intends to
implement further measures to enable flexible adjustments in the exchange rate targeting real exchange
rate competitiveness (Indicative Trigger 7.2). These measures will help ensure that Ethiopia’s exchange
rate remains consistent with its macroeconomic fundamentals.
DPF 2 Indicative Trigger #7.1: The Macroeconomic Committee: (a) endorses a market-based framework for
issuing and trading government securities; and (b) implements first measures to introduce tradeable securities.
DPF 3 Indicative Trigger #7.2: The NBE implements measures to enable flexible adjustments in exchange rate
targeting real exchange rate competitiveness.
Expected Results: With the introduction of a market for government securities, the Government would
be able to start partially financing itself through the domestic bond market by the end of the DPF series.
Besides, the NBE will be able to use the secondary market for its monetary and liquidity management
operations. Allowing sufficient exchange-rate flexibility will reduce the accumulated overvaluation of the
ETB, bolstering Ethiopia’s export competitiveness. An effective interbank foreign exchange market will
help address the imbalance between foreign-exchange supply and demand and reduce incentives to use
the parallel market, thereby reducing or even eliminating the premium between the official and parallel
exchange rates.

The Ethiopia WBG CPF 2018-202217 supports the Ethiopian government GTP II and aligned with
the WBG twin goals of eliminating extreme poverty and boosting shared prosperity and
achievement of the Sustainable Development Goals (SDGs). Given the importance of supporting
private sector-led growth the CPF was prepared jointly with IFC and Multilateral Investment Guarantee
Agency (MIGA). The
CPF is organized around three focus areas: (i) Promoting Structural and Economic Transformation
through Increased Productivity; (ii) Building Resilience and Inclusiveness; and (iii) Supporting
Institutional Accountability and Confronting Corruption. This DPF will help achieve some specific goals
set in the CPF including enhanced business and investment climate, improved access to finance for for
micro, small and medium enterprises, adoption of new approaches for sustainable infrastructure
financing and debt management, and strengthened citizen engagement and holding government
entities accountable. The
DPF’s actions aiming to create more fiscal space also support the objectives of building resilience and
inclusiveness by making more domestic public financial resources available to finance social programs
and develop buffers for shocks, including natural disasters. The proposed DPF focuses on increasing the
role of the private sector and integrating transparency and accountability reinforcing sectoral
engagements envisaged in CPF. This DPF with the focus on creating fiscal space, opening up private
sector and improving accountability and transparency complements actions already supported through
the WBG operations in Ethiopia on social and economic inclusion agenda, human capital development
and resilience.

As noted in the macroeconomic policy framework section, major macroeconomic risks are largely
related to the external and fiscal sectors. Export performance has been weak over the past few years
mainly due to structural and competitiveness issues including rigid factor and product markets and an
overvalued exchange rate. Although the Government has been making significant investments including
in energy and the development of industrial parks to boost manufacturing exports, Ethiopia’s exports
sector continues to be highly concentrated in few agricultural commodities making it highly prone to
shocks related to movements in global commodity prices. The weak export performance coupled with
the relatively large stock of non-concessional borrowing to finance infrastructure investments by SOEs
have led to a “high risk” of debt distress since the 2017 DSA. Efforts towards maintaining a competitive
exchange rate, strictly adhering to the commitment of no new non-concessional borrowing, and
accelerating structural reform are critical to preserve external balances.

