FORTUNE+ VIDEO SPONSORED CONTENTS ADVERTORIALS FORTUNE AUDIO Fortune Careers New TRADE AFRICA New

Fortune Logo

Month: December 2020

CAN THEY REFORM?

Posted on by Web Master

In step, Chief Justice Meaza Ashenafi (far right) marches from the podium with new board members of the Ethiopian Broadcasting Corporation after swearing them in last Thursday, December 24, 2020. Opposition leaders Yeshewase Asefa (centre right) and Aregawi Berhe (PhD) (far left); and Alemu Seme (PhD), a senior offical of Prosperity Party, took their oath after MPs approved the nominations made by Prime Minister Abiy Ahmed (PhD).As new additions to the eight-person board, their appointment was approved without much contention. The only inquiry fielded was to the continued board membership of Kamia Junedi, whose role as a legislator was called into question as a possible conflict of interest. Tagesse Chafo, the speaker of parliament, responded that the session hardly concerns her given that she has been on the board since 2018.

There have long been calls to make state media institutions independent of political interference, which influenced the appointment of opposition figures such as Merara Gudina (Prof.). The general media landscape has further been criticised for toeing the state line through the political control of public  media outlets, as well as the quashing of institutions deemed to be critical. Over 240 websites and news channels used to be blocked before restrictions were lifted in 2018. The country was also among the worst jailers of journalists, according to the Committee to Protect Journalists (CPJ), until none were reported to be behind bars in 2018.

Reforms in that year also brought the start of long sought amendment processes to the media law, which earlier this month passed the Council of Ministers. It would give legal identity to internet-based media outlets and prohibits remanding a person who is accused of violating the media law for further investigation.

Still, the current administration has been accused of falling into old habits in transparency and media independence. Several internet outages have occurred, including one that covered the entire country last July, while a hate speech law was legislated. There have been seven journalists behind bars in 2020, according to the CPJ.

Economic Planning Needs to Learn the Cost of Indiscipline

Posted on by Web Master

It is refreshing to see a publicised high-level government meeting become somewhat confrontational. A conflict of ideas is not always a bad thing; in many cases, it allows for further deliberation and digestion. Prime Minister Abiy Ahmed’s (PhD) critique of the regional governments’ attempt to widen the Dine for Nation projects’ scope was encouraging.

But his putting down of their preferences for the projects – thereby agency – as unnecessary portends a continuation of central economic planning. Sure, the federal government has proven itself effective – if not transparent – in the progress it has made in public works such as the Sheger Beautifying Project. But it is usually the case that governments are effective at ensuring delivery on politically consequential projects. It says little though about institutions and local governments’ capacity to perform. This calls into question the sincerity of one of the chief focuses of the 10-Year Perspective Plan – institutional reform.

The Plan has in its field of vision much more than institutional transformation. Endorsed on December 11, 2020, by the Council of Ministers, it is about as unique as most multi-year national plans a developing country can come up with.

The similarities to the series of editions of the Growth & Transformation Plans (GTPs), from the details the administration has chosen to make public throughout the discussions and presentations, are uncanny. The structural economic transformation from agriculture to manufacturing is still desired. It targets a double-digit growth, at over 10pc, and aims for single-digit inflation. These are the same old assumptions its designers have developed, only expecting different results.

Infrastructure development, energy efficiency and closing gaps in the education and health sectors are all included as targets by respective ministries. The same old desire to see massive public investments to finance them.

Says the document: “Public spending with [a] strong focus on capital investment, pro-growth, and pro-poor sectors should be maintained until the country’s level of infrastructure and human capability reaches a critical minimum.”

The major difference with the GTPs, if any, is in the semantics. It aspires to see the “source of growth” coming from the private sector. The GTP documents did, in fact, acknowledge that the private sector could play a “driving role”.

The contradiction cannot be more apparent. Massive public spending crowds out the private sector, especially as key industries and markets remain beyond the reaches of the private sector.

The Perspective Plan is no better in its lucidity, if not worse. The current administration does not mince words on curbing public spending, and on giving space for the private sector to play its part – to walk the talk the GTPs never did. The contradiction here is that the administration’s policy continues to struggle to explain how a double-digit growth in GDP comes within the realm of realisation in the absence of an expansionary fiscal policy stance and monetary policy that encourages the central bank to print more money.

Initiatives such as public-private partnerships are welcome, but the private sector is notoriously hard to depend on when it comes to large projects with longer return periods. The reputation of several private companies in project management remains unsatisfactory.

There are positive differences between the Perspective Plan and the GTPs. The latter was planned in clusters for agencies to build on. The Perspective Plan is preceded by the respective 10-year development plans of ministries. Therein is a detailed assessment of challenges, strengths, and a description of strategies and programmes.

If institutions could be encouraged to implement these projects in a similar bottom-up approach, it would be one more break from the GTPs. But that is the tricky part.

Fitsum Assefa’s (PhD) Planning & Development Commission seems to understand implementation is an Achilles’ heel, hence it  emphasises institutional reforms. But her predecessors had similar sentiments as well. The second edition of the GTP, launched in 2016, also indicated the need for capacity building, public participation and good governance.

Ironically, it went on to make what amounted to a mockery of these targets. The administration’s assurance “to sustain . . . healthy external debt with tight monitoring of developments” ran up against unsustainable debts public enterprises were taking up. This included guaranteed external debt for these enterprises that stood at 25pc of the whole that Ethiopia owes to its external creditors.

Its pledge to give “utmost emphasis” to “planning and management capacity to execute projects on time and with the given budget and quality” was even less inspiring.

Even politically sensitive projects such as the Grand Ethiopian Renaissance Dam (GERD) were delayed and ran beyond budget. But that was just the tip of the iceberg, as Auditor General Gemechu Dubisso’s perennial disapproval of government agencies to parliament revealed. An audit covering the three years up to 2018/19 found a gap of 44 billion Br in the 1,962 projects it looked at. This represents an amount equal – in Birr terms – to over a third of the country’s earnings in goods export.

The enormity of the mismanagement of some projects boggles the mind the deeper they are looked at.

Take, for instance, the Zarema Mayday and Megech dams. The former, having been launched in 2012 for an estimated cost of 4.2 billion Br, was by last year expected to set the government back 14.5 billion Br. Megech was expected to cost double its initial estimate of 5.6 billion Br; the contractor on the project was paid without the consultant having to sign off on it, according to findings by the Auditor General.

