Adama Industrial Park in Ethiopia
In Adama Industrial Park, more than 4,500 diligent workers sew uniforms for Ethiopian security forces. For the Ethiopian National Defence Force (ENDF), federal police, prison guards, and police forces design military uniforms, raincoats, and accessories.
Antex, a major player in Chinese fashion production, has seven sheds in the park and has established itself as a preferred contractor for government contracts. Antex used to sell clothing and accessories to other countries, but after Ethiopia was removed from the African Growth Opportunity Act (AGOA) last year, the firm now primarily serves Ethiopia’s internal market, fulfilling orders from national and local security agencies.
“After the AGOA prohibition, we ceased exporting. The operational and administrative director of Antex Ethiopia Plc, Tigist Gemechu, said, “We are struggling not to lay off employees. We have 4,500 workers.” “Only 40% of our installed capacity is being used.”
According to Tigist, the government has switched tactics after previously placing purchases overseas. Because of the restriction, our exports decreased, therefore the government began placing orders domestically. Therefore, we are replacing the foreign currency that the government used to purchase military gear. We are preserving the government’s currency even if we are not producing any at this time.
Before the government began using domestically produced uniforms last year, Ethiopia had been sending significant amounts of foreign money abroad for these kinds of things.
The nation’s declining foreign reserves make import authorizations rare.
Manufacturing sectors report that it takes more than a year to get permission in foreign currency for the purchase of replacement parts and raw materials, particularly if the business is not exporting or producing its own.
Because of a lack of skill, transportation connections, fuel, raw materials, and other necessities, along with challenges paying for necessary imports and replacement parts, many firms are only able to function at a small portion of their installed capacity.
Ethiopia’s low production, dependency on imported raw materials, and poor capacity utilization rates continue to be major barriers to import substitution, even though both the domestic and export markets support it.
At the moment, just 37% of the demand for manufactured goods is being met by Ethiopia’s domestic manufacturing sector, which accounts for less than 6% of the country’s GDP. Imports account for seventy percent of the remaining market demand. In a significant shift in policy, the administration does want to double the percentage of domestic products by the end of the next ten years.
One of the tried-and-true industrialization techniques used in developing nations, especially in Asia and Latin America, is import substitution industrialization (ISI). The fundamental goal of import substitution is self-sufficiency in both industrial and consumer goods.
Among the top model economies that have shown the model’s ability to change an economy in less than 50 years are Brazil, India, and China. However, after gaining its independence, Africa’s attempts to replace its imports seem to have faltered due to pressure from donors and the Washington Consensus.
Ethiopia up until recently focused mostly on export-led development and paid little attention to import substitution. However, the Ethiopian government was forced to make a drastic turnabout because of several issues, including the US rescinding Ethiopia’s eligibility for the AGOA trade program, declining foreign currency reserves brought on by rapidly increasing import expenses, COVID-19, and poor export results.
As of right now, the Ministry of Industry (MoI) has completed the industrial, automotive, and import substitution plans. This is the first time that such all-encompassing policies have been developed.
Tarekegn Bululta, the state minister of industry, asserts that in the fiscal year 2022–2023, indigenous output replaced imports totaling around USD 2.3 billion. There is still a significant amount of money to be saved to reduce Ethiopia’s reliance on imports, however, since its yearly import bill comes to almost USD 18 billion.
According to the State Minister, “textiles, leather goods, manufactured products, construction materials, chemicals, and beverages” have been the main categories affected by import substitution.
Tilahun Abay, an advisor to the minister of industry, issued a warning that the USD 2.3 billion sum mentioned is inaccurate. He explains that since it “neglects import costs,” it “does not reflect the net effect of import substitution efforts.”
According to Tilahun, “No domestic industry has achieved full localization yet,” Ethiopia still imports essential raw materials for the textile and leather sectors, as well as crude oil for edible oil plants.
Tilahun emphasizes that Ethiopia is beginning from scratch when it comes to import substitution for the majority of goods. As of right now, his Ministry has completed the nation’s first import substitution plan. The plan is prepared for execution, which is scheduled to start in Ethiopia’s fiscal year 2023–2024.
In 2023–2024, the government intends to save two billion dollars by replacing some commodities included in the strategy with imports. Tilahun lists them as edible oil, leather, textiles, telecom gear, and building supplies.
The net impact is seen by this predicted import substitution of USD two billion. It implies that all raw materials have to be obtained locally. To do this, we have instructed significant edible oil processors, such as Belayneh Kinde, to begin growing oilseeds on their own properties or contract farming with farmers,” he adds.
According to the advisor, four businesses, including the textile mills in Arbaminch and Bahirdar, have been chosen to produce cotton and thread domestically.