Hand-Written

External Imbalances

The external current account deficit narrowed further to 6.7 % of GDP in 2017/18 (compared to
8% in 2016/17) due to higher services export revenue and policy-driven public imports restraint, but
external imbalances remain high. FDI fell, possibly owing to political uncertainty, and other financial
inflows also declined, contributing to acute foreign exchange shortages. Reserves fell further to US$2.8
billion (1.6 months of imports) by June 2018-assessed to be below adequacy benchmarks. In July 2018
the NBE took a non-concessional US$1 billion deposit from the Abu Dhabi development Fund, which
temporarily alleviated foreign exchange shortages. The nominal exchange rate with the USD was largely
held steady since the October devaluation, leading to real appreciation in recent months. The 2017 Debt
Sustainability Analysis (DSA) assessed the risk of debt distress as high. Since then, the public debt-to-
GDP ratio is estimated to have increased by over 4 percentage points to 62.5 percent (33.7 percent of
GDP corresponding to external debt). Preliminary estimates suggest that the two debt sustainability
indicators that breached their respective thresholds in the 2017 DSA (the net present value of debt and
debt service, both relative to exports) remain materially above these thresholds.
Recent Macroeconomic Development
Ethiopia continues to experience strong output growth as the economy recovers from recent droughts and
key infrastructure and FDI projects come online. Official data indicate that GDP grew 10.9 percent in
2016/17, and growth in 2017/18 is estimated to have slowed to 7.5 percent, as public spending restraint,
foreign exchange shortages, and political uncertainty dampened activity. Inflation, at 14 percent in July
2018, remains above the authorities’ single digit target, driven by rapid credit growth, pass-through of the
October 2017 devaluation, civil unrest disruptions, and import shortages. The monetary policy stance was
tightened after the devaluation, but all key interest rates remain negative in real terms, and broad money
growth robust. The general government budget deficit, although contained, ratcheted up to 3.8 percent of
GDP in 2017/18, as revenue continued to stagnate. Tax shortfalls were offset by investment cuts,
although anti-poverty and social programs were largely protected. Privatization of the national tobacco
company provided additional budgetary funding. Aggregate financial stability indicators point to a
profitable banking sector partly reflecting, however, strong protection from competition.
Outlook and risks
Real GDP growth is likely to remain strong at 8.5 percent in 2018/19, supported by lower political
uncertainty, temporary easing of forex shortages, and manufacturing FDI inflows. Medium term growth is
projected at around 7 percent, based on current policies-not incorporating a potential acceleration of
reforms by the new leadership. The 2018/19 federal budget is consistent with a 3.5 percent general
government deficit, assuming restrictive execution. The current account deficit is envisaged to narrow
gradually conditional on continued restraint on public projects, fast-growing manufacturing exports, albeit
from a low base, and a more flexible exchange rate. In the short-term, downward risks dominate owing to
policy risk, a possible deterioration of the global trade environment or growth in partner countries and
tightening of financing conditions for developing countries.
Debt sustainability would deteriorate if the export acceleration envisaged under the baseline fails to
materialize. Medium term risks are balanced since adopting now a more ambitious and faster reform
agenda poses significant medium term growth upside-via private sector development and FDI.
External Sector, Export Performance, and Competitiveness and Banking
A major driving factor for Ethiopia’s sustained growth since 2004 was the robust growth in exports. The
country’s exports grew at more than 20% a year since 2002 thereby enabling the doubling of goods export
earning every four years. While global prices were supportive of the surge in export growth, domestic
production growth, in particular, from the agriculture sector was key to the expansion in export.
This export surge was instrumental in the creation of jobs and foreign currency generation. But in
addition to favorable global condition and volume expansion, the Ethiopian government’s strategic
intervention to develop some sectors contributed to the positive performance in exports. Key in this
regard is the revelation of the horticulture industry which was nurtured through well-designed
government policies. Similarly, sound strategies anchored on long-term vision helped to expand air
transport services export earnings.
In recent years however, imbalances in the external sector have become a major challenge for the country.
The trade imbalance portion is mainly explained by the under-performance of the export sector in recent
years. The other dimension emanates from increased burden from accumulated external debt contracted to
finance major infrastructure projects and productive investments with the expectation that export earnings
would continue to expand. Measures taken by the government, including policy measures which limited
new public sector commercial borrowing, are arresting further deterioration in the external imbalance.
The external current account deficit in 2017/18 has narrowed to 6.7 percent of GDP, compared to 8
percent in 2016/17. The decline in the deficit is seen to be noteworthy when put in the context of the ratio
in 2015/16, which was elevated at 10.4 percent of GDP and 11.5 percent in 2014/15.
Improved performance in export of services and policy induced public imports restraint contributed to the
recent reduced current account deficit.
Yet, commodity export will continue to pose challenges on the current account. Due to drop in global
prices for export commodities since 2012, Ethiopia’s export growth continues to experience major
difficulties. Although some efforts to increase volume of exports compensated for the loss, overall export
earnings declined as percentage of GDP for most of the last several years. The government recognizes
that Ethiopia is vulnerable to price swings because unprocessed agricultural products dominate its
exports. For this reason, the country has been working to diversify its exports, with increased focus on
manufacturing and energy export. Renewed efforts in accelerating value addition are also part of the
broader strategy.
In terms of the structural issues that are constraining export sector development, the reform agenda of the
Ethiopian government includes the following: (i) promote and establish industrial parks as a base for
manufacturing and job creation.
(ii) Increase value-addition and quality of export products
(iii) Ease constraints related to the supply of reliable power, credit and foreign exchange
(iv) Address challenges related to trade logistics and transport
(v) Improve the rules and regulations governing business operation in the country
(vi) Maintain a real exchange regime that supports the competitiveness of the country
The Ethiopian government will continue to take measures that will improve the competitiveness of the
private sector. The Ethiopian Airlines provides a competitive cargo transport and large cargo logistics
facilities at its hub at Addis Ababa Bole International Airport, while the electrified railway line that
connects the country to the seaport of Djibouti has now started commercial transport operation. Moreover,
the completion and operationalization of more and more industrial parks will facilitate export-oriented
economic transformation. As of July 2018, eight industrial parks have become operational, with monthly
export performance exceeding 14 million USD and employment of more than 56 thousand people. As
most of these parks are progressively trying to expand towards their capacity, over the medium-term, the
eight parks and several others under construction will contribute significantly to the foreign exchange
generation and employment creation the country needs.
On a related front, to enable the delivery of integrated response to trade logistics challenges, the Ethiopian
government in August 2018 approved a National Logistics Strategy. The strategy provides a framework
for subsequent actions that will facilitate efficient import-export trade-including faster clearance of cargo
from seaports and dry ports; reduce excess cost and delays encountered by private and public operators in
the process of using logistics facilities; to provide an improved legal basis for inter-sectoral coordination
and modernized delivery of logistics services; and through introducing a clear vision about the future
direction o logistics services in Ethiopia, enable stakeholder to design appropriate solution and
modernization which leverages technology to provide competitive solution.
Beyond the broader policy frameworks provided by the National Logistics Strategy, the Ethiopian
government subsequently took concrete actions to address some key regulatory constraints that prevented
the participation of international private operators in the sector. Accordingly, in the spirit of promoting
joint ventures between domestic operators and international players, the Board of the Ethiopian
Investment Commission has amended the investment regulation in August 2018, to allow international
private operators to participate in the provision of services including bonded warehouse, consolidation
and de-consolidation services, and allow joint venture participation of international logistics service
providers holding up to 49% of stake.
Regarding banking industry in Ethiopia, the sector remains one of the drivers of growth in the country. It
has played a key role in delivering the accelerated economic growth and expansion of investment in
building productive capacity over the last two decades. However, the pace of financial sector
development and modernization of banking falls short of matching the transformation agenda the country
has embarked upon. The Ethiopian government recognizes that the economic transformation agenda has
to be supported by modern and vibrant financial sector. Towards this end, the National Bank of Ethiopia
(NBE) has initiated the preparation of a financial sector roadmap. The roadmap will layout banking sector
reforms, which will be aligned with Ethiopia’s WTO accession agenda. Furthermore, the roadmap will
address key issues including credit to the private sector and purchase of NBE bonds. During this process,
NBE will also design and implement a market-based framework for issuing and trading government
securities.

On the monetary policy side, the government is committed to take measures that improve the
competitiveness of the exchange rate. The National Bank of Ethiopia will continue to undertake
additional measures to usher-in modern foreign exchange management and enhanced availability of
foreign currency to the private sector to encourage investment and exports. In August 2018, the Board of
the National Bank of Ethiopia (NBE) passed decisions on four action areas which are expected to
contribute towards easing some of the restrictive provisions related to the foreign exchange and credit
availability to the private sector. These are just initial steps, and they will be supplemented through other
measures based on objective assessments.

Respondents

Ministry of Trade and Industry, the Ministry of Agriculture and Rural

Development, the Ethiopian Customs Authority, the National Bank of Ethiopia, the

Ethiopian Quality and Standards Authority, the Ethiopian Sugar Production Support Center

Sh. Co., the Addis Ababa Chamber of Commerce, the various exporters associations (vis.,

the Ethiopian Coffee Exporters Association, the Ethiopian Meat Producers-Exporters

Association , the Ethiopian Horticulture Producers and Exporters Association, the

Ethiopian Leather Industries Association, Amibara Agricultural Development Enterprise,

the Ethiopian Pulses, Oilseeds and Spices Processors-Exporters Association and the

Ethiopian Textiles and Garment Producers Association.