When prodded, the Ministry of Water, Irrigation & Electricity and project coordinators on the Zarema Dam could not properly defend questions from MPs. All they had as a retort was that the Ethiopian Sugar Cooperation did not hand them the necessary documents and became involved in the project just four years ago.

The GTPs could hardly be faulted for such failure. They were plans. They could point out targets and call attention to challenges and shortcomings. In the end though they need to be followed up with political commitment and accountability, a system of checks that could be used as a bulwark to such rampant mismanagement of public resources.

What can make a difference here is ensuring that the stakeholders are themselves the custodians of development, which requires doubling down on the vertical decentralisation of power set out in the Constitution. Federal government oversight is necessary, but the leads on projects should be communities whose members are meant to benefit themselves.

Another important piece of the puzzle is the courts.

There is a rich literature on what is known as quasi-democratic institutions and competent administrations embedded within some non-democracies. In many cases, these make up the courts, which are used to check the discretionary power of bureaucracies and lower-level officials. Still, even this requires a semblance of political commitment from the highest corridors of power, where such outliers are tolerated as necessary to effective administration and management of the economy.

Inclusive economic institutions are also the best answer to the dilemma of developing a 10-year economic plan in a country that has elections every half decade. Here too, the GTPs offer a lesson.

The last two years have seen a reorientation from the statist approach to development. The multi-year plan was suddenly unseated as a document that serves as a foundation for economic policymaking.

The Perspective Plan can face a similar fate if those with state power now cannot form a majority coalition in parliament after next year’s general elections or in the one five years later. Ownership of the plan, decentralisation of implementation and the courts are critical. The political mud-fighting above would be insulated to a degree from the key targets of the GTPs, the Perspective Plan or any other national multi-year plan that may come along.

After all, nearly everyone agrees that the poor level of human and physical capital is the key obstacle to growth and that addressing them is the viable route to development.

Leather Industry Desperate to Save own Skin

Posted on by Web Master

Black and white markings on their legs and large semi-circular rimmed horns that stretch over a metre long are part of the endemic Walia Ibex’s signature look. The Walia can weigh over 100Kg and is a rare sight, mostly found in the highlands of the Semien Mountain range near places like Gonder in Amhara Regional State. This was the hometown of Alemayehu Simegn (PhD), owner of the first Ethiopian-owned leather tannery in the country. After this well-known mountain goat, he named his company; he was proud of his country, and the animal’s beauty was an allegory for his craftsmanship.

The former farmer learned the craft from his father, who traded in goat and sheepskins. He would make the 700Km journey from Gonder to Addis Abeba on foot – carrying animal skins and hides to supply tanneries in the city and to take sought-after supplies back to his hometown from the capital. His journey to owning one of the country’s biggest tanneries was not a short one, but his company, Wallia Leather & Leather Products Plc, still stands to this day, 60 years on. But not unlike the precious Walia Ibex, it’s existence is critically endangered.

There have been many developments in the leather industry scene since Alemayehu ventured into the business, including the proliferation of tanneries and manufacturers engaged in the sector. Today there are 27 leather tanneries in the country, processing skins and hides to produce leather for both export and local consumption. Large-scale manufacturers of leather products like bags, shoes and gloves number 44. Simultaneously, around 1,000 medium and small enterprises are engaged in the industry, with most producing goods for the local market.

But, for the most part, the industry has so far not managed to maximise its gains by manufacturing value-added products. It remains producing mainly raw or, at best, semi-processed products for the export market. As of late, members of the industry sent out an SOS after sustaining heavy losses that have brought their industry to its knees. Distressed executives have presented a request letter to the prime minister’s macroeconomic team with calls for support.

In the past 10 years alone, nearly 30 manufactures have either been neck-deep in unpaid loans or have gone under, according to data from the Ethiopian Leather Industries Development Association, which also includes the Skins & Hides Suppliers Association, a body with over 15,000 members.

Though it is brimming with potential, the challenges facing this industry are manifold. The country possesses the largest livestock population on the continent with over 123 million heads of cattle, sheep and goats. Unfortunately, quantity has long trumped quality.

Environmental factors, feed and overall living conditions of the livestock play a big role in the quality of their hides and skins, according to Hailekiros Debesay, deputy director at the Leather Industry Development Institute.

“The majority of problems in quality arise before the animals are slaughtered,” he said. “It’s hard to remove the skin of the cattle because of such problems.”

From over 20 million livestock that are slaughtered each year, barely 10pc qualify for the three grades of proffered hide quality distinction. The remainder is considered sub-standard. Commercialisation solutions are desperately needed here as most hides and skins are sourced from people’s backyards following major holidays celebrated in the country. The people that go through neighbourhoods collecting these hides carry them around far longer than they should without preservatives.

The diminished quality undoubtedly affects export earnings, explained the Deputy Director of the Institute, which has been supporting the industry for nearly two decades. It works on research and development, consulting, training and education.

The impact of the Novel Coronavirus (COVID-19) gravely affected the industry’s export earnings; amassing only 36pc of its intended goal in the last fiscal year at 73 million dollars. The dwindling forex earnings have left the tanneries cash-strapped for buying essential chemicals for leather processing through their own retention accounts. This has forced many to join the long queue for forex at banks.

Kangaroo Shoe Factory, a 30-year-old industry veteran, has been waiting for over a year now. The company, which specialises in leather shoes, used to get around 300,000 dollars every few months in the past, according to Yosef Behabtu, managing director of the company.

“We’re now sourcing some materials locally at a much higher price,” he said. Operating at 20pc of its production capacity, it imports nearly all raw materials aside from its leather from the outside market. Its minimal export to countries like Italy and Germany had helped it mitigate the dearth of forex, but COVID-19 took away that consolation.

“We used to purchase spare parts and tend to other immediate needs,” said Yosef. “It has reached a concerning stage for us. The industry has also lost its priority status in forex allotment.”

Raw materials for manufacturing industries and agricultural inputs such as fertiliser, pesticides, chemicals and seeds are now second to importers of medicine in the waiting list for forex.

Kangaroo catered largely to a local client base, but companies that focused on the local market have seen their earnings slashed by more than half. Ethio-Leather Industry Plc (ELICO), a state-owned turned private company, is a prime example.

