Business & Economy

Manufacturing moves centre stage

Manufacturing moves centre stage
  • PublishedMay 1, 2019

Ethiopia has been steadily developing its manufacturing sector in a bid to supplement vital income from its more traditional exports. If it can maintain political stability, it could join Nigeria and South Africa as a continental powerhouses. Report by James Jeffrey.

This Mother’s Day gone, there is a fair chance that if you bought your flowers in the likes of the UK or US, the floral arrangement for your dear mother contained cut flowers from Ethiopia. Ethiopia’s income from flower exports has increased steadily over the years, generating $228.6m in the last fiscal year, according to Ethiopia’s Ministry of Trade, part of the overall $2.84bn worth of goods exported. This marked an increase of 10.5% since 2013.

In its bid to become a light-manufacturing hub to rival those in the Far East, Ethiopia is pursuing an ambitious programme of building multiple investor-friendly industrial parks offering special opportunities in textiles, leather products, horticulture and pharmaceuticals, to attract both foreign capital and know-how as it seeks to keep boosting those export numbers.

“The best sectors relate to export revenue generation,” says Reg Hankey, CEO of Pittards, a British leather goods company trading in Ethiopia since the 1920s. “Broadly these are agriculture, textiles, leather, shoes, leather goods and other manufacturing options. These all generate foreign exchange, but also employ lots of people whilst developing their skills, enabling the society to move away from poverty.”

Along with cut flowers – representing 11% of total exports in 2016/2017 – Ethiopia’s other top exports were coffee (30%), oil seeds (12%), pulses (10%), gold (9%) and khat (9%), according to the US Department of Commerce. Major destinations for Ethiopia’s exports in this period were Asia (37%, with China at 20%), Europe (32%) Africa (21.5%), and the US (8%).

“In the next 10 years, the exports from these industrial parks and other manufacturing facilities outside of them, plus value-added agricultural production, including coffee, and electricity and other items are expected to account for up to 25% of GDP from less than 5% today,” says Zemedeneh Negatu, chairman of Fairfax Africa Fund, a US-based investment firm. Fairfax has several investments in Ethiopia including in technology and manufacturing. “Ethiopia’s export model is similar to the strategies used by the Asian Tigers and China to generate significant forex and build wealth in just a few decades.”

Made in Ethiopia

Zemedeneh notes how global brands such as Calvin Klein, Tommy Hilfiger and the Italian clothing manufacturer and retailer, Calzedonia, are already successfully exporting to Europe and elsewhere.

“The export opportunities are significant for products Ethiopia has started to manufacture, and will be manufacturing in the future, which will be in demand around the world,” Zemedeneh says.

It all fits in with the government’s Growth and Transformation Plan II (GTP II) that aims to spur economic structural transformation and sustain accelerated growth towards the realisation of the national vision to become a low middle-income country by 2025. Increased exports also address key vulnerabilities, such as the persistent shortage of foreign exchange within the economy.

“The government hopes that textile and garment manufacture in Chinese-inspired and funded industrial parks will be a game- changer,” says Clive Newell, executive director of the London-based consultancy agency, G3 (Good Governance Group). “This is a challenge as it entails new working methods for an agricultural population and a high level of government support from institutions that have little experience of industry or export.”

But Ethiopia has a significant advantage in its preferential treatment in export terms by other countries. Growth in Ethiopia’s garment manufacturing, for example, has been largely driven by the African Growth and Opportunity Act (AGOA).

This US Trade Act established in 2000 – applicable until at least 2025 – enhances market access to the US for qualifying Sub-Saharan African countries like Ethiopia, granting up to a 32% relief on tariffs to garment buyers. Ethiopia’s exports also benefit from being granted duty-free and quota-free access to the EU, Japan, Canada, China, Turkey, Australia and New Zealand.

Ethiopia needs all the export leverage it can get in its fight to decrease its trade deficit gap, which has steadily increased on average by 12.5% per year between 2004/05 and 2016/17, reaching $15.8bn in the last of those fiscal years.

“It looks bad, but it is to some degree expected, and mitigated,” says Will Davison, International Crisis Group Senior Analyst for Ethiopia. “Ethiopia needs to purchase capital goods such as machinery to increase the economy’s productive capacity, as well as essential items like food and medicine, so it’s hard to control import growth. Also, exports aren’t the only source of forex – the country receives more remittances, grants, loans, and FDI combined than it generates from exports, reducing its current account deficit.”

Export elixir

To make the overall balance even more manageable, Ethiopia is trying to expand into new areas for exporting. A Chinese conglomerate, POLY-GCL, is spearheading the $4bn development of oil and gas projects in western Ethiopia. Construction of a 550km pipeline pumping gas to Djibouti Port is underway, and substantial exportation is set to begin in 2021.

Ethiopia can’t be accused of shrinking from bold economic gambits, but it remains to be seen if such efforts will pay off as hoped.

“Recent economic successes have been building the foundations for a dynamic market economy by investing in infrastructure and people – but many planned new export streams are behind schedule, including sugar, gold, potash and electricity,” Davison says. “Still, we tend to focus on goods, whereas Ethiopian Airlines is a service export and has been remarkably successful, sometimes generating more foreign exchange than the largest grossing commodity, coffee.”

Massawa opens new door

The recent rapprochement with Eritrea offers Ethiopia’s export endeavours the possibility of using Massawa, on Eritrea’s Red Sea coast as a crucial alternative to Djibouti Port, which until now has monopolised Ethiopia’s export traffic ­– and charged a handsome sum for the privilege, estimated at $1.5bn-$2bn in port fees.

“My company exports Ethiopian beers to Europe,” says entrepreneur Yemane. “I used to export beers from Djibouti to Rotterdam, but now that peace has come between Ethiopia and Eritrea, Massawa port is a much better option.”

The timing is fortuitous. Ethiopia is struggling under high public debt, rising inflation and has long been plagued by a shortage of foreign currency, while at the same time lately the economy hasn’t performed well. Those cut flower export sales in 2017 achieved only 68% of the government’s revenue target. But Ethiopia has demonstrated an ability to weather its troubles. The stability of Ethiopia’s macroeconomic and investment policies during the unrest meant Ethiopia was still reported as a 2017/18 ‘Star Performer’ in an FDI Attractiveness survey by the World Bank.

Some observers talk of Ethiopia eventually emerging as an African powerhouse alongside South Africa and Nigeria – if it can retain stability both politically and economically. The national elections in 2020 will be key. NA 

Written By
James Jeffrey

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