NARROWING TRADE DEFICIT THROUGH INCREASED IMPORT SUBSTITUTION

Transcription

1 NARROWING TRADE DEFICIT THROUGH INCREASED IMPORT SUBSTITUTION Research Team Samuel Feyissa, Post Graduate Diploma in Industrial Project Management, Research Institute for Management Science (the Netherlands) Tarekegn Garomsa, Post Graduate Diploma in Rural Development Management, International Center for Entrepreneurship and Career Development (India) July 2011 Produced and distributed by the Addis Ababa Chamber of Commerce and Sectoral Associations with financial support from the Swedish Agency for International Development Cooperation, Sida Sida

2 Private Sector Development Hub/Addis Ababa Chamber of Commerce and Sectoral Associations, 2011 P. O. Box 2458, Mexico Square, Addis Ababa, Ethiopia Tel: +251(0) / , Fax: +251 (0) , All Rights Reserved. No part of the publication may be produced or transmitted in any form or by any means without the prior permission of the copyright holder. The only exception is for a reviewer, who may quote short excerpts in a review. Disclaimer:- The views expressed in the study do not necessarily reflect the views of PSDHub or Addis Ababa Chamber of Commerce and Sectoral Associations or Sida. They are solely the responsibilities of the authors.

3 Contents 1 Background and Study Methodology Government Initiatives for Private Sector Development Incentive Schemes for Export Promotion and Impact Competing Industries Contents of the Incentive Schemes Influence of Incentive Schemes on Export Promotion and Import Competing Industries External Trade Performance of the Country Export Performance Composition and Magnitude of the Country s Import The Magnitude of the Trade Deficit Options for Narrowing Ethiopia's Trade Deficit General Commodities for Promotion from the Food Sector Commodities for Promotion from the Chemical Groups Plastic and Rubber Products Paper and Paper Products Products for Promotion from the Textile Sub-sector Possibilities of Import Substitution in the Footwear Industry Import Substitution Possibilities in Non-metallic Mineral Sub-sector Investment Possibilities in the Iron and Steel Industries Import Substitution Possibilities in Wood and Wood Products Summary of Selected Commodities for Possible Import Substitution Mechanisms for Increasing Domestic Production of Imported Goods Value Chain Analysis of Selected Import Substituting Products Conceptual Framework of the Value Chain Analysis General Features of Some Selected Products Mapping Value Chain of Selected Products Constraints and Opportunities Prevailing in the Selected Products... 90

4 8 Recommendations General Recommendations Value Chain Specific Recommendations References Annexes...113

5 List of Tables Table 1: Value of Exports by Major Export Commodities Table 2: Ethiopia s Export by Country of Destination, Table 3: Ethiopia s Import by Major Sub-sectors Table 4: Ethiopia s Average Trade Deficit ( ) Table 5: Trade Deficit in Some Agricultural Commodities Table 6: Summary of Approved Manufacturing Investments by Sub-sector and Status ( ) Table 7: Value of Food Product Imports Table 8: Value of Dairy Product Imports and Domestic Production Table 9: Production and Import of Wheat Table 10: Value of Domestic Production and Imports of Grain Mill Products Table 11: Domestic Production and Import of Malt Table 12: Value of Domestic Production and Imports of Food Prepared from Cereal Flour Table 13: Value of Domestic Production, Export and Import of Vegetable and Animal Oils & Fats Table 14: Value of Domestic Production and Import of Inorganic Chemicals Table 15: Value of Organic Chemical Imports Table 16: Value of Domestic Production, Export and Import of Pharmaceutical Products Table 17: Value of Fertilizer Imports Table 18: Value of Domestic Production and Import of Tanning/ Dyeing Extract and Pigments/Paints Table 19: Value of Domestic Production, Import and Export of Soap & Organic Surface Active Agents Table 20: Value of Gross Domestic Production and Import of Plastic Products Table 21: Value of Domestic Production, Import and Export of Rubber. Products Table 22: Value of Domestic Production, Import and Export of Paper and Paper Products Table 23: Value of Domestic Production, Export and Import of Man-made Filaments Table 24: Value of Apparel and Clothing (Knitted/Crocheted) Imports Table 25: Value of Apparel and Clothing (Not Knitted/Crocheted) Imports Table 26: Value of Domestic Production, Exports and Imports of Other Made-up Textile Articles Table 27: Quantity of Footwear Produced, Exported and Imported... 53

6 Table 28a: Value of Domestic Production, Export and Import of Cement & Stone Origin Products Table 28b: Value of Domestic Production, Export and Import of Ceramic Products Table 28c: Value of Domestic Production, Export and Import of Glass & Glass Products Table 29: Value of Domestic Production, Export and Import of Basic Iron & Steel Table 30a: Value of Domestic Production, Export and Import of Articles of Iron & Steel Table 30b: Value of Domestic Production and Import of Miscellaneous Articles of Base Metal Table 31: Value of Domestic Production and Import of Cutlery, Hand Tools and General Hardware Table 32: Value of Import of Selected Parts and Accessories Table 33: Value of Domestic Production, Export and Import of Wood & Wood Products Table 34: Summary of Selected Commodities for Promotion with Their Estimated Market Size and Share Table 35: Brief Summary of the Rational for Selecting Ten Commodities for Promotion List of Figures Figure 1: Average Percentage Share of Major Export Commodities of the Country ( )...16 Figure 2: Trends and Composition of Export of Ethiopia...17 Figure 3: Trends of Ethiopia s Trade Deficit, Figure 4: Generic Value Chain Maps of Selected Products...89

7 ACRONYMS AND ABBREVIATIONS ADLI BOF CIDA CIF Coop CSA EAF ECX EIA EIAR ELIA EMPPA EPOSPEA ERCA ETA ETB ETGMA FDI GDP GoE GTP Ha HS IDS ILO ISO Agricultural Development Led Industrialization Basic Oxygen Furnace Canadian International Development Agency Cost, Insurance and Freight Cooperative Central Statistical Agency (of Ethiopia) Electric Arc Furnace Ethiopian Commodity Exchange Ethiopian Investment Agency Ethiopian Institute of Agricultural Research Ethiopian Leather Industries Association Ethiopian Milk Producers and Processors Association Ethiopian Pulses and Oil Seeds Processors and Exporters Association Ethiopian Revenue and Customs Authority Ethiopian Tanneries Association Ethiopian Birr Ethiopian Textile and Garment Manufacturers Association Foreign Direct Investment Gross Domestic Product Government of Ethiopia Growth and Transformation Plan Hectare Harmonized System Industrial Development Strategy International Labour Organization International Organizations for Standardization

8 LLP LLPTI MFI MoARD MoI MoT NBE NGO PASDEP PSD QSAE SDPR SME SNV TFP ToR USD Leather and Leather Products Leather and Leather Products Technology Institute Micro Finance Institute Ministry of Agriculture and Rural Development Ministry of Industry Ministry of Trade National Bank of Ethiopia Non - Governmental Organization Plan for Accelerated and Sustained Development to End Poverty Private Sector Development Quality and Standards Authority of Ethiopia Sustainable Development and Poverty Reduction Small and Medium Enterprise Netherland Development Organization Total Factor Productivity Terms of Reference United States Dollar

9 CHAPTER ONE BACKGROUND AND STUDY METHODOLOGY 1. Background Ethiopia s foreign trade performance has been shown increasing trends both in value of exports and imports since the start of the Plan for Accelerated and Sustained Development to End Poverty (PASDEP) in 2004/05. According to the Annual Report of the National Bank of Ethiopia (2007/08), during the period 2004/05 to 2007/08, the value of the country s export ranged from USD million to USD 1,465.8 million, while import varied from USD 3,633.2 to 6,810.7 million over the same period. As a result the trade deficit of the country over the period increased from USD 2,785.8 million to 5,345 million. The trade deficit thus appears to be the single most important cause for Ethiopia s current account deficit. Although the deficit has been partly offset by the increase in private transfers (reaching USD 2.8 billion in 2007/08) as well as by the net service exports (USD 160 million in 2007/08) the current account balance has consistently been negative over the past few years reaching USD 2.8 million in 2007/08. The ever expanding trade deficit depletes the country s scarce foreign exchange, forcing the country to implement strict foreign exchange control measures and procedures to avert the situation. At the end of 2007/08 the foreign exchange reserves of the NBE were sufficient to cover only 1.5 months of goods imports. External debt also increased and reached USD 2.8 billion (NBE, 2007/08), corresponding to 12% of GDP, in 2007/08. In the face of increasing demand for inputs, consumer and capital goods, and various services, the fiscal policy measures will not by themselves bring permanent solution for narrowing the trade deficit unless accompanied by other measures that give special priority for boosting export trade and promoting import substituting projects. As a result of the fiscal policy measures, firms relying on imported inputs and capital goods have been negatively affected due to delays in importing essential materials or machinery and sometimes due to the impossibility of importing them altogether. Furthermore, the foreign exchange controls and procedures which have been established by the government in response to the shortage caused additional costs and delays for all firms, including Ethiopian exporters in their dealing with foreign trade partners. 1

10 Ethiopia s economic development policy over the past decade has focused on the development of the export sector as a major means of generating foreign exchange. The core assumption of the country s Industrial Development Strategy (IDS) of 2002 is the primacy of the free market, and government support is only to be provided on a temporary basis in order to help domestic industry become internationally competitive. In line with the overarching Agricultural Development Led Industrialization (ADLI) strategy the IDS focuses on labour intensive industrial inputs and consumption goods for agriculture and value added/processed goods, especially for exports. Although the IDS has undoubtedly contributed to Ethiopia s increasing exports, it is now clear that the export-led strategy must be complemented by other measures that help to address the widening trade deficit. The trade deficit and its economic and social implications are a matter of concern to both the public and private sectors. Thus, it is important for both parties to work together on an in-depth review of the contents of import and export items. There is an urgent need to address the trade deficit not only on the income side (i.e. export), but also on the expenditure side (i.e. import) by identifying products that can be locally produced to reduce foreign exchange outflows/expenditure for imports. Similarly, additional possibilities for expanding the volume and range of export products need to be investigated in detail. Thus, the Private Sector Development Hub program, having a firm belief that the private sector can contribute to narrowing the trade deficit through investing in import substituting projects and export products, decided to conduct a study that provides directions and strategies to narrow the trade deficit of the country by addressing the above mentioned issues. 2. Objective of the Study The objective of the study is to provide recommendations for Ethiopia on how to narrow the widening trade deficit in a market friendly manner, based on a thorough analysis of Ethiopia s recent international trade performance and an assessment of the merits of existing export development activities and incentives to foster production for the domestic market Study Methodology In order to be able to sufficiently and comprehensively handle its objective the study has mainly focused on desk and field research. The former involves the collection and compilation of all relevant data from secondary sources, while the latter attempts to generate relevant primary information from different

11 sources through various methods. Details of the data compilation, analysis and interpretation procedures are presented below. 3.1 Data Sources a) External Trade Statistics: Export and import data covering at least the latest five years has been collected, compiled and disaggregated mainly to the HS 6 and/or 8 digit levels. The major destinations for the country s export and origin of imports are also compiled. b) Policy Issues: Available incentive schemes that the Ethiopian government availed to new investment, expansion, export trade, import substituting schemes have been compiled from relevant secondary sources. c) Approved Investment Projects: A list of projects currently at different stages of promotion have been compiled at sub-sector level to analyze their contribution to import substitution efforts of the country. 3.2 Compilation, Collection and Analysis of Data Primary data, focusing mainly on constraints and opportunities, have been collected from value chain actors and support providers to carry out the value chain analysis component of the study. Key constraints of political, economic, social and technological nature have been identified through discussions with relevant chain actors and support providers. Opportunities of similar nature have also been identified in selected value chains. Data Analysis: The external trade statistics data for selected commodities and in aggregate have been analyzed as follows: Export and Import Performance: - Calculation of average exports and imports (2004/ /09) at HS 6/8 digit level; - Calculation of average growth rate; - Graphical and tabular presentation of the share of major trading partners; - Highlighting the major production, marketing, financial, technological etc. constraints/opportunities lead operators in selected value chains face. 3

12 Export versus Import: - Percentage comparison of export with import for selected value chain commodities; - The average trade deficit for selected commodities; - Overall trends of the country s trade deficit; - Competitive position of domestic industries compared to importing companies (product quality, product price, market share etc.); - Graphical and tabular presentation of the trade gaps for selected value chain commodities; Analyzing Import Substituting Value Chains: Import substituting commodities have been selected based on several criteria such as growth potential and competitiveness, poverty reduction potential, social benefits, prospects of success and outreach. The commodities selected are analyzed in the light of the following factors: - The task of chain mapping at micro, messo and macro level, describing the basic functions at each level, has been carried out for each selected import substituting value chain; - Opportunities and constraints that prevail in the primary and support activities along the different value chain stages of selected import substituting value chains have been identified to recommend appropriate strategies; - The possibility of horizontal and vertical linkages among value chain business operators has been carefully analyzed to recommend strategies for improving the competitiveness of selected import substituting value chains; - The cost factors (economies of scale, capacity utilization, interrelationships among business units, degree of vertical and horizontal integration, geographic location, institutional factors, etc.) related to value chain activities at subsequent stages of the value chain have been carefully examined to develop and recommend cost effective strategies for selected chains in accordance with global trade norms. - Finally upgrading strategies have been recommended to overcome the major constraints that main chain actors are facing and rationally exploit the opportunities. 4

13 CHAPTER TWO GOVERNMENT INITIATIVES FOR PRIVATE SECTOR DEVELOPMENT The Ethiopian government recognized the private sector as a leading agent to bring sustainable economic growth in the country, and to this effect it has formulated and issued several development policies, strategies and directives to unleash the potential of the private sector since it came to power in An increased participation of the private sector in all spheres of development endeavors has remained crucial to bring about a fast growth in the economy of the country. Thus, cognizant of this fact, the government has taken several measures to develop the private sector. During its early years the government focused on political reconstruction, macroeconomic stability and rural development. The following are the major reforms that the government implemented in light of its overall development objectives (World Bank, 2009): Devaluation of the Birr; Reduction of import tariffs and streamlining of export and import procedures; Reformation of interest rate structures toward more positive real rates; Tax policy reform; Rationalization of public expenditure; Privatization of public enterprises; Enactment of a new investment; and Reduction of price control and liberalization of domestic trade. The Government of Ethiopia has launched three different development programs since In the mid-1990s, the Agricultural Development Led Industrialization (ADLI) strategy was introduced as the overall strategic vision for industrial development. The ADLI aimed at raising the productivity of the agricultural sector, mainly composed of private small-holder farmers, to generate investment capital in order to invest in downstream industrial activities, which would in turn generate markets for agricultural produce, thus creating a virtuous cycle. The second development program, which included a basic platform for infrastructure and human capital investment, gradual privatization of state 5

14 enterprises and introduction of a Trade Practice Act, was articulated in the 2001 Poverty Reduction Strategy Paper (World Bank 2009). A number of different sectoral strategies were developed since then. One of them, which has strong relevance to the interest of the private sector, is the Industrial Development Strategy of the country. The strategy was developed in 2002/03 and addressed the following development issues: Elimination of obstacles to the growth of investors, both foreign and domestic; Provision of adequate support to enable entrepreneurs to compete globally; Determination that industrial development should leverage on abundant factors; and hence Focuses that the industrial strategy should follow and support agricultural development in order to achieve efficiency in resource use and attain rapid development. The strategy further identifies supporting factors such as the creation of a stable macroeconomic environment, transparency, infrastructure and an efficient financial sector. The Ethiopian government has launched a third generation of reform to bring an accelerated and sustained development to end poverty over the period 2005/06 to 2009/10. The initiative known as the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), prepared by the Ministry of Finance and Economic Development (MoFED), was a national program advocating the principle of a pro-poor economic growth. Strategies and action plans to end poverty were developed and implemented in all economic and social sectors by all sector organizations and line departments at both the federal and regional levels. The initiative was expected to contribute directly to the development and integration of trade at regional, national and global levels. The government streamlined areas of focus along this perspective. This included promoting and fostering the commercialization of agriculture, private sector development, export development, tourism development, and infrastructure development (water resource, water supply and sanitation, road and transport, power and telecommunication). The private sector development initiative in the context of PASDEP aimed to address major problems inherent in all the economic and social sectors of the country. 6

15 As it is clearly stated in the PASDEP document, in order to generate a massive push to accelerate growth in agriculture and rural development there is a need to focus on the commercialization of agriculture and promotion of much more rapid non-farm private sector growth. The rational for the commercialization of agriculture lies in the fact that the transformation from subsistence practice to a more business/market-oriented production system, while protecting the essential agricultural base on which the poor depend for their livelihoods, would bring sustained economic development. Furthermore there was a need for a systemic approach to realize the greater involvement of the private sector in the rural economy in value adding and processing activities. It was recognized that it would be difficult for the government to address all the development challenges confronting the agricultural sector. Therefore, as clearly stated in the PASDEP, the majority of the response in achieving fast growth in the rural economy had to come from the private sector. If the dynamism and entrepreneurial talent of the private sector is synchronized within a rural economic framework, then it will be easier to achieve fast economic growth. The principles underlying the PASDEP strategy included a commitment to create conducive environment for private investment and business activity, to replace the hitherto significant role of the state with greater domestic and foreign private participation, and to strongly support the growth of export industries by finding all round solutions to the following major problems: Most Ethiopian industries are not competitive. Productivity is low, and quality often does not meet international standards; The technology used is often old and obsolete. Technological information is not easily available to entrepreneurs; The skills and qualification of the workforce are often inadequate for modern industrial production; Most owners/managers of manufacturing industries do not have a modern management qualification and background, but come from a more traditional crafts background. Entrepreneurship is not firmly rooted in Ethiopian society and moreover suffered greatly under the former socialist regime; Entrepreneurs complain about the difficulty of access to finance. Start-up finance for micro and small businesses, particularly for cooperatives, is to some extent available through a limited number of microfinance institutions. Long-term investment finance is hard 7

16 to obtain although some financing is available for export-oriented sectors from the Development Bank of Ethiopia; Finding land and premises for business operations is described as cumbersome, partly due to the fact that private landownership does not exist in Ethiopia. Therefore land allocation goes through public sector channels and can involve long bureaucratic procedures. A recent study of the World Bank (2009) concluded that the approach that the country followed to revitalize industrial development has not yet worked. The study suggested that the main issues holding back investment and productivity growth are to be found in the policies that constitute the investment climate. According to information obtained from the data base of the Ethiopian Investment Agency, a total of 7,816 projects were licensed during the period July 2005 to July 2010, of which only 3.6% of them (278 projects) were under implementation and 5% of them (390 projects) started operation. The remaining 91% of them are still under pre-implementation. The progress over the last five years appears to be lagging far behind in view of the time it takes to become operational after approval. At least those projects which were approved in , numbering about 3,318, should have started implementation and operation. The government has initiated the Growth and Transformation Plan (GTP) to carry forward the important strategic directions pursued during the PASDEP period. The plan envisages, besides maintaining a fast growing economy, to achieve better results in all sectors. The role of the private sector in this context has been pinpointed to make greater contribution for the realization of the plan. The government pledged to make more effort to improve and increase the role of the private sector in the agriculture and industrial sectors of the economy. The participation of the private sector in horticulture and large scale farming development shall be encouraged through addressing the major constraints that dominantly hinder development in the agricultural sector.the plan states that necessary arrangements will be made to increase the private sector s participation in large scale farming by identifying potential areas for agricultural development. Similar commitments have been pledged by the government to encourage private investment in medium and large scale manufacturing industries. Thus the government s five-year Growth and Transformation Plan is expected to address some of the inherent obstacles that hampered new investments from taking place at a fast rate. 8

17 CHAPTER THREE INCENTIVE SCHEMES FOR EXPORT PROMOTION AND IMPORT COMPETING INDUSTRIES 3.1 Contents of the Incentive Schemes In the face of the strategic challenges that prevailed in the country, the government made relentless efforts to curb development constraints. As a step forward to attract potential investors and pave the way for private investors, the government issued a liberalized investment code (Proclamation No. 37/1996), and later made a series of amendments (Proclamation No. 116/1998, 280/2002, and 375/ 2003) to make the environment more conducive for both foreign and domestic investors. Following the issuance of these liberalized investment codes, focal points both at national and regional level for promoting, coordinating and facilitating investment in the country were established. The Ethiopian Investment Agency (EIA) and regional investment bureaus are entrusted to facilitate the investment process. The EIA, the focal point at national level, provides one-stop investment services such as the provision of all necessary information required by investors, approval of investment applications and issuance of investment permits, trade registration and operating licenses for private investors, granting of work permits to expatriate employees, approval and registration of technology transfer agreements between local companies and foreign technology suppliers, and facilitating the acquisition of land as well as utilities by private investors in accordance with the relevant federal and regional government laws and regulations. Within the framework of the investment code, the government granted various incentives to both domestic and foreign investors who are engaged in investment areas eligible for incentives. The objective of the investment incentives is to encourage private investment and promote the inflow of foreign capital and technology into Ethiopia. Special incentive sectors and sub-sectors include agricultural development and agro-processing, agricultural production, manufacturing of equipment and machinery, spare parts, components and supplies, vehicle bodies, other products and assembly plants, and publishing of printed goods, large-scale road and building construction and other related works. Rural transportation facilities including the purchase of spraying machinery, trucks fitted with 9

18 refrigeration facilities, or other equipment for support services are also eligible for special incentive facilities. The investment incentive packages as described in the Council of Ministers Regulation No. 84/2003 include the following: 10 Exemption from payment of customs duties: One hundred percent exemption from the payment of import customs duties and other taxes levied on imports is granted to all investment capital goods, such as plant and machinery, equipment etc. Also exempted are spare parts worth up to 15% of the value of the imported investment capital goods, provided that the goods are not produced and not available locally in comparable quantity, quality and price. Exemptions from payment of export customs duties: Ethiopian products and services destined for export are exempted from the payment of any export tax and other taxes levied on exports. Income tax holiday:any income derived from an approved new manufacturing and agro-industry investment or investment made in agriculture shall be exempted from the payment of income tax for a specified period. Profit tax holiday of up to five years is granted for investors based on industry type (new or expansion/ upgrading), level of export-orientation. An additional one year profit tax exemption is given if the investment is made in the under-developed regions like Gambela, BenshangulGumuz, Afar and Somali regional states. Exemption from payment of taxes on remittance: Any remittance made by a foreign investor from the proceeds of the sale or transfer of shares or assets upon liquidation or winding up of an enterprise is exempted from the payment of any tax. Loss carry forward: All investors investing in areas eligible for incentives are entitled, when their enterprises suffer losses during the tax holiday period, to carry forward such losses following the expiry of the exemption period for half of the income tax exemption period which could be from 3 to 5 years depending on the location and investment areas. Liberal depreciation rate:depending upon the choice of the investor, either a straight line or an accelerated method can be employed for the calculation of depreciation allowances. Provision/allocation of land: According to the Urban Land Lease Holding Proclamation of 1993, the Government possibly will provide land with public tendering which is to be utilized for investment.