Elico, which exports 60pc of its products, used to average around five million dollars a year in earnings but may have to settle for less than one million dollars this year, according to Abebe Teklu, managing director at ELICO, which operates with over 1,800 employees and has been privately owned for 25-plus years.

The pandemic is the culprit here, shutting down markets like Italy, India and China – the company’s main export destinations.

“There were times when it used to generate up to seven million dollars annually,” said Abebe. “But standing at the half-year point, we have had to reassess our expectations for this year.”

The letter to the Prime Minister addressed these issues and more. The flooding of the local market with cheaper imported products, an agenda now more relevant than ever with the country set to join the World Trade Organisation (WTO), is another subject included in the call for assistance.

The Association, which has penned this letter on behalf of its 120 members, is requesting higher import taxation on leather goods. It argues that the export of its industry is bolstered by revenues from the local market that help it recover costs and allow it to offer competitive prices on the global market. Manufacturers mainly from India and China bring products that it cannot compete with in price,  a claim recognised by the Ministry of Trade & Industry.

The biggest problem, however, remains finance. Short-term maturity loans and high-interest rates have inundated some manufacturers and placed others on the verge of defaulting. High costs for mandatory tannery treatment centres and a competing synthetics market compound the issue.

But the country’s recent switch to the current administration’s Homegrown Economic Reform Agenda appears promising to some in the industry. Discussions, though still underway by the macroeconomic team, have reached some points of understanding, according to Eshete Asfaw, state minister for Trade & Industry.

“A legal framework for a policy on quality is being crafted by the Ministry and nearing completion,” he said. “The quality of products will allow for more consumption by the local market.”

Taxes on imports are also expected to increase to protect the local market, according to Eshete.

The ever-burning issue of foreign currency shortage seems to have reached a potential resolution as 45pc of the country’s total forex earnings is earmarked to go toward the industrial sector, according to Eshete.

“The accession to the WTO has brought a focus to the quality of products being produced here for the local market as well as export. This will also apply to products being imported,” said Eshete.

The Ministry also says it is facilitating bank loans for manufacturers who will be expected to produce plans for loan repayment as part of the application process.

Funding has also been secured from the World Bank, explained Eshete, to enhance capacity building of quality assessment and research institutions under the Ministry, which is expected to enhance knowledge transfer and technological aspects of the industry.

Imposing higher taxes may not be feasible or advisable when the country joins the WTO, according to Tsegaye Gebrekidan (PhD), an economist at the Policy Studies Institute.

“There are certain instances where this might be possible, but it can’t go far,” he said. “Doing this may also have reciprocal effects from other countries to Ethiopia.”

Instead, Tsegaye advises on working on the fundamental problems that plague the industry. The lack of skill across the value chain and the quality of raw materials like hides and skins need more attention instead, according to him.

However, formulating a standard policy is legal under the WTO framework and will ultimately benefit not just the local producers but also the consumers as well, according to the expert.

He also pointed out that common waste treatment plants, which have hit a snag in development, will also reduce costs.

“The waste treatments ensure that environmental standards are being met and will have beneficial spillover effects,” he said. “It will also make the host communities have a positive reception to the industry.”

Looking into reusing waste from the processing of hides and skins is also another option, he added.

The WTO’s accession signals that the country is open and favourable to business, it will also open up doors elsewhere for Ethiopian-made products. Industry players’ ability to stay competitive will largely predict their success in penetrating markets and making the most of the advantages the ascension could entail.

In addition to the support and facilitation from government institutions and banks, the Leather Industries Development Association is itself taking steps to remedy the situation. It has initiated the process to acquire a state-of-the-art shop on Bole International Airport’s premises in the capital. Through an estimated 50-million-dollar investment, the planned 3,000Sqm shop is hoped to vend quality leather products to travellers from all over the world. The Association is looking to bolster its revenue by capitalising on the market of millions of travellers that pass through the airport every year.

Perhaps the industry can even attain its export revenue target of 2.4 billion dollars 10 years from now. Only time will tell.

Ministry Waives 14.5b Br in Taxes, Customs Duties

Posted on by Web Master

The Ministry of Finance waived 14.5 billion Br in accumulated tax and customs duties that have been imposed on companies for various imported items. The waiver, which includes penalties and fines, was offered for items imported into the country leading up to July 2019.

Signed by Eyob Tekalign (PhD), state minister for Finance, the letter sent to the Ethiopian Customs Commission last week followed the Council of Ministers’ decision for tax and duty relief to companies in April. The Council relieved the companies from the payments due, citing the effort to support businesses affected by the Novel Coronavirus (COVID-19) pandemic fallout.

Following the Council’s decision, the Ministry delegated the Commission to assess and report the total taxes and duties owed to the federal government. The Commission reported that the companies owe a total of 18.1 billion Br.

The Commission’s report, which has four divisions, showed that the taxes and duties were claimed from companies accused of misusing duty-free privileges, arrears that were discovered during a post-clearance audit, and vehicles imported to the country temporarily with duty-free privileges but are still in use. Part of the value was expected from companies that exported products manufactured with raw materials imported with duty-free privileges.

Out of the total, 5.4 billion Br worth of taxes and duties imposed on items imported before July 2015 was fully waived. The remaining amount, which was partially waived, was levied on items shipped into the country from 2015 until last year.

Even though the Council decided in April, the process to check all the documents to come up with the exact value took time, according to Eyob.

The Ministry has written off the full taxes and duties debt of the then Metals & Engineering Corporation (MetEC), amounting 5.1 billion Br. The value was due for the items the company imported between 2015 and 2019. Out of the total value, 58 million Br was for administrative penalties and interest.

“The entire value is cancelled since the value can’t be collected,” reads the Ministry’s letter.

About 2.3 billion Br in taxes and duties along with fines and interest owed by companies that were already closed or whose properties were foreclosed on by banks for defaulting on their loans are fully cancelled.

Under the fourth category, the government had expected 5.6 billion Br in taxes and customs duties for the items the companies imported between 2015 and last year. Out of the total value, 3.7 billion Br is unpaid taxes and duties, while the remaining stems from accrued penalties and interest. Businesses under this category will pay only the taxes and duties, while the Ministry has removed the penalties and interest.

Businesses with two million Birr worth of tax debt are also given a two month period to pay 25pc of the value and settle the remainder in two years. If these companies pay the full amount in two months, they will receive a 10pc write-off, according to the letter.