The strategy’s chosen industries need to retrace their steps in the value chain and develop self-sufficiency in input procurement. This implies that when they become self-sufficient, we won’t need foreign currency to buy raw materials,” Tilahun said.
Additionally, he applauded the central bank’s recent move to prohibit the importation of 38 goods, including processed meals. Investors are becoming interested in domestic food manufacturing after the prohibition. For example, we’re going to start making mango peel juice shortly.
The president of the state-owned policy bank that funds industrial and agricultural projects in Ethiopia, Yohannes Ayalew (Ph.D.), says the Development Bank of Ethiopia (DBE) is changing its lending programs to encourage import substitution.
Yohannes said, “We will no longer be granting loans for local factories that do not participate in backward linkages.” For instance, we won’t lend money to large manufacturers of edible oil unless they also grow oilseeds and have access to a local source of raw materials. If not, their activities get stalled after we provide loans since they do not have enough foreign currency to buy raw materials from outside.
Regarding edible oil, he states that the policy bank is now authorizing loans for the planting of palm trees, among other places, such as Gambella and Dire Dawa.
Officials from the MoI are still at odds about how to gauge the advancement of import substitution, however.
Some contend that it is attained when all domestic demand is satisfied locally. Some claim that happens when the source of raw materials is completely localized. Tilahun said, “This argument has not been resolved, which is why the import substitution strategy’s ratification was delayed.”
According to experts, accomplishing structural reform in the economy has to be the primary concern. To maintain a steady supply of raw materials for industry, structural change guarantees excess agricultural output. Industries will continue to depend on imported inputs if agriculture is unable to achieve surplus yields and continuous productivity increases.
Experts emphasize that Ethiopia has to progressively transition from light industry and agriculture to heavy industries to start substituting imports.
According to Andualem Goshu (PhD), a professor at Addis Ababa University’s (AAU) College of Development Studies, import substitution is inevitable for Ethiopia. “In any other case, it is challenging to satisfy the enormous demand for foreign exchange needed to pay for imports,” he said. Andualem clarified, “Ethiopia is implementing both import substitution and export-led growth strategies simultaneously.” The Derg and Haileselassie I governments had explicit policies that prioritized import substitution. But the policies are now inconsistent.
The government depreciated the local currency as one of the financial incentives. The National Bank of Ethiopia (NBE) has constantly depreciated the Birr in recent years, to incentivize local producers by raising the cost of imports. However, the strategy of devaluing the birr has backfired. Industries that depend on imported inputs are compelled to purchase imported raw materials at greater costs as a consequence of the devaluation, which is compounded by declining foreign exchange reserves. Due to the soaring overhead expenses of domestic businesses, prices have become exorbitant.
It is also anticipated that nations adopting the ISI model would strike a careful balance between protectionism and competitiveness. To strengthen local manufacturers and suppliers, ISI mandates that the government maintain protectionist policies, subsidies, and incentives. Local farmers and SMEs as well as new businesses may benefit from this. Local suppliers and manufacturers are given priority in public procurement rules.
However, protectionism is challenging in the face of globalization, especially since Ethiopia is liberalizing, privatizing, and opening up its economy to join the World Trade Organisation (WTO) and the African Continental Free Trade Area (AfCFTA). As a result, import substitution might encounter significant difficulties.
The goal of Ethiopia’s Minister of Industry, Melaku Alebel, is to raise the proportion of domestically produced items that replace imported commodities from 30% in 2020 to 60% by 2030—the year the Ten Years Perspective Plan (TYPP) ends.
The 10-year TYPP development strategy, which spans 2020–2030, is now in progress. However, the strategy has been beset from the beginning by COVID-19, prolonged internal strife, and delays to the global supply chain brought on by the Russo-Ukrainian war. Currently, just 30% of Ethiopia’s demand is met by goods produced locally. The remaining 70% is thus covered by imports, a trend the government hopes to reverse in the next seven years.
“The market share of Ethiopian manufacturers was just thirty percent in 2020, the year the 10-year development plan was implemented,” Melaku said. At now, the percentage is 37 percent. “By the conclusion of the 10-year development plan, the objective is to achieve at least 60%.”
Ethiopia has great potential to replace imports in the manufacturing, IT, and agricultural sectors via tailored policies such as tax incentives for certain businesses. Ethiopia must implement institutional changes to reduce red tape, enhance infrastructural accessibility, and create high-quality commodities that people want while partially replacing imports.
Getting Ethiopian manufacturers access to cutting-edge technology, trained labor, and specialty inputs would be major obstacles. Also, a lot of local businesses lack market knowledge about what matters most to customers. Import substitution may lead to the development of domestic value chains, businesses, and employment if farmers and industrial enterprises have the proper incentives and assistance. Success, however, will depend on overcoming obstacles to create high-quality products that delight customers.