19 Remittance: Both foreign and domestic private entities have the right to establish, acquire, own, and dispose of most forms of business enterprises with up to 100% equity ownership. Capital repatriation and remittance of dividends and interest is guaranteed to foreign investors under the Investment Proclamation. Any foreign investor has the right, in respect of an approved investment, to make the following remittances out of Ethiopia in convertible foreign currency at the prevailing rate of exchange on the date of remittance: Profit and dividends accruing from an investment; Principal and interest payment on external loans; Payments related to technology transfer or management; agreements; Proceeds from sale or liquidation of an enterprise; Proceeds from the sale or transfer of shares or assets; and Compensation paid to a foreign investor. 3.2 Influence of Incentive Schemes on Export Promotion and Import Competing Industries The investment incentives together with the conduciveness of the country s environment for investment need to be adequately promoted to attract both domestic and foreign potential investors and also to bring concrete measurable impact on the economic development of the country. EIA recently launched a website with the objective of introducing the investment regime and requirements for investment in the country and new developments to potential domestic and foreign investors. There is evidence that shows the economic benefits that the country generated from those incentive schemes, though it is difficult to measure their direct impact on the economic performance of the country within the scope of this study. For instance, the incentive scheme on exports has partly played an important role in the performance of the country s exports. The scheme would certainly attract new exporters and encourage existing ones to diversify and expand their activities. For instance, the export of the country grew from Birr 4,989.2 in 2003 when the incentive schemes were introduced to Birr 17,733.4 million (ERCA, 2009) in 2009, corresponding to an average yearly growth rate of 23.5%. This is attributed partly to the incentive schemes. The profit tax holiday granted to investors under certain conditions in particular appears to be highly instrumental in attracting new investors. 11

20 As stated earlier any income derived from an approved investment in new manufacturing, agro-industry and information and communication technology (ICT) development or agriculture is exempted from the payment of income tax for a certain period. With the objective of increasing the foreign exchange earnings of the country from export, the profit tax holiday puts more emphasis on new investors in the export business. The duration of the exemption period ranges from 2 to 8 years (see Annex 1) depending upon the volume of export and the location where the investment took place. The recent expansion of floriculture development in the country could be cited as one example in this respect, though the contribution of other incentive packages could be equally cited. There was another important momentous worth mentioning in this connection. Some years back the country enjoyed an increase in earnings of foreign exchange from the export of staple food crops. However, the venture resulted in shortages of supply for domestic consumption and as a result the price of food crops tended to show sharp rises in the domestic market. The government, being aware of the negative impact it brings on the livelihood of the society, decided to temporarily terminate the exporting of staple food crops. Although it was difficult to tell whether the export business was undertaken by new exporters, the incentive scheme could have played some part in initiating new exporters to be engaged in the export of staple food crops. In general, the recent high export performance of the country has been attributed partly to the export incentive schemes which include the profit tax holiday, duty draw-back scheme, voucher scheme and bonded manufacturing warehouse scheme. In addition, all Ethiopian products, with the exception of few products (e.g. semi-processed hides and skins), destined for export are exempted from the payment of any export and other taxes levied on exports. 12 The incentive schemes were launched with the objective of bringing increased investment into the country. The number of medium and large manufacturing establishments was estimated at 909 (CSA, 2006/07) when the investment code was issued. The number increased to 1,900 (CSA, 2009) over a period of six years, corresponding to a yearly average growth rate of 13%.The result indicated that, on average, about 164 new medium and large manufacturing establishments became operational every year during the period 2002/ /08, while new investments before the issuance of the investment code were deplorably small. For instance, prior to the issuance of the code i.e. between 1999/2000 and 2000/01 only 9 (CSA) new establishments joined the industry.this clearly indicates that the investment incentive schemes have brought remarkable positive changes in the investment regime of the country.

21 However, in spite of the progress made in the number of new project applicants and project approvals, the implementation status is very much far from being satisfactory. Investors data base from EIA indicated that a total of 7,816 manufacturing investment projects were approved over the last six years ( ). The expected employment creation capacity of these projects has been quite significant. A total of 524,675 permanent employments and 479,380 temporary employments were expected to be achieved from the implementation of the approved projects. However, out of the total approved projects only 390 (EIA) were operational so far, while 278 remained under implementation. The two together accounting for no more than 9% of the total approved projects, created permanent and temporary employment for an estimated number of 38,622 and 37,307(EIA) persons, respectively. The increase in the number of applicants for project approval could be attributed to the various incentive schemes that the government made available to all new potential investors. The slow nature of the implementation could have been due to failure on the part of government offices in charge of administering the various incentive schemes. For instance, the investment code (Proclamation No. 280/2002) stipulates that the respective government office in charge delivers land required for an investment to approved projects within 60 days after receiving application for land allocation. However, a recent study of the World Bank (2009) indicated that a sizable number of investors reported access to land as a constraint to business operation and takes much longer time than stipulated in the code. Another equally important point that often attracts the attention of development agents has been the issue of finance. Most investors usually do not have all the capital that a project requires. Many of them come up with a certain portion of the capital the project requires in the hope that the remaining amount could be financed by a bank loan. However, there are instances when during the process of implementation of the project the expectation of the investors could not be met for some reason and as a result the implementation of approved projects remains negligible. The same study of the World Bank (2009) indicated that some 60% of the respondents in its enterprise survey of the country in 2006 were constrained by access to finance. The incentive schemes and the investment code as clearly indicated and discussed above have been highly instrumental in attracting new investments, aimed at both the export and domestic market. A further detailed study needs to be carried out to identify major constraints that contributed to the slow implementation progress of approved investment projects. 13

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23 CHAPTER FOUR EXTERNAL TRADE PERFORMANCE OF THE COUNTRY 4.1 Export Performance The country s export performance during the period showed consistent growth in aggregate, though fluctuation was observed in certain export commodities. Export value increased at an average annual growth rate of 23% over the five years to 2009 (see Table 1). The growth is attributed to increased volume of export, rising export prices and diversification of export commodities. Many of the export commodities are primary products of agricultural origin and the contribution of the industrial sector still remained at a deplorable low level. Table 1: Value of Exports by Major Export Commodities Value of Export ( 000 Birr), years Average Export Commodities Average % Share Live animals 192, , , , , ,400 3 Meat 164, , , , , ,367 2 Flowers 84, , ,510 1,011,926 1,526, ,440 6 Pulses 264, , ,873 1,240,432 1,290, ,501 7 Coffee 3,072,046 3,754,563 3,730,966 5,391,742 4,292,423 4,048, Oilseeds 1,512,480 1,115,761 1,400,427 2,460,475 4,443,263 2,186, Chat 584, , ,584 1,132,066 2,014,540 1,087,443 9 Hides/skins and leather 608, , , , , ,154 6 Gold 385, , , ,717 1,074, ,921 5 Others 829, ,269 1,426,591 1,326,228 1,569,464 1,220, Annual Total 7,698,132 8,785,619 10,705,887 14,946,011 17,733,396 11,973, Source: Ethiopian Revenue and Customs Authority Coffee continued to dominate the country s export, registering an average share of 34% followed by oilseeds with an average share of 18%. Although coffee still remained to be dominant, its share in total export of the country declined from 40% in 2005 to 24% in 2009; while other export commodities started gaining popularity in the global market and their share in total export increased from year to year. For instance, the share of flower jumped from 15

24 1% in 2005 to 9% in 2009, similarly the share of pulses increased from 3% to 7%, oilseeds from 20% to 25% and that of chat from 8% to 11%.. The average share of the major export commodities is summarized in Figure 1. Figure 1: Average Percentage Share of Major Export Commodities in Total Export of the Country, ( ) Source: Ethiopian Revenue and Customs Authority The contribution of the non-coffee export commodities, although their share appeared relatively low compared to coffee, appeared to show outstanding performance over the period under review. For instance, the export value generated from export of fresh cut flowers increased from a value of Birr 85 million in 2005 to Birr 1,527 million in 2009, registering an average annual growth rate of 106%. Admirable export performance was also observed in other export commodities such as pulses, which grew at an average annual growth rate of 49%, live animals at 39%, chat at 36%, oilseeds and gold growing at 31% and 29%, respectively. There are quite a large number of other commodities from the agriculture as well as the manufacturing sectors that contributed to the aggregate growth of the country s export during the period under review. A summary of the trends and the magnitude of export of the major commodities are presented in Figure 2. 16

25 Figure 2: Trends and Composition of Export of Ethiopia Source Ethiopian Revenue and Customs Authority As indicated earlier the export commodities of the country are mainly of agricultural origin with only few of them having gone through a value-added process. Primary products will obviously generate more value if they are processed in domestic manufacturing industries. The question still remains whether they still attract the export markets after being processed here in the domestic industry. This entirely depends on the technological capacity and competitiveness strength of the domestic industries. There are domestic industries that are already exporting manufactured products but not operating at the required levels for so many reasons. Many of them are promoted on the basis of local resource based criteria without giving due attention to other factors such as productivity, technology, competitiveness etc. Comparative advantage alone does not create access to global market, but when combined with cost advantage factors it certainly brings sustained economic growth and more foreign exchange to finance capital that the country needs. 17

26 Price Comparison of a Primary Product Export and the Processed Products Although it is not the objective of this study to compare the margin of profit between enterprises engaged in primary product export and processed products export, the advantage of the latter in generating more value to the economy of the country can be easily demonstrable from the following examples. For instance, the unit export value of pickled goat/sheep skin in 2009 was Birr per kg and that of tanned/crust and finished leather of goat/sheep skin stood at Birr per kg and Birr per kg, respectively. The total value of export earned from each commodity in 2009 was about Birr 34 million, Birr 234 million and Birr 11 million, respectively and bringing the total value to nearly Birr 279 million. In volume terms the country exported a total volume of 1,129,784 kg, of which 301,406 kg is from export of pickled goat/sheep skin, 813,054 kg from tanned/crust goat/sheep skin and 15,324 kg from finished leather of goat/sheep skin. If this total volume was exported in its finished form, provided the market is there, the total export value would have been Birr 815 million, nearly three times more than the actual export value. The government, recognizing the benefits to be drawn from the value added venture, levied a much higher duty on exports of hides/skins in wet-blue and pickled stages to discourage exporters (Regulation No. 25/2009), thereby issuing an instruction to existing tanneries to convert their tanning industry to the next higher stage of processing (crust and finished stage) with the objective of adding value to the product and eventually increasing foreign exchange earning of the country. Ethiopia s exports are destined to different countries across the globe. China became the major market for Ethiopian export commodities, commanding a share of about 14% in 2009 (see Table 2). China s main import during the year from Ethiopia included oilseeds, hides and skins, titanium ores and chat. These four major products alone constituted 97% of China s import from Ethiopia. The second important market was the Netherlands, whose total import from Ethiopia reached Birr 1,618.3 million in 2009, of which flowers, coffee and oilseeds took the largest share. In fact the Netherlands has been 18

27 the major market for Ethiopian flowers. Its import of this commodity reached Birr 1,372.6 million in 2009, constituting about 85% of its total import from Ethiopia. Ethiopia s export to Somalia, a country which remained politically unstable for many years, is surprisingly better than the exports to other neighboring trade partners such as the Sudan, Kenya and Djibouti. Somalia s total import from Ethiopia in 2009 reached Birr 1,564.2 million, while that of Djibouti and the Sudan stood at Birr million and Birr million in the same year. Table 2: Ethiopia s Export by Country of Destination, 2009 Value Share Destination ( 000 Birr) (%) China 2,506, Djibouti 558, Germany 1,457, Israel 529, Italy 561, Netherlands 1,618, Saudi Arabia 1,296, Somalia 1,564, Sudan 850, Switzerland 1,221, United Arab Emirates 809, United Kingdom 653, United States 816, Others 3,290, Total 17,733, Source Ethiopian Revenue and Customs Authority 4.2 Composition and Magnitude of the Country s Import The country imports different kinds of commodities which are not supplied in sufficient quantity by domestic industries. The country s aggregate import over the last five years increased from Birr 32,612.8 million in 2005 to Birr 90,555.7 million in 2009 (ERCA s Data Base), registering a 29% average annual growth rate (see Table 3). Consistent increases were not observed in all products, and imports fluctuated from year 19

28 to year. The largest share goes to importation of machinery and equipment, constituting on the average 31% of the total average import of the country. Fuel appeared to be the second import product followed by organic and inorganic chemical products, food and beverage and metallic products in that order of magnitude. Table 3: Ethiopia s Import by Major Sub-sectors (in million Birr), Commodity Description Food Products and Beverages Organic and Inorganic Chemical Products 5-Years Average Average Share (%) 3,382 2,261 3,142 10,482 9,328 5, ,003 3,816 5,898 8,787 12,908 6, Plastic and Rubber Products 1,744 1,855 2,235 3,464 4,242 2,708 5 Paper and Paper Products ,219 1, Wood and Wood Products , Fuel & Oil 5,533 8,977 7,144 19,772 15,355 11, Metallic Products 3,610 3,636 5,698 7,482 9,719 6, Non-metallic Products Textile and Textile Products 1,960 2,388 2,375 2,237 2,932 2,378 4 Machinery & Equipment 10,135 13,003 16,598 21,637 29,509 18, Others 1,965 2,285 3,885 2,946 3,550 2,926 5 Total Import 32,613 39,890 49,180 79,510 90,556 58, Source: Ethiopian Revenue and Customs Authority and Consultant s calculation 4.3 The Magnitude of the Trade Deficit Despite encouraging growth of exports over the five years, the trade deficit of the country continued to remain wide as the growth of imports also accelerated fast during the same period. The magnitude of the trade deficit increased from Birr 40,320.7 million in 2005 to Birr 72,822.3 in 2009, exhibiting a yearly average growth rate of nearly 16%. A sudden increase in the value of import in 2008 and 2009 exasperated the path followed to maintain the level reached in the previous years, and resulted in a deficit of nearly twice the 2007 and 2006 levels. 20

29 Table 4: Ethiopia s Average Trade Deficit (in million Birr), Year Export Value Import Value Trade Deficit ,698 48,019-40, ,786 39,890-31, ,706 49,180-38, ,946 79,510-64, ,733 90,556-72,822 5-years Average 11,974 61,431-49,457 Source Ethiopian Revenue and Customs Authority The country s industrial base has remained weak and failed to boost the export of manufactured products or to produce commodities capable of substituting imports in order to narrow the ever widening trade deficit. The export growth performance achieved in the past emerged mainly from the agricultural sector and not from the manufacturing sector. The country s trade deficit has been continuously increasing as shown in Figure 3 due to the escalating cost of and high dependency on imports and the slow growth of exports. Figure 3: Trends of Ethiopia s Trade Deficit, Source: Figure drawn on the basis of data from the Ethiopian Revenue and Customs Authority 21

30 The country reported huge deficit even at individual agricultural commodity level where it has the potential to narrow the gap. As shown in Table 5 some important agricultural commodities made significant contributions to the aggregate trade deficit of the country, with the exception of sugar which enjoyed a trade surplus. There is a possibility of local production to narrow the deficit, especially if production of soya beans, wheat flour, dried peas and malt are increased. Table 5: Trade Deficit in Some Agricultural Commodities ( 000 Birr), 2009 Commodities Import Export Trade Deficit/ Surplus Soya beans 6,570 2,685-3,885 Wheat flour 99, ,911 Grain sorghum 69,770 No Export -69,770 Dried peas, shelled 42,944 17,816-25,128 Durum wheat 803,771 No Export -803,771 Spelt and common wheat 307,751 No Export -307,751 Malt not roasted 21, ,685 Raw cane sugar, in solid form 69, , ,897 Source: Ethiopian Revenue and Customs Authority and Consultant s calculation 22

31 CHAPTER FIVE OPTIONS FOR NARROWING ETHIOPIA S TRADE DEFICIT 5.1 General There are two possible options for narrowing the prevailing trade deficit of the country. The first involves the transformation of the export of primary commodities into export of high value-added manufactured products through the development of proper upgrading strategies. The second option refers to the introduction of new import substituting commodities and increasing the production volume and the competitiveness of existing domestic manufacturing industries. In today s highly dynamic global market with reduced protection levels, competition is increasingly shaped by costcompetitiveness advantages. There were and still are several instances where imported commodities become cheaper than their local counterparts. The domestic manufacturing industries most often complain about being uncompetitive due to importers tendency to under invoice commodities they import and poor quality of imported commodities. On the other hand, Ethiopian manufacturing industries are reported to suffer from low productivity, which contributes to their low competitive ability. A World Bank recent study (2009) shows that the overall total factor productivity (TFP), that is the efficiency with which resources are used in production, is lower for Ethiopian manufacturing industries than other sub-saharan African countries. Thus, existing manufacturing industries need to give proper attention to low productivity factors and the government also apply strict legal measures and reforms to protect them from unfair trade practices if import substituting actions are to be effective. Nearly all of the imported products, with the exception of heavy machinery and equipment can be produced locally.quite a large number of manufacturing enterprises, which are expected to complement import, have been licensed during the past five years, though manufacturing industries under operation remained deplorably low as can be seen in Table 6. During the period a total of 7,816 projects at a capital of Birr 236,835 million were licensed, of which only 278 are now under implementation while another 390 have become operational. Nearly 92% of the licensed projects are still under preimplementation. 23

32 Table 6: Summary of Approved Manufacturing Investments by Sub-sector and Status, Sub-Sector Implementation Operation Pre-Implementation No. of Projects Capital in 000 Birr No. of Projects Capital in 000 Birr No. of Projects Capital in 000 Birr Electricity, gas, steam and hot water supply 3 8,250 Growing of crops, vegetable, fruit, horticulture & beverage crops 1 70,000 Manufacture of basic metals 4 46, , ,364,743 Manufacture of chemicals and chemical products , , ,989,813 Manufacture of electrical Machinery and apparatus not elsewhere specified 9 2,203, , ,640,815 Manufacture of fabricated metal products, except machinery and equipment , , ,751,755 Manufacture of food products and beverages 80 6,258, ,831 1,968 34,822,889 Manufacture of Furniture, Manufacturing not elsewhere specified 15 78, , ,738,237 Manufacture of machinery and equipment not elsewhere specified 13 60, , ,642,350 Manufacture of medical, precision and optical instruments, watches and clocks 5 58, ,462 Manufacture of motor vehicles, trailers and semi-trailers 6 27, , ,621,901 Manufacture of office, accounting and computing machinery ,833 Manufacture of other nonmetallic mineral products 54 15,431, ,297,718 1,500 98,354,491 Manufacture of other transport equipment 2 2, ,046 Manufacture of paper and paper products 5 22, , ,598,121 Manufacture of radio, television and communication equipment & apparatus 3 14, ,982 Manufacture of rubber and plastics products , , ,961,214 Manufacture of textiles , , ,426,964 Manufacture of tobacco products 1 20,250 Manufacture of wearing apparel, except fur apparel , , ,444,779

33 Sub-Sector Implementation Operation Pre-Implementation No. of Projects Capital in 000 Birr No. of Projects Capital in 000 Birr No. of Projects Capital in 000 Birr Manufacture of wood, products of wood; except furniture 3 72, ,889 Other mining and quarrying 2 12,500 Publishing, printing and reproduction of recorded media 3 6, , ,118,490 Recycling 1 74, , ,930,200 Sale, maintenance and repair of motor vehicles & retail sale of automotive fuel 4 12,988 Tanning, dressing of leather, & footwear 3 46, , ,518,444 Grand Total ,735, ,954,041 7, ,145,405 Source: Ethiopian Investment Agency To further strengthen the rational for import substitution, this study compiled and analyzed the trends of individual imported commodities and the size of the market they command. The commodities that are believed to have a sizable impact in narrowing the trade deficit of the country are identified based on certain criteria for further promotion to attract potential investors. 5.2 Commodities for Promotion from the Food Sector The country s food supplies are mainly composed of primary agricultural products and manufactured food products. The primary agricultural food products are mainly catered from domestic sources, with some supplements coming from import. Manufactured food products, however, are supplied both from domestic food industries and from imports, the latter comprising most of the aggregate food supply of the country. As shown in Table 7, the country imported food products ranging from Birr 3,595.6 million in 2005 to Birr 9,872.5 million in 2009, including some primary products of agricultural origin. Importation of cereals took the largest share, with a yearly average import value of Birr 2,826.7 million over the past five years to be followed by animal and vegetable fats and oil products with a yearly average of Birr 1,485.5 million over the same period. To provide a clear picture on the magnitude, trends and contribution of individual imported food products and to further facilitate the identification of products for import substitution, some of the broadly defined products in Table 7 are further sub-divided into their components as defined in HS 6 or 8 digit levels. 25

34 Table 7: Value of Food Product Imports ( 000 Birr) 5-Years Description Average Dairy prod; birds eggs; natural honey; edible prod 48,857 69,460 52,588 82, ,667 71,974 Edible vegetables and certain roots and tubers 256, , , , , ,788 Edible fruit and nuts; peel of citrus fruit or melons 9,489 12,703 16,205 27,786 26,830 18,603 Cereals 2,005, ,650 1,335,937 5,607,249 4,337,932 2,826,737 Prod mill industry; malt; starches; insulin; wheat gluten 109, , , , , ,081 Oil seed, oleaginous fruits; miscellaneous grain, seed, fruit etc. 40,111 66,386 33, , , ,505 Animal/veg fats & oil & their cleavage products; etc. 664, , ,477 2,396,233 2,826,725 1,485,520 Sugars and sugar confectionery 146, , , , , ,713 Prep of cereal, flour, starch/ milk; pastrycooks prod 158, ,668 79, , , ,698 Prep of vegetable, fruit, nuts or other parts of plants 30,249 33,625 48, , ,850 72,654 Miscellaneous edible preparations 54,025 61,394 81,021 94, ,597 79,831 Beverages, spirits and vinegar 47,048 50,912 96,942 78, ,412 79,926 Others 23,703 31,652 37,571 61,487 73,771 45,637 Food Total 3,595,585 2,520,734 3,474,456 10,975,065 9,872,485 6,087,665 Source: Ethiopian Revenue and Customs Authority and Consultant s calculation Dairy Products The aggregate yearly import of dairy products over the last five years ranged from Birr 48.9 million in 2005 to Birr million in 2009, exhibiting a consistent growth except in 2007 where there was a minor drop compared to imports in Milk and cream in solid form containing less and greater than 1.5% fat dominated the market for imported dairy products, holding on the average about 86% of the total imported dairy products. The domestic production, on the other hand, showed a continuous growth over the same period and increased from Birr 68 million in 2005 to Birr million in