The waiver on the fines and interest will encourage the businesses to pay their taxes, according to Eyob.

“We already accounted for the receivables while preparing this fiscal year’s budget,” he told Fortune.

The letter also stated that the companies’ cases, which were not included in the Commission’s investigation report, can be reviewed according to the new letter after the Commission examined their cases. It also asserted that taxpayers whose cases are pending at the Tax Appeal Commission and in the courts, can also apply for penalty and interest relief at the Commission, which will review their applications and make an appropriate decision.

Most of the taxes and duties were levied on the companies unreasonably, according to Yohannes Woldegebrail, a tax law expert, who has worked as a prosecutor at the then Ethiopian Revenues & Customs Authority (ERCA).

“During post-clearance audits, workers at the tax authority were imposing taxes and duties on minor violations,” said Yohannes.

Yohannes also believes that most of the taxes and duties were uncollectable and the tax authority was expecting and pressuring these companies to settle the payments.

“Most of the companies can’t pay the tax debt,” he said.

Last April, along with the tax relief, the Council of Ministers granted interest and fine relief to companies that bought state-owned enterprises if they fully paid the principal before September 26, 2020.

Board Adds Dukem Depot to PPP Projects

Posted on by Web Master

The board of the Public-Private Partnership, which is chaired by Minister of Finance Ahmed Shide, approved the construction of the country’s largest depot through the joint investment of the government and the private sector. Planned a few years ago, financial constraints have so far delayed the project.

Approved three weeks ago, the project was tabled to the board after the Ministry of Finance reviewed the proposal and endorsed it for a final blessing from the board. An Australian consultancy firm that was hired to conduct a feasibility assessment has estimated the cost of Dukem Depot to be 145 million dollars. The construction of the Depot is expected to take three years.

Proposed to be built in Dukem town, Oromia Regional State, the Depot will rest on 10ha of land. It will have a capacity of storing 300 million litres of jet fuel, benzene and diesel fuel. Upon completion, the terminal is expected to boost the nation’s emergency reserves from 36 days of supply to 65.

The Depot, which will be the first in the country that stores jet fuel, will have 12 tanks that each have a storage capacity of 25 million litres. Two-thirds of the tanks will reserve diesel fuel, while the remaining will contain jet fuel and benzene. Each tank is five times larger than the nation’s current largest depot, which stores five million litres.

The Ethiopian Petroleum Supply Enterprise, which has been handling the project for the past three years, could not proceed with the construction due to budgetary restrictions, according to Tadesse Hailemariam, CEO of the Enterprise, which imported four million litres of fuel in the last fiscal year, spending 2.4 billion dollars.

“We requested another financing model from the Ministry,” Tadesse told Fortune. “We also stressed that the project needs priority since it is a national security matter.”

Currently, the country has 13 terminals with a total capacity of reserving 367 million litres of fuel. The Enterprise, which was established half a century ago and has branches in Djibouti and Sudan, built a 174-million-Br depot at Awash Sebat Kilo to store 30 million litres two years ago.

Dukem Depot is part of the Enterprise’s Strategic Depot Construction Master Development Programme that also aims to construct an additional depot in Dire Dawa. Expected to store 65pc of the country’s fuel consumption needs, Dukem Oil Depot will be equipped with an automated control system and can load 20 oil trucks at a time, each carrying 45,000lt.

To deliver fuel products quickly, the plan calls for connecting the Depot with Ethio-Djibouti Railway. The trains’ electric power will be disconnected while passing through the Depot’s premises, and they will instead use their diesel engines for safety purposes, according to the plan.

Following the inception of the project three years back, the Enterprise hired SMEC International PTY, an Australian firm, two years ago for a quarter of a billion Birr to prepare the engineering design, develop a tender document, help the Enterprise hire a contractor, supervise the contractor and commission the project.

Last year, SMEC International PTY delivered the front-end engineering design that includes the technical requirements and identifies the proposed project’s main costs. The document also includes details about electro-mechanical features, safety and hazard control systems, as well as environmental issues.

The Enterprise submitted all the prepared documents to the Ministry of Finance, according to Tadesse.

After receiving the request, the PPP Directorate under the Ministry helped the Enterprise team prepare a feasibility study, training the staff to devise the document.

The original document the Enterprise presented to the Ministry proposes to build the Depot through an Engineering, Procurement & Construction (EPC) modality. Thus, the document should be readjusted to fit into the PPP modality, according to a person familiar with the issue.

Currently, the PPP Directorate under the Ministry of Finance is conducting studies on environmental, legal and land issues; an affordability analysis; and economic viability to fulfill PPP modality requirements.

Including the latest one, the board has approved 23 projects to be developed through the PPP modality. Three of them are road, five hydroelectric, eight solar and an additional eight are wind projects. The board also approved one housing project to be developed through a PPP arrangement.

Among the projects, the first industrial-scale solar park that will be developed through a PPP was signed last December. The 20-year power purchase agreement was inked between the government and ACWA, a Saudi Arabian energy company. ACWA will develop two 125MW solar photovoltaic (PV) projects in Afar and Somali regional states with its own financing and sell it to the government at 0.025 dollars a kilowatt-hour, the cheapest rate in Ethiopia.

The public-private partnerships financing model came onto the scene three years ago due to government financing shortages for major infrastructure developments. Drafted by the Ministry of Finance, the public-private partnership bill was legislated by the parliament in 2017. The proclamation also formed a board composed of ministers of Finance; Water, Irrigation & Electricity; Transport and Public Enterprises. Heads of the National Planning & Development Commission and the National Bank of Ethiopia and representatives from the private sector also sit on the board.

Committee Arises to Assess Damaged Investments

Posted on by Web Master

The Office of the Prime Minister has formed a high-level committee that will assess the damage suffered by investments and business entities due to instability in the country. With four institutions as members, the committee has started its operations by requesting that banks and insurance companies submit data about clients whose businesses were affected by a spate of violence.

The Ethiopian Investment Commission, the Development Bank of Ethiopia (DBE), the Commercial Bank of Ethiopia (CBE) and the Ethiopian Insurance Corporation are the members of the committee. The Commission sent letters to the Ethiopian Bankers Association and the Association of Ethiopian Insurers two weeks ago, inquiring about companies and investments affected.