MINISTRY OF FOREIGN AFFAIRS OF THE
FEDERAL DEMOCRATIC REPUBLIC OF
ETHIOPIA

FOREIGN TRADE PROMOTION

MANUAL
FOR
ETHIOPIAN DIPLOMATIC MISSIONS
MINISTRY OF FOREIGN AFFAIRS OF THE
FEDERAL DEMOCRATIC REPUBLIC OF
ETHIOPIA
ECONOMIC AND BUSINESS AFFAIRS GENERALDIRECTORATE
ADDIS ABABA
NOVEMBER 2007

Foreign Trade Policy Targets and Strategies

Generally speaking, Ethiopia's foreign trade policy has three general objectives: (1) developing and
ensuring broad international market for the country's agricultural products in particular; (2)
generating sufficient foreign exchange which is essential for importing capital goods, intermediate
inputs and other goods and services that are necessary for the growth and development of the
economy; and (3) improving the efficiency and international competitiveness of domestic producers
through participation in the international market.
The export promotion strategy of Ethiopia is upheld by three main pillars: (1) focusing on limited
number of priority exportable products; (2) focusing on providing an all-round support to exporters;
and (3) executing export promotion activities in a well-organized manner. (Since the export
promotion activities of Ethiopia's Diplomatic Missions form part and parcel of the overall national
efforts, these three pillars should also form the basis on which the export promotion services
provided by the Missions are to be founded.) While the first pillar implies that the focus of the
country's (and hence the Missions') export promotion activities are to be selected exportable
agricultural products in the medium term, this does not mean that other (non-priority) products are
to be discouraged or ignored.
Export Performance
The Government of Ethiopia has been exerting at most effort to bolster the export sector. This has
not only resulted in sustained and remarkable growth in the export sector but also has paid off in
terms of diversifying the narrow range of export products through new investments in export
sectors such as floriculture and textile. The multi-dimensional supportive interventions of the
Government under the umbrella strategy of ADLI have led to encouraging results in most key
export product categories; in particular, in products such as pulses and oil seeds. The growth trend
in the export sector is expected to continue at the current or at an improved rate in the near future.
In order to show the performance of the export sector during the past few years more clearly,
attempt has been made to present data related to the past 10 years in Table 1 below based on the
raw data obtained from the Ethiopian Customs Authority1. This is complemented by the 6 years'
data presented in Annex VIII. From the data it is abundantly clear that the performance of the
export sector of Ethiopia has indeed been remarkable in the past few years. As such, the total value
of exports has increased from ETB 3.9 billion in 1997 to ETB 8.9 billion in 2006 which is a two and
half fold growth. As Annex VIII clearly shows, in the period between 1994 - 1999 E.C., export
earnings grew on average by 22% with the earnings rising from USD 436 million in 1994 E. C. to
USD 1.2 billion in 1999 E.C.
Encouraged by the consecutive growth of earnings from the export sector, the government
envisages that such earnings would stand between USD 1.6-1.8 billion in the year 2000 E.C.
(2007/08).
Performance of Ethiopia's Merchandize Trade (value in ETB)

Year FOB Value of Exports CIF Value of Imports Merchandize Trade

Balance
1997 3,919,004,423 7,490,578,841 -3,571,574,418
1998 3,947,987,070 10,391,891,031 -6,443,903,961

General-Directorate made computations of exports, imports, trade balance, direction of trade etc. from
this raw data.
2 The Ethiopian Customs Authority issues a full year's data only at the end of December of a given year.
3 For more practical purposes, a brief description of the major export products of Ethiopia and the addresses of the
major exporters is annexed towards the end of this manual.

