Commentaries | Aug 01,2020
This year has been anything but a good year for Gabriela Esayas, a businesswoman who started a few years ago.
Ordinarily, she would import goods up to three times a year. Not having been approved a letter of credit, Gabriela has only made a single trip abroad this year. Several times a day, she finds herself telling customers she has no pesticides in stock in her store in Merkato.
Touted as the largest open-air market in Africa, Merkato is a place where buyers do not have to hassle much to get what they want, as long as they are resourceful enough to pay. Those days are gone, at least for now. Gabriela, who supplies agricultural inputs and equipment, is a witness to this.
Her store is wedged between similar establishments in the area commonly referred to as Gojjam Berenda. Known as a hub for wholesale distributors, electronic equipment shops and butter vendors surround Gabriela and her neighbours. Her store, Marsama Agricultural Inputs & Equipment Supplier, displays various goods, but most of its business comes from the agrochemical industry. In a desperate attempt to supply her customers with these much-needed products, she has resorted to buying back from farmers who bought in excess.
"When farmers call us and ask for products, we too ask them what they have in excess and buy from them," she told Fortune.
Supply crunches have hit the largest market. For what little is available in stock, it is a seller's market. The impact is reflected in the price of goods, including on chemicals sprays Gabriela's store sells. The price of pre-treatment herbicides has more than doubled to 350 Br and a container of anti-fungal spray, sold for 1,250 Br a month ago, now goes for 1,650 Br.
For many businesspeople, the game in town is access to foreign currency to open letters of credit (LC). They are not available to everyone and when they do come, LCs are few and far between.
The stock of foreign currency reserves is dwindling by the day. It barely covers two months' worth of imports, the huge imbalance between import bills and export proceeds further complicates the task of bridging the country's balance of payment deficit, averaged at five billion dollars.
Ethiopia's foreign currency earnings come through limited routes: remittance, exports, grants, foreign investments, and borrowing. Remittance is the largest contributor to forex earnings, reaching as high as six billion dollars last year, showing a 29pc growth from the previous year.
Another financing mechanism is foreign borrowing and aid, which has been in jeopardy as development partners turn their back over the war in Tigray Regional State. The latest suspension in development aid came from Germany, whose government announced the freezing of 100 million euros in aid.
Traders in Mercato have seen the flow of goods decline significantly over the past few months.
This loss could be offset by record-high export revenues this past year. Authorities have announced that the economy has generated 3.6 billion dollars in export, owing to the increase in coffee and gold. No less impressive was the report from the government disclosing that Ethiopia attracted 3.5 billion dollars in foreign direct investment during the same period.
Reducing the imports bill has been an anchor policy followed by the administration of Prime Minister Abiy Ahmed (PhD), since 2019.
"We've successfully slowed down the growth of imports," said the Prime Minister.
He might have in mind a marginal increase of 0.6pc seen last year to a total of 14 billion dollars. The administration may have attained its goals and this might seem like a good outcome but it comes with a cost.
The federal government has imposed strict measures on importing goods it categorised as "luxury" beginning March last year. A newly introduced excise tax included vehicles and sugary products as "luxury goods" subject to heavy tariffs. It is what policymakers call "a strategic deterrent on products that are non-essential and bad for health."
The authorities at the central bank followed suit a year later, significantly altering the management of export retention accounts as well as diaspora accounts. The latter, privileged to import goods of their choosing, was bound to surrender 30pc of their forex earnings directly to the central bank. They are now limited to importing "essential goods" such as agricultural inputs and pharmaceuticals.
Abel Tefera is a car importer in business for the past eight years. Significantly impacted by the excise tax, he saw the car dealership market disrupted by policy changes.
Prices on imported vehicles have skyrocketed in just a year. The dealership price for a Toyota Rav4 model has hit the roof, surging by a million Birr to 5.8 million Br. Importers are also limited to a select pool of brand new vehicles meaning that the market has been crowded with similar vehicles, robbing importers like Abel of the room for any competitive edge. Abel has observed that the car dealership business is getting from bad to worse.