The committee was formed as part of the government’s latest efforts in helping investments recover quickly from vandalism sustained due to the recurrent violence that has engulfed the country, according to a letter sent by the Commission.

A few weeks ago, the National Bank of Ethiopia (NBE) started drafting a directive to set up loan schemes geared toward redressing damaged investments. The directive is expected to specify the interest rate and preconditions for the loans.

After receiving the Commission’s letter, the Bankers Association dispatched a request to banks requiring the submission of information about damaged companies, including the companies’ total capital and outstanding loans. The Association also attached a form that the member banks are to fill out and send back to the Association within a week. The banks have been required to provide details about the 419 companies listed by the Commission.

The companies are engaged in the service, agriculture and manufacturing sectors across four regional states and one city administration. About 326 of them are from Oromia Regional State, with the majority located in Ziway town. The second and third highest numbers are registered in Amhara and Benishangul-Gumuz regional states, totaling 58 and 31, respectively. A single company from Dire Dawa is also on the list.

Sher Ethiopia, B.G.I. Ethiopia, Castel Winery, the National Mining Corporation’s Daleti Quarry Site, ELFORA Agro-Industry’s Melgie Wendo Food Processing Factory, Tana Beles Sugar Development Project, Haile Hotels & Resorts, and Horizon Plantations’ Limu Coffee Farm are among the companies included on the list.

The Bankers Association has a plan to extend the deadline since not all of the banks have filed the reports. The deadline might be pushed back to the middle of this week, according to the Association.

Ermias Andarge, acting president of Enat Bank, confirmed that the Bank had dispatched the form to all of its branches to check whether the listed companies are their borrowers and report any damage to their investments.

“We’re waiting for responses,” he told Fortunelast Friday.

The Association of Ethiopian Insurers has also received an inquiry from the Investment Commission concerning the identification of listed companies that have purchased insurance policies from them. The request has also been dispatched to member insurance companies.

However, the Association’s leadership is preparing to ask clarification from the Commission regarding specifications about the kinds of insurance policies the companies have purchased, according to a source close to the case.

After collecting the information, the committee will use it to determine whether the investments need support from the regional or federal government, according to a source from the Commission.

Lately, the country has been experiencing sustained political uncertainty, which has led to the repeated vandalising and looting of local and foreign investments. Over the past two-and-a-half years, many lives have been taken and many properties have been destroyed by 113 major conflicts that have engulfed the country, according to a statement by Prime Minister Abiy Ahmed (PhD) during his address to parliament a few weeks ago. Most of the conflicts occurred in Amhara and Oromia regional states.

Before 2018, the government had been reimbursing the loss of investments due to violence in cash. The government was also providing the companies with additional duty-free benefits and exemptions for importing any property lost. Between 2014 and 2017, the government spent a total of over 800 million Br for damaged investments through DBE and CBE. However, over the past three years, the reimbursement has stopped since the government could not financially cover the high cost of the damage.

A study conducted by the Commission indicated that a total of 485 investments were vandalised over the past two years. There are over 700 damaged investments backlogged from the past as well those which are currently undergoing damage assessments. The investors have applied in the past, but due to many reasons, have had their requests delayed. The Commission is facilitating tax payment extensions and loan rescheduling for impacted investments.

Enat Bank Bags Modest Profit, Yet EPS Slides

Posted on by Web Master

Enat Bank registered 208.6 million Br in profit over the last fiscal year, a modest 3.5pc increase from the previous year. The Bank’s profit growth rate has slowed down compared to the preceding year’s performance that saw a 33pc surge.

Despite the moderate profit rise, the earnings per share fell by 13pc to 161 Br mainly due to the 15.7pc growth in paid-up capital, which reached 1.4 billion Br.

Hanna Tilahun, the board chairperson, stated that the past fiscal year was quite different from previous ones in many ways.

“During the budget preparation and approval process,” said Hanna, “it was hard to predict that the liquidity crunch would be so significant as to jeopardise banking operations at large.”

Last year, the banking industry witnessed a liquidity strain that has not been seen in the economy for over two decades. Aiming to alleviate the problem, the National Bank of Ethiopia (NBE) has availed 14.5 billion Br in loans, in two rounds, to the cash-strapped private commercial banks at a competitive bidding interest rate.

The pandemic, which Hanna characterised as a new overwhelming crisis, came onto the scene while the Bank was struggling to recover and rebalance from the staggering liquidity crunch.

To help customers affected by the pandemic, Enat removed a three-month interest rate for borrowers, especially for businesses in the hotel and tourism industry, and waived commission fees for Letters of Credit (LC) extensions.

These measures cost the Bank about 15 million Br, according to Ermias Andarge, the acting president of Enat, which has 18,874 shareholders. Ermias replaced Wondwossen Teshome, the recently departed president.

Despite these challenges, the Bank has performed well in loan and advance disbursement, which stands at 6.5 billion Br, a 27pc rise. This is accompanied by a 17pc increase in deposits, which reached 8.4 billion Br. The 5.8 percentage point increase in the ratio of loans to deposits pushed the rate up to 77.3pc.

This is an impressive increase, for which the management of the Bank should be appreciated, according to Abdulmenan Mohammed, a financial statement analyst.

“However, the management should take extra caution regarding further increases, as it may undermine the liquidity level of the Bank,” he said.

Ermias says the loan to deposit ratio of the Bank has spiked due to the five-year NBE Bill’s phaseout and the significant growth of deposit mobilisation.

In October 2019, the central bank repealed the mandatory NBE bill, which required banks to surrender 27pc of their gross loans and advances to the central bank. With a maturity period of five years and five percent interest rate, the bond aims to mobilise funding for the Development Bank of Ethiopia (DBE), which finances selected areas.

The total income of Enat rose by 31.5pc to 1.3 billion Br. Income from interest on loans, investment in NBE bonds and time deposits, reached 1.1 billion Br, amounting to a 41pc surge. Income from service charges and commissions also showed a notable spike of 31.4pc to 222.8 million Br, while earnings from foreign exchange dealings stagnated at zero for the second consecutive year.

This phenomenon was observed across several banks, according to Abdulmenan, who attributed stiff competition and volatile international trade as causes.

Ermias also says that foreign currency earning is the major challenge facing the Bank.