35 The apparent consumption of manufactured dairy products of the country, excluding the consumption by the large majority of the rural and semi-urban segment of the population which do not have access and purchasing power to buy manufactured dairy products, ranged in value from Birr million in 2005 to Birr million in The share of import varied between 34.7% and 45.2%, with an average share of 41.5%, as shown in Table 8. Consumption is expected to increase as urbanization and urban population of the country continue to grow. The market share of imported dairy products is expected to increase proportionally. In view of the country s potential in livestock resources there appear to be ample opportunities to expand and diversify the domestic dairy manufacturing industries. There is a wide market opportunity to substitute the milk imported in powder form with locally processed liquid milk, provided domestic industries adhere to hygienic and health requirements of processing and packing dairy products. Table 8: Value of Dairy Product Imports and Domestic Production ( 000 Birr) 5-years Description Average Milk and cream in solid forms of =<1.5% fat 10,386 20,357 20,416 27,199 45,324 24,736 Milk and cream in solid forms of >1.5% fat, unsweetened 26,617 34,057 25,518 31,449 50,617 33,652 Milk and cream in solid forms of >1.5% fat, sweetened 3,386 5,637 1,769 5,533 1,738 3,612 Sweetened milk and cream (excl. in solid form) 6,067 2, , ,466 Butter , Fresh (unripened/uncured) cheese, including whey cheese and curd Processed cheese, not grated or powdered Cheese 1,490 1,631 1,993 1,823 3,823 2,152 Others 641 5,075 1,405 10,992 2,309 4,084 Total Import 48,857 69,460 52,588 82, ,667 71,974 Total Export Domestic Production 1 67,964 99,013 99, , , ,213 Apparent Consumption 116, , , , , ,312 Share of Import 42.0% 41.4% 34.7% 45.2% 42.8% 41.5% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 1 Central Statistical Agency and own estimate for

36 5.2.2 Cereals, Pulses and Oilseeds These are the major staple agricultural crops that the majority of the country s population consumes. The Ethiopian farmers produce these crops mainly for own consumption with little marketable surplus. Since the domestic production alone does not meet the ever growing demand for agricultural products, the government has to import agricultural crops regularly to satisfy the unmet demand. Wheat grain is the major crop among the cereal group that the country imports regularly. The imported quantity into the country jumped from million tons in 2007 to 1,111.5 million tons in 2009, exhibiting a growth of 70% (see Table 9). Domestic production also increased from 2,314.5 million tons to 3,075.6 million tons during the same period, corresponding to a growth of 15%. Export of cereals has remained negligible. Import thus continued to grow in spite of the growth achieved in domestic production, indicating the existence of a growing market for wheat grain. It managed to capture about 29% of the market during the recent past. Table 9: Production and Import of Wheat (tons) 3-Years Description Average Durum wheat import 198, , , ,998 Spelt, common wheat and meslin import 185, , , ,965 Total wheat import 384,127 1,100,050 1,111, ,962 Domestic production of wheat 2,314,489 2,537,640 3,075,644 2,642,591 Apparent consumption of wheat 2,698,616 3,637,690 4,187,166 3,399,553 Share of wheat import 14.2% 30.2% 26.5% 28.6% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation In addition to imports of wheat in grain form, the country also imports a substantial volume of wheat flour, indicating that the existing domestic grain mill industries are not in a position to meet the country s overall demand for wheat and other grain flours. As can be seen in Table 10, wheat flour imports in 2008 increased tenfold compared to the preceding year and it further grew nearly by another tenfold in 2009 as compared to 2008, jumping in value from Birr 33.7 million to Birr million. The country exports some grain mill products, but not comparable with the volume it imports. 28

37 The flour supply from domestic grain mill industries dominates the market. They are reported to have adequate capacity to meet the demand generated by individual households, bakeries, pastries, and other food industries. However, their operation frequently remains below their installed capacity due to shortage of grain, power interruption etc. (CSA, 2007/08). The market does not justify the creation of additional capacity in the domestic grain mill industry in the short and medium term span. However, grain mills have to upgrade their product quality to meet customers expectation, especially those flour users in the downstream industries such as bakeries, pastries and spaghetti and macaroni producers. Table 10: Value of Domestic Production and Imports of Grain Mill Products ( 000 Birr) 5-years Description Average Wheat or meslin flour 175 3,953 3,725 33, ,054 75,730 Maize (corn) flour ,499 12,159 4,470 Other cereal flour, not elsewhere specified 3,753 8,804 1,901 20,403 42,304 15,433 Total import 4,044 13,077 5,881 63, ,517 95,633 Domestic production of grain mill products 2 448, , ,040 1,147,029 1,571, ,128 Apparent Consumption 452, , ,921 1,210,676 1,962, ,761 Share of imported flour 0.9% 2.4% 1.1% 5.3% 19.9% 10.2% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The upcoming beer industries are expected to generate additional demand for malt. There is only one malt factory in the country catering for domestic beer industries, with substantial supplement from import. Although malt import fluctuated during the five years to 2009, the average annual import, estimated at 24,621 tons, is much higher than the domestic production. The volume of imports obviously tends to increase by a substantial volume in the near future when the upcoming breweries become operational unless they have an integrated facility to produce malt. 2 Unless otherwise specified the source for domestic production of manufactured products is Central Statistical Agency, Report on Large and Medium Scale Manufacturing Industries Survey, Oct

38 Table 11: Domestic Production and Import of Malt (tons) 5-Years Description Average Malt not roasted 10,579 26,953 32,184 30,297 21,724 24,347 Roasted malt Total malt import 10,579 26,967 32,195 30,826 22,541 24,621 Domestic production 15,945 14,968 11,231 16,820 14, ,741 Apparent consumption 26,524 41,935 43,426 47, ,362 Share of import 39.9% 64.3% 74.1% 64.7% 60.5% 62.6% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Thus, the market for malt, which is made mainly from malt barley, is readily available and signals the existence of an opportune moment for potential investors or to expand the existing malt factory Food Products of Cereal Flour Imports of food products made from cereals such as spaghetti, infant foods and other food preparations appear to increase with the growth of population and urbanization. During the last five years total import of food made from cereals increased from a value of Birr million in 2005 to Birr million in 2009, with the exception of year 2007 when import dropped dramatically to Birr 79 million. Other food preparation of flour, represented by HS (no specific name attached to the HS) took the largest share, while importation of spaghetti in aggregate grew from a value of Birr 8.9 million in 2005 to Birr 61.8 million, registering an average annual growth rate of 62%. Aggregate import constituted on the average 31.6% of the total apparent consumption during the period 2005 to The domestic food industries according to the results of the CSA manufacturing survey (2009) are operating nearly at 85% of their installed capacity, suggesting that import will continue to share the market unless either the existing food industries plan to expand or new investors are encouraged to join the industry Own estimate

39 Table 12: Value of Domestic Production and Imports of Food Prepared from Cereal Flour ( 000 Birr) Food Import: 5-Years Description Average Preparations for infant use, for retail sale, of flour, etc. 12,203 16,944 12,270 5, ,452 Other food preparations of flour 110,831 16,685 2, , , ,144 Uncooked pasta containing eggs,not stuffed 1,166 1,812 1,757 1,314 6,305 2,471 Uncooked pasta, not containing eggs, not stuffed for infant/ invalid use 7,043 12,834 11,994 26,177 47,001 21,010 Others 27, ,872 48,959 85, ,817 84,858 Total import 158, ,668 79, , , ,698 Domestic Production of Food: Manufacture of macaroni and spaghetti 192, , , , , ,514 Manufacture of other food products 139, , , , , ,305 Total domestic production 332, , , , , ,819 Apparent Consumption 490, , , , , ,517 Share of import 32.3% 18.4% 16.6% 42.2% 40.6% 31.6% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Vegetable and Animal Oils and Fats The country imported vegetable and animal oils and fats ranging in value from Birr million in 2005 to Birr 2,826.7 in 2009 (see Table 13). Edible palm oil took the largest share of the market with a registered value varying between Birr million and Birr 2,397.1 million during the period under review. One can imagine the sharp rise in value which is in part attributed to a sharp rise in the unit price of the commodity. The CIF value of the commodity increased from nearly Birr 5,000.00/ton in 2005 to Birr 12,000.00/ton in The price increase coupled with an increase in volume of import enabled the commodity to enjoy the largest share of the market. The supply to the market from domestic manufacturers, excluding the small scale manufacturers, appears to be negligible compared to imported edible oils. They are not larger in gross value of production than the domestic small 4 Own estimate 5 Own estimate 31

40 scale edible oils and fats manufacturers as is evidenced from the result of CSA s small scale manufacturing survey. They registered a gross value of production estimated at Birr million in 2008 (CSA, 2009), bringing the combined value of the industries to Birr million during the same. Table 13: Value of Domestic Production, Export and Import of Vegetable and Animal Oils & Fats ( 000 Birr) 5-Years Description Average Import of Vegetable & Animal Oils & Fats: Edible soya bean oil 255,760 42,083 73,657 92,298 17,500 96,260 Edible palm oil 136, , ,789 1,924,618 2,397,077 1,041,672 Edible linseed oil 76,873 53,157 10,175 24,330 93,263 51,560 Edible other fixed oil vegetable fats and fractions 14,586 18,148 35,589 92,797 51,781 42,580 Edible vegetable fats and oils 54,932 58, ,184 65, ,238 89,285 Edible preparations of fats and oils 69,958 96, , ,640 74,726 99,779 Others 55,713 98,382 72,571 43,117 52,139 64,384 Total import 664, , ,477 2,396,233 2,826,725 1,485,520 Domestic Production of Vegetable & Animal Oils & Fats: Manufacture of vegetable and animal oils and fats 6 109, , , , , ,042 Exports of Vegetable & Animal Oils & Fats: Beeswax and insect wax 10,881 10,486 14,777 11,934 19,690 13,554 Other vegetable & animal oils and fats 873 3,456 2,782 5, ,577 Total Export 11,754 13,942 17,559 17,084 20,316 16,131 Apparent consumption 762, ,274 1,052,264 2,513,746 2,950,454 1,606,431 Share of import 87.1% 78.4% 90.2% 95.3% 95.8% 92.5% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 32 6 The figure does not include the contribution of small scale manufacturers 7 Own estimate

41 5.3 Commodities for Promotion from the Chemical Groups The country imports different kinds of chemical products for direct consumption and to be used as raw materials or inputs for domestic industries. The chemical groups this study considered are classified into inorganic chemicals, organic chemicals, pharmaceutical products and fertilizer. A brief description and analyses of the potential products to be promoted for import substitution within each group are provided in the following section Inorganic Chemicals The major inorganic chemicals that the country imports regularly are those described in Table 14. The total value of imported inorganic chemicals into the country ranged from Birr million in 2005 to Birr million2009, corresponding to a yearly average growth rate of 38.5%. The yearly average value of import over the last five years amounted to Birr million, constituting important chemicals such as carbon, sodium hydroxide, titanium oxides, magnesium chloride, disodium carbonate, calcium carbonate and cyanides and cyanide oxides of sodium. Nearly all of them are used as raw materials in chemical products industries and others. Table 14: Value of Domestic Production and Import of Inorganic Chemicals ( 000 Birr) Inorganic Chemical Imports: 5-Years Description Average Carbon (carbon blacks and other forms of carbon) 11,966 13,448 13,692 19,513 19,155 15,555 Hydrogen chloride (hydrochloric acid) 1,856 5,158 5,030 5,259 6,483 4,757 Sodium hydroxide (caustic soda), solid 12,063 23,467 22,019 28,865 49,687 27,220 Titanium oxides 5,975 17,065 15,985 25,541 39,446 20,802 Magnesium chloride 921 4,010 5,931 20,144 82,190 22,639 Disodium carbonate 2,391 3,256 7,056 19,153 30,581 12,487 Calcium carbonate 6,004 8,426 11,118 20,254 22,778 13,716 Cyanides and cyanide oxides of sodium 7,041 8,608 9,060 9,219 24,580 11,702 Carbides of calcium 4,840 3,014 2,822 4,819 5,840 4,267 Others 61,750 76,703 72, , ,108 94,193 Total Imports 114, , , , , ,338 Domestic Production: Production of basic chemicals, except fertilizer & nitrogen compounds 52,566 46,637 61,529 73,589 82,322 63,329 Apparent Consumption 167, , , , , ,667 Share of import 68.6% 77.8% 72.9% 78.7% 83.7% 78.2% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 33

42 On the average import commanded about 82% of the market over the past five years and this will continue to prevail until local manufacturing industries catch up with the growing market. According to key informants interview and discussion in the sector (BEKAS Chemicals), the country has rich potential resources for the production of many of the inorganic chemicals indicated above. For instance, the country has large potential of titanium ore, which can be used as raw material for the production of titanium oxide. The country currently enjoys attractive export market for the raw material and capacity of exploiting the titanium ore deposits must be further advanced to serve upcoming potential new investors in titanium oxide production. Titanium oxide is mainly used as an input in the paint industry and, the above source further witnessed the existence of other inorganic chemicals that are mostly used as an input in the paint industry. According to the same source, sodium ash, which is also a basic raw material for many chemical products, is available in adequate volume in the country and is currently used for the domestic production of caustic soda. The caustic soda (sodium hydroxide) produced locally is not sufficient in quantity to meet the growing market demand and thus the country was forced to import every year over the past years, ranging in value from Birr 12.1 million in 2005 to Birr 49.7 million in In general there exists ample opportunity to produce inorganic chemicals by rationally exploiting the inorganic chemical resources of the country Organic Chemicals Several varieties of organic chemicals are imported into the country. The Harmonized System of product classification includes some medicinal products such as different types of vitamins, penicillin derivatives, antibiotics etc. under this chemical group. The total annual import of chemicals in this group increased from Birr million in 2005 to Birr million in 2009, registering an average annual growth rate of 29.4% (see Table 15). 34

43 Table 15: Value of Organic Chemical Imports ( 000 Birr) 5-Years Description Average Dioctylorthophthalates 15,178 16,670 20,316 34,740 10,885 19,558 Cyclic amides (incl. carbonates) and derivatives; salts thereof 4,036 2,100 5,597 4,677 8,160 4,914 Isocyanates 28,257 46,654 49,653 81,731 62,412 53,741 Penicillin and derivatives with a penicillin acid structure; salts 17,247 23,611 34,463 49,646 77,817 40,557 Other , , , , ,879 Total import 149, , , , , ,650 Domestic production of chemical products not specified elsewhere 26,333 29,025 49,201 61,752 77,328 48,728 Estimated apparent consumption 175, , , , , ,378 Import share 85.0% 87.3% 83.1% 86.5% 84.4% 85.2% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Organic chemicals from the domestic industries have been found difficult to categorize or identify by name due to lack of pertinent sources. However, the CSA manufacturing survey results provide some information on chemical products not elsewhere classified. Assuming that these are the share of the domestic industries in the organic chemical group, their aggregate gross production has been estimated to range from Birr 26.1 million in 2005 to Birr 77.3 million in If one takes these estimates into account, the apparent consumption of organic chemicals would turn out to range from a value of Birr million to Birr over the period under review. Import again controls much of the organic chemical market of the country, commanding about 85% of the market share over the period under review Pharmaceutical Products There are currently three state owned and four private industrial establishments that are engaged in the production of pharmaceutical products such as capsules, tablets, antibiotics and cough syrup. The gross value of their combined production have been estimated to vary between Birr 170 million and Birr million during the period (CSA, 2009). 35

44 Table 16: Value of Domestic Production, Export and Import of Pharmaceutical Products ( 000 Birr) 5-Years Description Average Vaccines for human medicine 144, , , , , ,275 Medicaments of other antibiotics, not for retail sale 3,078 2,919 21,195 21,318 25,516 14,805 Medicaments of penicillin s or streptomycin s..., for retail sale 7,402 13,546 10,211 19,478 42,132 18,554 Medicaments of other antibiotics, for retail sale 22, ,660 44,160 68,859 62,555 68,933 Medicaments of other hormones, for retail sale 527, , ,338 9,655 19, ,662 Other medicaments of vitamins or other products of for retail sale 16,775 8,263 13,161 10,449 25,235 14,776 Other medicaments of mixed/ unmixed products,(excluding anesthetics) 124, , ,444 1,173,349 2,846,460 1,021,962 Wadding, gauze, etc. with pharmaceutical substances for retail sale 3,352 9,285 7,747 14,209 21,065 11,132 First-aid boxes and kits 1,428 21,179 22,120 39,004 20,766 20,899 Chemical contraceptive preparations based on hormones or spermicides 95,938 47, ,784 82, , ,103 Others 31,382 45,926 49,843 80,550 46,821 50,904 Total import 978,247 1,200,961 1,800,732 1,977,051 3,793,034 1,950,005 Domestic Production 169, , , , , ,578 Exports: Vaccines for veterinary medicine 1, ,009 16,434 6,391 5,768 Others 24 2, , ,083 Total Export 1,487 3,183 4,009 18,906 6,674 6,852 Estimated Apparent Consumption 1,146,736 1,414,173 2,053,787 2,269,856 4,134,103 2,203,731 Share of Import 85.3% 84.8% 87.7% 87.1% 91.7% 88.5% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Some are exported, mainly consisting of vaccines for veterinary medicine. On the average the country earned about Birr 6.8 million from export of pharmaceutical products over the five years to The country s overall 36

45 requirement of pharmaceutical, medicinal chemicals and botanical products are met through import and domestic production. The share of the latter appears to be negligible, not exceeding on the average about 12% of the total estimated demand of the country as can be seen from Table 16 above. Import on the other hand enjoys the bulk share of the market, varying in value between Birr million and Birr 3,793.0 million holding an average share of 88.5%. Import of vaccines for human medicine and other medicaments of mixed/unmixed products, excluding anesthetics (as defined in HS 8 digit) 8, took the largest share and sharp rises were observed in the recent past. For instance, the latter suddenly increased from a value of Birr million in 2006 to a high value of Birr 2,846.5 million in 2009, showing a comparable rise in between the years too. This clearly indicates the existence of wide and growing market opportunities for potential investors to invest in pharmaceutical and medicinal projects Fertilizer The majority of the Ethiopian population is engaged in farming activities, which require the use of fertilizer to enhance the fertility of the soil and consequently increase yield per hectare. The use of inorganic fertilizer is widely spreading in the country, though there are few cases where organic fertilizer such as manure from animal waste is used for backyard farming. The types of fertilizer most frequently imported include urea and DAP, described as diamoniumphospahate and monoamonium phosphate. The total value of import of the country during the five years ( ) increased from Birr million in 2005 to Birr 3,971.1 million in 2009, with a yearly average growth rate of 47% (see Table 17). The share of DAP was estimated on the average to be 66.2%, while Urea took 25.5% of the market and the balance being shared by other types of chemical fertilizers. 8 The product includes different types of antibiotics, HIV medicine, capsules, intravenous glucose etc. as defined in the commercial or brand names 37

46 Table 17: Value of Fertilizer Imports ( 000 Birr) 5-Years Description Average Urea 263, , , , , ,078 Double salts and mixtures of ammonium sulphate and ammonium nitrate 1, ,927 10,138 11,647 5,240 Mineral or chemical fertilizers, nitrogenous 1,929 4,912 3,341 10,677 6,873 5,546 Mineral or chemical fertilizers, phosphatic 57, ,788 Mineral or chemical fertilizers, potassic, nes 1,719 4,131 3,662 12,635 11,274 6,684 Diammoniumhydrogenorthophosphate (diammonium phosphate) 73, ,206 1,835, ,518 Ammonium dihydrogen or phosphate (monoammonium phosphate) 360, , , ,104 1,020, ,235 Others 89, ,034 59,970 71, , ,779 Total 850,145 1,071,944 1,095,850 2,665,294 3,971,107 1,930,868 Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The government has put top priority in its GTP to ensure sustainable supply of fertilizer in the required quality and quantity to speed up productivity in the agricultural sector. Accordingly, it has indicated that it will soon establish a domestic fertilizer manufacturing plant and farmers will then have easy access to fertilizer supply Tanning/Dyeing Extract and Pigments/Paints The chemical products in this category are imported as finished products such as the paints and varnishes and as inputs for the tanning and paint industries. There are currently a total of 11 and 15 domestic paint and varnish manufacturing and tanning industries (CSA, 2009), respectively, in the country. All imports of tanning substances are consumed by the tanning industries. Their combined annual import in the recent past ranged from a value of Birr 14.3 million to Birr 18 million. These tanning substances, according to a knowledgeable expert from the chemical sector, are mainly products of chromium, which is available in high potential in the country. 38

