Cash Starved Domestic Drugmakers Turn to EIC for a Lifeline

Apr 27 , 2025. By AKSAH ITALO ( FORTUNE STAFF WRITER )

Key Takeaways:

• Ethiopian drug makers are seeking unconditional guarantees from the state-owned Ethiopian Insurance Corporation to access a 30pc advance, amounting to about four billion Birr, from the Ethiopian Pharmaceutical Supply Service.
• Local banks impose high collateral and service charge demands, prompting manufacturers to explore the state insurer as an alternative financial source.
• The envisioned shift could promote domestic pharmaceutical production, reduce import dependencies, and enhance access to affordable drugs.
• Policy initiatives seek to increase domestic procurement of medicines, showing the sector's importance in meeting public health needs.

Cash-strapped drugmakers, squeezed by strict banking rules and rising fees, are pinning their hopes on the state-owned Ethiopian Insurance Corporation (EIC) as a means to new sources of working capital.

The manufacturers want to unlock a 30pc advance, about four billion Birr, from the Ethiopian Pharmaceutical Supply Service (EPSS), a federal agency, to cover day-to-day costs and keep production lines moving. But to receive that money, companies should present unconditional guarantees. Local banks, say industry executives, either refuse outright or demand steep collateral and quarterly service charges that reach 2.5pc, the equivalent of 10pc a year.

Over the past month, the Ethiopian Pharmaceuticals Suppliers & Manufacturers Sectoral Association has held talks with the insurer to see whether it will issue the guarantees at a lower cost and without tying up company assets.

“It's been too much trouble,” said Association President Daniel Waktole.

He blamed banks for charging “inflated commissions while offering limited access to the needed facilities,” but expressed optimism that the state insurer could deliver a “more practical alternative.”

The Pharmaceutical Supply Service signed 12 billion Br in six-month contracts with domestic companies last year to supply 120 categories of medicines out of a total of 782 to be purchased. Only nine firms are expected to claim most of that business, yet domestic output still covers only a third of the federal agency’s needs. Manufacturers delivered 44pc of the 4.5 billion Br in agreed-upon supplies last year; the rest fell victim to financing woes.

To date, the Service has released 780 million Br in advances to companies that secured existing bank guarantees. Others are stuck waiting for the insurer to step in.

Under the proposed arrangement, manufacturers would obtain unconditional guarantees from the insurer, collect the advance from the supply agency and then ship the drugs.

Solomon Nigussie, deputy director general, disclosed that the federal agency supports the shift because “we only trust the state-owned Corporation.” According to him, steady cash flow is crucial if factories are to meet the country’s demand for affordable medicine.

The risk is that a manufacturer could default.

Unconditional guarantees function as a financial shock absorber, protecting the advance if the supplier fails to deliver. The insurer has yet to put pen to paper, but companies such as Kilitch Estro Biotech see the scheme as essential. The firm landed a 522 million Br order from the supply agency last year, yet General Manager Daniel Waktole (PhD) said working capital gaps remain a chronic headache.

“Local manufacturers have the capacity,” he said. “But, the capital constraints keep coming back.”

Domestic producers have also asked the Commercial Bank of Ethiopia (CBE), a state-owned financial institution, for over seven billion Birr loan to open deferred letters of credit (LCs) for raw material imports. A three-way deal comprising the Bank, the EPSS and the EIC has been floated, but CBE has yet to respond.

The Pharmaceutical Supply Service, founded in 1947, channels medical goods to 5,000 health institutions through 19 outlets nationwide. In the last fiscal year alone, it pushed out 51 billion Br in supplies, financed by a mix of donations and direct procurement. Of its 21 billion Br distribution budget this year, 70pc pays for program medicines funded by the Ministry of Health, while the remaining 30pc, or eight billion Birr, supports supplies through a revolving fund for chronic treatments.

Officials want domestic manufacturers to lift their share of agency procurements from eight percent to 40pc this year and plan to increase to 60pc within a decade. Incentives include a 25pc price preference for domestic suppliers and special breaks for small businesses.

Still, the financing logjam remains.

Cadila Pharmaceuticals, which began as part of Ethiopia’s first drug factory in 1964, is running at a quarter of its capacity. The company secured a 223 million Br contract but struggled to obtain the advance. According to General Manager Kanchan Banerjee, banks demanded 100pc collateral and “exorbitant” service charges.

“Affordable guarantees have become remote,” he told Fortune.

Kanchan welcomed the insurer’s potential role, hoping it could “unlock vital access to funds” after years of struggle.

New rules from the National Bank of Ethiopia (NBE) have not helped. A recent directive caps a bank’s combined loan and guarantee exposure to related parties, including customers with common shareholders, at 25pc of its capital. State-owned enterprises are exempt, but private manufacturers are not. According to a mid-tier bank president, who asked to remain anonymous, collateral is still crucial because “the high financial risks involved” can wipe out depositor money when guarantees fail.

Demessew Kassa, secretary general of the Ethiopian Bankers Association, echoed the concern, noting that banks have lost “billions” when projects collapsed.

“It's depositors’ money after all,” he said.

Ethiopian Insurance Corporation is not rushing the paperwork either. Zewditu Ayalew, a company representative, confirmed the negotiations but said the risk assessments are not yet finished.

“It'll have its financial benefits,” she said. “But, the pros and cons are being weighed.”

The insurer was formed in the 1970s after the military government nationalised 13 private insurers. It now sells more than 45 insurance products through 61 outlets. Assets stood at 17 billion Br in June 2024, up 30pc from a year earlier, while gross profit jumped by 16pc to 1.34 billion Br.

The Health Ministry has thrown its weight behind the deal. State Minister Firehiwot Abebe recently asked the insurer to help issue guarantees. Birhanu Wolde, the Ministry’s finance manager, disclosed that policy reforms to bolster home-grown manufacturing and encourage public-private partnerships are underway.

“We'll provide support at every stage,” he told Fortune. "Import substitution is vital for long-term stability, and locally produced medicine is key to transforming the sector."

Yet, financial experts warn that adopting a blanket guarantee policy without adequate safeguards could lead to past losses being replicated.

According to Worku Lemma, a financial consultant, a single road-construction guarantee cost the banking system 800 million Br when the contractor disappeared.

"Financial mismanagement has been rampant,” he said, urging careful vetting based on a company’s financial record and performance history. “Not every business should be treated the same. Banks need to have clear strategies.”

Industry officials say the urgency is hard to overstate. The pharmaceutical sector, born in partnership with Smith & Nephew Associates in 1964, still covers only a slice of domestic demand despite decades of government incentives. Domestic plants often sit idle due to a lack of raw materials and short-term financing, even as authorities push an ambitious plan to meet most of the country's medicine demand at home.

The advance payment is one of several levers sought at closing to close that gap. Federal agencies hope that quicker cash will encourage plants to increase production, reduce import bills, and give patients easier access to affordable drugs. But until the guarantee impasse is resolved, factories will continue to juggle uneven cash flow, and the state may have to keep buying from overseas.

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PUBLISHED ON Apr 27,2025 [ VOL 26 , NO 1304]

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