“We’re trying to work with the international organisations and exports to improve our earning of foreign currency,” said Ermias.

The total expenses of Enat expanded by 46.5pc to 1.1 billion Br. Interest rate expenses rose by 35.8pc to 656 million Br. In comparison, salaries and benefits rose by 17pc to 188 million Br.

Enat’s total number of employees had reached 660 by the end of the last fiscal year after the bank hired 120 new staff. It has also opened 12 new branches, pushing the total number of branches to 57 at the end of the fiscal year.

The total assets of Enat reached 11.2 billion Br, exhibiting a 21.7pc expansion. The 1.7 billion Br worth of investments that Enat has made in the NBE bond showed a 12.4pc decline that accounted for 15pc of total assets and 20pc of total deposits.

Its total liability stood at 9.4 billion Br, a 22.2pc increase from the previous year. Its cash and bank balances showed a 26.1pc rise to 2.3 billion Br. Cash and bank balances account for 20.5pc of the total assets and 27.4pc of the total deposits of Enat.

This shows that Enat has a good liquidity level, according to Abdulmenan.

Provisions for the impairment of loans and other assets expanded massively, recording a 456.7pc growth to reach 37.3 million Br.

A shareholder, who joined the Bank a few years back following a recommendation from a professional association he works with, says the Bank’s reported figures are good. He sees the Bank as being on the positive side.

“However, the real value of the figure is low when we look at it against the inflation rate,” the shareholder, who received a little over a 10pc dividend, told Fortune.

Last fiscal year’s average inflation rate stood at 19.9pc.

A very challenging time is awaiting Enat and all other banks, according to the shareholder, who says that the full impact of COVID-19 and the desert locust invasion will be manifested this fiscal year.

“The continuous and recurrent conflicts across the country impacted the country’s image,” he said, “and this has consequences toward foreign currency earnings and businesses in the service and tourism industry.”

He also says that there will be tough competition among banks, mentioning the dozen or so banks currently undergoing the establishment process.

The banking sector might not stay closed to foreigners since the country has joined the continental free trade area and started the World Trade Organisation accession process, according to him.

Commission Delays Long-Awaited Prosecution Mandate

Posted on by Web Master

The draft Ethics & Anti-Corruption Commission law tabled to parliamentarians last week has excluded a mandate to prosecute — the addition that initiated the revision. Forwarded to the standing committee for legal, justice and democracy affairs at parliament, the draft instead includes changes intended to align the Commission with the country’s ongoing reforms and strengthen its institutional independence.

The draft proclamation, which had been under amendment for nearly a year, proposes to have its budget and the salaries of its employees approved by the parliament instead of the Ministry of Finance and the Civil Service Commission, respectively.

The revision, which initially intended to bring back the powers of prosecution from the Police Commission and the Office of the Attorney General to the Commission, was postponed until after a study takes place, according to Tesfaye Shamebo, research & training director at the Commission.

“The study will assess which body is more suited for the role,” said the Director, who explained that the Commission’s work had slowed down since the mandate was shifted in 2015. “It was also intended to restore public faith in the institution, but it will have to wait until the study is conducted.”

The ethics liaison or directorate established across all public offices, which used to report to the head of the institution it is located in, will also now report to the Commission. The latest draft proposes to assign the Commission full administrative control over these directorate offices.

The Bill also aims to bring clarity and strengthen the mandate of some other issues that have been blurry in the past. Preparing a National Anti-Corruption Policy & Strategy has been explicitly listed as the duty of the Commission. The mandate has been unclear in the past, and this has been a major reason for the lack of a national policy, according to Tesfaye.

The Commission is tasked with administering a software database that will enable not only asset registration of public officials but also access to the register. If approved, it will enable the Commission to present this data upon request from law enforcement authorities.

Presented to the parliament in June, the draft law proposes the creation of Commission offices in the administrative zones of Addis Abeba and Dire Dawa and the regional states to ensure comprehensive work.

Among its other tasks, the Commission will be reporting on the country’s overall status to the United Nations Office on Drugs & Crime (UNODC). The UNODC, which heads the organisation’s efforts against illicit drugs and international crime, assists states that are signatory to the United Nations Convention against Corruption in implementing this convention.

“Ethiopia was undergoing an assessment by Egypt and Greece,” said Tesfaye. “It was paused due to the pandemic, but we’re compiling the reports at the moment.”

Measures that the Commission can take against improprieties it observes or against those that fail to implement its recommendations will be outlined under a following regulation. A Code of Conduct for elected public officials is also nearing completion by the Commission, according to Tesfaye.

“The Code will no longer allow elected officials to receive presents and offerings from other parties,” he said. “If so, they will be requested to report or return it.”

The strength and independence of the Commission will be affected by the individuals that will be appointed to lead the institution, according to Sisay Mengiste (PhD), a human rights and federalism researcher at Addis Abeba University.

“The individuals heading this institution should be experienced, confident and capable,” he said. “If they are in a position where they’re just seeking job security, it will be easy to look the other way.”

The commissioner and deputy commissioner’s appointment, through the selection of the Prime Minister, would create more confidence if done through a nominating committee of the parliament, he added. However, the lawyer stressed that this is not as essential as ensuring the implementation of the law.

Zemen to Launch Mobile Banking Solution

Posted on by Web Master

Zemen Bank is set to launch its new mobile banking application, which will enable individuals and corporate customers to transfer payments and check balances, in early February 2021.

The mobile banking solution and a planned series of upgrades of the Bank’s digital platforms are under development by CR2, an Irish-owned banking software provider working with Zemen for the past decade in developing its card and internet banking systems. CR2, which operates in Africa, the Middle East and Asia, has previously developed the Amole mobile banking app for Dashen Bank.

Awarded last March, experts of CR2 have been working with Zemen remotely due to the Novel Coronavirus (COVID-19) pandemic in order not to affect the original schedule of the project. The executives of the Bank declined to disclose the project value or the payment made to CR2.

Part of this rollout is aimed at revitalising Zemen’s card and internet banking solutions, according to Amha Tadesse, vice president in charge of IT at the Bank, which has 10,559 internet banking users, a 12pc climb from the 2018/19 fiscal year.

“The project aims to create an omnipresent digital banking experience that allows customers to access services through its digital outlet,” he said. “In doing so, the Bank wants to avail all of its front desk services digitally.”