"We try to survive as long as we can," Abel told Fortune, adding that he would shift his business if things carry on like this.
The despair is not much different elsewhere.
Very few import orders are being placed, according to a market insider operating in the Mercato area. Importers are still using letters of credit approved before the restrictions on diaspora accounts were enforced. The number of letters of credit opened for diaspora accounts plunged by 60pc, disclosed a senior executive in one of the leading private banks, who requested anonymity.
"People are now spreading out their orders, making multiple small orders instead of one in bulk," said the market insider.
But businesses find this route more costly, and buyers are left feeling the burn.
As most transfers into diaspora accounts are believed to be from the parallel market, surrendering almost a third of forex earnings entails a high cost to importers. The value of the Birr against the Dollar in the black market reached 58 Br, against the official market's 45 Br last week.
Experts caution, yet again, buyers are left with the short end of the stick as importers look to mark up for the cost incurred, with few of them interested in using diaspora accounts to import essential items authorities at the central bank would want to prioritise. Importing essential items, such as pharmaceuticals, cannot be as straightforward as wearables, for the regulatory requirements are cumbersome and technical.
"It requires storage facilities and professionals to be in charge," the Mercato insider noted.
The central bank wants to rationalise the restrictions attributing to the "illegal transactions" contributing to remittance flow through informal channels.
“We thought it would be more important to import pharmaceuticals than cars,” said Fikadu Digafe, vice governor and chief economist at the National Bank of Ethiopia (NBE).
The Vice Governor credits the huge inflow of remittance to the enforcement of the new restriction. However, he conceded a thorough analysis needs to be carried out to determine to reasons.
"Even remittance that comes through formal agents has increased by 40pc," Fikadu disclosed to Fortune.
Dereje Zenebe, president of Zemen Bank, saw how the usage of diaspora account significantly declined.
For banks like Zemen that have not been content with diaspora accounts, the drop has been welcomed. They see it as a practice hindering the flow of foreign currency that would have otherwise come through formal channels. It has been a costly ordeal since banks were forced to surrender 30pc of all forex earnings to the central bank.
"From what we've seen in our bank and others, the flow of foreign currency has significantly improved," said Dereje.
Experts, however, argue that it would have been better to find a way to incentivise the diaspora instead of blocking foreign currency avenues. The trend where exporters were buying foreign currency off diaspora account holders was market-driven.
"What is the problem with that?" Rahel Kidane, an investment banking and financial expert with over a decade of experience. Having previously worked at Access Capital, Rahel has published researches on private equity.
Businesses in the import sector might have been impacted. But it is the end buyers affected the most, with little in the way of options but locally manufactured goods. Sub-standard products manufactured locally have flooded the market, going for the same prices as imported ones.
It is not only a shortage of foreign currency that is drying up stocks, however.
Issues with the shipment of products have also been a bane for importers, who have had to wait months for their goods to be delivered. There has been a global shortage of shipping containers since the onset of the COVID-19 pandemic. With strict lockdowns in the global west and south, containers were not offloaded or loaded, as usual, creating disruptive shortages.
Ethiopia feels burnt, with many companies, including the state-owned Ethio telecom, reporting import item delays as the Ethiopian Shipping & Logistics Service Enterprise struggles to pick up goods.
Importers, however, had to look for other means, now using unimodal transporters to ship their products, which is more costly in terms of foreign currency.
Gabriela is doing her best to sell off what is left of her stock. Anxious because most of the products on her shelves are approaching their expiry date, she can do little except hope that a letter of credit comes through very soon.
PUBLISHED ON Jul 24,2021 [ VOL 22 , NO 1108]
Commentaries | Aug 01,2020
Radar | Jul 31,2021
Radar | Apr 25,2020
Fortune News | May 25,2019
Fortune News | Feb 01,2020
Fortune News | Sep 10,2021
Fortune News | Nov 16,2019
Fortune News | Oct 24,2020
Agenda | Sep 14,2019
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