For many years, profit margins in Ethiopia’s markets have been excessively high across various sectors. Recent data from a study by First Consult, an economic consulting firm, shows that car dealers make 67 percent profit margins on Mitsubishi Attrage vehicles, which is just one example of the inflated profits seen throughout the economy. Similar high markups are prevalent when visiting markets like Merkato in Addis Ababa. Basic imported clothes that cost just a few dollars overseas end up 20 times more expensive due to the punitive margins charged by importers, wholesalers, and retailers.
While traders do bear some responsibility for these profit-seeking behaviors, the underlying causes run much deeper and are rooted in Ethiopia’s long history of supply-side challenges. For decades, lack of competition, constraints on imports, scarce foreign currency reserves, and an underdeveloped manufacturing sector have created an enabling environment where traders could demand inflated prices without fear of competition or alternatives for consumers. Strict regulations and barriers made it easy for those in positions of power over supply chains to extract excess profits.
In such a tightly controlled economy with imbalances of supply and demand, it is understandable how profit margins ballooned to the dramatic levels seen today. However, it is clearly not sustainable nor beneficial for consumers or long-term economic development. With rising living standards and education levels increasing consumer awareness, the excessive pricing could threaten social stability if left unchecked. Reform was urgently needed to correct these market distortions and channel the economy towards a more equitable and productive path.
RELATED POSTS
The government recognized these issues and took an important step last month by liberalizing Ethiopia’s trade and retail sectors. Officials aim to foster fair competition and curb the prevalent high profit margins through deregulation and private sector participation. In theory, opening the market should allow more actors and alternatives, applying downward pressure on prices as traders are forced to compete on factors like margins instead of relying on supply constraints. Over time, this could significantly benefit consumers and support Ethiopia’s goal of attaining middle-income status.
However, liberalization alone may not achieve the desired outcomes and additional complementary policies are still required to strengthen the supply side of the economy and address underlying structural weaknesses that enabled the price imbalances in the first place. While deregulating distribution channels is a critical first move, producing goods locally at scale must also be prioritized to reduce reliance on imports and their associated foreign exchange constraints.
Giving manufacturers priority access to resources like foreign currency, loans, land, and utilities will be pivotal to accelerate this industrialization process. Expanding productive capacity domestically provides alternatives to imported goods, strengthening Ethiopia’s negotiating position and reducing traders’ power over pricing. The government should ensure manufacturers have what they need to grow, innovate, create jobs, and become regionally competitive.
Rather than allowing total free rein to retailers flooding into the market, policymakers could consider mechanisms for local partnerships. For example, regulations requiring large retailers to source a certain percentage of inventory from domestic manufacturers over time. This balanced approach would satisfy foreign investment goals while strategically building upstream linkages in supply chains. As local production rises to meet more of the market demand, import dependency lessens alongside its negative pricing impacts.
Addressing lingering macroeconomic challenges like foreign exchange volatility also remains crucial to stabilize the operating environment for businesses. In a context with restricted access to hard currency, importers and traders will always wield out-sized pricing power that breeds distortion. Improving export competitiveness, remittance inflows, and currency policies like a dual exchange rate regime can help alleviate these pressures over the long run. Already, the significant role of the parallel market in governing prices underlines the need for reforms in this area.
Another key missing element from Ethiopia’s current policy is the need for robust consumer protection. Dismantling the former Consumer Protection Authority was short-sighted, as consumers remain vulnerable without a dedicated watchdog protecting their interests. As the market evolves through privatization and firms gain relatively more power over pricing, threats of exploitative business practices targeting consumers will inevitably rise.
Merely housing consumer affairs within a Ministry of Trade directorate is insufficient. An independent and properly resourced Consumer Protection Authority needs to be reinstated, ideally reporting directly under high-level leadership like the Prime Minister. International experience shows that countries with strong consumer agencies enjoy fairer, more equitable outcomes over the long run. Such an empowered regulatory body is essential to monitor markets, enforce trade laws, investigate complaints, impose penalties on violators, and raise awareness of consumer rights.
Samson Berhane is an economics graduate with expertise in business and economic reporting and communications. He can be reached at [email protected]. The views expressed in this article are his own and do not represent the opinions of the institutions he is affiliated with nor that of the magazine.