A customer who wants to order or cancel an Automated Teller Machine (ATM) card should be able to do so through the mobile app, according to Amha.

“Smartphone use and internet connectivity have been increasing, and our client base fits into that segment,” said Amha, elaborating on the growing demand for digital banking services among Zemen’s customers.

The Bank’s mobile banking service is currently provided through Unstructured Supplementary Service Data (USSD) technology, which Amha says is considered an outdated system that needs to be supplemented with modern mobile banking solutions.

Nebiat Tekle, an expert in digital banking with 11 years of experience, points out the reservations that Ethiopian banks have in allowing digital integration.

“Banks need to have the appetite to develop features with Application Programming Interface (API) integrability,” he said.

APIs are computer programmes that allow multiple software programmes to interact with one another. Development of APIs by Ethiopian banks would allow, for example, e-commerce platforms to easily integrate mobile payment services.

Nebiat suggests that Zemen develop a multi-purpose app with an appealing and easy-to-use user interface and experience while ensuring tight security protocols.

The expert also noted that the banking industry, especially when it comes to technological products, does not collaborate with local vendors. He explains that there could be two primary reasons for this. Developing a core banking system with a plethora of modules requires massive investments that Ethiopian private investors do not want to indulge in. He suggests that the government or the banks themselves take the lead.

The second reason he mentions is that even though local developers can build affordable and high-quality digital systems and apps in terms of looks, the products lack adequate security features. This explains why almost all Ethiopian banks are using core banking systems and banking solutions developed by well-known global companies, according to the expert.

These apps’ usability is another concern, considering the limited mobile and internet network penetration in the country. Nebiat confirms the potential user base of these mobile apps is low in number. Still, he suspects that usage of these digital services will spike with the implementation of new laws and regulations, such as the one that restricts people from directly depositing cash into someone else’s account.

“The investment is huge, and the usability is low,” he said. “Nonetheless, these apps have got to be developed; that’s the only way to move forward.”

Nebiat also believes that inter-banking features are much needed, as customers are otherwise put in the difficult position of opening accounts at multiple banks to conduct transactions. He suggests that Zemen Bank also consider integrating a bank-to-bank transfer option on its new platform.

Last week, Zemen, which grossed 1.1 Billion Br in profit last year, a 57pc increase from the previous year, hired PricewaterhouseCoopers East Africa (PwC) to design a five-year strategic plan and a 10-year strategic road map.

Task Force Emerges to Reinvigorate Investments in Tigray

Posted on by Web Master

A task force made up of six members from the Ministry of Trade & Industry has been set up to assess the cost of damage to businesses in Tigray Regional State due to the recent conflict. Established a week ago, the task force will also forward recommendations to reinvigorate factories and start production.

The team, which has already commenced operations, held a meeting with investors and business owners from Tigray Regional State last week to discuss the challenges the region’s conflict has had on their operations. Enabling indefinite storage of goods without charge at customs, allowing up to three months of extensions for the renewal of work permits, facilitating increased forex allotment, and restoring disrupted infrastructure in the region were among the solutions tabled during the discussion.

The unrest in the Regional State, which began in early November following the armed conflict between the federal government and the region’s former administration after the latter attacked the Northern Command of the Ethiopian National Defence Forces, had forced most businesses to close their doors. The conflict has caused the destruction of many properties and the displacement of workers, according to the investors.

The inability to process work permit renewals, the withholding of their goods at ports and customs centres due to road closures, and forex shortages were additional issues brought up by the investors.

The investors asserted that communications interruptions had left them largely in the dark about their businesses’ status. After nearly a month of a blackout, communication lines were partially restored in parts of the Regional State.

There are around 93 large enterprises and around 7,000 small and medium enterprises that operate in the Regional State. These companies created employment opportunities for more than 270,000 foreign and local workers before the beginning of the conflict, according to data from the Ministry.

Sheba Leather Industry Plc, Semayata Dimensional Stones Factory, Ethio-Shewit General Trading Plc, and Savana Farming Plc were present at the discussion held at the Ministry’s premises at the end of last week. The investors, who voiced their concerns over significant damage to their investments, said recovery without government assistance is near impossible and urged the government to act quickly.

“It’s difficult to pay our employees, because activities have ceased, and we were unable to pick up our goods from Djibouti due to road closures,” said Mikiyas Tadele, manager of Ethio-Shewit.

The company also faces additional problems due to their foreign employees from China. The employees, which had been evacuated from the region to the capital for their safety, stayed in rented housing. This has created another financial burden for the company, according to the manager.

Egzi Tsehaye, the founder of Zenit Barley, says that his company has suffered losses estimated to be 90 million Br. Despite this, he asserted that the company aims to rebuild entirely within four months.

Sheba Leather Industry has sustained 100 million Br in losses due to the robbery and fire at its plant, according to Zerabruk G. Michael, marketing & business development manager at Sheba.

The businesses need to prepare a plan in which they identify expected support from the government, according to Zerihun Abebe, textile & leather director at the Ministry.

Zerihun mentioned that the disruption greatly affected exports, the marketing of domestic industrial products, and employment opportunities and pledged that the task force would work to overcome these issues.

The government should showcase immediate solutions for investors, according to Ahmed Kellow (PhD), managing director of First Consult, who added that such damage could seriously impact the economy of the country.

“Media also has a big role to play in bringing attention to the problems faced by the community in the region,” said Ahmed.

Zemen Insurance Debuts with Decent Profit

Posted on by Web Master

Zemen Insurance, the latest entry in the insurance business, netted 18.3 million Br in profit during its first year of operations. The profit was mainly generated from investment activities.

With an original par value of 5,000 Br, the earnings per share (EPS) of the nation’s 18th insurer also registered at 19.7pc. The company commenced full operations just 25 days ahead of the previous fiscal year’s conclusion after securing its license from the National Bank of Ethiopia (NBE) in January of this year.

The firm had plans to commence operations early, according to Melaku Ezezew, the board chairperson of Zemen, which was founded by 942 shareholders and raised 81.5 million Br in paid-up capital from the subscribed capital of 114.6 million Br. Even though the establishment of the insurance company was initiated during the general assembly of Zemen Bank, the Bank did not invest in the insurance firm due to its investment policy prohibiting it from investing in companies that are less than three years old.

“Even though we planned to start operations early,” said Melaku, “we had to start late due to the Novel Coronavirus (COVID-19) and instability around the country.”

