Minister of Finance Ahmed Shide has intensified efforts to enforce mandatory domestic procurements across federal government institutions. He issued directives to 169 federal agencies two weeks ago, urging them to prioritise local suppliers and swiftly dispose of outdated equipment, to boost economic growth and promote domestic industry. Underpinning this initiative is a broader strategy targeting import substitution and public property management.

Price ceilings for domestic procurements have been raised to a staggering 150 million Br, signalling the support for local industries while construction projects have a ceiling of up to 600 million Br.

For Eyob Tekalegn (PhD), state minister for Finance, the importance of aligning import substitution goals with the country's evolving economic policy, particularly under the second Homegrown Economic Reform Agenda, is essential. He said local manufacturing role is paramount to achieve broader macroeconomic objectives.

"Structural changes are crucial to meet import substitution targets," Eyob told Fortune.

Government is the country's largest buyer of goods and services, with annual expenditures totalling close to 150 billion Br. However, a significant portion of these procurements involve international suppliers.

The electronic procurement system introduced three years ago, has also become compulsory for most public purchases and is deemed as vital for reducing corruption and speeding up procedures. Nearly 70 institutions engaged in e-procurements last year, with bids totalling over 42 billion Br. The shift is projected to reduce expenditures by an average of 6.57pc, illustrating the cost-saving benefits.

However, most foreign companies participate in government procurements through arrangements with local firms, which result in additional commissions and service fees being tacked onto the final price of products.

Gebeyaw Yitayew, head of the Public Procurement & Property Authority, stresses the importance of transparency and fair competition in creating a procurement landscape conducive to supporting local industries. He believes introducing a mandatory e-procurement system has played a vital role in reducing corruption.

"It helps manage public resources efficiently," he said.

The Ministry of Industry plans to conduct a comprehensive study aimed at assessing the capacities of local manufacturers and their ability to meet the requirements for government purchases. Netsanet Abebe, the Ministry's head of Chemical Products Promotion & Competitiveness, highlights the need to increase the productive capacity of local manufacturers. Many firms operate below their full capacity, facing stiff competition from foreign counterparts.

"Industries have barely reached their potential," she said, highlighting the untapped growth opportunities.

Manufacturers have underperformed for several reasons such as access to forex, crippling their operational capacities. The 'Let Ethiopia Produce' initiative aimed at reviving the sector is considered a step forward by Minister Melaku Alebel who recently appeared before Parliament pushing for government agencies to source at least some of their procurements domestically, a move towards import substitution.

However, experience of other African countries tells a different story. Countries like Ghana, Tanzania, and Zambia, which had once championed industrial import substitution, found themselves in fiscal deficits, escalating external debt, and economic stagnation. A myriad of factors, including geopolitical shifts, inefficiencies, technological stagnation, fiscal burdens, and macroeconomic missteps, influenced the outcome with industries, once shielded by protective policy measures, languished in a state of stagnation, failing to innovate or expand.

While protectionist policies hold promise for nurturing domestic industries, concerns linger over potential compromises in product quality and fair competition. According to Shiferaw Mitiku, a logistics and supply chain management lecturer at Addis Abeba University, while the initiative is exciting, there is room for exploitation of the policy, which may use preferential access to bid and raise prices.