47 Table 18: Value of Domestic Production and Import of Tanning/Dyeing Extract and Pigments/Paints ( 000 Birr) Description Average Synthetic organic tanning substances 5,702 8,326 3,201 13,459 11,520 8,442 Inorganic tanning substances; tanning preparations 8,561 9,741 9,418 8,846 6,468 8,607 Acid dyes and preparations; mordant dyes and preparations 3,162 4,121 3,342 6,778 9,829 5,447 Pigments and preparations based thereon 9,499 11,111 15,921 26,022 28,224 18,155 Pigments & preparations based on titanium dioxide, cont.= >80%titanium dioxide 11,976 9,869 10,133 16,946 6,476 11,080 Paints and varnishes, in a non-aqueous medium 12,368 15,015 18,426 24,892 21,036 18,347 Paints and varnishes, in an aqueous medium 2,502 4,484 7,237 7,332 9,277 6,166 Glaziers & grafting putty, resin cements, caulking comp s & other mastics;. 6,248 3,603 3,502 5,345 8,309 5,402 Printing ink, whether or not concentrated or solid (excl. Black) 9,250 11,812 11,856 16,341 20,689 13,990 Stencil or cyclostyling ink 3,453 2,959 3,875 4,266 4,793 3,869 Others ,011 50,438 75,226 89,879 60,834 Total paints, pigments and printing ink import 99, , , , , ,290 Domestic production of paints, varnishes and mastics 204, , , , , ,652 Estimated apparent consumption 317, , , , , ,990 Import share 32.7% 30.4% 31.3% 29.5% 27.1% 33.1% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The tanning industries as well as all manufacturing industries in the country that use imported inputs are suffering from tied up working capital as it takes several months to import these inputs. The government having realized the problem has now allowed the establishment of a bonded warehouse where these inputs could be stored in advance so that the tanning industries can buy them at any time. According to information obtained from the Leather and Leather Product Technology Institute (LLPTI), three international companies are in the process of establishing a bonded warehouse that supplies major inputs to domestic industries, thereby shortening the lead time it takes to import them and easing working capital shortage and eventually raising the capacity utilization of the industries. The domestic paint industries appear to be strong and command much of the paint and varnish market share of the country. Their combined value of production over the years 2005 to Own estimate 39

48 was estimated to vary between Birr million and Birr million, accounting for an average market share of 67%, the difference being held by import. The growth observed in the construction sector is expected to bring further market opportunities for potential investors in the paint and varnish industry. The average production value per industry of existing paint and varnish manufacturing industries is estimated at Birr 39.3 million, suggesting that at least four additional investors having this average capacity would easily capture that portion of the market held by import without creating fierce competition Soap, Organic Surface-Active Agents and Washing Preparations At present there are 5 state owned and 40 private manufacturing industries (CSA, 2009) producing different types of soaps, organic surface active agents and detergents. Their combined gross value of production over the past five years was estimated to vary between Birr million and Birr 1,161.3 million, commanding on the average 62% of the market share. Export, mainly of candle and wax, appears to be negligible, with a yearly average earning of Birr 600 thousand over the five years to The combined value of import over the period under review ranged from Birr 276 million in 2005 to Birr million in 2009, capturing on the average about 38% of the market as shown in Table 19. Among the different types of soap and washing preparation materials imported into the country, toilet soaps in bars, laundry soaps in bars and powder and detergents represented the largest share. For instance, the combined import value of laundry soaps in bars and powder was estimated to vary between Birr million in 2005 and Birr million, seizing on the average a 25.8% market share. Value of production achieved per industry in the past turned out, on the average, to be Birr 14.4 million, though there are certainly variations in capacity and production. This indicates that the portion of the market covered by import is significantly large to attract a sizable number of potential investors. 40

49 Table 19: Value of Domestic Production, Import and Export of Soap and Organic Surface Active Agents ( 000 Birr) 5-Years Description Average Soap and organic surface-active products in bars, etc., for toilet use 22,533 18,813 36,594 29,908 34,481 28,466 Soap and organic surface-active products in bars, etc. 94,808 97,095 62, , , ,924 Soap in powder form 103, , , , , ,573 Washing preparations (detergents) 11,664 29,786 21,333 45,609 68,249 35,328 Washing and cleaning preparations, put up for retail sale 5,446 1,329 1,654 7,081 7,706 4,643 Other organic surface -active agents 4,499 14,184 12,400 27,641 20,281 15,801 Other lubricating preparations, with <70% petroleum oil 1,812 2,062 2,493 5,656 13,535 5,112 Polishes, creams and similar preparations for footwear or leather 4,645 5,435 20,294 23,265 24,950 15,718 Candles, tapers and the like 12,279 7,180 12,605 20,388 32,759 17,042 Others 14,984 12,753 12,877 36,259 24,876 20,350 Total import 275, , , , , ,956 Domestic Production of soap and detergent cleaning and polishing, perfume & toilet preparations 335, , , ,468 1,161, ,980 Export , Estimated apparent consumption 610, , ,029 1,381,538 1,752,780 1,052,336 Share of import 45.2% 43.6% 38.8% 38.5% 33.7% 38.4% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 5.4 Plastic and Rubber Products Plastic Products The markets for plastic products are served both by imported and locally produced products. A total of 76 manufacturing industries currently exist in the country (CSA, 2009) that produce plastic products both for the domestic and export markets. They consumed imported polypropylene, polyethylene and other polymers of propylene and ethylene that is worth, on the average, Birr million between 2005 and 2009 as raw material to produce different kinds of plastic products. The total value of domestic production of plastic articles, on the other hand, over the five years varied between Birr million in 2005 and Birr 1,601.1 million in 2009, with a yearly average of Birr million. 10 Own estimate by taking average growth rate that prevailed during

50 The domestic industries managed to command nearly 60% of the market for plastic products, the balance being covered by imported articles of plastic. The market has been characterized by fast growth over the last five years, registering an average annual growth rate of 26.8%. As a result both the import and the supply from domestic industries sharply rose to respond to the growing demand over the period under review. The former registered a yearly average growth rate of 16.8%, except in 2006 when it dropped for some reason, while the former responded to the growing market by increasing production at an average annual growth rate of 35.5%. The domestic plastic articles manufacturing industries have accumulated sufficient experience and appear to be role models for new comers into the industry. Thus the market remains to be attractive for new investors in view of the size of the market held by imported plastic articles. Additional plastic products to consider for selection are shown in Annex 3. Table 20: Value of Gross Domestic Production and Import of Plastic Products ( 000 Birr) 5-Years Description Average Tubes, pipes and hoses, rigid, of other plastics 13,663 11,775 16, ,713 39,919 44,002 Tubes, pipes and hoses, not reinforced, with fittings attached 7, ,033 41,986 64,831 23,294 Other tubes, pipes and hoses 32,537 13,273 20,257 67, ,652 46,960 Fittings, for tubes, pipes and hoses, of plastic 29,303 26,657 30,049 54,619 49,616 38,049 Floor...coverings of polymers of vinyl chloride 27,468 23,720 37,700 45,997 55,006 37,978 Plates..., of polymers of ethylene, not reinforced, etc. 89,729 7,717 14,107 8,263 17,378 27,439 Plates..., of polymers of propylene, not reinforced, etc. 19,167 20,937 25,433 36,458 27,146 25,828 Other cellular plates, strips..., of plastics 33,969 29,294 37,471 29,937 71,071 40,349 Sacks and bags (incl. Cones) of other plastics (excl. Ethylene) 9,120 11,733 22,409 32,837 41,316 23,483 Others 240, , , , , ,434 Total import 512, , , , , ,637 Domestic production 475, , ,611 1,190,736 1,601, ,561 Exports of Plastic Products 339 1,274 5,824 15,744 6,320 5,900 Apparent consumption 987,689 1,105,291 1,271,700 2,117,335 2,549,471 1,606,298 Share of import 51.9% 31.9% 35.9% 44.5% 37.4% 40.1% Plastic Raw Material Total Import 608, , ,099 1,259,211 1,361, ,931 Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Own estimate for only 2009

51 5.4.2 Rubber Products There is one state owned rubber producing establishment, the largest in the country, and four private manufacturing industries, the former mainly producing tires and inner tubes for the domestic market. Their combined production was estimated to vary between Birr million in 2005 and Birr million in 2009, growing at an average annual growth rate of Birr 11.2% during the period. The domestic industries also exported some rubber products to the international market, mainly consisting of rubber tires. Table 21: Value of Domestic Production, Import and Export of Rubber Products ( 000 Birr) 5-Years Description Average Tubes, pipes and hoses of vulcanized... not reinforced, without fittings 2,410 5,826 23,234 13,146 9,722 10,867 Tube, pipe & horse of vulcanized rub. Reinforced with other.material,with fittings 4,210 5,037 5,115 5,736 14,750 6,970 Endless transmission belts/ ting: trapezoidal-ribbed circular 60>v-belt<180cm 6,782 10,217 9,851 13,124 21,410 12,277 New pneumatic tires, of rubber of a kind used on motor cars 91, , , , , ,569 New pneumatic tires, of rubber of a kind used on buses or lorries 308, , , ,461 1,030, ,048 New pneumatic tires of rubber: of a kind used on construction or industrial. Rim >61cm 3,847 3,386 4,013 5,377 15,386 6,402 Inner tubes, of rubber of a kind used on motor cars, buses or lorries 11,500 13,375 14,514 16,026 28,805 16,844 Sheath contraceptives 28,148 6,109 18,816 32,049 58,171 28,659 Surgical gloves 6,001 7,043 21,712 14,736 27,623 15,423 Gloves for medical examination 6,580 5,151 6,811 10,902 16,612 9,211 Gaskets, washers and other seals, of vulcanized rubber 30,034 53,612 90, , ,367 83,451 Articles of vulcanized rubber 5,338 10,874 20,307 20,040 27,537 16,819 Others 64,820 87, , , , ,518 Total rubber product import 569, , ,842 1,160,428 1,827,489 1,017,058 Domestic production of rubber products 213, , , , , ,054 Rubber product export 427 5,224 12,943 5,267 3,431 5,458 Estimated apparent consumption 781, ,929 1,046,128 1,448,973 2,150,371 1,272,654 Share of import 72.8% 76.1% 78.0% 80.0% 85.0% 79.9% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The domestic market absorbed rubber products ranging in value from Birr million in 2005 to Birr 2,150.4 million, corresponding to a yearly average growth rate of 28.8% (Table 21). The largest share of the market, 43

52 estimated at nearly 80%, was covered by import, while the domestic industries catered for the balance. Value of import grew from Birr million to Birr 1,827.5 million over the period under review and is expected to grow unless potential investors join the domestic industry to reduce the share of import in the domestic market, thereby narrowing the trade imbalance that prevailed for so long. Out of the total import of rubber products, tires and inner tubes took the lion s share of the market, the two combined represented on the average about 71% of the total import of rubber products into the country and 57% of the overall market in terms of value. If one considers only the market for tires and inner tubes alone in terms of quantity, the share of imports on the average turned out to be 78%. 5.5 Paper and Paper Products Despite the long history that the paper industry has in the country, the bulk of the country s demand for paper and paper products still depends on import. A total of 22 paper and paper products manufacturing establishments (CSA, 2009) [excluding publishing and printing services], 4 state owned and 18 belonging to the private of which 3 are small scale nature, are operating in the country. Their combined average value of production over the five years to 2009 was estimated to be Birr million, while the overall national market for paper and paper products stood at Birr 1,069.7 million on average. This clearly shows, as is also evidenced from the import statistics that the market remained highly dominated by import. Export has remained negligibly small; the maximum being exported was Birr 797 thousand in The ranges of imported paper and paper products are presented in Table 22. The aggregate value of import over the period under review stood between Birr million and Birr million, corresponding to a yearly average growth rate of 22.1%. Most of the paper is used in the printing and publishing services and isinput for paper converting establishments. 44

53 Table 22: Value of Domestic Production, Import and Export of Paper and Paper Products ( 000 Birr) 12 5-Years Description Average Paper & paperboard, not contain fibres: weight >=40g/m 2 but <150g/m 2 in sheets 103,061 70, , , , ,973 Other paper & paperboard...weight >=40g/m 2 but <150g/m 2 20,464 27,886 40,600 38,820 34,474 32,449 Toilet... Similar paper, in rolls or sheets 20,232 19,736 23,452 33,001 38,499 26,984 Other paper and paperboard for writing, printing 24,078 51,923 27,216 43,018 53,004 39,848 Napkins(diapers)and napkin liners for babies 11,401 10,203 19,830 30,275 39,027 22,147 Exercise-books 43,029 80, , , , ,264 Others 224, , , , , ,964 Total Value of Import 446, , , , , ,628 Value of Domestic Production 227, , , , , ,063 Estimated apparent consumption 674, , ,920 1,398,299 1,532,864 1,069,691 Share of import 66.2% 67.1% 69.1% 68.8% 64.7% 67.1% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation There are also paper products that are imported for direct consumption in the form of exercise books, napkins, toilet papers, envelopes, etc. According to the Manager of Yekatit Paper Converting Enterprise, the existing local capacity for the production of exercise books is more than sufficient to meet the country s demand for exercise books. However, due to, mainly raw material shortage, working capital limitation and weak competitive position, they operate much below their capacity. As a result import enjoys the lion s share of the market. 5.6 Products for Promotion from the Textile Sub-Sector The textile manufacturing sub-sector has been one of the oldest manufacturing industries in the country. The industry is mainly divided into three classes of manufacturing establishments (excluding the cottage/handicraft 12 Other paper products are included in Annex 4 45

54 manufacturing industries), namely, large, medium, and small scale. Their outputs fall under the following major product groups: Spinning, weaving and finishing of textiles; Manufacturing of crocheted fabrics and knitting mills; Manufacturing of made-up textile articles; and Manufacturing of wearing apparel. In the first two groups of establishments, currently there are 21 manufacturers (CSA, 2009) engaged in the production of spinning, weaving and finishing of textiles, of which 9 are state owned, while those producing similar products in the small scale establishments are estimated to be 1,313 in number. In the knitting and crocheted fabrics manufacturing group, a total of 3 belonging to large and medium and 36 small scale manufacturing establishments exist. The majority falls in the wearing apparel product group, an estimated 3,097 establishment in the small scale and 39 in the large and medium categories are operating in the country (CSA, 2009). The domestic production of textile and textile products are destined for both the domestic and export markets. The overall average gross value of production of the large and medium manufacturing establishments turned out to be Birr 1,091.0 million during the period from 2004 to 2008, while the yearly contribution by the small scale establishments stood at Birr million only, bringing the country s total yearly average to Birr 1,245.8 million. The textile and textile product mixes imported into the country are mainly divided into the following groups: Man-made filaments, consisting of products such as sewing thread of synthetic filaments, woven fabrics of synthetic yarn of polyesters etc.; Apparel and clothing knitted or crocheted such as women s or girls ensembles, men s or boys shirts, T-shirts etc.; Apparel and clothing not knitted or crocheted of similar products as above etc.; and Other made-up articles of textiles consisting of tents, tarpaulins, blankets, bed cover and sheets etc. 46 The magnitude of import and its share in the total textile and textile product market of the country and the products that attract potential investors under each group shall be elaborated below.

55 5.6.1 Man-made Filaments The major market for man-made filaments consists of the garment industries of the country. They absorbed different ranges and varieties of man-made filaments, estimated at a value ranging from Birr 1,343.6 million to Birr 1,875.4 million per year during the period 2005 to 2009 (see Table 23). The domestic textile industries enjoyed a higher share of the market. They served on average about 59% of the market demand during the period under review, the balance being covered by import. Table 23: Value of Domestic Production, Export and Import of Man-made Filaments ( 000 Birr) 5-years Description ,009 Average Sewing thread of synthetic filaments 3,675 3,843 3,967 5,929 6,426 4,768 Textured yarn of polyesters 5,709 3,287 10,162 15,325 26,582 12,213 Multiple or cabled yarn of viscose rayon 9,026 12,811 12,945 20,302 16,670 14,351 Woven fabrics of synthetic yarn >=85% textured/non-textured polyester filament 516, , , , , ,308 Others 20,404 15,697 16,804 42,495 88,674 36,815 Total value of import 555, , , , , ,455 Value of domestic production 897, ,435 1,097, ,552 1,000, ,637 Value of Export 0 2,928 5,183 6, ,020 Estimated apparent consumption 1,452,779 1,484,171 1,649,470 1,343,555 1,875,386 1,561,072 Share of import 38.2% 38.3% 33.8% 48.9% 46.6% 41.2% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The target markets, according to experts from the textile industry (ETGMA and Oasis Garment Factory), are looking for wide varieties of fabrics, whereas the domestic industries managed to supply them with limited varieties, not exceeding 7 varieties while the global market offers over 400 varieties of fabrics. Furthermore, the domestic textile industries do not have the capacity to meet the growing market demand. Thus, the existing domestic industries need to increase and diversify the fabric varieties they are currently producing to respond to the need of the market and additional investment appears to be inevitable to substitute import, which is currently enjoying an average market share of 41%. 47

56 5.6.2 Apparel and Knitted or Crocheted The CSA figure on wearing apparel does not provide a breakdown for domestic production of apparel knitted or crocheted. The statistic has been compiled to represent all types of wearing apparels in aggregate. The share of the domestic garment industries that produce apparel knitted or crocheted is difficult to estimate and shall be treated in aggregate with apparels not knitted or crocheted. The role import of apparel knitted or crocheted plays in the country s market for apparel shall be highlighted independently. As indicated in Table 24, the country imported wearing apparel of this group ranging from a value Birr million in 2005 to Birr million in 2009, corresponding to a yearly average annual growth rate of 8.5%, with an exception of the import in 2006 when it dropped a little. The most important in this group in terms of market size includes wearing apparels like T-shirts, tracksuits, babies garment, women s or girls ensembles and men s or boys underpants. Table 24: Value of Apparel and Clothing (Knitted/Crocheted) Imports ( 000 Birr) 5-Years 48 Description Average Men s or boys jackets... Of other textiles knitted or crocheted 11,092 17,516 4,306 4,319 3,083 8,063 Women s or girls ensembles, of synthetic fibers, knitted or crocheted 12,540 8,741 11,933 18,113 40,757 18,417 Skirts and divided skirts of synthetic fibers, knitted or crocheted 1, ,892 5,760 5,057 3,486 Men s or boys shirts of cotton & other textiles, knitted or crocheted 12,712 10,860 5,140 6,175 3,282 7,634 Men s or boys underpants and briefs of cotton & other textiles, knitted or crocheted 10,153 7,881 8,198 12,248 30,778 13,852 Women s or girls briefs, etc., of other textiles, knitted or crocheted 1,309 1,588 4,000 4,961 7,204 3,812 T-shirts, singlet s, etc., of other textilesknitted or crocheted 94,319 95, , , , ,720 Jerseys, pullovers.. other of wool or fine animals 9,566 8,541 11,141 15,456 19,764 12,894 Babies garments, etc., of synthetic fibers & other textiles, knitted or crocheted 728 4,589 9,186 17,887 66,915 19,861 Track-suits of synthetic fibers & other textiles, knitted or crocheted 50,299 37,206 31,006 29,096 16,158 32,753 Others 69,743 70,418 64,313 69,684 90,662 72,964 Total value of import 299, , , , , ,513 Source: Ethiopian Revenue and Customs Authority

57 The value of import of T-shirt alone varied Birr 94.3 million and Birr million during the period under review, enjoying a market share of 35.6% of in the total imported wearing apparels belonging in this group. There are local industries supplying T-shirts to the domestic market and export markets, though their share in the domestic market is believed to be small due to mainly limited varieties, styles and competition problems with the imported ones Apparel Not Knitted or Crocheted This is another group of wearing apparels made-up of textile fabrics not knitted or crocheted. It includes apparels of all varieties and fashions for both sexes. Import and domestic production are competing in the market. The latter also supplies the international market, though in a limited volume. The domestic gross value of production of wearing apparels in aggregate 13, including knitted/crocheted, was estimated to vary between Birr 62.6 million in 2005 and Birr million in 2009 (Table 25), showing a sharp rise in the last two years, which could be attributed to either a contribution from new entrants or increased production from existing garment manufacturing establishments or both to respond to a growing market demand. Import as well showed a rising trend, except in 2008 when the value dropped by about 10.5% compared to the previous year. Apart from this exception import of apparels not knitted/crocheted increased from Birr million in 2005 to Birr million in The figure does not include the contribution of the small scale garment producers, whose production in 2008 was estimated to be Birr million (CSA). 49

58 Table 25 :Value of Apparel and Clothing (Not Knitted/Crocheted) Imports ( 000 Birr) 5-years 50 Description Average Men s or boys ensembles of other textiles 2,955 11,573 32,823 33,812 76,686 31,570 Men s or boys jackets and blazers of other textiles 16,286 31,851 40,995 31,769 16,123 27,405 Men s or boys trousers, breeches, etc., of cotton 92,641 73,644 77,072 83, ,880 88,004 Men s or boys trousers, breeches of other textiles 18,599 51,662 63,780 67,800 60,624 52,493 Women s or girls ensembles of synthetic fibres 33,765 19,700 20,313 17,741 14,654 21,234 Women s or girls jackets and blazers of other textiles 32,662 28,536 29,951 41,229 63,671 39,210 Men s or boys shirts of other textiles 12,869 24,923 33,455 26,405 31,534 25,837 Women s or girls blouses, shirts, etc., of cotton 33,623 18,970 21,910 20,761 33,530 25,759 Babies garments and clothing accessories of other textiles 33,300 54,929 47,715 35,714 24,962 39,324 Men s or boys garments of other textiles 3,592 21,021 29,024 22,856 34,849 22,268 Shawls, scarves, mufflers, mantillas, veils, etc., of other textiles 9,287 18,267 23,518 28,980 39,778 23,966 Others 160, , , , , ,395 Total Import 450, , , , , ,464 Aggregate Estimate: Total Import (includes apparels both knitted and not knitted/crocheted and not crocheted) 749, , , ,915 1,189, ,977 Value of domestic Production (includes apparels both knitted and not knitted/crocheted and not crocheted) 62,612 80, , , , ,333 Export of apparels knitted or crocheted 3,148 8,147 5,751 31,366 18,169 13,316 Export of apparels not knitted or crocheted 14,746 8,859 7,911 13,717 9,867 11,020 Total export 17,894 17,007 13,662 45,083 28,036 24,336 Estimated apparent consumption 794, ,526 1,203,845 1,260,183 1,712,921 1,167,974 Share of import 94.4% 92.7% 78.4% 72.8% 69.4% 78.9% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Import in 2005 and 2006 commanded over 90% of the aggregate market for wearing apparels. Its share in the following years declined to 69.4% in 2009 as production from domestic establishments started to grow by a substantial amount. In spite of the improvement registered by domestic manufacturing

