Amid Ethiopia’s ongoing foreign currency shortage, local investors like Tesema Ayano are left with little choice but to explore new avenues for survival.
Tesema, who lives in Addis Ababa’s Lebu district, has spent years working to realize his ambitions to set up an avocado oil factory. The project began with a significant investment of 250 million birr and the goal of employing 400 people, and the factory itself stood at 80 percent completion four years ago. But since then, progress has stalled.
The main hurdle for Tesema, like so many others, is the lack of foreign currency. He needs it to import critical machinery and finish the factory. He placed a request for foreign currency with the Development Bank of Ethiopia (DBE) eight months ago but has yet to see a dime. His hands are tied, and the project remains at a standstill.
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To find a solution, Tesema pivoted to exports. On August 12, 2024, he obtained an export license from the Ministry of Trade and Regional Integration. He then set up an export business with 23 million birr in capital. Now, he prepares to export raw avocado to European buyers until the factory starts production. This is a recourse to generate the foreign currency he sorely needs to get his factory off the ground.
There is more to Tesema’s story.
Four years ago, he was granted 12 hectares of land for avocado farming. However, despite the approval, the land has yet to be handed over to him. Bureaucratic delays have left him in limbo, unable to cultivate the avocado farm he envisioned.
At the end of July 2024, Ethiopia floated its exchange rate regime, which caused the value of the birr to drop sharply. Before the float, 1 USD was equivalent to about 57 birr on the official market. Now, the rate hovers near 105 birr at banks.
This drastic devaluation has spurred investors like Tesema to export, as the exchange rate benefits exporters. The rise in the value of the dollar compared to the Birr means that exporters receive significantly more Birr for their foreign currency earnings. Tesema believes this policy change will benefit exporters and help them generate more foreign currency, urging the government to support the export sector further.
Another businessman, Tadele Edosa, has also embraced the export market. Tadele has worked for years as a pharmaceutical sales agent, connecting pharmaceutical importers with wholesalers. He earns a two percent commission for his services. His business network also extends into coffee, where he links coffee suppliers with exporters. Through this work, Tadele has learned the ins and outs of the import and export business, realizing its potential for profit.
Tadele had anticipated that the Birr would lose value, as did many in his network. This expectation partly motivated his decision to enter the export market. On August 9, 2024, he registered as an exporter and received a license to export agricultural products, mainly oilseeds. He started the business with one million birr in capital.
Tadele also sees that the devaluation of the Birr has provided a much-needed advantage for exporters. Previously, many exporters were operating at a loss, selling their products at lower prices abroad just to gain access to foreign currency. For example, coffee exporters were incurring losses of up to 30 percent, while those in the pulses market were barely breaking even. The foreign currency they earned was often used to import goods, which were the primary source of their profit.
Even though the prices of agricultural products have increased domestically,, the Birr’s devaluation has far outpaced these price hikes. Tadele illustrates this by comparing the cost of a quintal of Wollega coffee, which rose from 4,000 Birr to 5,000 Birr. In contrast, the exchange rate for USD soared from 57 Birr to over 100 Birr, making it more profitable for exporters. Tadele notes that many investors are now turning to export because the significant increase in the value of foreign currency makes it less likely for them to incur losses.
Additionally, recent macroeconomic reforms have further incentivized exports. The National Bank of Ethiopia (NBE) now allows exporters to retain 50 percent of the foreign currency they earn, up from the previous rate of 40 percent. This change, Tadele says, has encouraged more people to enter the export business.
Because of his limited capital, Tadele chose to start by exporting oilseeds. He hopes to expand into the coffee export market when he has the funds, as coffee requires a larger investment.
Dejene Dadi, the general manager of Oromia Coffee Farmers Cooperatives Union (OCFCU), represents 557,000 coffee farmer members. He believes that the recent devaluation of the Birr will have significant benefits for both coffee growers and exporters. With the increased value of foreign currency, coffee farmers will see higher returns for their produce.
“Its impact is obvious. It is very good for coffee growers and coffee exporters,” Dejene remarks.
However, he also has concerns. Dejene worries that the floating of the Birr and the resulting devaluation may drive up prices, potentially affecting coffee growers. While growers will benefit from higher foreign currency earnings, the cost of coffee in the local market is expected to rise as well. This creates a new challenge for exporters who now require more capital to purchase coffee.