Shumetie Zerihun, the founding CEO of Zemen Insurance, says that the firm’s management made a wise decision in keeping the money in banks to generate income until the firm started operations.

“We were getting between a 12.7pc and 13pc interest rate on time deposits,” said Shumetie. “The rate was determined by a competitive bidding process.”

From investment activities including interest on time deposits, saving accounts and government bonds, Zemen earned 20.2 million Br. It also gained an additional 5.7 million Br from other operating income, including service fees from the sale of shares and income from the recovery of bad debts. However, it registered no income from commission fees.

Zemen should keep on performing well in investment activities, according to Abdulmenan Mohammed, a financial statement analyst with two decades of experience.

Between February and early June, the firm’s management had been focused on preparation activities. This involved organising human resources and re-charting procedures by working on policy manuals and insurance policies, revising feasibility studies, and designing a three-year strategic and operational plan.

“To control expenses,” Shumetie said, “the organising committee’s chairperson and I undertook all these activities.”

Out of the Bank’s net profit, the board of directors have proposed 15.1 million Br, or 82.5pc, be allocated as a dividend payout.

This level of dividend for a new entrant is awe-inspiring and delightful to its shareholders, according to Abdulmenan.

Hailegebriel Demeke, one of the founding shareholders, agrees with Abdulmenan’s comment. He says that most new businesses operate with losses during their first months.

“I never expected a profit this year,” said Hailegebriel, who received a 16pc dividend during the past fiscal year. “Its performance was magnificent and even better than some [of the other] insurance companies.”

Zemen managed to register 161,840 Br in gross premiums on the core insurance business largely from the business’s marine and motor classes. It ceded 8,092 Br of the premiums to reinsurers, having a 95pc retention rate, which is much higher than the industry average of 77pc registered in 2019.

The firm registered 329,339 Br in underwriting losses during the year and paid just 641 Br in claims. Its underwriting expenses also stood at 335,104 Br.

Admitting that the firm did not perform well in the core insurance areas and considering its short existence in the business, Shumetie says the firm used the 25 days before starting the current fiscal year to look for clients.

“We were able to get new businesses,” he said.

The operating and administrative expenses of Zemen stood at eight million Birr, of which 5.2 million Br was spent on the start-up establishment of the firm. The remainder was spent on general administration. Spending on employees’ salaries and benefits registered at 1.5 million Br.

Zemen’s total assets expanded fairly, registering 9.8pc growth to 122.2 million Br. Out of this, 76.8 million Br and 18 million Br were put into investments and leased assets, respectively.

The total liabilities of Zemen stood at 5.6 million Br before the end of the fiscal year, a decline of 68pc from the 17.4 million Br that was registered during the project period.

The firm’s paid-up capital also grew by 21.2pc to 98.8 million Br. The paid-up capital represents 80.9pc of its total assets.

“This indicates that Zemen has strong capital,” said Abdulmenan. “It should use this capital efficiently.”

During the general assembly held three weeks ago, the shareholders agreed to boost Zemen’s paid-up capital to 150 million Br to strengthen its capacity and minimise the value of the business it sends to reinsurance companies, according to Shumetie.

“We’re waiting for the approval from the central bank after sending the decision of the general assembly,” he said.

Cash and bank balances of Zemen stand at close to eight million Birr. The ratio of cash and bank balances to total assets reached 6.5pc.

As Zemen is approaching the minimum liquidity level, it should take extra care to avoid a further reduction, according to Abdulmenan.

“Since we don’t have liabilities,” said Shumetie, “we’re over-liquid.”

The Next Frontier of Transport, Logistics: Digitisation of Services

Posted on by Web Master

Ethiopia has been aspiring to become a middle-income country for the past decade; however, it is a long way from achieving this vision. Various reasons can be attributed to poor performance, yet one of the major ones is a failure to establish strong institutions.

The core of strong public institutions rests on the rule of the game that structures the organisation’s position in delivering adequate services. And the rules are constructed through the socioeconomic and political environment of the country, formal and informal organisational arrangement, as well as the system installed in the organisation to execute its mandate.

In our case, leaving aside the political meddling, almost all public institutions rely on the traditional, manual-based system, which is highly bureaucratic, slow and rigid to respond to the growing demand of citizens. Usage of information technology to advance the service quality is also continuously compromised to maintain the status quo of growth expressed in terms of growth domestic product (GDP) alone. GDP does not necessarily show multi-dimensional growth in terms of indicators such as establishing strong institutions, equity and equality.

If we want to leapfrog in successfully realising the Homegrown Economic Reform Agenda and the recently green-lighted 10-Year Perspective Plan, we need to work on establishing effective public institutions. This should be in a way that they could give ample room for the private sector and civil societies to play their part.

Moreover, innovation in the concept, system and process in the formation of institutions and delivery of services has to be central, as I discussed in a previous piece for this publication, “The Urgency of Innovation in Transport Service Delivery,” [Vol. 21, No 1059, August 16, 2020]. Here, there is a need to articulate transport service concept innovation in understanding and delivery of services.

In this era, governments should be citizen and service-centred. That is, the concept of government and government services should be innovatively shifted to overcome the inherent nature of inefficiency in their service design and delivery. The traditional, mostly centralised and rigidly controlled type of services should be diverted to digital government, whereby services are delivered transparently, efficiently and impartially.

More precisely, the transport services should be demand-driven, where the services are designed to accommodate the need and demands of the residents while encompassing flexibility to interact with other advanced technological systems.

For instance, Demand Responsive Transportation (DRT) is an information technology-based system that specifically requires innovation in route and time concepts, the booking concepts, the network concepts and vehicle allocation concepts.  In this manner, the transport system will provide services based on the demands of residents using the applications.

The idea of introducing concept innovation in the logistics sector is also all about improving citizens’ experience of accessing goods in a seamless way. One way of achieving this is using technologies such as blockchain. It can drastically transform the logistics system by facilitating the functioning of the back office and creating a public ledger for every transaction, hence making the system more transparent and efficient.

Such concept innovations are in the interest of making verified information available to citizens and making the transport and logistics services flexible based on the demands of users. This would alone shift the gears drastically, allowing more room for system and process innovation in the transport and logistics sector. This way, we can make a tangible difference in the lives of every citizen as a nation of brave souls.