59 establishments, import still continued to enjoy a higher share of the market. Over the past five years to 2009 its average annual share stood at nearly 79%, justifying a wide market opportunity to exist for local investors in the textile wearing apparels sub-sector. Annex 5 includes additional products falling in this product group for further consideration Other Made-up Textile Articles This textile article group includes products such as blankets, bed linen and spreads, toilet and kitchen linen, mosquito nets, etc., as described in Table 26. There are also domestic industries which produce some of the articles, mainly blankets and bed sheets, both for the domestic and export markets. The export performance of the country in this group appears to be much better than the wearing apparels group described above. The average annual export value of this group stood at Birr 47.5 million; nearly double that of the latter over the five years to Domestic production in value for this group is not available separately; it is aggregated with the other groups of textile products discussed earlier. Table 26: Value of Domestic Production, Exports and Imports of Other Made-up Textile Articles ( 000 Birr) 5-Years Description Average Blankets (excl. electric blankets), etc., of synthetic fibers 33,353 33,353 24,618 22,843 21,222 27,078 Bedspreads (excl. knitted or crocheted) 16,836 30,834 32,665 25,056 11,733 23,425 Mosquito nets of cotton (not knitted or crocheted ) 33, , ,489 9,755 4,128 94,458 Mosquito nets of synthetic fibers (not knitted or crocheted ) 74, , ,942 21,321 82,883 94,230 Others 78, ,204 87,665 91, , ,501 Total import 236, , , , , ,692 Export 25,093 44,620 71,043 45,531 51,289 47,515 Estimated apparent consumption , , , , , ,692 Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Import of mosquito nets of cotton and synthetic fibers is the largest in terms of value among this group, to be followed by blankets, bed spreads and 14 Domestic production included in the other group of apparel products 51

60 tarpaulins. The total import value of mosquito net increased from Birr million in 2005 to Birr million and Birr million in 2006 and 2007, respectively, and then showed a dramatic drop in the following two years. The fall in the recent past could be attributed not to a falling demand perhaps, but might have occurred due to budgetary problems. There is no source that indicates domestic production of mosquito nets. See Annex 6 for other products to be promoted in this group. 5.7 Possibilities of Import Substitution in the Footwear Industry The footwear market in Ethiopia is served both by domestic production and imports. Domestic production includes footwear made up of leather, rubber, plastic and canvas, which are also imported. Ethiopia exports a reasonable number of pairs to the rest of the world as well. The domestic production of footwear articles was estimated to range from 9,577.4 thousand pairs in 2005 to 21,986.5 thousand pairs in 2009 (Table 27), growing at an average annual growth rate of 23.1% over the period. Plastic footwear took the largest production share, estimated to vary between 8,352.5 thousand pairs and 19,708.2 thousand pairs contributing on the average 87.9% of the total domestic production. There were ups and downs in the production of footwear made up of leather and canvas and rubber during the period. The average production reached 1,403.1 thousand pairs in the case of leather footwear, while that of rubber and canvas footwear stood at thousand pairs during the period. Out of the total domestic production, the country exported annually on the average of thousand pairs over the same period. Fluctuation was also noted in the case of import as well. During the five years to 2009 the maximum imported was 21,344.1 thousand pairs in 2006; while the lowest was 12,495.9 thousand pairs in the year Import enjoyed the largest share until 2007 and thereafter its share declined leaving some room for domestic production to enjoy a larger slice of the market. On average import still dominates the market, holding about 56% of total market for footwear. It is now time that potential investors and existing footwear industries think of joining the industry and improving the quality and design of footwear to make best use of this wide market opportunity held by imports. 52

61 Import: Table 27: Quantity of Footwear Produced, Exported and Imported (pairs) 5-Years Description Average Waterproof footwear (not covering the ankle) 78,745 37, , , , ,069 Sport footwear, of rubber or plastics 1,750,634 3,759,986 3,070,356 1,639,110 1,074,705 2,258,958 Footwear, not covering the ankle, of rubber or plastics 11,109,745 12,523,807 9,658,703 9,087,504 8,590,045 10,193,961 Footwear with leather soles and uppers, covering the ankle 1,628 10,663 2,625 1,730 7,596 4,848 Footwear with rubber... Soles, leather uppers, not covering the ankle 96,454 66,339 40,553 42,108 87,588 66,608 Sports footwear, with rubber or plastic soles and textile uppers 1,745,574 2,030,853 2,553,824 2,821,600 1,756,211 2,181,612 Footwear, with leather or composition leather uppers 81,820 65, ,930 76,583 50,612 93,103 Other Footwear, NES 2,934,121 2,849,471 2,000,004 1,088, ,445 1,882,764 Total import 17,798,721 21,344,141 17,636,969 15,203,929 12,495,861 16,895,924 Domestic production: Leather shoes and boots 1,081, ,044 1,287,012 1,748,516 2,052,196 1,403,051 Plastic footwear 8,352,492 6,893,529 8,469,260 15,901,540 19,708,197 11,865,004 Canvas and rubber shoes 143, , , , , ,081 Total domestic production 9,577,376 8,056,545 10,092,844 17,757,441 21,986,474 13,494,136 Export 100, ,687 73, , , ,454 Estimated apparent consumption 27,275,189 29,117,999 27,656,751 32,622,530 34,045,564 30,143,607 Share of import 65.3% 73.3% 63.8% 46.6% 36.7% 56.1% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 5.8 Import Substitution Possibilities in Non-metallic Mineral Sub-sector The non-metallic mineral sub-sector includes products of ceramic, cement and glass origins. Domestic production exists in all the three product groups. The market is further supplemented by import as the supply from domestic 53

62 industries alone does not meet the ever growing demand for the respective products. In the case of cement and stone origin products, the domestic industries contribute the bulk of the products. As indicated in Table 28a, the gross value of the domestic industries was estimated to vary between Birr 1,042.8 million in 2005 and Birr 3,960.5 million in 2009, registering an average annual growth rate of 39.6%, the bulk of which is contributed by cement production. The contribution of import started to catch up with the supply from the domestic sources starting in 2007, though the latter still maintained its domination in the market. The increase in import has been attributed to rising demand by the fast growing construction sector. The government approved the importation of cement to fill the gap.this will continue to prevail until the existing domestic industries start operating in their full capacity and the upcoming ones become fully operational. Table 28a: Value of Domestic Production, Export and Import of Cement & Stone Origin Products ( 000 Birr) 5-Years Description Average Cement clinkers , , ,397 97,110 White Portland cement , , , , ,189 Portland cement (excl. white) 2,024 42, , ,767 1,458, ,412 Other hydraulic cements, etc ,341 56,966 29,107 23,616 Others 23,991 32,834 40,187 50,074 74,415 44,300 Total import 26, ,394 1,260,270 1,586,510 2,008, ,627 Domestic production 1,042,777 1,511,596 2,361,385 2,837,015 3,960,515 2,342,657 Export 7,122 3,291 3,132 5,416 4,822 4,757 Estimated apparent consumption 1,062,612 1,609,699 3,618,523 4,418,109 5,963,696 3,334,527 Share of import 2.5% 6.3% 34.8% 35.9% 33.7% 29.9% 54 Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation The ceramic product group includes products such as wall and floor tiles, ceramic sinks and wash basins, tableware etc. The construction sector is the main driving force for the creation and growth of market demand for these products. There is only one domestic manufacturing establishment that produces different types of ceramic products. Its capacity and the range of products it currently produces are not sufficient to meet the growing market demand. Thus, the country will have to import ceramic products to fill the gap. As shown in Table 28b, the domestic production of ceramic and clay products ranged in value from Birr million to Birr million over

63 the last five years, while import varied between Birr 99.4 million and Birr million over the same period. Import appears to be growing faster than the growth rate recorded by domestic establishments. Table 28b: Value of Domestic Production, Export and Import of Ceramic Products( 000 Birr) 5-Years Description Average Refractory bricks, blocks, tiles, etc. 1,345 3,779 23,806 14,095 18,994 12,404 Glazed tiles, cubes and similar articles, for mosaics 7,731 12,893 26,715 31,180 45,334 24,771 Glazed ceramic flags and paving, hearth or wall tiles, etc. 35,898 40,832 49,237 61,101 92,195 55,853 Ceramic sinks, wash basins, baths... and other sanitary fixtures 14,465 15,443 25,156 38,709 62,302 31,215 Tableware and kitchenware, of porcelain or china 17,101 17,345 18,092 14,405 22,105 17,810 Others ,516 38,277 49,416 56,167 36,692 Total import 99, , , , , ,795 Domestic production 137, , , , , ,046 Export Estimated apparent consumption , , , , , ,550 Share of import 41.9% 43.2% 49.6% 42.7% 44.2% 44.4% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation Export appears to be negligible and the trade balance is in favor of imports. The country consumed ceramic and clay products valued at Birr million in 2005 and Birr million in 2009, corresponding to an average annual growth rate of 30.1%. The future market is expected to move at this rate and import will continue to hold about 44% of the market unless new investment and/or expansion become operational in the near future. The share of the domestic glass manufacturing establishments in the market for glass and glass products appears to be much lower than import. It managed to serve about 20% of the total market over the last five years, while import took the balance. As indicated in Table 28c, import of glass and glass products rose from a value of Birr million in 2005 to Birr317.6 million in 2009, corresponding to a yearly average growth rate of 24.3%. The domestic production did not show any appreciable growth over the period. 15 Includes the contribution of small scale manufacturing establishments 55

64 Non-wired and unworked sheet glasses of different types, as shown in the table, are the major imports among this group. Their aggregate value over the period stood in the range of Birr 27.6 million and Birr 80.2 million, representing on the average 25% of total import of glass and glass products. Glass bottles and flasks are the next important import products among the group, enjoying an average share of 20% of the total market for glass and glass products. Table 28c: Value of Domestic Production, Export and Import of Glass and Glass Products ( 000 Birr) 5-Years Description Average Unworked drawn/blown glass (excluding coloured, opacified, etc.) 2,064 3,230 14,036 10,444 12,457 8,446 Non-wired unworked sheets of float/ground/polished glass, with absorbent layer 2,674 13,375 20,037 21,715 25,489 16,658 Non-wired unworked sheets of float/ground/polished glass coloured... 12,635 9,298 9,798 12,086 20,058 12,775 Non-wired unworked sheets of float/ground/polished glass 10,193 16,750 10,086 21,793 22,191 16,203 Other carboys, bottles, flasks,jars,...a kind used for packing 25,005 21,571 53,839 98,923 78,805 55,629 Drinking glasses (excl. Of lead crystal) 23,621 27,844 29, ,298 Slivers/yarn of glass fibers; chopped strands glass fibers of length >50mm 493 1,771 3,490 5,251 36,650 9,531 Others 56,388 45,596 62, , ,921 51,847 Total import 133, , , , , ,856 Domestic production 37,584 68,863 48,863 51,822 57,679 52,962 Export Estimated apparent consumption 170, , , , , ,731 Share of import 78.0% 67.0% 80.6% 84.7% 84.7% 80.3% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 5.9 Investment Possibilities in the Iron and Steel Industries 56 Iron and steel industries have prominent places in all economic sectors of a country. The iron and steel sector manufactures the steel used in the production of thousands of manufactured products, ranging from toasters to automobiles

65 to defense applications. Steel is also a key input into the development of infrastructure such as office buildings and bridges. Construction, automotive, and industrial equipment account for a large share of iron and steel consumption around the globe. Facilities currently operating around the world use one of two processes, which utilize different raw materials and technologies to produce steel. 1. Integrated steel mills use a blast furnace to produce iron from iron ore, coke, and fluxing agents. A basic oxygen furnace (BOF) is then used to convert the molten iron, along with up to 30% steel scrap, into refined steel. 2. Mini-mills use an electric arc furnace (EAF) to melt steel scrap and limited amounts of other iron-bearing materials to produce new steel. The country regularly imports basic iron and steel produced using any one of the above processes and products from iron and steel product manufacturers. Domestic industries also augment some portion of the country s demand for iron and steel and products thereof. For the purpose of providing some directions to promote import substitution products from this sector, the products are grouped and analyzed as follows: basic iron and steel; articles of iron and steel; iron and steel tools and implements; and machine parts and accessories Basic Iron and Steel Some of the imports in this product group are used as raw materials for the production of articles of iron and steel and the rest would be utilized mainly in the construction sector. Currently a total of 15 manufacturing industries (CSA, 2009) are engaged in the production of basic iron and steel. The combined gross value of production of these industries ranged from Birr 1,085.3 million in 2005 to Birr 1,253.4 million in 2009, while import during the same period varied between Birr 2,114.1 million and 4,456.4 million, respectively(table 29). The country registered some exports as well, amounting on the average to Birr 14.3 million per annum. The size of the market for basic iron and steel in the country thus stood in the range of Birr 3,181.7 million and Birr 5,707.2 million over the same period. Import took an average share of about 73% of the total market (Table 29). This is expected to increase during the next five years as a result of implementation of the GTP unless local industries take strict measures to expand and rehabilitate their production facilities and new investments are promoted to take advantage of the growing demand. As can be noted from the table, there are wide ranges of products to be promoted for import substitution. 57

66 Table 29: Value of Domestic Production, Export and Import of Basic Iron & Steel ( 000 Birr) 58 5-Years Description Average Semi-products of iron or non-alloy steel, >=0.25% carbon 54,883 38,197 19,101 62,804 43,564 43,710 Flat/hot-rolled iron/steel, in coils, width >=600mm, not pickled,<3mm thick 228, , , , , ,898 Flat/cold-rolled iron/steel, in coils, width >=600mm, >1mm but <3mm thick 33,020 49,445 38, , ,217 69,343 Flat/cold-rolled iron/steel, in coils, width >=600mm, >=0.5mm but <=1mm thick 11, ,287 71, ,035 50,352 Flat/cold-rolled iron/steel, in coils, width >=600mm, < 0.5mm thick 94, , , , , ,296 Flat/cold-rolled iron/non-alloy steel, width>=600mm,not clad, plated/ coated 56,234 49,009 58,934 71,449 20,573 51,240 Flat-rolld iron/steel, wid.>=600mm,plated with zinc(exc. electroplated)corrugated 20,548 4,730 2,505 8, ,856 45,641 Flat-rolled iron/steel, wid.>=600mm,zinc plated/ coated(exc. electroplated) 339, , , , , ,017 Hot rolled iron/steel bars &rods,in coils, circular cross-sect<14mm diameter 130,940 64, , , , ,625 Hot-rolled iron/non-alloy steel bars & rods, in irregularly wound coils 30,611 91,424 63,104 82,013 56,108 64,652 Iron or non-alloy steel bars and rods, forged, 6,137 84,014 51,943 52, ,497 68,860 Iron/steel bars & rods, hot rolled, twisted/with deformed from rolling proc. 445, ,761 1,076,178 1,269,079 1,356, ,811 Iron/steel bars and rods, hot-rolled, hot-drawn or hot extruded 36,718 27,388 26, ,750 76,867 56,686 Rolled products of stainless steel, >=600mm wide ,098 52, ,557 73,213 65,904 Others 625, , ,296 1,125,522 1,404, ,929 Total import 2,114,134 2,039,373 3,445,982 4,258,926 4,456,407 3,262,964 Domestic Production 1,085,284 1,374,069 1,473,048 1,081,328 1,253,432 1,253,432 Export 17,753 7,334 6,910 36,907 2,606 14,302 Estimated apparent consumption 3,181,665 3,406,108 4,912,119 5,303,347 5,707,234 4,502,095 Share of import 66.4% 59.9% 70.2% 80.3% 78.1% 72.5% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation In view of the size of the market, potential investors have already shown some interest to invest in the sector. According to EIA, a total of 61 projects

67 received license, of which four are under implementation and one already started operation over the five years to The status of the remaining majority is not known so far. Nevertheless, there still remains wide market opportunity to tap. Additional products are provided in Annex 7 for further consideration Articles of Iron and Steel The estimated apparent consumption of all products in this group jumped from Birr 1,334.8 million in 2005 to Birr 5,654.7 million in 2009, corresponding to an average annual increase of 43.5% (see Table 30). The increment was largely attributed to increased import, where in absolute value it increased from a value of Birr 1,053.1 million to Birr 4,059.6 million during the same period, registering an average annual growth rate of nearly 40%. Table 30a: Value of Domestic Production, Export and Import of Articles of Iron & Steel ( 000 Birr) 5-Years Description Average Tubes, pipes and hollow profiles, of cast iron 24,934 43,509 8,748 64,651 34,746 35,318 Tubes and pipes, welded, circular, of other alloy steel 61,338 50,895 73, ,642 75,707 75,790 Tubes, pipes and hollow profiles, riveted, of iron or steel 162, , , , , ,582 Towers and lattice masts of iron or steel 87,492 50, , ,264 1,089, ,328 Structures iron or steel of a kind used for fencings 188, , , , , ,093 Nails, tacks, drawing pins, corrugated nails... of iron or steel 25,241 31,572 20,595 59,949 73,478 42,167 Screws and bolts of iron or steel 39,318 39,747 92,177 65,358 93,914 66,103 Leaf-springs and leaves therefor, of iron or steel 17,124 28,580 22,769 25,908 29,832 24,843 Table, kitchen or household articles... of iron or steel, enameled 15,836 22,913 25,066 19,004 21,519 20,868 Vermin traps and similar application of iron/steel 12,661 35,076 93,625 84, ,683 68,054 Others 417, , , ,489 1,420, ,014 Total import 1,053,144 1,068,615 1,509,703 2,209,756 4,059,584 1,980,160 Domestic production 282, , ,075 1,088,643 1,597, ,466 Export 954 1, ,181 2,535 1,338 Estimated apparent consumption 16 1,334,763 1,457,763 1,992,013 3,297,218 5,654,689 2,747,289 Share of import 78.9% 73.3% 75.8% 67.0% 71.8% 72.1% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 16 Includes the contribution of small-scale manufacturing establishments 59

68 Among the different products that make up this group, products like pipes, tubes and hollow profiles of different size and type, iron or steel structure and towers and lattice masts took the largest share in terms of value. For instance, the average import value of the last two products stood at Birr million and Birr million, respectively, between 2005 and The demand for these and other products in the group is expected to continue growing over the GTP period, attracting potential investors to join the industry. Annex 8 provides additional products worth promoting from the group. Imported products, described in Table 30b also belong to this group. There are wide market opportunities to be tapped by potential investors in this group as on the average import serves about 42% of the market. Table 30b: Value of Domestic Production and Import of Miscellaneous Articles of Base Metal ( 000 Birr) 5-Years Description Average Padlocks of base metal 21,433 16,354 18,892 10,703 30,078 19,492 Locks for furniture of base metal 8,396 10,739 9,419 10,441 13,141 10,427 Locks of base metal 13,144 13,186 14,919 21,953 32,501 19,140 Hinges of base metal 8,760 11,541 10,944 13,662 22,279 13,437 Mountings, fittings, etc., for buildings, of base metal 3,632 5,049 6,682 15,722 14,212 9,059 Mountings, fittings, etc., for furniture, of base metal 3,433 4,866 5,034 6,764 6,592 5,338 Mountings, fittings, etc., for doors, staircases, of base metal 3,722 11,424 14,353 30,632 19,207 15,867 Crown corks of base metal 11,735 21,167 28,152 40,146 69,762 34,192 Stoppers, caps and lids (excl. crown corks)... of base metal 7,679 6,853 3,762 7,771 9,718 7,156 Coated electrodes of base metal, for electric arc-welding 11,911 27,677 28,458 32,131 73,810 34,798 Others ,874 39,061 77,819 68,268 48,490 Total import 117, , , , , ,398 Domestic production 160, , , , , ,181 Estimated apparent consumption 277, , , , , ,579 Share of import 42.2% 49.3% 34.1% 42.5% 44.8% 42.3% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 60

69 5.9.3 Iron and Steel Tools and Implements Imports of hand tools, cutlery and general hardware were estimated to vary between Birr million in 2005 and Birr million in The domestic production, excluding production from small scale manufacturing enterprises 17, over the same period was nearly comparable as can be seen in Table 31. The size of the market for the products falling in this group ranged in terms of value from Birr million to Birr million over the period under review, registering an average annual growth rate of 13.8%. Overall import and domestic production, including the small scale establishments contribution, appear to serve the market equally. That means about 50% of the market is readily available for potential investors. Tools such as agricultural and forestry hand tools and rock drilling and earth boring tools are among the products to be promoted for import substitution. Table 31: Value of Domestic Production and Import of Cutlery, Hand Tools and General Hardware ( 000 Birr) 5-Years Description Average Mattocks, picks, hoes and rakes 6,873 2,752 5,579 3,105 13,277 6,317 Scythes... timber wedges and other agricultural/forestry hand tools 12,312 14,907 14,456 24,889 15,346 16,382 Hammers and sledge hammers 6,101 9,132 6,948 8,694 17,090 9,593 Rock drilling/earth boring tools (excluding working part of cermets);parts 2,605 5,836 4,206 5,018 24,362 8,405 Interchangeable tools for hand or machine-tools 14,561 9,738 8,287 27,273 20,443 16,060 Others , , , , ,062 Total import 133, , , , , ,821 Domestic production 134, , , , , ,027 Estimated apparent consumption 268, , , , , ,848 Share of import Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation 17 Production figures for some years are not available and production has been comparably small in those years where data is available. 61

70 5.9.4 Machine Parts and Accessories Products of the automotive industry and industrial equipment frequently consume parts and accessories to replace broken and worn out components. These parts and components are produced from iron and steel. Parts and accessories requirements for vehicles, machinery and mechanical appliances appear to be growing every year. For instance, the country s import of machinery and mechanical appliances alone, including parts and accessories, increased from Birr 4,249.8 million in 2005 to Birr 11,198.5 in 2009, corresponding to an average annual growth rate of 27.4%. Some import figures on selected parts and accessories are compiled just to indicate the size of the market for the products. These are summarized in Table 32. The aggregate import value of these products ranged from Birr 153 million in 2005 to Birr in The country would save a sizable foreign exchange if some of these parts and accessories are locally produced. According to discussion with experts from the Ethiopian Metal Industry Development Institute, domestic capacity already exists within the Ministry of Defense to produce some of the parts and accessories. Manufacturing establishments which are suffering from chronic shortage of parts and accessories can access at least some from domestic sources. According to the same source a committee has been already formed to promote the production of parts and accessories using this capacity for the existing industries. The existing manufacturing industries in the leather, textile etc. sub-sectors are currently requested to submit the type and quantity of parts and accessories they require for their machinery and equipment. Other potential investors can be engaged in a number of options to produce parts and accessories of the above types. 62