Major Export Products3

The structure of the export sector of Ethiopia is characterized by high commodity concentration as
is the case with least developed countries. That is, the sector is dominated by a few primary products
that account for a lion's share of the country's export earnings.
During the period 1994-1999 E.C., the leading export products of the country were coffee; oilseeds,
pulses and spices; chat; hides and skins; and in very recent years flower and gold.
For example, during the 1999 E.C. (2006/07), the share of the biggest contributors to the export
earnings of the country was as follows: coffee (36%), pulses, oil seeds and spices
(22.6%) of which the oilseeds were the most dominant (15.9%), gold (8.2), chat (7.8%), and hides,
skins and leather products (7.6%). In absolute terms this means that coffee accounted for USD 424
million; pulses, oil seeds and spices' share was USD 267.6 million of which oilseeds accounted for
USD 188 million; gold USD 97 million;; and hides and skins fetched
USD 90 million; chat fetched USD 88.5 million and so on in the same year (i.e. 2006/2007).
It is therefore abundantly clear that export earnings from coffee still dominate and indeed exceed
that of the second major export earners, namely pulses, oilseeds and spices by USD 157 million in
that year. There has been, however, an interesting new development in the export composition of
the country in recent years. That is, even though the sector is still dominated by a few primary
products and coffee is still the biggest foreign exchange earner for the country, its percentage
contribution to export earnings has gradually declined from 57% on average during the 1997/98-
2000/01 period to 37% during 2000/01-2006/07 period. That is a decline from a share of more
than half to about one third in a matter of few years. As can be seen from the annexed data, this
phenomenon occurred not because the absolute total (dollar) amount that coffee earns in a year has
declined but because other sectors' contribution to export earnings has increased. That is, the
contribution of product categories such as pulses and oilseeds and new comers such as flower has
reduced the dominance of coffee in the export sector of Ethiopia - indicating a process of gradual
horizontal export diversification. Indeed the earnings from flower export have shown a dramatic
growth such that it rose from a mere
USD 159,000 in 1994 E.C. to USD 65 million in 1999 E.C. which is a four hundred fold growth, in
a matter of six years. Even though the country is trying to increase its earnings from coffee by
increasing its supply and by activities such as branding its coffees (Sidamo,
Harar, Yirgachefe, etc.), it is even more determined to reduce the relative contribution of the
product in the export sector by diversifying its export composition.
1.5 Import Structure and Major Import Products
A look at Table 1 above shows that not only exports but also imports of Ethiopia have shown a
dramatic increase in value in recent years. In fact, imports have increased in value much more than
exports. This is a reflection of the effects of liberalization of external trade sector and the rising
demand for import in the country as the result of the robust economic growth and investment
activity; and possibly, the rising international prices of petroleum and petroleum related import
products. As a result, the deficit in trade balance went from ETB 3.6 billion in 1997 to ETB 31.2
billion in 2006.
However, a look at the structure and composition of Ethiopian imports, reveals that capital goods
account for the lion's share in the country's import expenditure, followed by imports of non-durable
consumer goods, semi-finished goods and petroleum.
1.6.1 Major Destinations of Ethiopian Exports
The General-Directorate's computations from the data obtained from the Ethiopian
Customs Authority reveal that the share of the major destinations of Ethiopian exports in terms of
individual trading partners or countries for the year 2005 to have been the following: Germany
(13.3%), China (9.1%), Japan (7.3%), Djibouti (5.9%), Saudi Arabia (6%), Italy (5%), and the US
(4.7%). Indeed during the three years, i.e. from 2004-2006,
Germany remained the single most important destination for the Ethiopian exports. In the same
period, the second, the third and the fourth, etc places were alternatively taken by other countries.
As such these places were occupied in 2006 by Japan, China, Saudi Arabia, Italy and Djibouti; in
2005 by China, Japan, Switzerland, and Saudi Arabia; and in 2004 by the US, Japan, Saudi Arabia
and Italy. This means that from Europe, Germany and from
Asia, China and Japan were the most important trading partners for Ethiopian exports. A notable
fact regarding the destination of Ethiopian exports in recent years is that Djibouti's share went down
from 28.05 percent of the total in 2001 to just 5.99 percent in 2005 while that of China's shot up
from a meager 0.39 percent to 9.30 percent
1.6.2 Major Sources of Ethiopian Imports
According to Ministry of Trade and Industry's computations (based on Ethiopian
Customs Authority data), the most important source of Ethiopian import is the Middle East and
Asia which accounted for 57.5% in 2004/05 which was a remarkable rise from its share of 15% in
2000/01. This is followed by Europe whose share showed a slight increase in the same period from
23.1% to 25.5%. The third and fourth places were taken by North America and Africa
As for the individual trading partners, Saudi Arabia's share which was 9.7 percent in
2003 went up to 15.7 in 2005 while that of China which was around 9.6 percent as recently as 2003
has grown to 12.7 percent in 2005. In the case of China, the increase is basically the result of the fact
that that country has become a major source of lower cost consumer goods and other basic
manufactured items. In the case of Saudi Arabia, the increase is attributed to the petroleum price
hikes witnessed in the period under consideration as the country is the major source of Ethiopia's
petroleum and related products. In general, Saudi Arabia and China are the two most important
sources of Ethiopian imports in recent year; thereby demonstrating the fact that the Middle East and
the Far East are the major sources of the Ethiopian imports.5
1.7 Trade Balance
In the earlier sections, it was noted that the value of Ethiopian exports has shown a consistent and a
remarkable growth in recent years. It was also noted that the imports of the country have shown
even more pronounced increase during the same period. Consequently, the trade balance of the
country (which is the difference between the total value of exports and that of imports) has been
showing a growing deficit. For example the surge in imports from ETB 7.5 billion in 1997 to ETB
40 billion in 2006 compared to the export earnings which stood at 3.9 billion and 8.8 billion in the
same period led to the deterioration of the balance of trade position. This meant that the share of
export in import financing (export/import) declined from 52% in 1997 to 22% in 2006/07.
Consistent with this overall situation, Ethiopia's trade balance with its major trading partners calls
for concern. Accordingly, as Annex IX clearly depicts Ethiopia had deficit trade balance in
2004/2005 with all its major trading partners (except with Germany).
During this period the country had singe largest trade deficit with Saudi Arabia, followed in
descending order by China, USA, UAE, Italy, UK and so on. Earlier in 2000/2001, except with the
Sudan and Djibouti, the country had the largest deficit with China, followed in descending order by
Italy, USA, UK, France, Saudi Arabia and so on. The picture is almost the same in the intervening
period.
The aforementioned deficit in Ethiopia's trade balance can be interpreted in two ways.
On a negative note, it can be seen as cause for alarm since such a wide and growing gap between the
value of exports and imports of a country means that the country continues to need other sources of
financing its import demand such as foreign aid and credit; and needs the resources at an increasing
rate. On a positive note, the fact that the lion's share of the value of imports is taken up by capital
goods plus intermediate inputs is in fact an indication of the fact that the domestic economy is
growing and the productive capacity of the country is expanding at an increasing rate. In any case,
the fact still remains that Ethiopia remains what is technically known as an "import compressed"
economy - an economy whose growth potential could artificially be limited by its inability to import
what it needs for growth due to the gap between the value of exports and the import demand.
1.8 Export Potential/ Opportunities
According to Investment Guide to Ethiopia: Opportunities and Conditions which was published
jointly by UNCTAD and ICC (in 2004), the fact that Ethiopia offers a stable political and economic
environment as well as security; exceptional climate; almost complete absence of routine corruption;
continuously improving infrastructure and public service delivery; and abundant, cheap and trainable
labor force make it potentially an ideal destination for investment - and by implication for export.
More specifically, even though Ethiopia is a large and very diverse country, the economic and the
political environment is characterized by very little crime and disorder. The fact that Ethiopia has 18
ecological zones and five climatic zones ranging from alpine to desert means that the country is ideal
for a wide variety of agricultural activities. Since Ethiopia is one of the less developed countries with
the lowest levels of corruption, it can claim to offer one of the cleanest business climates in the
developing world.
Thus, besides all its untapped natural and human resources, the publication cited above describes
Ethiopia as "Safe, peaceful, stable and very nearly free of corruption". This means that its economy
has great potential to grow and prosper. Since the economic policies of the country are export
oriented, economic growth in the country translates into export growth.
Product specific export opportunities in brief are as follows:

