Over 4,500 busy hands make uniforms in Adama Industrial Park for Ethiopian security personnel. They fashion military uniforms, raincoats and accessories for the Ethiopian National Defense Force (ENDF), federal police, prison guards and police forces.
Antex, a giant in Chinese fashion manufacturing, runs seven sheds within the park, becoming a go-to contractor for government orders. The company once exported apparel and garments overseas, but after Ethiopia was delisted from the African Growth Opportunity Act (AGOA) last year, Antex now relies mainly on Ethiopia’s domestic market, with orders placed from federal and regional security institutions.
“We stopped exporting completely after the AGOA ban. We have 4,500 workers and we are struggling not to lay off employees,” Tigist Gemechu, operational and administrative director at Antex Ethiopia Plc, said. “We are only utilizing 40 percent of our installed capacity.”
Tigist says the government used to place orders abroad but recently changed strategies. “Since our exports dropped due to the ban, the government started ordering locally. So we are substituting foreign currency the government spentto import military uniforms. Though we are not generating forex for now, we are saving the government’s forex.”
Until the government switched to locally made uniforms last year, Ethiopia had allocated large sums of foreign currency overseas for such items.
The country’s dwindling foreign reserves mean import approvals are scarce.
Manufacturing industries claim it takes them over a year to get foreign currency approval to import raw materials and spare parts, especially if the company is not exporting and generating its own.
“I am spending USD 400,000 from my own pocket every month to import inputs,” QianAnhua, founder and general manager of Antex, told The Reporter.
These manufacturers operate at a fraction of their installed capacity due to shortages of crucial raw materials, fuel, talent and transport links, compounded by conflict and difficulties funding essential imports and spare parts.
Though the home and export markets favor import substitution, Ethiopia’s meager output, reliance on imported raw materials and low capacity utilization rates remain key obstacles to it.
Currently, Ethiopia’s domestic manufacturing sector, which constitutes less than six percent of the gross domestic product (GDP), is currently fulfilling only 37 percent of the demand for manufactured products. The rest—70 percent—of the market demand are being met by imports. However, the government targets doubling the share of domestic goods’ share before the next decade ends, in a crucial policy pivot.
Import substitution industrialization (ISI) is one of the well-tested industrialization models used in developing countries, particularly in Latin America and Asia. Import substitution is mainly about self-sufficiency, in consumer products as well as industrial outputs.
Brazil, India, and China are among the leading exemplary economies that have shown the model can transform an economy in less than half a century. But Africa’s import substitution efforts since independence seem to have withered, driven out by donor demands and the Washington Consensus.
Until recently, Ethiopia pursued a policy of export-led industrialization with little focus on import substitution. However, factors such as the US revoking Ethiopia’s eligibility for the AGOA trade program, dwindling foreign exchange reserves due to skyrocketing import bills, Covid19 and lackluster export performance have compelled the Ethiopian government to radically change course.
Currently, the Ministry of Industry (MoI) has finalized preparations of import substitution, industrial, and automotive strategies. This marks the first time such comprehensive policies have been drafted.
State Minister of Industry, Tarekegn Bululta, claims domestic production substituted imports worth around USD 2.3 billion in the 2022–2023 fiscal year. However, with Ethiopia’s annual import bill totaling approximately USD 18 billion, there remains sizable room to cover to curb import dependence.
The import substitution has primarily involved “textiles, leather goods, manufactured products, construction materials, chemicals and beverages,” according to the State Minister.
Advisor to the Minister of Industry, Tilahun Abay, cautions that the USD 2.3 billion figure cited is misleading. He clarifies that it “does not reflect the net effect of import substitution efforts as it neglects import costs.”
Ethiopia continues to import critical raw materials like thread for textile factories, crude oil for edible oil plants, and inputs for leather industries, according to Tilahun, who says, “No domestic industry has achieved full localization yet.”
Tilahun underscores that import substitution for most commodities in Ethiopia is starting from scratch. Currently, his Ministry has finalized the country’s first-ever import substitution strategy. The strategy is ready for implementation which will begin in the 2023/4 Ethiopian fiscal year.
The government plans to save USD two billion by substituting imports of selected items outlined in the strategy, in 2023/24. These include edible oil, textiles, leather, telecom equipment and construction materials, Tilahun notes.
“This USD two billion worth of projected import substitution indicates the net effect. It means all raw materials must be sourced locally. To achieve this, we have told major edible oil processors like BelaynehKinde to start cultivating their own oilseeds or outsourcing to farmers through contract farming,” he says.
For textiles, the Advisor says that four companies such as Arbaminch and Bahirdar textile mills have been selected to engage in domestic cotton and thread production.