71 Table 32: Value of Import of Selected Parts and Accessories ( 000 Birr) 5-Years Description Average Parts of pumps for liquids 11,236 12,873 16,810 23,677 18,616 16,642 Parts of air /vacuum pumps of air compressor of fans etc. 5,646 7,723 6,299 6,539 13,843 8,010 Parts for refrigerators,freezers... Heat-pump,household types 5,726 7,173 2,901 9,148 8,880 6,766 Parts of non-domestic heating / cooling equipment 1,732 6,023 3,043 7,739 27,842 9,276 Parts of lift, skip hoists or escalators 4,053 6,287 9,537 10,409 13,639 8,785 Other parts of soil preparation /cultivation machinery... ( ) 3,084 2,875 5,635 9,688 10,633 6,383 Parts of milling, etc., machinery 17,224 13,441 13,617 14,551 11,036 13,973 Parts of industrial machinery for food and drink manufacture 13,067 24,299 29, , , ,941 Parts of machinery for making/ finishing paper or paperboard ,390 27,606 6,512 Parts of machinery for making-up paper pulp... etc. 1, ,454 1,453 10,991 3,435 Parts and accessories of weaving machines (looms) 5,528 5,708 9,124 8,746 9,289 7,679 Parts of machinery for preparing... leather, making footwear, etc. 3,948 5,727 6,261 12,985 14,333 8,651 Parts of metal-rolling mills (excl. rolls) 13,660 12,919 22,839 64,562 11,773 25,151 Parts for grinding and crushing machinery 20,942 24,923 51,451 70, ,097 78,903 Parts of machinery for working rubber or plastics, etc. 8,840 12,530 7,376 25,565 13,621 13,586 Moulds for metal or metal carbides (excl. injection or compression) 1,303 2,638 13,607 6,896 15,551 7,999 Injection or compression type moulds for rubber or plastics 17,616 15,894 23,653 19,641 32,985 21,958 Moulds for rubber or plastics (excl. injection of compression) 17,157 17,958 28,582 18,806 26,018 21,704 Total 153, , , , , ,351 Source: Ethiopian Revenue and Customs Authority and own calculation 63

72 5.10 Import Substitution Possibilities in Wood and Wood Products The domestic wood industries are serving both the local and international markets. Their production, excluding furniture, was estimated to value ranging from Birr 62.8 million in 2005 to Birr million, registering an average annual growth rate of 27.1 %( Table 33). Out of this, products valued about Birr 19.3 million were exported, while the balance, supplemented with import, was consumed in the local market. The contribution of import was significant during the period. Total import, excluding furniture, increased from Birr million in 2005 to Birr million in 2009, corresponding to a yearly average growth rate of 30.3%. Although import showed a continuous increaseover the period, there was a tendency to shift from one wood product to another wood product. For instance, in 2009 some wood products disappeared from the market to be replaced other wood products. In general import continued to command the market, covering on the average about 78% of the domestic market. Table 33: Value of Domestic Production, Export and Import of Wood and Wood Products ( 000 Birr) 64 5-Years Description Average Non-coniferous hoop wood; split poles, etc.; wooden sticks, etc.; chip wood ,017 12,057 84,358 20,091 Coniferous wood sawn or chipped lengthwise, sliced or peeled, >6mm thick 43,372 50,314 93,177 95, ,378 79,223 Veneer sheets and sheets for plywood and other wood, =<6mm thick 3,644 3,142 4,825 3,964 3,358 3,786 Oriented strand board and wafer board,of wood: unworked/ not further worked 11,256 11,745 4, ,691 Oriented strand board & wafer board of wood:(excluding ) 3,215 5,610 11,690 1, ,391 Other particle board of wood : 7,586 11,111 3, ,549 Plywood, each ply =<6mm thick 60,517 82,792 76,308 11, ,220 Doors and their frames and thresholds, of wood 2,291 3,681 9,591 15,777 6,587 7,585 Parquet panels, of wood 1,619 1,146 2, ,107 Others 36,073 77,869 93, , , ,417 Total import 169, , , , , ,061 Domestic production 62,827 77,473 97, , , ,677 Export 715 1,909 20,727 30,053 42,985 19,278 Estimated apparent consumption 231, , , , , ,460 Share of import 73.2% 76.6% 79.8% 78.1% 80.2% 78.3% Source: Ethiopian Revenue and Customs Authority, Central Statistical Agency and own estimate and calculation

73 5.11 Summary of Selected Commodities for Possible Import Substitution The external trade statistics of the country provides import data for over 40,000 different types of products for a single year. Thus, it appears difficult and unmanageable to entertain all products for import substitution. One has to be selective in proposing those for import substitution. In the previous sections some indications on the size of the market for selected commodity groups and the share of import have been provided to guide potential investors from which to select for promotion. This section provides a summary of the size of the market of some potential commodities and their share in the market segment they serve to facilitate potential investors to select from for further consideration for investment. These are summarized in Table

74 Table 34: Summary of Selected Commodities for Promotion with Their Estimated Market Size and Share 66 Food Sub-sector Description 5-year Average Value ( 000 Birr) Estimated value of dairy products market absorbed (apparent consumption) 173,312 Market s h a r e (%) Milk and cream in solid forms of =<1.5% fat imported 45, Milk and cream in solid forms of >1.5% fat, unsweetened imported 50, Estimated value of wheat market absorbed (apparent consumption) 3,399,553 Durum wheat imported 545, Spelt, common wheat and meslin imported 210, Estimated value of grain flour market absorbed (apparent consumption) 937,761 Wheat or meslin flour imported 75, Estimated value of barley malt market absorbed (apparent consumption) 39,362 Barley malt imported 24, Estimated value of vegetable & animal oils & fats market absorbed (apparent consumption) 1,606,431 Edible soya bean oil imported 96, Edible palm oilimported 1,041, Edible linseed oilimported 51, Chemical Sub-sector Estimated value of inorganic chemicals market absorbed (apparent consumption) 290,667 Carbon (carbon blacks and other forms of carbon) 15, Sodium hydroxide (caustic soda) solidimported 27, Titanium oxidesimported 20, Magnesium chlorideimported 22, Estimated value of organic chemicals market absorbed (apparent consumption) 329,378 Dioctylorthophthalates imported 19, Isocyanates imported 53, Penicillin and derivatives with a penicillin acid structure; saltsimported 40, Estimated value of pharmaceutical products market absorbed (apparent consumption) 2,203,731 Vaccines for human medicineimported 306, Medicaments of other antibioticsimported, for retail sale 68, Medicaments of other hormonesimported, for retail sale 286,

75 Other medicaments of mixed/unmixed products,(excluding anesthetics)imported 1,021, Chemical contraceptive preparations based on hormones or spermicidesimported 135, Estimated value of Fertilizer market absorbed (apparent consumption) 1,930,868 Ureaimported 492, Diammoniumhydrogenorthophosphate (diammonium phosphate) imported 569, Ammonium dihydrogen or phosphate (monoammonium phosphate)imported 709, Estimated value of Tanning/dyeing extract and pigment/paints market absorbed (apparent consumption) 449,990 Synthetic organic tanning substancesimported 8, Inorganic tanning substances; tanning preparations 8, Pigments and preparations based thereonimported 18, Paints and varnishes, in a non-aqueous medium 18, Printing ink, whether or not concentrated or solid (excl. Black) imported 13, Estimated value of soap, organic surface active agents and washing preparations market absorbed (apparent consumption) 1,052,336 Soap and organic surface-active products in bars, etc., for toilet use 28, Soap and organic surface-active products in bars, etc. 119, Soap in powder form imported 141, Washing preparations (detergents) imported 35, Plastic & Rubber Products Estimated value of plastic products market absorbed (apparent consumption) 1,606,298 Tubes, pipes and hoses, rigid, of other plastics 44, Tubes, pipes and hoses, not reinforced, with fittings attached 23, Other tubes, pipes and hoses 46, Fittings, for tubes, pipes and hoses, of plastic imported 38, Floor...coverings of polymers of vinyl chloride 37, Plates..., of polymers of ethylene, not reinforced, etc. imported 27, Plates..., of polymers of propylene, not reinforced, etc. imported 25, Sacks and bags (incl. Cones) of other plastics (excl. Ethylene) imported 23, Estimated value of rubber products market absorbed (apparent consumption) 1,272,654 New pneumatic tires, of rubber of a kind used on motor cars imported 185, New pneumatic tires, of rubber of a kind used on buses or lorries imported 517, Gaskets, washers and other seals, of vulcanized rubber imported 83,

76 68 Paper and Paper Products Estimated value of paper and paper products market absorbed (apparent consumption) 1,069,691 Paper & paperboard, not contain..fibres: weight >=40g/m 2 but<150g/m 2 in sheets imported 134, Other paper & paperboard...weight >=40g/m 2 but <150g/m 2 32, Toilet... Similar paper, in rolls or sheets imported 26, Other paper and paperboard for writing, printing 39, Exercise-books imported 101, Textile Sub-sector Estimated value of man-made filaments market absorbed (apparent consumption) 1,561,072 Woven fabrics of synthetic yarn >=85% textured/non-textured polyester filament imported 574, Estimated value apparel knitted and not knitted or crocheted and not crocheted market absorbed (apparent consumption) 1,167,974 T-shirts, singlet s, etc., of other textiles, knitted or crocheted imported 109, Track-suits of synthetic fibers & other textiles, knitted or crocheted imported 32, Men s or boys ensembles of other textiles 31, Men s or boys jackets and blazers of other textiles 27, Men s or boys trousers, breeches, etc., of cotton imported 88, Men s or boys trousers, breeches of other textiles 52, Women s or girls jackets and blazers of other textiles 39, Babies garments and clothing accessories of other textiles 39, Estimated value other made-up textile articles market absorbed (apparent consumption) 347,692 Blankets (excl. electric blankets), etc., of synthetic fibers imported 27, Bedspreads (excl. knitted or crocheted) imported 23, Mosquito nets of cotton (not knitted or crocheted ) imported 94, Mosquito nets of synthetic fibers (not knitted or crocheted ) imported 94, Footwear Estimated number of pairs of foot wears market absorbed (apparent consumption) 30,143,607 Sport footwear, of rubber or plastics imported 2,258, Footwear, not covering the ankle, of rubber or plastics imported 10,193, Sports footwear, with rubber or plastic soles and textile uppers imported 2,181, Ceramic Products Estimated value of ceramic products market absorbed (apparent consumption) 420,550 Glazed tiles, cubes and similar articles, for mosaics imported 24,

77 Glazed ceramic flags and paving, hearth or wall tiles, etc. 55, Ceramic sinks, wash basins, baths... and other sanitary fixtures 31, Tableware and kitchenware, of porcelain or china imported 24, Glass and Glass products Estimated value of glass and glass products market absorbed (apparent consumption) 268,731 Non-wired unworked sheets of float/ground/polished glass, with absorbent layer imported 16, Non-wired unworked sheets of float/ground/polished glass coloured... imported 12, Non-wired unworked sheets of float/ground/polished glass 16, Other carboys, bottles, flasks,jars,...a kind used for packing 55, Drinking glasses (excl. Of lead crystal) imported 16, Iron and Steel Products Estimated value of basic iron and steel market absorbed (apparent consumption) 4,502,095 Flat/hot-rolled iron/steel, in coils, width >=600mm, not pickled,<3mm thick imported 260, Flat/cold-rolled iron/steel, in coils, width >=600mm, >1mm but <3mm thick imported 69, Flat/cold-rolled iron/steel, in coils, width >=600mm, >=0.5mm but <=1mm thick imported 50, Flat/cold-rolled iron/steel, in coils, width >=600mm, < 0.5mm thick imported 162, Flat/cold-rolled iron/non-alloy steel, width>=600mm,not clad, plated/coated 51, Flat-rolled iron/steel, wid.>=600mm,plated with zinc(exc. electroplated)corrugated 45, Flat-rolled iron/steel, wid.>=600mm,zinc plated/coated(exc. electroplated) 339, Hot rolled iron/steel bars &rods,in coils, circular crosssect<14mm diameter imported 143, Hot-rolled iron/non-alloy steel bars & rods in irregularly wound coils 64, Iron or non-alloy steel bars and rods, forged, imported 68, Iron/steel bars & rods, hot rolled, twisted/with deformed from rolling proc. imported 882, Iron/steel bars and rods, hot-rolled, hot-drawn or hot extruded 56, Estimated value of articles of iron and steel market absorbed (apparent consumption) 2,747,289 Tubes, pipes and hollow profiles, of cast iron imported 35, Seamless iron/steel casing...(excluding drill pipe) kind used in oil/ gas drilling imported 26, Tubes and pipes, welded, circular, of other alloy steel 75, Tubes/pipes/profiles, welded, of iron/steel 28, Tubes, pipes and hollow profiles, riveted, of iron or steel 201,

78 Cast tube or pipe fittings of iron, or steel imported 35, Tube or pipe fittings of iron or steel (excl. stainless) 32, Towers and lattice masts of iron or steel imported 379, Structures iron or steel of a kind used for fencings imported 365, Nails, tacks, drawing pins, corrugated nails... of iron or steel imported 42, Screws and bolts of iron or steel 66, Vermin traps and similar application of iron/steel 68, Estimated value of other articles of base metal market absorbed (apparent consumption) 513,579 Padlocks of base metal imported 19, Locks of base metal, nes imported 19, Hinges of base metal imported 13, Mountings, fittings, etc, for doors, staircases, of base metal imported 15, Crown corks of base metal imported 34, Coated electrodes of base metal, for electric arc-welding imported 34, Estimated value of cutlery, hand tools and general hardware market absorbed (apparent consumption) 348,848 Scythes... timber wedges and other agricultural/forestry hand tools imported 16, Hammers and sledge hammers imported 9, Rock drilling/earth boring tools(excluding with working part of cermets);parts imported 8, Interchangeable tools for hand or machine-tools 16, Parts and Accessories Estimated value of parts and accessories market absorbed (apparent consumption) 719,622 Parts for boring or sinking machinery of subheading or imported 141, Parts of machinery of 84.26, and , Parts of industrial machinery for food and drink manufacture 118, Parts of machinery of imported 78, Wood and Wood Products Estimated value of wood and wood product market absorbed (apparent consumption) 397,460 Non-coniferous hoop wood; split poles, etc.; wooden sticks, etc.; chip wood imported 20, Coniferous wood sawn or chipped lengthwise, sliced or peeled, >6mm thick imported 79, Plywood, each ply =<6mm thick 46, Doors and their frames and thresholds, of wood imported 7,

79 Some products from the above groups are selected for a value chain analysis to identify the functions of major actors in the chain and the constraints that stakeholders need to address to facilitate their promotion as import substituting products. The criteria used for selecting the commodities for a value chain analysis are basically divided into four categories, viz., growth potential and competitiveness, poverty reduction potential and social benefits, prospects of success and outreach/targeting. Details of the criteria under each category include the following: 1) Growth potential and competitiveness: Comparative advantages in terms of potential domestic resource; Potential market opportunities in national and export markets (Existence of unmet/unsatisfied market demand); Market competitiveness of the commodity; Business experience of chain actors; Existence of lead organization for growth of market for commodity; Current market share of the commodity; Chain actors leadership skills; Availability of basic necessary infrastructures for chain actors etc; Scope for value addition through processing or product improvement. 2) Poverty reduction potential, social benefits: Potential for income creation; Potential for new employment creation; Relevance to the poor and poverty reduction policy of the country etc. Existence of technical knowledge among men & women on how effectively to produce the commodity; Environmental sustainability of the commodity; Social inclusion of women, the poor and the disadvantaged in the chain etc. 71

80 3) Prospects for success: Conducive business environment (policy, government support etc.); Own initiatives and commitment of value chain partners; Existence of support providers and their roles in the growth of the production of the commodity and its market; Existence of business services ( transporters, technical support, training service providers, credit providers etc) for the commodity; Commodity is in the government s prioritized development subsector etc. 4) Targeting/Outreach: Number of enterprises engaged at different stages of the value chain; Regional coverage; Potential forward/backward linkages among large and small enterprise; Interest to potential investors to invest in the sector etc. The selection process was originally planned to be undertaken in consultation with key actors drawn from the private and the public sectors and other knowledgeable stakeholders. However, due to lack of willingness to share information among private business operators and the inconvenience of timing for some public officials, the above criteria were not fully utilized. Instead the consultants used their own judgment by assessing the short listed products against the above criteria to select 6 10 products for promotion as agreed with PSD Hub and mainly considered the size of the market and product s marketability, which remain in most instances as core elements for project decision. Accordingly among the products described in Table 34 above ten commodities are selected based on the above criteria for a detailed value chain upgrading strategy for import substitution and are summarized in the matrix below (Table 35). 72

81 Table 35: Brief Summary of the Rational for Selecting Ten Commodities for Promotion Selection Criteria Prospects of success Targeting/outreach Growth potential and competitiveness Poverty reduction potential, social benefits Commodities for Promotion - Wide regional coverage; - Attractive investment environment exists (This is common to all); - Product has strong potential for income creation, especially for smallholder farmers; - Strong livestock resource potential exists; Dairy Product (Milk) - High potential for creating a strong backward and forward linkage; - Market is dependable and growing; - The livestock sector is the priority area of the government; - Highly relevant to the poor; - Lead chain actors exist; - Technical knowledge exists etc. - Support providers exist; - Potentially high scope for value addition and product improvement etc. - Wide wheat growing areas exist; - Established support providers exist; - Income creation potential for smallholder farmers; Durum Wheat - Second largest in terms of area in sub- Saharan region of Africa; - Strong backward & forward linkage exists; - Priority area of the government etc. - Highly relevant to the poor; - Fast growing market exists; - Product contributes to employment creation; - Serves as a major input for end products such as bread, pasta, macaroni etc. - Commodity is environmentally sustainable in selected areas of the country; - High potential in engaging women; etc. - Creates potential interest to investors provided commodity 2 and 3 are promoted in the required scale etc. - Commodity falls in priority sub-sector of the government; - Employment creation potential exists; 3. Wheat Flour - Growing urban market opportunity at household and industrial level exists; - Technical knowledge exists; - Technology widely spread; - Product is environmentally friendly. - Lead organization exists; - Long year business experience exists etc. 73

82 74 Table 35 continued. Prospects of success Targeting/outreach Selection Criteria Growth potential and competitiveness Poverty reduction potential, social benefits Commodities for Promotion - Product has income creation capacity to smallholder farmers; 4. Sesame Seed ( Edible Oil) - High agricultural potential exists; - Highly relevant to the poor; - Attractive domestic and export market exists; - Technical knowledge available; - Lead chain actors exist; - Product is friendly to environment; - Support providers existing in major producing areas; - Commodity is the priority of the government; - Business service providers exist etc. - High potential for forward/backward linkages among chain actors; - Attractive to potential investors in view of the existing market potential of the product etc. - Product has high potential to substitute edible oil import; - Potential to include women and the poor both in up and down stream of the value chain etc. - Basic necessary infrastructure available in the main production areas etc. - Strong income creation capacity to smallholder farmers; - High market potential exists both in domestic and global markets; 5. Textile sub-sector: Cotton; - Highly relevant to the poor and to employment creation; - Strong comparative advantage exists; Fabrics; and - Lead organizations exist; - Technical knowledge available; Garment - Support providers exist; - It is among the government s prioritized development subsector; - Business service providers exist etc. - Number of enterprises at different stages of the value is growing; - Strong backward and forward linkage exist etc. - Potential to include women and the poor both in up and down stream of the value chain etc. - Basic and necessary infrastructure exists in main production areas; - Wide scope exists for value addition cotton yarn, cotton fabrics, apparels from cotton fabrics etc. - Highly relevant to the poor and to employment creation; - High market potential exists both in domestic and global markets; 6. Leather and leather Products (Footwear) - Technical knowledge available; - Strong comparative advantage exists; - Support providers exist; - It is among the government s prioritized development subsector; - Business service providers exist etc. - Number of enterprises at different stages of the value is growing; - Strong backward and forward linkage exist etc. - Lead organizations exist; - Basic and necessary infrastructure exists in main production areas; - Wide scope exists for value addition Leather shoes, leather garment, bags etc.