Coffee
Ethiopian coffee is among the very best in the world. The diversified type of Coffee
Arabica produced in the country is highly valued in the world markets, including for its gourmet,
specialty and organic coffee. It is also used for blending with and upgrading coffees produced in
other countries. Currently, the total area of the country covered by coffee is estimated to be more
than 400,000 hectares and the total production at 350,000 tones per year. Annual exports
approached 180,000 tons in 2006/07, a rapid rise compared to 58,000 tons in 1990/91.. Coffee
remains the single most important export crop, fetching 424 million USD in 2006/07. Preliminary
studies show that there is an ample room to increase coffee production through area expansion,
productivity improvements and through further processing. Only less than 4% of the estimated 12.5
million hectares of highly suitable land is covered by coffee at the moment; and if the current 5-6
quintals/hectare yield could be improved to 10-12 quintals/hectare achieved by similar coffee
variety producing countries like Kenya, it is possible to double the current level of total output from
the existing cultivated land area. The successful conclusion of the current efforts underway to
register and license fine Ethiopian coffees Sidamo, Harar and Yirgacheffe as brand names holds a
promising future for Ethiopia to harness huge benefits from its natural resource endowment.
Livestock and Livestock Products (Hides and Skins, Leather and Meat)
Ethiopia has the largest livestock population in Africa. It is estimated that there are about 35 million
heads of cattle, 11 million sheep, 10 million goats and 1 million camels.
From theses resources, for example, Ethiopia is capable of supplying 16-18 million pieces of hides
and skins per year. Not only the volume but also the unique quality of Ethiopian leather, some of
which are considered to be of prime quality in international markets, gives the country a competitive
edge over other countries. For example, Ethiopian goatskin named after a locality known as Bati is
accorded a high place in the market to the extent that it is referred to as "Bati Genuine" (the
international name given for high quality goat skins) and fetches the highest premium price in the
world market while anything that looks like it is referred as Bati type and may be offered the next
best price.
Currently, there are 19 tanneries in operation,, four of which are state owned and the remaining
under private ownership. They mainly produce semi-processed products for export and small
quantities of finished leather for the domestic leather products industry and very small share for
export. There are about 12 small and medium scale industries engaged in the production of leather
garments, footwear and small leather articles for the export and domestic market. Ethiopia has great
potential for the rapid development of its leather sector.
Its short term strategy is on moving all leather production from the wet-blue stage to the crust and
eventually finished stage. The strategy for the long-term is to gradually convert all available hides and
skins to finished leather products: shoe uppers, shoes, jackets, bags, etc.
It is worth mentioning that the country earned USD 89.5 million in 2006/07 from the export of
hides and skins.
With regard to meat and meat products, there are currently 5 export abattoirs of
international standard and five meat processing plants which are capable of producing fresh and
frozen as well as canned meat (such as corned beef, minced beef, stewed steak, corned mutton,
goulash, etc.). The current cumulative capacity of these plants will enable the country to supply
about 48,910 tones of chilled and frozen meat and 16,000 tones of canned meat annually. The rapid
rise in export earnings from 1.7 million USD in 2000/01 to 18.3 million USD in 2005/06 is a vivid
testimony of the opportunities available in the sector for further expansion. There is also a huge
potential for export of live animals. Natural pasture which constitutes 51% of the total land area of
the country is the main source of animal feed which provides for the growth of livestock free of
chemical and hormones with great appeal for health conscious developed country consumers. Given
the availability of suitable infrastructure and the export capacity of firms, the country can export
large number of heads of sheep and goats and over 100,000 heads of cattle annually. There was a
dramatic leap in the export of live animals such that in a short period of seven years the export
earnings jumped from a mere USD 18,000 in 2000/01 to 36.8 million USD in 2006/07 thereby
implying that the country has enormous potential yet to be tapped from the resources.
Pulses and Oilseeds
The fact that Ethiopia occupies a unique geographical area with sunny summer days, mild winters,
and has similar other favorable agro-ecological conditions means that it is highly conducive for
cultivation of most types of pulses and oil seeds. Since oilseed production in the country is usually
undertaken without the use of pesticides and fertilizers, the products can be sold with organic
labeling at premium price if appropriate certification is acquired. The oilseed export showed a rapid
expansion and as such fetched 188 million USD in 2006/07 compared to about 37 million USD in
2001/02. Export of pulses also grew dramatically during the same period.
Horticulture and Floriculture
Another area where Ethiopia has great export potential is horticulture and floriculture.
The country has agro-ecological, location and labor cost comparative advantage in the production
and export of various types of tropical fruits, vegetables, and cut flowers. It also has ideal condition
for items such as bobby beans, red onion, papaya, orange, potatoes, asparagus, avocado, mango and
many others. The Ethiopian Government encourages companies with experience in agro-processing
to invest in the floriculture sector. The recent investment boom in the cut flower production and
export is a testimony that the country is capable of competing with major exporting countries such
as Ecuador, Colombia and
Kenya. Easy access to suitable and suitably located land, with host of generous government
incentives provided to investors in the area, have opened up a great opportunity for production and
export of floricultural and horticultural products. As a result, the rapidly growing domestic and
foreign investment in the sector is expected to triple the total export (which was worth 81 million
USD in 2006/07 (i.e., 64 million USD in the case of floriculture and 17 million USD in the case of
horticulture) in the next two years.
Textile and Garments
Yet another area that holds great export potential for the country is the textile and garment sector.
The existing capacity as well as the potential to expand further the supply of cotton through area
expansion and productivity improvements, the availability of large reservoir of young easily trainable
and low-wage labor force, the industrial tradition already established and the preferential market
access the country enjoys in the US and EU markets under AGOA and EBA arrangements,
respectively, together with the huge importance and support provided to the sector by the
government mean that the sector is sure to become a competitive player in the world markets and a
major foreign exchange earner in not so distant future. The foreign exchange earning from the
sector rose to 12.6 million USD in 2006/07 from a mere 3.5 million USD in 2000/01,
demonstrating the great potential to increase export earnings.