Dejene explains that the coffee export business will become increasingly capital-intensive. Exporters will need more money to buy coffee as prices continue to rise in the local market, driven by the devaluation of the Birr. This problem is compounded by the existing liquidity crisis and lack of access to loans from banks. Coffee exporters already struggle to secure the necessary funds to buy coffee from suppliers, and Dejene foresees the new economic conditions will make this even more difficult.
He observes that many people entered the coffee export business in the past primarily to access foreign currency. According to Dejene, these exporters have been selling coffee at losses of up to 40 percent using their foreign currency earnings to profit from imports. However, he argues that this practice has been pushing global coffee prices down due to unnecessary competition. The devaluation, he believes, will force those exporting solely for the sake of foreign currency out of the market, helping to stabilize coffee prices.
This shift, Dejene argues, will better balance the supply and demand of coffee, reducing the likelihood of exporting at a loss. He says that with foreign currency no longer being the main issue, the coffee market will become more stable. Coffee growers will earn more, but local coffee prices will adjust to reflect global prices.
While the devaluation encourages more people to consider export as a viable and profitable business, Dejene warns that the key challenge will be the shortage of finance. As the coffee export business demands more capital, access to loans and credit will be critical for its continued growth. Without sufficient financial support from banks, many exporters may struggle to take full advantage of the new opportunities presented by the devaluation of the Birr, he said.
According to data from the Ministry of Trade, over 100 new exporters were registered between August 1 and August 12. Nearly all of them have signed up to export agricultural products, driven by the recent devaluation of the Birr. Many of these exporters are focusing on coffee, a key commodity in Ethiopia’s export economy.
Desalegn Ebiso, a resident of Hawassa in the Sidama Regional State, is one of these newly registered exporters. Backed by 40 million Birr in capital, Desalegn plans to start exporting coffee in September. Growing up in a coffee-exporting family, Desalegn is no stranger to the business. He learned the trade by working with his father, and he sees the current economic climate as an opportunity. Desalegn believes that the coffee export business, already profitable, will only become more lucrative as the value of foreign currency continues to rise against the Birr.
Similarly, Sebsebe Birda, who registered as an exporter on August 12, is eager to enter the coffee trade. With a five million birr investment, Sebsebe is optimistic that the devaluation will make his venture more profitable. The falling value of the Birr against foreign currencies was one of the factors in his decision to establish a coffee export business, as it allows exporters to earn more from their foreign currency revenues.
Samson Tsedeke, a business consultant and founder at MultiLink Consulting, sees the recent move toward a market-based exchange rate as a potential game-changer for Ethiopia’s export sector. He explains that as the Birr depreciates against foreign currencies, Ethiopian exports will likely become more competitive on the global market. With lower prices in the local market, Ethiopian goods will be more affordable internationally, boosting their demand.
Samson also highlights the financial benefits for exporters. As the value of the Birr decreases, exporters will earn more in local currency from their foreign sales, potentially leading to higher profit margins. This could, in turn, drive an increase in the volume of exports from Ethiopia.
However, Samson emphasizes that the success of this policy hinges on peace and stability across the country. Without peace and stability, he warns, the benefits of the exchange rate adjustment will not materialize, and the export sector will struggle to thrive.
In addition to political stability, Samson raises concerns about the severe credit crunch currently plaguing the Ethiopian economy. He points out that banks are failing to provide sufficient financing to manufacturers and exporters, a situation exacerbated by a regulation imposed by NBE in August last year. This regulation caps annual credit expansion by commercial banks at 14 percent, a measure aimed at controlling the rampant inflation.
Samson argues that this restriction is stifling economic growth, particularly in the export sector. Unless the central bank removes this regulation, he warns, businesses will continue to struggle, as banks simply cannot lend enough to meet their needs. He urges the government to address this issue by ensuring greater access to credit for exporters and manufacturers.
Samson stresses the importance of maintaining stable macroeconomic policies to support both the economy and the export trade. He predicts that withoutstability, the devaluation of the Birr could lead to significant inflationary pressures, particularly in the prices of essential commodities like oil and fertilizer. These rising costs, Samson fears, could undermine the competitiveness of Ethiopia’s exports.
To mitigate this risk, Samson recommends that the government subsidize oil and fertilizer to absorb the anticipated shock from rising prices. By doing so, he believes, the government can protect the economy from inflationary pressures while ensuring that the export sector remains competitive in the global market.