83 Table 35 continued. Selection Criteria Growth potential and competitiveness Poverty reduction potential, social benefits Prospects of success Targeting/outreach Commodities for Promotion - Technical knowledge exists; 7. Soap and Detergent - Wide and growing market opportunity throughout the country; - Contributes to employment creation, especially relevant to the poor farmers - It falls in the priority sector of the government five year GTP of the government - Existing manufacturing establishments are penetrating the domestic market and have great potential to substitute import. - Strong comparative advantage raw material for production of soap and detergent exist locally. - Local capacity exists for production of some parts and accessories; Parts and Accessories - The automotive and the manufacturing industries frequently require parts and accessories; - This product is also a priority of the government - Attractive to investors in the automotive industry. - Has wide and growing market. 75

84

85 CHAPTER SIX MECHANISMS FOR INCREASING DOMESTIC PRODUCTION OF IMPORTED GOODS Almost all existing manufacturing establishments operating in the country are producing goods that could substitute or supplement imported goods. In fact when a new manufacturing investment takes place, its products will eventually end up competing with its import counterpart. These manufacturing establishments always strive to increase their production as long as their products are marketable. However, their chance of staying in the market depends on two factors. The first factor that determines their survival is their competitive strength both in terms of product quality and cost of production. Some recent studies of the World Bank concluded that the overall aggregate total factor productivity in the Ethiopian manufacturing industries is lower than it is in other developing countries. This is one proximate cause of lack of competitiveness of Ethiopian manufacturers in both product quality and cost of production. Manufacturing establishments that are competing with imports thus need to improve their productivity. Secondly, the idea of import substitution refers to a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports with locally produced substitutes. This often involves government subsidies and high tariff barriers and non-tariff barriers to protect local industries. Import substitution can also be taken as a policy strategy, e.g. as an attempt to utilize underused capacities, reduce regional unemployment or protect infant industries. This form of economic protectionism has helped some countries to industrialize in the past, (such as South Korea and Taiwan) but many studies suggest that these steps can no longer be applicable in a globally linked market economy and are destined to bring economic risks, most notably potential economic inefficiencies, uneconomical use of available resources, and ultimately lead to higher prices. The economic policy of the country is in favor of free trade and marketoriented development. The promotion of import substituting manufacturing industries through the application of economic protectionism does not appear to be a proper mechanism to be considered in the country. As mentioned earlier existing manufacturers are still engaged in the production of imported goods and new manufacturers are coming up with projects having import substituting character. Most new investments in the manufacturing sector serve the market with products substitutable with imported ones. The objective here should be to encourage domestic industries to increase their volume of 77

86 production to bring meaningful impacts on the trade balance of the country. Some options that seek the attention of the government could be suggested to promote import substitution without applying economic protection in its strict sense. Brief highlights and descriptions of the options to be considered in this respect are provided as follows: 6.1 Revising Tariff Structures There are instances where the same import tariffs are applied on some imported finished products and imported raw material which is used to produce the finished products.for instance, in the textile manufacturing subsector, garment manufacturers that depend on imported fabrics to produce garment are charged the same import tariff as the garment importer. Levying similar import tariff discourages the domestic garment manufacturers effort to substitute import since they will not be able to compete with the imported garment. Furthermore the government did not take into account the wastage that result in the fabric during the garment making process. According to ETGMA and Oasis Garment Factory about 20% of the fabrics is wasted during the garment making process. This coupled with the unfair import tariff levied on imported fabric puts the domestic garment manufacturers at a disadvantaged position. The Ethiopian government has accorded high priority to the development of the textile, leather, chemical industrial sectors etc., in its five year GTP. By further revising the tariff structure that is currently being adopted potential investors will be encouraged to produce products locally and help to narrow the ever expanding trade balance of the country. 6.2 Abolishing Under Invoicing and Illegal Trade Practices It is generally known that under invoicing of imported products leads to unfair trade practices. Domestic manufacturers are forced to sell their products at a loss when under invoiced imported products flood the market. Although smuggling/contraband trade is reported to be declining, there are several incidences of contraband trade. The government should strengthen its law enforcement capacity to minimize the risk potential investors are facing in their effort to operate legally. 6.3 Encouraging FDI to Invest in Import Substitution 78 With the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries. Its recognition resulted from several factors,

87 particularly the more receptive attitude of a country to investment inflows, the process of privatization, and the growing interdependence of the world economy. FDI can become operational in two basic ways. The first is what economists call a green-field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. Thus, foreign firms investing in a country in either way are either engaged in a market expansion whereby they promote the same industry in the host country as they operate in their home country or invest in an industry abroad that provides inputs for their domestic production process or produce finished goods in the host country or export it to international market. The most important factor that attracts a foreign firm to invest in a developing country is the presence of a stable political environment and a relatively open free market. Accordingly developing countries in general strive to create a favorable and enabling climate to attract FDI, which brings capital, facilitates the transfer of technology, organizational and managerial practices and skills as well as access to international markets. In view of the advantage to be gained in this regard, Ethiopia formulated an investment policy that is capable of attracting FDI. The country also promulgated and enforced a package of incentives to attract FDI. As a result many foreign firms have been licensed to invest in major sectors of the economy since the government made some outstanding development reforms in the economy of the country. However,the progress appears to be slow in comparison to FDI inflows in some African countries. For instance, according to reports from UNCTAD, countries like Madagascar, Zambia, Ghana, Democratic Republic of Congo, Namibia, Tanzania, Chad and Burkina Faso managed to attract FDI in the range of USD 0.5 billion to 0.9 billion in 2007, while Ethiopia in the range of USD 0.2 billion to 0.4 billion (UNCTAD 2008). Ethiopia must learn from the experiences of best performers in Africa. National investors as indicated above most often fail to be cost effective and as a result they have weak competitive position compared to imported products. The flow of FDI on the other hand would bring in a spirit of learning by doing among the Ethiopian workers and entrepreneurs and facilitates easy transfer of technology and skill. Therefore, the government should give more priority to FDIs coming from those countries where much of the imports of this country originate from for the following reasons: - They often use labor intensive technology this is one of the comparative advantages the country has; 79

88 - They have already created an established market for their products and would easily monitor the market for product improvement and development; and - They are in a better position to know how the market operates and the package of incentive schemes the country offers. 6.4 Improving Quality Management and Standard According to some domestic manufacturers some imported manufactured products, mainly from some Far East countries, do not seem to meet some acceptable standards and fail to serve the purpose they are intended for. This resulted in unnecessary wastage of consumers scarce resource and created unfair competition practice in the market. They are taking advantage of the low purchasing power of the population and as a result these products are sold at prices much lower than the price quoted at a reasonable margin by domestic producers. That means domestic industries producing same products have difficulty in securing markets for their products and this discourages potential investors from taking rational decision to invest. Thus the government should develop some mechanisms to protect domestic industries from this kind of unfair invasion of the market with cheap and poor quality products not serving their intended purposes. One possible action to be taken by government, generally on all imported products, is to inspect randomly the quality of the product against a set of accepted standards at check points and forbid the goods from entering the market if they fail to qualify. This requires highly skilled personnel, modern laboratory and other testing facilities and accordingly the government should take a firm stand on this issue and create institutions for implementation. 80

89 CHAPTER SEVEN VALUE CHAIN ANALYSIS OF SELECTED IMPORT SUBSTITUTING PRODUCTS This study, as mentioned earlier, selects ten potential import substituting products for further analysis through the use of the value chain approach. This approach is instrumental as it helps in identifying dynamic linkages between productive activities by showing where value is added in the production process and allowing for better understanding of the constraints and opportunities within each segment in the context in which the chain operates. 7.1 Conceptual Framework of the Value Chain Analysis Value chain analysis and development has been described in various approaches and ways by different practitioners. The International Labor Organization (ILO) on its Operational Value Chain Guide (2007) describes it as a sequence of target-oriented combinations of production factors that create a marketable product or service from its conception to the final consumption. This includes activities such as design, production, marketing, distribution and support services up to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms, as well as within a single geographical location or spread over wider areas. More elaborate description of value chain was given by Kaplinsky and Mike Morris in a book entitled Hand Book of Value Chain Research (2001). This book describes value chain as: the full range of activities which are required to bring a product or service from conception, through the different 7 phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. According to Kaplinsky and Morris, value chain analysis resolves the weaknesses of the traditional sector analysis, which does not look into the inter-linkage between interrelated actors in a given market chain. Value chain is a recent concept in Ethiopia promoted by government and various development agencies. According to the SNV Annual Report (2009) the value chain concept is becoming famous and keeps on attracting the attention of government and non-government development agencies with the objective of enhancing the livelihood of rural community and urban and periurban entrepreneurs by trying to address the market linkage problem of the rural and urban communities. 81

90 Even though value chain development is not an easy task, different value chain initiatives have been accomplished recently in Ethiopia. Some of these include livestock, coffee, sesame seeds, milk, honey, teff, poultry, fruits, vegetables and other products in different localities. Towards that end, various interventions were introduced by government and non-government development agencies in the process of enhancement of value chains. 7.2 General Features of Some Selected Products Milk The overall milk production features in Ethiopia can be grouped around four main clusters as follows: Lowland agro-ecological livestock production system: This is a pastoral production system characterized by sparsely populated pastoral rangelands, where subsistence of the pastoralists is mainly based on livestock and livestock products mainly milk providing them with all the consumable, saleable outputs but do not provide inputs for crop production. Agro-pastoral form of livestock production system: This cluster dominates the mid agro-ecological zones where a tendency for crop production also exists together with livestock production. Agro-pastoralists are sedentary farmers who grow crops and raise livestock. The production system is subsistence where mainly female stock is kept for milk and meat production as well as maintaining the reproductive potential of the herd. Highland livestock production system: Animals are part of a mixed subsistence farming complex where livestock provide inputs (draught power, transport, manure) to other parts of the farm system and generate consumable or saleable outputs (milk, manure, meat, hides and skins, wool, hair and eggs). About 88% of the human population, 70% of cattle and sheep, 30% of goats and 80% of equines are found in this region. 82 Urban and peri-urban livestock production System: This cluster is found in and around cities and urban centers where crossbred animals (ranging from F1 to a higher blood level of exotic breeds mainly Holstein Friesian) are kept in small to medium-sized farms. Urban and peri-urban production systems include commercial milk producers and smallholders for relatively medium to large scale milk production.

91 However, despite the existence of high potential in the dairy sub-sector, the country continued to import a range of dairy products with value ranging from Birr 37 million in 2005 to about Birr 96 million in Wheat The most preferred grain crops grown in the cooler highlands of Ethiopia are teff, wheat and barley; while corn, sorghum, and millet are warm weather grain crops. It is estimated that about 85% of bread wheat is grown in Arsi, Bale and Shewa regions. The vertisols of the central and north-western highlands of Ethiopia (i.e. Shewa, Gojam, Gonder and Tigray regions) are known for producing durum wheat. Generally the wheat growing sites in Ethiopia are defined and clustered based on precipitation, temperature, altitude, longitude, and length of growing season. Due to the high rate of population growth, increasing urbanisation and thereby changing eating habits with relative income growth of urban dwellers,the demand for wheat in particular and that of other grains in Ethiopia is growing from time to time based on the changing tastes and prefrences of the population. Most of the consumers ( the army, universities, etc) used wheat products more than other cereals in the forms of bread, pasta, macaroni etc including the demand from expanding bakeries Sesame Seed Ethiopia is among the top-five producers of oilseeds in the world (J.Wijnands LEI, et al 2007). In the last few years, sesame production and marketing have shown significant growth in the country. According to CSA (2008/09) sesame sub sector generated employment opportunities and livelihood supports for over 750,000 smallholder farmers and significant number of other downstream actors in the chain. The traditional importers of Ethiopian sesame seed were China, Israel, Turkey and other Middle Eastern countries. Currently, more European countries and Japan have also shown interest to enter the market (FARM Africa, 2009) and the potentials of the international markets are also ever increasing for Ethiopian sesame which is expected to increase. Sesame contribution is significant at both macro and micro levels including export earnings. According to the Ethiopian Revenue and Customs Authority Export data , export earning has increased 16 times from Birr million in 2001 to Birr 2.02 billion in Similarly, the proportional share of contribution to export earnings of the country has risen from 5.7% in 2001 to 13.5% in

92 The rate of growth in terms of volume of production has also been tremendously raised. It increased from about 19,000 tons in 2000/01 to its current level of 216,741 tons due to a fast growing international market demand for the commodity. According to CSA (2008/09) sesame sub sector generated employment opportunities and livelihood supports of over 750,000 smallholder farmers and significant number of other downstream actors in the chain. Sesame has virtually a wide opportunity to be used also as an input in the domestic edible oil processing plants to substitute imports of edible and nonedible oil. The country s edible and non-edible oil import, in particular palm edible and non-edible oil, has been observed to show a sharp increase over the last five years growing in value from Birr 163 million in 2005 to Birr 2,408 million in 2009 with an average annual growth rate of 96%. Considering its benefits for the country and the producers, the Ethiopian Commodity Exchange (ECX) has included sesame as one of the compulsory products to be traded through its floor of exchange Malt Barley The malt barley growing sites are defined and clustered based on precipitation, temperature, altitude, longitude, and length of growing season. In the western, central and northern parts of the country, rainfall distribution is generally mono-modal. In the eastern part of the country (i.e., 39.4 to 42.5 E) the distribution is bimodal, resulting in two cropping seasons, viz. belg (short) and meher (main). Thus within the main crop growing zones particularly Bale and Arsi are the most ideal areas for barley production as well as for further expansion of malt barley production and thereby promote malt barley value chain at country level. Towards that end, malt barley production is currently being undertaken by state farms in Bale zone with relatively little volume. While the scale of production may vary from farmer to farmer based on land holding size and suitability of the land for the crop, a good number of smallholders surrounding Assela Malt Factory are producing malt barley. Particularly Kore and Kofele woredas of eastern Arsi and Shashmene woreda of western Arsi zone produce malt barley. It has been known that most of the volume of malt barley produced by both the state and smallholders farms often goes to Assela Malt Factory. 84

93 7.2.5 Cotton Ethiopia has enormous potential for the production of cotton particularly on low to mild altitude areas of the country subject to the availability of water. In terms of productivity, high yields are obtained in areas with an altitude ranging up to 1000 meters above sea level. In the absence of hail, frost, and other unfavorable weather conditions, cotton production can also be extended into areas with an altitude of 1500 meters above sea level. Cotton is presently being produced in Ethiopia under both rain-fed and irrigated conditions by state farms, private commercial farms and smallholders. According to recent unpublished study report (December, 2010) of the Textile Garment Association, land suitable for cotton cultivation in Ethiopia is 2.6 million hectares while currently cultivated land is only 85,000 hectares which is only 3% of the available potential Textile Millers Textile is one of the leading branches of manufacturing industry in Ethiopia in terms of its contribution to output, employment and trade. According to unpublished study report (December, 2010) of the Textile Garment Association, quoting CSA manufacturing survey report (2009) the sector s collective output was USD 95 million in 2009/10 and employed over 20,000 people directly in 2007/08 and generated USD 21.8 million. According to the Ministry of Industry and Trade, Benchmarking of the Ethiopian Textile Industry; the textile mills are mainly engaged in spinning of 25,858 tons/year, weaving fabrics 192,000 square meters, and knitting of 7,610 tons /year. The same report indicates that the textile mills in the country operate only at 50-70% of the installed capacity and even at much lower level of capacity in relation to the total market demand. Consequently, despite the great potentials and opportunities available in the country, the level of output, employment and foreign exchange earnings from the industry is by far small Garment Industry Garment is one of the emerging businesses in the textile industry which is a relatively new sub sector in Ethiopia that uses inputs such as fabrics, accessories and packaging materials for local and export markets. According to unpublished study report (December, 2010) of the Textile Garment Association; the garment industry has been encouraged and promoted by the country s main development programs during SDPR and PASDEP in anticipation of upstream development in the textile and cotton industries. 85

94 However, the bench marking study of the Ministry of Industry and Trade, reveals that the total woven and knitted fabrics being produced by the local textile mills does not meet more than 27% of the demand of current (over 40-45) garment establishments of the country. In addition to the inadequacy of fabric supply from local textile mills, there is a problem of satisfying the standard (type and size) of fabric that garment factories require. As a result, they are heavily dependent on imported fabrics. Thus the balance (73%) plus the unsatisfactory standard fabrics volume are imported in forms of fabrics and ready made garments costing the country dearly in foreign exchange. Leather Footwear Ethiopia being a predominantly agricultural economy with the largest livestock population in Africa has a strong base for semi-processed leather, finished leather and leather products. It is no surprise, therefore, that the recent export and import substitution development strategy introduced by the Government has singled out this sector as a priority area and incentive schemes have been designed accordingly. The Ethiopian leather industry initially developed in the context of an importsubstitution program and was highly protected from import competition, particularly in the leather footwear products for the domestic market. The leather product lines include leather shoes and shoe uppers and this subsector rapidly expanded due to the government protective policy although at the expense of quality considerations. However, in spite of the various supports it obtained and the priority attention it was accorded in the Industrial development strategy of the country, its performance during the four years ( ) was very low with 42%, 63%, 73% and 86.7% of the annual plans respectively. The current Growth and Transformation Plan (GTP) of the country therefore focuses on both export and import substitution strategy focusing on finalizing the value addition process (by producing leather shoes, shoe uppers, leather jackets, coats, skirts, trousers, vests, purses, wallets, etc.) and generating additional income instead of exporting largely low value-added semiprocessed hides and skins. Soap and Detergents 86 According to the recent external trade statistics (Table 19 of this report) of the country there is a steadily growing demand for soap and detergent products in Ethiopia. The statistics reveals that the level of gross value of soap and detergent products has increased from Birr 335,457 million in 2005 to Birr

95 1,161,300 million in 2009 assuming about 38.4% of the total import volume of the country. On the other hand, both state owned and private soap and detergent manufacturing companies produce on average 62% of the domestic market s demand whereas the remaining balance of the domestic demand has to be met through importation. Ethiopia has a huge potential to minimize the current level of import and even gradually export soap and detergent as most of the chemical and nonchemical ingredients can be processed here in the country. Perhaps one more promising potential is expanding production of growing oil palm tree, a good source of fatty acid (about 60% of the total ingredients) which is a key input in soap and detergent manufacturing. Oil palm tree is a tropical species that originated in West Africa, but now grows as a hybrid in many parts of the world, including South East Asia and Central America. The world demand for palm oil has soared in the last two decades, first for its use in food, consumer products and more recently as raw material for detergents and bio-fuel. Today, Malaysia and Indonesia account for about 87 percent of world palm oil production. Oil palm trees were not commonly grown in Ethiopia until 1987 when the Ethiopian Coffee Plantation Development Corporation started a pilot project on 10 hectares of land in Teppi with the technical assistance of FAO. The overall objective of this initiative was to pilot the production and processing of this valuable commercial crop and disseminate lessons to private small and commercial farmers in similar agro climatic zones. It seems the crop is doing well in Teppi though not widely publicized across the country as previously intended due to various reasons; partly due to the long distance of the project location from the central part of the country and partly due to lack of vigorous effort made to disseminate the lessons and information obtained from the pilot project. Accessories and Spare Parts The demand for accessories and spare parts is steadily increasing among heavy industrial groups and other light ones. Both heavy industrial groups (that includes the textile, leather, cement, sugar, etc.)and light industries (automotive, vehicles, machinery and mechanical appliances etc.) need accessories to finish and add values to their respective products and spare parts to replace their broken and worn out components. 87

96 As summarized in Table 32 of this report, the country s aggregate import value of parts, accessories, machinery and mechanical appliances increased by an average annual growth rate of 27.4%. i.e. from Birr 4,249.8 million in 2005 to Birr 11,198.5 in 2009 which is a significant amount of foreign exchange loss that can be somehow minimized by local value addition through import substitution strategy. Towards that end, efforts are currently underway with a new initiative of enhancing domestic metal engineering capacity that already exists within the country. This initiative is expected to be mobilized through a newly established Metal Engineering Corporation. The Corporation will get its major inputs from specialized national engineering establishments such as Defense Engineering factories Akaki Spare Parts Factory, Nazareth Tractor Factory, Ethiopian metal producing/importing companies, electrical appliances producing/importing companies, plastic producing/importing companies, etc. In this initiative, the Corporation has already started receiving accessory and spare part requirement details from leather, textile, cement, etc. industries with anticipated gradual involvement of potential private investors in the production of parts and accessories. 7.3 Mapping Value Chain of Selected Products The general value chain mapping that indicates major chain players at macro, micro and messo levels for all the selected ten import substitution commodities are summarized in schematic presentation in the form of generic value chain maps in Figure 4. 88

97 Figure 4: Generic Value Chain Maps of Selected Products 89

98 7.4 Constraints and Opportunities Prevailing in the Selected Products The constraints and opportunities that prevail in the selected 10 import substituting commodities are described below Constraints and Opportunities Commonly Affecting All Selected Value Chains a) Macro Level (Chain Context) i) Constraints Absence of value chain development policy framework for value chain development initiatives; Lack of policies for institutionalized local and international market information system; Manufacturers are not yet fully oriented to standards of the Ethiopian Quality and Standards Authority as well as ISO 9000 certification; Frequent electricity interruption affecting machinery and equipment as well as production process; Inadequate working capital due to limited access to bank loan/ credit for manufacturers; and Inadequate infrastructural facilities, electricity, road, telephone systems around some processing plants and factories. ii) Opportunities High rate of population growth and continued urbanization, increasing demand for food, agricultural and manufactured products; Supportive legal, institutional and incentive environment that stimulate investors entering into investment ventures; High rate of ongoing infrastructural development (roads, power, etc.) to facilitate input supply and trade from points of production to national and international markets; 90

99 Tax exemption privileges while importing required machinery and equipment, including tax holiday advantages. Facilitative legal, institutional and incentive environment that stimulates investors to enter into the sector; and High potential of enhancing national economic development and foreign exchange earnings. b) Micro Level (Chain Context) i) Constraints Banks collateral requirements and MFIs provide inadequate loan sizes that restrict small farmers from investing on farm inputs (seeds, fertilizers, farm tools, equipment, others); Underutilized capacity of manufacturing factories resulting in higher product costs exposing them to fierce competition against imported products; Absence of cooperation of working together among manufacturers dominated by individual efforts denying them a chance of bulk purchase and shipping practices that can minimize their costs and enhance their income; Mostly operate in obsolete manufacturing equipment and machinery; Lack of vertical integration among various level manufacturers; Manufacturers face serious challenges of satisfying customers that are familiar with quality, durability of imported products; Most raw materials and inputs are imported with long lead time which tie up working capitals causing underutilization of manufacturing capacity of factories which may again raises costs of production and prices; Manufacturers might be constrained by short pay back periods of loans and huge bank interest rates resulting in reduced cash-flow, profitability and may entail indebtedness; and Institutional arrangements do not seem yet in place to undertake such tasks that require higher level of professional and logistical responsibilities. 91

100 ii) Opportunities Ethiopia being one of the most populous nations, there is a huge unsatisfied domestic demand for agricultural and manufactured products; Availability of adequate workforce at relatively cheaper wages (payments); Steadily growing market demand for agricultural and manufactured products offering huge market opportunities for distributors and retailers; and Availability of adequate workforce at relatively cheaper wages (payments). c) Messo Level (Chain Supporters) i) Constraints Producers, processors and exporters constrained by inability to access appropriate loan type, facing long procedures of banks, undefined collateral conditions; Lack of institutionalized linkages (horizontal and vertical), coordination and collaboration among both small and large producers, buyers and suppliers of commodities, resulting in inefficiencies among the value chain operators; Most chain actors are constrained by shortage of working capital; Weak horizontal and vertical linkages and inefficiencies among the value chain operators; Lack of provision of incentive mechanisms for quality differentiation which de-motivate producers to commit for quality products; Lack of institutional support to regulate effective functioning of customs and clearing agencies hindering producers and exporters efficiency through long and bureaucratic hurdles; Inefficient logistics, transport and banking services that hinder effectiveness of production and marketing process; 92 Lack of institutionalized support provision in establishing binding contract agreements and price ranges among chain actors thereby affecting competitiveness;