1.9 Trade in Services

Notwithstanding the deficit in merchandise trade balance, net receipts from services exhibited a
surplus throughout the period under consideration thereby offsetting part of the trade deficit. This
was the result of rapid growth in receipts from travel, transportation and government services in the
period under investigation. Data compiled by the NBE reveals
that from 1997/98 to 2004/05 receipts from travel went up from USD 35.2 to USD179.9 million;
transportation from USD 205 million to USD 416.2 million; and government services from USD
82.9 million to USD 197.9 million.
These positive developments offset the observed pick-up in the payment for travel, transportation
and other services, thus contributing to the surplus in the services account, which stood at USD
241.6 million in 2004/05. As a result of this and other net receipts (such as official transfers) in the
services account, the staggering deficit in trade balance which was USD 2.8 billion in 2004/05 was
reduced to USD 960 million in the current account balance in the same year. According to data from
NBE, in 2006/2007, foreign exchange receipts from services and private transfers registered 18%
and 59% growth and totaled 1.3 and 1.1 billion USD, respectively. In the same period, official
transfers (grants and loans in the form of financial and material aid) amounted to 1.5 billion USD of
which 78% was grant. All in all, the country obtained 6.2 billion USD from all sources including
export earnings in the budget year 2006/2007. As a result, the balance of payments recovered from
the deficit it encountered in the 2005/06 budget year and showed surplus at the end of 2006/2007
budget year.
1.10 Market Access and Opportunities for Ethiopian Exports
Ethiopia enjoys preferential market access by virtue of being a member of the
COMESA (Common Market for Eastern and Southern Africa) which embraces 23 countries with
total population of about 380 million. A study commissioned by the government is underway to
assess the implications of the zero-tariff regime under the COMESA Free Trade Area (FTA)
arrangement. Meanwhile, Ethiopian exports are entitled to benefit from the customs duty reduction
arrangement introduced before the establishment of the FTA once they meet the COMESA Rules
of Origin criteria.
Ethiopia has embarked on the process of the WTO accession negotiation by submitting its
"Memorandum on the Foreign Trade Regime" to the Organization. The successful completion of
the process would render the country, inter alias, unfettered access to the markets of the global body
whose membership is increasingly assuming a universal character.
Ethiopia is also involved in the Economic Partnership Agreement (EPA) negotiations that aim at
addressing reciprocal market access issues between ACP-EU and among the ACP country blocks
under the framework of the Cotonou Agreement which has redefined the relationship between
African, Caribbean and Pacific (ACP) countries and the EU. Furthermore, Ethiopia qualifies for a
preferential market access to EU markets under the Everything But Arms (EBA) initiative and to
the US markets under the African Growth and Opportunity Act (AGOA). EBA is a preferential
market access given by the EU to a group of Least Developed Countries (LDCs) (including
Ethiopia) that allows the countries to export their products duty free and without quantitative
restrictions, excluding arms and ammunitions. Similarly, AGOA is part of the Trade and
Development Act of the US Government promulgated in 2000. This non-reciprocal trade act
provides that African products meeting eligibility requirements will receive duty and quota free
treatment up to 2015. The Act provides most sub-Saharan African countries (including Ethiopia)
with the most liberal access to the US market available to any country or region with which the US
does not have a Free trade Agreement. A broad range of manufactured goods from Ethiopia are
entitled to preferential market access under the Generalized System of Preferences (GSP) in
Australia, Canada, Finland, Japan, New Zealand, Norway, Sweden, Switzerland, USA and most
countries in the EU. No quota restrictions are placed on Ethiopian exports falling under the 3000-
plus items currently eligible for GSP treatment. The People's Republic of
China has also granted almost all Ethiopian export products (agricultural products and raw materials,
in particular) duty free access to its markets. Ethiopia, as an LDC and as acceding country to the
WTO, is expected to benefit from the duty-free and quota-free (DFQF) market access opportunities
for LDCs being negotiated in the WTO in the context of the ongoing Doha development Agenda
negotiations.
On top of all these, Ethiopia's geographical proximity to the Middle East and Gulf countries offers
great potential market for Ethiopian export products. There is also great potential particularly for
export of perishable but high value products (such as floricultural and horticultural products) from
Ethiopia to the EU due to its geographical proximity (relative to its competitors). All in all, the
aforementioned potential renders Ethiopia a well-placed country not only as an investment
destination but also as a springboard to huge market destinations.

Domestic Policy, Legal and Administrative Framework Relevant to

Import-Export Trade
Registration requirement for engaging in exporting
Export registration requirements in Ethiopia follow the same procedures as those that apply to
import registration requirements

Export Licensing procedure

The details of export licensing procedure are the same as the import licensing procedure.
The proclamation and regulations mentioned in 2.1.3 below apply also for export procedures. As in
the case of importers, exporters are required authorization to export certain products. Export
products, which require authorization and authorizing government institutions, are indicated here
under:
Ministry of Agriculture and Rural Development for coffee, forest products, live animals including
wild animals, plants and birds;
Ministry of Mines and Energy for mineral products, such as marbles, gold, and other precious
metals and stones.
In addition to the above-mentioned government ministries, the Quality and Standards
Authority of Ethiopia gives authorization by inspecting and certifying Export Products for which
relevant Ethiopian Standards have been established and are made mandatory under Council of
Ministers Regulation No. 13/1990.
Export Procedures
There are a range of procedures and various types of documentation required for export of goods
from Ethiopia. Upon the decision to accept a purchase order, the first thing an exporter needs to do
is to finalize the export contract stipulating the method of payment for the export consignment.
Then it has to apply for the registration of export order with one of the commercial banks operating
in the country or the National Bank of Ethiopia.
According to the regulations issued by the National bank of Ethiopia, all exports except coffee have
to be registered with any of the commercial banks operating in the country, and only the registration
for export of coffee should take place at the national Bank of Ethiopia.
The first stage in the registration process involves registering the initial import intent issued by the
buyer. The documents required at this stage are a valid export license and a document that indicates
the purchase intent from the buyer. The second stage involves finalizing the export contract and
acquiring an export permit that allows the export of that particular consignment. The export
contract required by the commercial banks includes the following copies depending on the modes of
payment involved: LC (6 copies), advance payment (5 copies), CAD (5 copies) and consignment
note (5 copies). At this stage, the exporter is required to fill the Customs Clearance Annex form
issued by the commercial bank on behalf of the Ethiopian Customs Authority. This later facilitates
the clearance of goods at the checkpoints by the Customs Authority.
After preparing the export goods with the product description in the export contract, the exporter
has to make arrangements for suitable packaging and apply to the Quality and Standards Authority
or other pre-shipment institutions of the country depending on the type and nature of the product
to be exported. The next step is to acquire a certificate of origin if the regulations of the importing
country require so. This is necessary if the exports are to qualify under some preferential tariff or
other treatment for originating in Ethiopia. The next step is acquiring customs clearance from the
Customs Authority in order to be able to pass all Ethiopian checkpoints. The documents required
for this purpose are a valid export license; export permit for the consignment from a commercial
bank or the NBE; certificate of origin; quality and standard or pre-shipment inspection certificate;,
commercial invoice, packing list, Customs Declarations Annex form stamped by a commercial bank;
and an insurance certificate. Finally, after delivering the goods by fulfilling the necessary documents,
the exporter hands over all the relevant documents to its banker for collecting payments.
Import Regulation

