In an expansive land of the manufacturing sector, a troubling narrative unfolds as the industry is met with multifaceted challenges, jeopardizing the livelihoods of thousands and undermining the country's economic stability. The suspension of Ethiopia from the African Growth & Opportunity Act (AGOA) in January 2022, a consequence of the protracted conflict in Tigray, emerges as a pivotal moment triggering a cascading series of setbacks for the once-thriving textile manufacturers.

The aftershocks reverberate through industrial parks, with Hawassa Industrial Park experiencing a significant workforce reduction of 16pc, impacting nearly 25,000 employees since the AGOA suspension.

Ethiopia has been trying to promote its export trade and reduce dependence on imports for more than half a century. Nonetheless, there is persistent rigidity in the structure of the foreign trade, export earnings were stagnant while imports continued ballooning. Low productivity within the economic sectors and dominance of unprocessed or minimal value additions have also kept the export earnings low.

Exports from industry parks fell by 24pc last year. The largest Hawassa Industrial Park sprawling at 140hcts located 285Km from the capital with nearly 60 sheds best suited for textile manufacturers, has taken a sharp blow since Ethiopia’s suspension from the African Growth & Opportunity Act (AGOA) in January 2022. Ethiopia’s textile manufacturers, who once thrived on exports to the US, were left to scramble for alternative markets.

Belay Michael, branch manager of the Ethiopian Investment Commission at the Park, revealed that most companies are merely surviving.

The challenges extend beyond geopolitics, with additional woes including disruptions to the vital trade route in the Red Sea due to Houthi militia attacks, exacerbating logistical complications for industry parks. Despite efforts by the Ministry of Industry to alleviate the situation by allowing factories to sell to local markets from industrial parks, progress remains elusive, and the Hawassa Industrial Park is operating at only 15pc of its export potential.

Manufacturing has underperformed for several reasons. Macroeconomic factors such as access to forex, industrial and FDI policy emerge as a common thread, crippling their operational capacities. Aklilu Wubet (PhD), president of Wegagen Bank, highlights the immediate impact of foreign currency shortages on manufacturers, particularly those heavily reliant on it for raw materials. He points out the liquidity crunch and credit cap, both of which significantly affect the sector's ability to operate smoothly.

According to Aklilu, although loans to the manufacturing sector have increased in recent years, they still fall short of meeting the sector's demand. While the central bank has initiated a three-year strategy to enhance macroeconomic stability by reducing inflation and bolstering foreign currency reserves, Aklilu suggests that the full realisation of these ambitious objectives may take time and faces various challenges yet to be addressed.

The sector has not been regarded as a top policy priority in the current regulatory overhauls at the National Bank of Ethiopia (NBE). While officials recognise the credit cap can impact the sector "It's for a greater cause," said Hanna Hailemariam, advisor at the central bank.

According to UNDP study findings, the predominant macroeconomic challenge confronting the industrial sector is the overvaluation of the currency coupled with a shortage of foreign exchange. It depicts an artificially overvalued currency that creates distortions in the economy, acting as a disincentive for domestic production as imported goods become comparatively cheaper.

The repercussions extend throughout the entire economic landscape. Microeconomic factors such as reliable utility supply water and proper taxation add to the issue. The government's efforts to expand tax revenue by 35 billion Br to 440 billion Br adds another layer of pressure, coinciding with tightened credit availability, security concerns, and foreign currency shortages.

Bekoji & Digalu Mountain Springs Plc, manufacturer of Bekoji bottled water, has faced a protracted dispute with federal tax authorities, resulting in the closure of its operations six months ago. The closure of the company after a decade of production has left 240 employees out of work.

The company was entangled in a four-year tax audit that revealed tax receivables amounting to 19 million Br. The audit occurred at a time when the company was already facing financial challenges, with loans drying up and the factory struggling to sustain itself. Adefris Kifle, a major shareholder and manager at the company, expressed regret about the timing of the audit and its exaggerated findings.

"We were forced to go out of business," he said.

Birtukan Girma, senior advisor at the Ministry of Revenues, contends that the majority of tax findings result from companies underreporting revenues and overstating expenses, actions that are discovered at a later stage. According to Birtukan, the existing framework has everything in place to conduct thorough audits. While acknowledging the possibility of minor technical errors during the audit process, she emphasised that the appeals process is in a position to address concerns and provide some relief.

"Sector-based manuals leave little room for speculation," she said.

The importance of addressing knowledge gaps, promoting transparency and strengthening the auditing infrastructure are indicated by experts for the effectiveness of the taxation system. Yohannes Woldegebriel, a veteran tax lawyer, sheds light on the significant discrepancies in tax assessments, attributing a portion of the issue to the disparity between what authorities consider tax deductible and what manufacturers assume is already accounted for.

"There is a serious lack of awareness for tax laws," he told Fortune.