“The selected industries in the strategy must go back a step in the value chain and become self-sufficient in inputs supply. This means we will no longer allocate foreign exchange to import raw materials once they are self-sufficient,” Tilahun said.
He also praised the central bank’s recent decision to ban imports of 38 items, including processed foods. “Following the ban, investors are showing interest in domestic food processing. For instance, we will soon start producing juices from mango peels.”
Yohannes Ayalew (PhD), president of the Development Bank of Ethiopia (DBE)—the state-owned policy bank that finances agricultural and manufacturing projects—says the bank is adjusting its lending schemes to promote import substitution.
“From now on, we will stop approving loans for local factories that do not engage in backward linkages,” Yohannes said. “For example, we will not provide loans to major edible oil producers unless they are also engaged in oilseed farming and have their own local raw material supply. Otherwise, after we issue loans, their operations become stuck due to a lack of foreign exchange to import raw materials from abroad.”
In the case of edible oil, he says the policy bank is currently approving loans for palm tree cultivation, including in Gambella and Dire Dawa areas, among others.
However, there remains a lack of consensus among MoI officials regarding how to measure import substitution progress.
Some argue it is achieved when local fulfillment meets whole domestic demand. Others say it occurs when raw material sourcing is fully localized. “This argument has not been finalized, which is why ratification of the import substitution strategy was delayed,” added Tilahun.
Experts argue the main issue should be achieving structural transformation in the economy. Structural transformation ensures surplus agricultural production so that raw materials can continuously flow to industries. Without attaining surplus yields and constant productivity growth in agriculture, industries will keep relying on imported inputs.
Experts also stress that Ethiopia must start import substitution from agriculture and light manufacturing, and gradually shift toward heavy industries.
For Andualem Goshu (PhD), a lecturer at the College of Development Studies at Addis Ababa University (AAU),import substitution is unavoidable for Ethiopia. “Otherwise, it is difficult to meet the huge forex demand required to cover the bill for imports,” he explained. “Ethiopia is implementing both export-led growth and import substitution strategies simultaneously,” Andualem explained. “During Haileselassie I and the Derg regimes, the policy was clear, focusing on import substitution. But currently, the policy is mixed.”
One of the monetary incentives the government introduced is the devaluation of the local currency. The National Bank of Ethiopia (NBE) has significantly devalued the Birr in recent years continuously, intended to encourage local producers by making imported items more expensive.
Nonetheless, the birr devaluation policy has backfired. Coupled with depleting forex reserves and since industries rely on imported inputs, they are forced to buy imported raw materials at higher prices as a result of the devaluation. This has skyrocketed overhead costs of domestic industries making prices unaffordable.
Countries that implement ISI model are also expected to achieve a delicate balance between protectionism and competitiveness. ISI requires the government to maintain protectionist policies, subsidies, and incentives to empower domestic producers and suppliers. this is helpful for SMEs, emerging enterprises, and local farmers. Public procurement policies also prioritize local producers and suppliers.
But protectionism is difficult in the face of globalization, particularly at a time when Ethiopia is opening up its economy, liberalizing, privatizing, and trying to join the African Continental Free Trade Area (AfCFTA) and the World Trade Organization (WTO). Therefore, import substitution may face serious challenges.
Melaku Alebel, Ethiopia’s Minister of Industry, aims to increase the share of locally manufactured goods that substitute for imported products from 30 percent in 2020 to 60 percent by 2030, which marks the deadline of the Ten Years Perspective Plan (TYPP).
The TYPP is a 10-year development roadmap already underway, covering the period from 2020 to 2030. But the plan has faced setbacks from the outset due to COVID19, protracted internal conflicts, and global supply chain disruptions caused by the Russo-Ukraine war.
Currently, domestically manufactured products cover only 30 percent of Ethiopia’s demand. This means imports cover the remaining 70 percent, which the government wants to reverse in the next seven years.
“When the 10-year development plan was implemented in 2020, the market share of manufacturers in Ethiopia was just 30 percent,” Melaku said. Currently, the share stands at 37 percent. “The goal is to make it at least 60 percent by the end of the 10-year development plan.”
With targeted policies like tax incentives for specific industries, Ethiopia has immense potential to substitute imports in agriculture, manufacturing and IT sectors. Institutional reforms to streamline bureaucratic hurdles and improve infrastructure access will also be critical to helping Ethiopia produce high-quality goods that consumers demand while substituting some imports.
Key challenges will include Ethiopian manufacturers accessing advanced technology, skilled labor and specialized inputs. Many local firms also lack market insight into what consumers value most. With the right incentives and support for industrial companies and farmers, import substitution could develop domestic value chains, companies and jobs. But overcoming challenges to produce high-quality goods that satisfy consumers will determine success.