(a) Registration Requirements for Engaging in Import

The Government of Ethiopia has issued Proclamation No. 67/1997 (amendment
Proclamation No. 376/2003) and Council of Ministers Regulations No. 13 /1997
(Amendment Regulation No. 95/2003) for Federal Government Commercial Registration and
Licensing. The requirements are clearly stipulated in the Proclamations and the Regulations. These
are:
No person shall engage in commercial activities such as import, export, wholesale, retail,
manufacturing and service rendering business unless registered in a commercial register.
Foreign nationals considered as domestic investors and Ethiopians who wish to have an import
license and engage in any business activities in Ethiopia have to make a principal commercial
registration. For this purpose, a businessperson has to be registered principally at the Ministry of
Trade and Industry or at regional states trade bureau. Principal commercial registration is made only
once except it is amended upon the request of the trader when he/she wants to change the
particulars in the initial registration.
Whereas the businessperson (physical or juridical) wants to open branches at different places he/she
makes a summary registration at the Ministry of Trade and Industry or regional states trade bureau
where he/she opens a branch. Such registration is made by citing the particulars entered in the
principal commercial register in brief. For Ethiopian nationals a recent passport size photograph, a
complete application form and photocopy of the applicant's ID card is the requirement to be
registered for a principal and a summary registration.
Foreign nationals considered as domestic investors shall apply for a principal or summary
registration by completing and submitting the application form to the Ministry of
Trade and Industry together with the following in two copies:
his/her recent passport size photograph;
a photocopy of the pages of his/her passport which identify him/her and indicate his/her legal
entry into the country;
investment permit; and
Photocopy of his residence permit.
Registration fee: (a) Principal registration (ETB 80 or USD 9.30) (b) Summary registration (ETB
10 or USD 1.20)
Unless adding value, foreign nationals are not allowed to engage in import-export trade.
(b) Characteristics of the National Tariff
The national tariff is based on the Harmonized System (HS). The legal framework for the
application of the HS is Article 4 of the International Convention on the Harmonized Commodity
Description and Coding System and Ratification Proclamation No. 67/1993, Article 5 of the
Definitions of Power and Duties of the Council of Ministers and the Executive Organs of the
Federal Democratic Republic of Ethiopia Proclamation No. 4/1994 and Article 51 (1) of
Proclamation 60/1997. All Customs tariffs revisions and amendments since 1993 have been done
based on the Internationally Accepted Commodities Descriptions and Coding System of the HS
including the latest amendment of import tariffs Regulation No. 209/2003, dated January 9, 2003.
The Harmonized System (HS) is articulated in 4 digits, 6 digits and 8 digits of the Harmonized
System (HS) tariff item number. The HS 1996 version had been replaced by the 2002 version as
from January 1, 2003. Both import and export tariffs are based on ad valorem duties. There are no
preferential tariffs other than for imports from the COMESA member states. All imports from the
Sudan (Proclamation No 318/2003 and Article 4 of the Agreement), and imports of salt, fish and
fish products, and bottled or canned water from Djibouti are zero-rated. The import duty rates for
the rest of imports from COMESA member states are 10 percent less than the (most favored
nation) MFN duty rates.
A series of customs tariff amendments and measures have been taken since 1993.
The maximum import tariff has been decreased step by step from 230 percent to 35 percent.
The average tariff rate has also been reduced from 41.6 percent to 17.5 percent and tariff bands
from 23 to 6 including the zero rate bands. As per Regulation No.80/2002, the The number of tariff
lines is 5608, out of which 5424 are subject to ad valorem duties while the rest are duty free items
and prohibited. Currently the lowest and highest tariffs are 5% and 35% respectively, which makes
the dispersion of 30%. The current simple arithmetic average of all tariff lines, is 20 % and the
weighted average tariff rate is 17.5 %. As indicated in Table 3 above, the share of 2003 annual
imports of goods falling within each band is as follows: zero percent band, 4.3 %; five percent band,
20.1 %; ten percent band, 15.8%, twenty percent band, 13.7 %; thirty percent band, 15.1 %; thirty-
five percent band, 31.0 %. In general, the duty-free category of imports is mostly comprised of
fertilizers, articles of wood, railway or tramway locomotives, rolling-stock and parts thereof, aircraft,
spacecraft and parts thereof, etc. Within the 5 and 10 percent bands are raw materials and
machineries, which are used by manufacturing industries. Items within the 20 percent band include
organic chemicals, carton, boxes, envelopes, sacks and bags, thread, synthetic filaments, artificial
filaments, yarn and synthetic monofilament staple fibers. Items within the 30 and 35 percent bands
include perfumes, soaps, tiles, transmission belts, ornaments, silk, cotton, jewelry, footwear, motor
vehicles, textiles products and toys. To encourage sectoral development, and to accommodate social
health and security issues, the Ethiopian customs tariff book also contains the second schedule
which mainly lists conditional exemptions at nil or reduced rates and exemptions at nil for
importation by or on behalf of privileged organizations, persons, public bodies and institutions.
(c) Tariff Quotas and Tariff Exemptions
Ethiopia does not apply tariff quotas. However, there are tariff exemptions (relief from duties and
taxes) for various kinds of imports. These include:
Exemptions granted on imports by diplomatic missions or consular privileges according to the
Vienna Convention;
Relief on goods imported for education, scientific and cultural materials (UNESCO agreement);
Equipment or material related to International Civil Aviation Organization (ICAO
Convention);
Commercial samples and advertising materials;
Importation of tourist publicity documents and materials;
Goods for display or use at exhibitions, fairs and meetings;
Relief on personal effects imported by investors and capital goods for the specific project under
the permission of government authorities;
For goods imported for home use by international organizations and etc.;
Exemptions for humanitarian and religious purposes; and
Tariff exemptions granted by Proclamation no. 249/2001 (revised in 207) as export trade duty
incentive scheme.
(d) Import licensing procedure
Pursuant to Proclamation No. 67/1997 (Amendment Proclamation No.376/2003) and
Council of Ministers Regulations No.13/1997 (Amendment Regulation No.95/2003), registered
importers are required to obtain license from the Ministry of Trade and Industry.
The import of certain goods and materials are regulated from the line of responsibility entrusted
upon government offices and authorities. In line with this, there are offices, which administer the
imports of different products. The products that need authorization and the relevant institutions are
indicated here below:
Road Transport Authority - for imports of motor vehicles and transport machinery

