Amidst a stark economic downturn, Ethiopia finds itself entangled in a gripping foreign currency crunch that has sent shockwaves across its manufacturing landscape. The repercussions are palpable as production lines fall silent, forcing once-thriving factories to a grinding halt.
News broke a couple of months ago when Moha Soft Drinks, a renowned bottler for PepsiCo, announced its imminent closure. The reason attributed was a severe lack of access to sufficient foreign currency needed to import crucial raw materials. In fact, the company survived from closure following the measures it took. Yet, the problem persists.
Despite boasting a production legacy spanning over two decades, the company’s annual foreign currency requirement of USD 38 million to import vital Pepsi concentrate proved insurmountable, leaving Moha with no choice but to shut down its operations.
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The aftermath has been dire, with over 8,000 workers across more than half a dozen plants operated by Moha losing their jobs. The news sent shockwaves through the nation.
Although the manufacturing sector is considered a priority in terms of foreign exchange allocation, it has encountered significant challenges due to currency shortages, leading to disruptive production and mounting economic pressure.
The scarcity of foreign currency not only hampers the repatriation of profits for companies but also has a direct impact on job stability.
The acute shortage of foreign currency, which remains the primary challenge faced by the nation’s manufacturing industries like Moha, has also wreaked havoc on Shemu’s oil factory.
Shemu Edible Oil Manufacturing Share Company, a part of the Shemu Group, has experienced a prolonged halt in production, lasting close to seven months. This unfortunate situation arose from the factory’s struggle to secure USD 325 million in funding required to import and process crude palm oil locally.
Sitra Ali, the Chief Operating Officer at Shemu Edible Oil Factory, reveals that the company had been diligently working towards securing funds from the World Bank to resume its production. However, their efforts were met with numerous obstacles, and despite their commitment, the necessary funds could not be obtained.
“We were in the midst of securing funds from the World Bank but unfortunately, it didn’t come to fruition,” Sitra disclosed, refraining from divulging the specific reasons for the funding setback.
The factory’s production has long been halted, but continues to provide compensation to its employees.
Presently, only 900 out of the 1500 workers are showing up for duty at the plant. The remaining staff receives their salaries either bi-monthly or tri-monthly, owing to a scarcity of foreign currency, as revealed by a factory insider.
Moha Soft Drinks and Shemu Edible Oil now find themselves in the company of Ethiopian Crown Cork & Can Industry on a growing list of major manufacturers that have pressed pause on their production lines due to the drying up of foreign exchange streams.
This predicament has sparked an exodus among businesses. However, it’s important to note that such distressing realities are not isolated incidents.
According to a UNDP Quarterly Economic Profile released in July 2023, the shortage of currency has forced 51 prominent factories to suspend operations throughout the year.
Shibeshi Betemariam, the secretary general of the Addis Ababa Chamber of Commerce & Sectoral Associations, emphasizes that the failure of policies in this sector presents the most formidable challenges, while underscoring that Ethiopia’s foreign exchange shortage is symptomatic of deeper structural issues within the economy that require comprehensive adjustments.
Domestic manufacturers now have the obligation to surrender only half of the foreign exchange they generate from exports, a significant reduction from the previous rate of 70 percent.
Fekadu Degefie, the vice governor and chief economist at the central bank, asserts that the National Bank of Ethiopia (NBE) has been actively working to assist manufacturers through supportive policies. He highlights the implementation of the Supplier-Credit System, which was previously accessible only to foreign direct investments, as well as changes in the forex surrender requirement.
Shibeshi believes that the foreign currency challenges faced by the sector can be traced back to detrimental management practices over the past 12 to 15 years.
“A singular adjustment in monetary policy alone is insufficient to provide a long-term solution. Instead, a comprehensive structural adjustment is imperative to effectively tackle these issues,” Shibeshi emphasized.
The manufacturing sector, according to Lemessa Tariku (PhD), is not the sole victim of the forex crunch, claims.The senior researcher who specializes in the Trade and Industry Sectorsays that all sectors relying on imports of global raw materials are severely affected.
The capacity utilization, exemplified by industrial parks, stands as a testament to substantial public investments made by the federal government. Lemessa notes that these parks are currently operating at a mere 30 percent of their maximum capacity, primarily due to challenges such as shortages in raw materials that contribute to diminished production.
Ironically, despite the manufacturing sector’s preferential access to foreign currency, it remains plagued by problems. While prioritizing the sector with foreign exchange allocation was meant to be a lifeline, it has not prevented the sector from drowning in its own challenges.
In recent years, Ethiopia’s manufacturing sector has faced significant challenges, leading to a decline in its contribution to the country’s GDP. According to a working paper released by the UNDP, the sector’s share in GDP dropped from 5.9 percent in 2019 to 4.4 percent in 2022, largely due to interruptions in production and a series of domestic and external shocks.
The impact of these challenges became evident as hundreds of manufacturing firms, approximately 446 out of nearly 5,000, were forced to close their doors in 2022, highlighting the severity of the situation and the sector’s ability to sustain growth.
Ethiopia’s ambition to become an industrial hub has led to the establishment of 18 industrial parks, a collaboration between private and public entities. These parks have attracted substantial foreign direct investment, amounting to approximately USD 740 million between 2007 and 2023. They have also played a crucial role in generating employment opportunities, providing livelihoods for around 150,000 individuals.
However, the UNDP’s Quarterly Profile suggests that the manufacturing sector has been slow to recover from the shocks it has faced over the past three years.
Shibeshi highlights that around 300 diverse manufacturing industries, which relied on financial support from entities like the World Bank, IMF, and local financial associations, have closed both before and after the conflict in northern Ethiopia.
Currently, Ethiopian manufacturing only satisfies 38 percent of the country’s needs, with the remaining 62 percent being covered by imports.
The consequences of the currency shortage have extended to the country’s overall economic stability. Ethiopia’s total export earnings for the fiscal year 2022/23 reached USD 3.6 billion, representing a 12 percent decline compared to the previous fiscal year.
This figure fell short of the targeted amount of USD 5.2 billion, highlighting the significant impact of the challenges faced by the manufacturing sector on the nation’s export performance.
In 2023, the industry sector, including manufacturing, accounted for approximately 11.8 percent of the total export earnings, equivalent to USD 400 million: a decline of 23 percent in contribution compared to the industry’s share in the 2021/22 fiscal year.
The effects of the currency shortage extend beyond the manufacturing sector and have raised concerns about the federal government’s international standing.
The federal government’s decision not to fulfill a USD 33 million Eurobond coupon payment, leading to a default scenario, has attracted attention from credit rating agencies. Fitch, in particular, downgraded Ethiopia’s credit rating, signaling an imminent default and join the exclusive club of defaulting countries, such as Zambia and Ghana.
Fitch’s most recent outlook, released on December 2, 2023, downgraded Ethiopia’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) from ‘CCC-‘ to ‘CC,’ while the Long-Term Local-Currency IDR (LTLC) was affirmed at ‘CCC-.
While the government maintains that the default was a strategic decision to ensure fair treatment of all creditors, the situation has emphasized the urgent need for comprehensive and sustainable solutions to address Ethiopia’s economic challenges.
Efforts are being made to mitigate the impact of the foreign exchange shortage. The government has reached a debt payment suspension agreement with bilateral creditors, including China, aiming to allocate USD 1.5 billion to other pressing needs.
However, a sobering reality remains.
The country’s foreign exchange reserves, standing at USD 0.8 billion as of May 2023, remain critically low, providing only a few weeks of import cover. This stark revelation emphasizes the urgent need for swift action to address the economic challenges faced by the country and reinforce its financial stability.