101 Lack of institutional arrangements to orient all chain actors on national and international market standards and enforcement on their fulfillment; Inadequate institutional support to regulate effectiveness of relevant support offices such as customs, clearing agencies, transport, logistics, bank services, etc. that hinder factories importation of inputs; Absence of institutionalized and reliable local and international market information to facilitate; Inadequate institutional support to regulate effectiveness of relevant support offices such as customs, clearing agencies, transport, logistics, bank services, etc. that hinder factories importation of inputs; Absence of institutionalized and reliable local and international market information to facilitate competitiveness of the sub sector; Supportive incentives for unlimited access to working capital are not yet in place to enable factories to engage in bulk purchase and importation of essential inputs to minimize under-utilization of factory capacity and minimizing costs of production; and Constrained by shortage of working capital, unable to procure essential inputs in bulk resulting in longer supply lead time causing under-utilization of factory capacity and raising costs of production. ii) Opportunities High potential business opportunity for financing institutions to lend out capital for suppliers engaged in equipment, technology, transport, expertise, etc; Potential demand prevails for private and public chain supporters to engage in delivering services in training on business management skills, record-keeping, computing costs of production, break-even points, revenue generation, etc; Great business opportunity for banks and rural micro-finance institutions to finance chain actors business at local and export levels; 93

102 High potential demand for private sector chain supporters to deliver professional services in strategic business management, record-keeping, computing costs of production, determining break-even points, revenue generation strategies, etc; and Huge demand for finance, insurance, logistics, transport, etc., services delivery that encourage providers and engagement of private companies Value Chain Specific Constraints and Opportunities 1. Selected Agricultural Products (milk, wheat, sesame seed, malt barley, cotton) a) Macro Level (Chain Context) i) Constraints Inadequately established development program for livestock and crop farming among regions; Predominantly small holders agriculture system with heavy dependence on weather and environmental situations coupled with traditional crop farming and animal husbandry practices resulting in poor agricultural productivity; Lack of access to well suited land and water resources in most inhabited areas of the country for effective livestock and crop farming practices; High rate of population growth (about 3 percent/annum) forcing farmers to overgraze and cultivate available land resulting in low level of agricultural productivity; Poor institutional capacity and competence of agricultural producers and cooperative associations to deliver effective support services to farmers; Inadequate post-harvest, cold house technology, storage and road infrastructure resulting in loss of agricultural produce affecting continuous supply of raw materials to agro processing plants; and Lack of provision of institutionalized market information system making small farmers dependent on middle men s unreliable information. 94

103 ii) Opportunities The country is endowed with adequate land and agro ecology suitable for the production of range of agricultural products which have high international market demand; and Enhanced level of potential opportunity of the agriculture industry to contribute to the local economy, saving of foreign exchange and even ultimately increasing foreign exchange earnings. b) Micro Level (Chain Actors) i) Constraints Household need based agricultural production system of small holders with little or no orientation to market demand responses; Poor provision of technological inputs forcing small crop and livestock farmers to keep on using indigenous seeds and livestock breeds resulting in low level of crop and livestock productivity; Repeated cultivation of land, erratic rain fall, pests and diseases often reduce level of crop productivity; The few existing private seed producers, breeders and feed producers often constrained by shortage of land and lack of technologies to ensure continuous and effective supply of agricultural inputs; Non-existence of cold chain technologies and facilities to preserve perishable crop and livestock products often constraining operations of product collectors and processors; Processors lack bacteriological and chemical laboratories depend on physical observations for quality control; Unhygienic and faulty processing equipment and practices contributing to poor product quality and leakage of products; Inadequate and unreliable supply of improved seed, fertilizer, feed, veterinary and crop protection chemicals and other essential input resulting in lower productivity of small farmers; and Most small farmers forced to sell their products to local traders or cooperatives right after harvest to repay debt with no speculative power or access to alternative markets. 95

104 ii) Opportunity Great potential demand and business opportunity for input suppliers to invest on provision of improved seeds multiplication, distribution, market information and coordination. c) Messo Level (Chain Supporters) i) Constraints Inadequate institutional support on provision of improved technological inputs and agronomic practices resulting in lower productivity, loss of post-harvest and poor quality of product reducing farmers and exporters income;. Inadequate extension education and knowledge transfer systems resulting in weak farmers cooperatives and unions with inadequate skills in marketing, organization, management and decisions making; Smallholders are constrained by lack of working capital often less than Birr 5,000 extended by MFIs have never been adequate restricting farmers from investing on farm inputs (seeds, fertilizers, farm tools, equipment, others); and Absence or little number of government and private agencies to regularly supply small farmers with selected seeds and cross bred animals. ii) Opportunities High potential demand calling transporters to engage in supply of milk tankers and transport services; High potential demand for operators engaged in provision of services like artificial insemination; farm input supplies, market information, distribution facilities, dairy breeding in-calf heifers, etc; High potential opportunity for public and private agricultural research institutes to further research, promote and disseminate improved seed varieties and livestock breeds; and Existence of various international agencies willing to support the development of the agricultural sub-sector. 96

105 2. Industrial Products (Fabrics, Garment, Footwear, Soap & detergent, Accessories and Spare Parts) a) Macro Level (Chain Context) i) Constraints Fabrics: Textile millers are major fabric producers composed of public owned enterprises with integrated manufacturing approach having little or no orientation to value chain development process; Local textile factories produce fabrics in limited varieties, quantities and standards that often do not respond/ satisfy demands of local garment factories; and Local textile factories produce fabrics in limited varieties, quantities and standards that often do not respond or satisfy demands of local garment factories. Accessories and Spare Parts: Production of accessories and spare parts at commercial level is a new initiative the needs well studied strategic, transparent and consistent policy and regulatory directions for its operations; Dominated by state sector monopoly with absence or little involvement of private sector in the chain process to ensure sustainability; and Feasibility and commercial viability of the business do not yet seem well assessed to convince banks for financing. Leather Footwear: Existence of cross border illicit trade and misuse of raw hides and skins due to lack of awareness, resulting in a low recovery rate and ultimately shortages of raw hides and skins. ii) Opportunities This initiative may get priority in the national economy as it is timely and in line with import substitution of government s Growth and Transformation Plan (GTP); and Existence of huge demand for accessories and spare parts. 97

106 b) Micro Level (Chain Actors) i) Constraints Fabrics: Most ginneries are old, underutilized involving relatively high cost of ginning, yet supply 80% of the lint cotton demands of domestic textile mills; Most of the integrated textile mills are engaged in the production and finishing of cotton and nylon fabrics that cater for the domestic market with less or no orientation to export standards; Generally underdeveloped textile industry with obsolete manufacturing machineries using outdated production technologies accompanied by low level of productivity; Most textile mills operate under capacity (52% as per CSA data) raising cost of production and less competitive price range for their fabrics; Millers produce fabrics with limited volume, variety and standards which do not often respond to demands of the emerging garment sector; Textile millers are constrained by inadequate human skill, knowledge and poor productivity raising costs of production leading to less competitive prices of their produce; and Textile millers currently constrained by stiff competition from imported fabrics and used clothing leaving them in difficult positions to pay back their loans on time. Soap and Detergent: Oil palm tree has not yet been widely introduced in the country though it is major source of fatty Acid the major ingredients that consist up to 60% of soap and detergent manufacturing; Locally produced chemical ingredients are inadequate both in quality and quantity to satisfy manufacturers demands; The sub-sector is dominated by small producers with limited production capacity; 98 Shortage of chemists, technologists and skilled labor resource in the sub sector;

107 Shortage and low quality accessories such as packing and labeling materials; Factories prefer selling their finished soap and detergent products through own factory gate outlets with less interest to use wholesalers and retailers; and Whole sale and retailers face challenges to sell locally finished soap and detergent products to consumers which are already much more familiar with high quality and branded import products. Accessories and Spare Parts: Heavy import dependence for metal engineering inputs which is already constrained by long bureaucratic hurdles of import facilitating government agencies; and Shortage of high level designers, technologists and skilled labor resources for accessories & spare part items. Footwear: Animal breeding is traditional and household based, and most slaughtering is done in private homesteads instead of abattoirs, affecting quality of skins and hides with itchy diseases resulting in reduced leather prices; Collection of raw hides and skins involves a long line of supply chain by smallholders with incoherent relationships; Underutilized processing capacity (30-90%) of the already obsolete equipment & machinery of tanneries due to shortage of raw leather resulting in fierce competition for its supply; Tanneries lack product diversification focusing only on high/ medium income customers with high leather prices; Low trust and cooperation of working together among hides and skins producers and processors; Shortage of processed leather products to increase volume of shoe production; The shoe making business is mainly dominated by small holders with no modern shoe making technologies and machines to meet standard requirements; and 99

108 Shortage of accessories such as stretching machine, standard shoe soles, etc., for shoe making. ii) Opportunities Ginneries are main sources of lint cotton (produce 30,000 metric tons/annum) and cotton seed supplied to domestic and export markets; High potential demand for ginning services as numerous textile factories are currently under establishment; Steadily growing domestic and international market demand for locally produced cotton fabrics providing business expansion opportunities for textile industries; There is a growing trend of customers preference to buy locally manufactured textile products so long as the product maintains a minimum quality standard of imported items; Steadily growing market demand for cotton fabrics providing huge market opportunities for exporters; and Great potential for expansion of production of accessories and spare part items due to huge unsatisfied demand of key industries. c) Messo Level (Chain Supporters) i) Constraints Leather Footwear: Lack of institutionalized support provision in establishing binding contract agreements and price regulations to encourage competitiveness of leather footwear exporters. Soap and Detergent: Absence of chemical Products Technology Development Institute; Absence of fully fledged research and development service; Young and inadequately influential Chemical Industries Association; and Absence of well-defined national Chemical Industries development strategy. 100

109 Accessories and Spare Parts: Despite the existence of a Technology Development Institute for key industries, the manufacturers in point do not have any such support systems; and Fully fledged research and development services though crucial at levels of manufacturers, they are not yet established. ii) Opportunities Existence of Leather and Leather Products Technology Institute (LLPTI); Provides training for middle level management and technicians required by the leather industry; LLPTI is equipped with state of the art technology in all the relevant fields of the industry; Possesses fully fledged model plant for the tanning, footwear and leather goods production; and Appropriately staffed with highly qualified personnel. 101

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111 CHAPTER EIGHT RECOMMENDATIONS Some of the recommendations proposed in this study are relevant to all value chain operators. Value chain specific recommendations are also provided to be considered by various value chain operators across the selected 10 import substituting commodities. 8.1 General Recommendations Macro Level (Chain Context) It is recommended to establish strong vertical and horizontal linkages among chain actors through value chain multi-stakeholders platforms to discuss common issues and find common solutions. National/regional level macro institutions need to orient public and private sector support providers (offices of agriculture, cooperative promotion agency, private enterprises, ECX, tax offices, quality and standards, NGOs, etc.) on value chain as a development approach and its application. Private/public capacity building service providers should be stimulated to engage in the provision of information, business plan development, training on business management, accounting, auditing, inventory and quality control systems, etc. Policy making institutions are advised to establish regulations and procedures to facilitate value chain process in which chain actors could be coordinated, contractual agreements enforced, mechanisms for multiplication and distribution of research results and other technologies established, weak chain operators (the poor, women, etc.) enabled to participate, product adulteration and illegal trading to be prevented. It is advisable that government regulatory agencies monitor implementation of the good policy and incentive frameworks issued and provide strategic and diverse support to value chain promotion so that it becomes competitive and benefits from domestic, regional and global potential markets. 103

112 It is crucial to develop stimulant policy framework that attracts the private sector to engage in manufacturing basic accessories and inputs that are currently being imported Micro Level (Chain Actors) It is essential that chain actors engage in product/market upgrading process through changing the product features starting from production up to end processors to enhance the value of the product either by improving quality or form of presentation like changes in packaging. It is recommended that chain actors engage in business linkages through vertical and horizontal integration as it is a process by which chain actors join hands to jointly innovate, invest their resources (such as knowledge, money and time) together by sharing risks and costs to increase their competitiveness for mutual benefits. It is advisable that chain actors focus on meeting market expectations based on the identified constraints and opportunities as well as capacity to deliver. It is advisable that chain actors set up joint consultation forums where constraints and opportunities of the value chains are discussed, goals set and value chain upgrading strategies developed and implemented either jointly by all or individual chain actors. It is time to design and execute context-based factory strategies that facilitate optimal utilization of human, financial and factory capacity to enhance productivity, minimize cost of production, determine market based competitive price of produce. Regular and careful monitoring of the realization of the policy provisions and their impacts on sub-sector s productivity, profitability and meeting the import substitution objectives. It is recommended that manufacturers and chain actors design and execute context based factory strategies that facilitate optimal utilization of human, financial and factory capacity to enhance productivity, minimize cost of production, determine market-based competitive price of produce. 104

113 It is advisable that manufacturers be efficient and productive in meeting quality standards for their products including use of standard quality packaging and labeling materials to win customers confidence and preference on locally manufactured products Messo Level (Chain Supporters) Chain support institutions are strongly advised to stimulate involvement of private chain operators to engage in the provision of services such as training on pre- and post-harvest handling, business plan development, business management, accounting, auditing, inventory and quality control systems, database establishment, recordkeeping, accessing financial resources, provision of improved high yielding local seed varieties/breeds, market information, technology transfer as well as expanding business linkages, etc. It is recommended to establish practical model agreements on business partnership, contractual arrangements, direct business linkage, cost minimization techniques to minimize inefficiencies, and contract enforcement mechanisms to promote accountability on both sellers and buyers and thereby gradually enhance learning, market transparency and benefit transferring to SMEs and farmers. It is crucial for support institutions to establish and promote the provision of well institutionalized, reliable local and international market information regularly to facilitate well-informed decisions of chain actors. It is strongly recommended that institutional arrangements be made to orient all chain actors on national and international market standards and their fulfillment enforced. It is recommended to provide capacity development support in well planned continuous interventions to enable producers effectively utilize their capacity and become more productive and profitable entities. Linking the research and capacity development efforts of the sector with universities and technical institutes of higher learning for standardization and ensuring sustainability is recommended. It is advisable that messo level agencies design sub sector based technical and productivity enhancement capacity development packages tailored to the various level manufacturers. 105

114 It is crucial to initiate public and private banks to design sector based loan and credit facilitation and extend investment loans to encourage old manufacturing companies to replace obsolete machinery and equipment in systematically designed layout arrangements in response to the changing dynamics of the economy. Support is recommended to be provided for establishing systems for collaboration, binding contract agreements and other ethical business practices among chain actors to enhance their competitiveness. Establish institutional arrangements to orient all chain actors on national and international market standards and enforcement on their fulfillment. 8.2 Value Chain Specific Recommendations Macro Level (Chain Context) (i) Agricultural products National/regional level relevant macro institutions are advised to develop long term national/regional value chain development policy, goals, strategies and programs for the agricultural sub sector which allow participation of weak chain operators (the poor, the women, etc.). National/regional level institutions advised to establish standards, grades, quality based floor prices for agricultural producers to facilitate a win-win partnership between producers and other value chain actors. Relevant macro level institutions are advised to facilitate enabling environment for active involvement of private/public chain operators to effectively provide services in areas such as improved seeds, training on pre- and post-harvest handling practices, easier access to financial sources (by producers, traders, cooperatives and unions, processors, millers, etc.) at affordable interest rates. Relevant macro level institutions are advised to engage national/ regional infrastructural development institutions (like the electricity, telecom, roads institutions, etc.) in connecting high agricultural potential areas with major market and processing sites to enhance the level of livelihood and export earnings. 106

115 (ii) Fabrics Government institutions need to institute workable policy and strategy for cotton fabric value chain development that involves participation of all chain operators. It is recommended that the textile and dying sectors re-strategize and expand to supply local garment companies with adequate quantity, standard, variety and quality fabrics to stimulate the import substitution initiatives of the country. (iii) Soap and Detergent It is crucial that government policy makers design national value chain strategy to gradually substitute the huge volume of imported ingredients as well as finished soap and detergents products by initiating production of essential ingredients locally. These include substituting fatty acid imports by expanding the already piloted oil palm tree growing, production of caustic soda by expanding processing of soda ash (now produced in Zewai) and sodium chloride which is locally produced. (iv) Accessories and Spare parts It is crucial that government policy makers design national value chain strategy to gradually substitute the huge volume of imported spare parts and accessories and ensure that chain actors plan, organize and execute their operations in line with the strategy to be competitive and gradually substitute total Micro Level (Chain Actors) (i) Agricultural Products Increased involvement of chain actors is crucial in the provision of seed, improved animal breed, feed, fertilizers and other inputs to small farmers to overcome current shortage of food and agricultural products. Producers need to think of alternative supply channels either to deepen their presence in the market or to penetrate new markets such as direct supply to the processors through producers cooperatives and/or by the traders or by getting organized into new value chain business organizations. 107

116 Functional upgrading is also advisable which is about adding function to what already a chain operator has been doing. In this case, cleaning, grading, weighing and packing of the products properly according to the market/buyer expectations, will help satisfy unmet end market demands. Intra-sector/chain upgrading is also crucial which means more of the chain actors operate in a new market channel within the same value chain. For instance, wheat producers can also engage in improved seed multiplication and distribution of the crops to other farmers in the area or to other producers in the country through arrangement of their primary cooperatives or unions. (ii) Fabrics Establishment of joint consultation forums among key textile chain actors is crucial where regular discussions take place on major constraints and opportunities of the cotton fabric value chain, and where setting goals, value upgrading strategies are designed and implemented. (iii) Leather Footwear SMEs need to be continuously trained and assisted to improve the quality of their products and be competitive in all aspects in the face of imported footwear to meet the objectives of generating income and gradually substitute imported products. There is a need to integrate the different actors into clusters (especially the SMEs) so that they coherently work together to enhance their capacity in terms of mitigating problems, increase their respective shares,, make them competitive in the local markets, commonly access resources, technology, capital, business climate and physical infrastructure. There is sometimes a lack of processed leather for shoe uppers in sufficient quality resulting in under-utilization of available capacity resulting in minimized profits and perhaps losses. Thus the clustering arrangement is recommended to help secure sustainable supply for inputs. 108

117 8.2.3 Messo Level (Chain Supporters) (i) Agricultural Products Sectoral support institutions are strongly advised to disseminate research findings and improve technologies, seeds, agronomic practices, etc., through well contextualized extension services to enhance level of crop/livestock production and productivity. Assist in setting up of product collection and assembly centers at convenient locations to facilitate easy access of producers, minimize and gradually reduce product spoilage. Support institutions are advised to introduce mechanisms to encourage producers and processors engage in local value addition alternatives to the raw products being exported to the international market as processing products locally into different forms will help competitiveness in the international market. (ii) Textile Fabrics and Garment Establishing cotton, garment/apparel and textiles information hub that facilitates provision of information on linking to global value chain, dissemination of information on local and international market, conducting research and sharing experiences among actors of the sectors is crucial. (iii) Leather Footwear The tannery sub-sector is a key to stimulating the activities of the foot wear sub-sector. Thus it is advisable to consider the following supports in collaboration with national and international agencies well experienced in the sector: - Continue with the already existing promotion of the tannery sub-sector efficiency through optimal utilization of their capacity by employing techniques such as benchmarking, handling, facilitating access to loans, etc. - Overcome the shortage of chemical input supply by continuing the proposed bonded warehouse through Foreign Direct Investment (FDI) approach. 109

118 (iv) Soap and Detergent It is timely and strategic to initiate net-working and cooperation among small soap and detergent manufacturers to work together for joint bulk purchase and shipping orders to shorten lead time for imported chemical ingredients that enable them to fully utilize their manufacturing capacity, minimize their costs of manufacturing, enhance their income and thereby become competitors and profitable entities. It is strongly recommended that the soap and detergent subsector is linked to relevant universities and chemical engineering institutes to facilitate research on product standardization and ensure sustainability of operation. (v) Accessories and Spare parts It is recommended that support institutions facilitate coordination among accessory and spare part chain actors to jointly establish a well organized research and development center linked to universities and engineering institutes for innovation, quality standardization and ensuring sustainability of their operation. Initiating public and private banks to design metal engineering sector context based loan and credit facilitation and extend investment loans to encourage old manufacturing companies to replace obsolete machinery and equipment in systematically designed layout arrangements is crucial. 110

119 REFERENCES CSA, 2008/09, Agricultural Sample Survey, Addis Ababa. CSA, 2009, Large and Medium Scale Manufacturing & Electricity Industry Survey, Addis Ababa. Ethiopian Revenue and Customs Authority, External Trade Statistics, Ethiopian Investment Agency, Project Data Base, Lists of Licensed Projects, Addis Ababa, FARM, 2009, Baseline Survey of Sesame Trade Arrangement, Transaction Cost and Risks- Ethiopia, Addis Ababa, FAO, Small Scale Palm Oil Processing in Africa, Agricultural Services Bulletin No.148 International Labor Organization (ILO),2007,Operational Value Chain Guide Kaplinskyand Mike Morris: A Hand Book for Value Chain Research, 2000 J.Wijnands, et.al, May 2007, Oil Seeds Business Opportunities in Ethiopia, The Hague. Ministry of Finance and Economic Development,2006, A Plan for Accelerated and Sustained Development to End Poverty. Proclamation No. 280/2002, Re-Enactment of the Investment Proclamation of the Federal Democratic Republic of Ethiopia. Proclamation No. 375/2003, Investment Amendment Proclamation of the Federal Democratic Republic of Ethiopia. Proclamation No.37/1996, Investment Proclamation of the Federal Democratic Republic of Ethiopia. Proclamation No. 116/1998, A Proclamation to Amend Investment Proclamation of the Federal Democratic Republic of Ethiopia. Textile Garment Association; December, 2010, unpublished study report on Ethiopian Textile & Garment Industry. World Bank, 2009, Toward the Competitive Frontier: Strategies for Improving Ethiopia s Investment Climate. 111

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121 Annexes ANNEX 1 Profit Tax Holiday Granted to Investors Engaged in New Investment Ventures Conditions for Eligibility Income Tax Exemption Income tax exemption for investments made in relatively underdeveloped regions Exports at least 50% of products or services 5 years 6 years 1. Supplies at least 75% of products or services, to an exporter, as a production or service input. 2. Under special circumstance the Board may grant 5 years up to 7 years 6 years up to 8 years 1. Exports less than 50% of products or services, or supplies products or services only to the domestic market 2. Under special circumstance the Board may grant 2 years up to 5 years 3 years up to 6 years Exports at least 50% of products or services and increases, in value production or services by over 25% through the expansion or upgrading of an existing enterprise 2 years 2 years Source: Ethiopian Investment Agency 113

122 ANNEX 2 Comparison of Unit Export Value of Some Export Products before and after Value Addition (Based on Export Value of 2009) 114