Ministry of Health (Drug Administration and Control Authority) - for human and animal drugs
and medical equipment
Ministry of Agriculture and Rural Development - for pesticides, seeds, plants and other articles,
which are liable to be infested or infected with plant pests, live animals and animal products.
The Quality and Standard Authority of Ethiopia gives import accreditation by inspecting and
certifying products for which relevant Ethiopian Standards have been established and are made
mandatory under Council of Ministers Regulation No. 13/1990. Communication apparatus and
similar equipment like radio receivers, gaming machines, lottery tickets and games; armaments,
dynamites and fire guns, cigarettes and petroleum are exclusively imported by the Ethiopian
Telecommunication Corporation, National Lottery
Administration, Ministry of Defence and Ethiopian Tobacco and Cigarette Enterprise and
Ethiopian Petroleum Enterprise respectively.
(d) Rules of Origin
Ethiopia has not established its own rules of origin. However, it applies the
COMESA rules of origin for imports from and exports to COMESA member states. The
Ethiopian Customs Authority also signs the GSP, EUR1, and ICO certificates and provides VISA
for AGOA beneficiaries.
2.2 Incentives Structure Related to Import-Export Trade
As was stated in previous sections, the Ethiopian Government is keen to encourage exports and to
attract foreign investment in priority sectors. Accordingly, it has drawn out various legal and policy
incentives structures and specific strategies to this end. One such incentive structure is the tariff and
duty exemption scheme granted under Procl. No. 249/2001 (as revised in 2007) and is known as the
Export Trade Duty Incentive Scheme Establishment Proclamation. The revised proclamation
deepens the Export Trade Duty
Incentive Scheme by addressing the limitations observed in the implementation process of the
earlier one and extends the scheme to the 'indirect exporters' that contribute to the growth of export
trade. It is worth mentioning at this juncture that all export products are exempt from any taxes as
well as export duty payments. Needless to say, such exemption would enhance the price
competitiveness of export in the world market.
The aforementioned incentives include three schemes: Duty Drawback, Voucher and Bonded
Manufacturing Warehouses. All the three schemes are intended to provide exporters with duty and
tax free access to inputs from all sources regardless of the origin of imports.
The following brief description is given in the interest of providing a better feel of these first set of
schemes:
(a) Duty Draw-back Scheme
According to Proclamation No. 249/2001 (as revised in 2007), duty draw-back means a
scheme by which duty and taxes paid on raw materials used in the production of commodities is
refunded upon exportation of the commodity processed and shall include refund of duties paid on
goods re-exported in the same condition for being not in conformity with purchase order
specifications, damaged, short delivery or not in market demand. The same Proclamation defines
"Duty" to mean all indirect taxes and duties paid on raw materials and commodities imported or
produced locally. The beneficiaries of duty draw-back scheme include (a) producer-exporter wholly
or partially or occasionally engaged in exporting their products; (b) indirect producer-exporters
wholly, partially or occasionally supplying their products to producer-exporters or exporters in the
form of raw materials or finished goods; (c) indirect producer-exporters supplying imported raw
materials to producer-exporters without processing them; (d) exporters (e) persons or organizations
re-exporting commodities or raw materials they have imported upon payment of duties if being not
in conformity with purchase specifications, damaged, short delivered or not in market demand.
Regarding the duty draw-back scheme rate, the Proclamation stipulates that when the export of raw
material or commodity on which duty to be drawn-back is ascertained:
If re-exported in the same condition, 95% of the duty paid shall be refunded;
If exported after being processed or used for packing and containing commodities,
100% of duty paid shall be refunded.
(b) Voucher Scheme
This is a scheme where individuals and organizations that are engaged in wholly or partially
exporting their products are granted eligibility certificate from the Ministry of Trade
and Industry and are issued a "voucher book" by the Customs Authority. To be a beneficiary
of the Voucher Scheme persons and organizations must, among others, fulfill the following criteria:
Have manufacturing or exporting license; submit at the beginning of the budget year their annual
business and export plan; submit input-output coefficients; supply information concerning raw
materials wasted in the process of production; submit evidence of export performance in the last
two years if they are not new to the sector; and sign an agreement with the Customs Authority
undertaking to fulfill obligations of the scheme. If the exporters are new entrants into the sector,
they must submit their annual export plan and investment certificate and/or trade license from the
appropriate government organ.
Regarding the procedure for the application of the Voucher Scheme:
The Customs Authority shall issue Voucher Book on which is entered the amount of duty to be
paid on raw materials they may import, to producers who are desiring to become beneficiaries of the
Voucher Scheme upon satisfying the conditions stated above;
Upon arrival of imported raw materials at the customs port, the producer importing the raw
materials shall present his/her Voucher Book to the customs station where the raw materials are
declared. The customs officer at the station shall deduct the amount of duty payable on the raw
materials from the entry book, where upon the raw materials shall directly be transferred to the
private warehouse in the premises of the production site.
Customs formalities shall be carried out in the producer's private warehouse.
Bonded Manufacturing Warehouse
Beneficiaries of Bonded Manufacturing Warehouse Scheme are producers wholly engaged in
exporting their products who are not eligible to use the Voucher Scheme and who have license that
enables them to operate such warehouse. Persons or organizations that can be beneficiaries of
Bonded Manufacturing Warehouse Scheme are persons who have fulfilled the following conditions:
Have manufacturing license; have a warehouse that fully complies with all the requirements provided
for by customs laws and regulations; that pay allowances to customs officials assigned in the
warehouse and license fees as determined by law; present evidence showing that they have ensured
the warehouse; that can provide Customs Authority their annual export plan showing the type,
quantity and value of the products they intend to export during the year, and the raw materials they
import to use in the manufacturing of the products; and submit input-output coefficients.
As for the procedures for application of Bonded Manufacturing Warehouse Scheme:
The customs official and the exporter shall jointly lock the licensed warehouse;
The exporter who imports raw materials shall complete transit formalities at the port of arrival
and the raw materials shall directly be transferred to the warehouse. All necessary formalities shall be
completed at the warehouse.
By way of a final remark, it is worth mentioning that the revised proclamation imposes strict
discipline on the violators of the forgoing incentive scheme whose severity increases with the
recurrence of the offence.
The second set of incentives intended to promote export trade relate to export financing.
A brief description of these set of incentives is given below:
(a) Export Credit Guarantee Scheme (Directive No. SBB/33/2002)
The scheme provides non-coffee exporters access to pre-shipment and post-shipment finance
equivalent to the volume of the previous year's export proceeds without any collateral requirement
for existing exporters and with 20% and 30% collateral requirement for new producer-exporters and
new exporters, respectively. Both the pre- and postshipment guarantees are provided to a maximum
of 180 days. Pre-shipment finance meets the working capital requirements between the time of
receipt of the order and the time of shipment. It normally covers procurement of raw materials for
the export goods, processing or manufacturing of the export goods, packaging of the export goods,
costs of special inspection or tests required of the importer, transportation of the goods to seaport
or airport or railway sides of departure or destination (depending on the delivery terms), ports,
customs and shipping agents' charge, freight and insurance charges depending on which it is (CFR
or CIF contract), cost of documentation, port handling operations, warehousing, etc. Post -
shipment finance represents bridging finance - working capital provided to the exporter for the time
interval between the shipment of the goods and receipt of payment from the importer. The fund
enables the exporter to continue in business during this period.
(b) External Loan and Suppliers or Foreign Partners Credit (Directive No. REL/005/2002)