As Ethiopia tentatively transitions out of conflict, ambitious economic reforms needed to revive its struggling economy appear daunting.

After decades of strong growth under infrastructure projects, Ethiopia’s economy stagnated under Prime Minister Abiy Ahmed (PhD) since 2018. The Tigray conflict cost thousands of lives, displaced millions, and diverted resources from development.

Finance Minister Ahmed Shide recently acknowledged Ethiopia faces a “serious economic crisis.” The government is seeking debt relief and pursuing reforms, but structural changes require external support.

The Ethiopian economy grew 6.4 percent in 2022 but is projected to slow to 5.5 percent in 2023 due to conflict, high inflation, and Russia’s war in Ukraine. Inflation in Ethiopia sits at a record 33.5 percent, straining households and businesses while constraining government finances.

The government has spent over 50 billion birr to subsidize fuel and 21 billion birr in fertilizer subsidies over the past eight months, with the cost of the two strategic imports witnessing an increase by as much as 100 percent. While subsidies aim to mitigate rising costs, S&P Global economist Alisa Strobel notes they have been “only modestly effective.” She thinks fuel subsidies may need further reduction, and absent structural reforms, Ethiopia’s fragile recovery could quickly reverse.

Despite previous attempts to reduce spending, which have had limited success due to rising government expenditure and disappointing growth of government revenues, the bitter pill for Ethiopia may be central bank borrowing. However, experts equate this with money printing, which has been a driving force behind the country’s high inflation rate of 32 percent year-on-year in April 2023. This comes on top of the depreciation of the Ethiopian Birr by around 18 percent against the US dollar in 2022, a situation that has put pressure on citizens and businesses alike.

Foreign exchange reserves have fallen dangerously low, slowing imports and causing goods shortages. An estimated 20 million Ethiopians require food aid.

Strobel says while some indicators offer hope, “Ethiopia’s economic challenges are substantial.”

While economic recovery resulting from the peace achieved in the country’s north might seem within reach, the soon-to-mature external loan the country took to develop its mega projects over the decade is another worrying development.

Debt restructuring has been on the table for over a year and a half now, with the International Monetary Fund (IMF) and its financiers seeming to be the ultimate decision-makers, given that creditors are unwilling to make any moves without getting an updated assessment of the nation’s current debt risk status.

The IMF is already in discussions with Ethiopia’s government to provide support. But any new assistance program would likely require financial commitments from creditors to make the deal work.

Credit rating agency S&P Global Ratings believes an IMF loan for Ethiopia is under serious consideration, which would be an important first step to eventually restructure the country’s large debts. An IMF program is hoped to help revive Ethiopia’s struggling economy by providing emergency funding, encouraging critical economic reforms, and boosting confidence among investors.

However, IMF assistance would likely come with conditions requiring greater transparency, accountability, and governance reforms—areas where Ethiopia has been hesitant in the past. If an IMF deal can be reached and implemented successfully, it could lay the foundation for Ethiopia’s debt restructuring to eventually move forward, which has been delayed for some time, according to experts.

But any IMF program and debt relief would only be part of the solution to Ethiopia’s deep economic challenges; broader reforms, political stability, and sustained growth will also be needed to make meaningful progress, said an official who closely follows the situation.

Strobel says one priority will be liberalizing Ethiopia’s exchange rate, given that the IMF provides funding and boosts reserves. A “sensible approach” could mitigate hyperinflation risks as the Birr’s depreciation rate declines. However, floating the currency quickly likely requires substantial IMF disbursements and reserves, according to Strobel.

Convincing leaders to implement ambitious reforms after instability appears difficult. Ethiopia’s economy remains at a crossroads. The path chosen will determine whether people finally see better days. Wisdom, restraint, and meeting needs could still lead to an economic revival.

Strobel concludes external support is critical due to Ethiopia’s debt default risks and “critical shortage of foreign exchange,” requiring budget support due to high costs of “fuel, food, and fertilizer.”

In the meantime, the World Bank’s Africa Chief Economist Andrew Dabalen this week remarked on Africa’s debt sustainability, which may add to the concerns already facing economies like Ethiopia, grappling with low growth and high inflation.

Almost half of the countries in Sub-Saharan Africa are already in debt distress or at high risk, and growth is expected to remain sluggish at just 3.1 percent in 2023 while inflation remains in double digits in many parts of the continent, according to him.

The situation has been further compounded by recent debt defaults in Zambia and Ghana, as well as civil unrest and delayed debt restructuring negotiations in Ethiopia.

“While many countries are implementing necessary reforms, the challenges facing African economies remain significant,” said Dabalen.

Despite the difficulties, African countries are uniquely positioned to take advantage of a low-carbon future given their abundant mineral resources, according to him. However, it remains to be seen whether Ethiopia can be one of the indebted African nations with the capacity to maximize revenues and build sustainable, industrialized economies in the face of ongoing economic challenges.

Emnet George had saved every hard-earned birr with the dream of finally owning her own home. After years of scrimping and saving, she handed over her life’s savings to the Habitat New Flower real estate company to purchase an affordable housing unit. The sales agent promised the small two-bedroom house would be ready within three short years, in plenty of time for Emnet and her young family to move in.

But three years turned into five, then ten, then fifteen. Excuse after excuse was given by the company as Emnet’s two-bedroom apartment house, covering 115 sq. m., remained an empty skeleton of concrete and rebar. Emnet’s dream of finally having a place to call home slowly turned into a nightmare of never-ending delays, broken promises, and dwindling hope.

Emnet then realized that if she truly wanted a home for her family, she would have to finish the construction herself. Armed with nothing but determination and a shoestring budget, she embarked on the risky venture of completing her dream home, one brutal day of backbreaking labor at a time.

But that was not easy.

The real estate company gave her the option to either pay additional money if she wanted her house delivered, or they would refuse to give her the title deed and not allow her to finish the house herself. When she went to the authorities, officials said her file was nowhere to be found, complicating the situation. At that point, she took the case to court.

The company’s delays and the authorities’ reluctance only steeled Emnet’s resolve. She quietly persisted with the construction, pouring her heart and soul into every brick and every tile. With hard work and stubborn hope, her dream home slowly took shape. After five grueling years, the court ruling finally came down in Emnet’s favor. She was granted the title deed and ownership of the property. As Emnet stood in the now-finished house for the first time as its rightful owner, she felt the sweet taste of justice.

All the struggle, sweat, and tears had built this place—a hard-won victory that would shelter her for years to come. Standing tall in the entryway of her little two-bedroom home, Emnet proudly says, “This is mine.”

Emnet’s struggle with homeownership is, unfortunately, not unique. Many homebuyers in Ethiopia have faced significant hurdles in their pursuit of owning a home. The experience of many homebuyers in Ethiopia has been that their years-long pursuit of owning a home has turned into nothing but thin air. Delays, legal disputes, and others left individuals and families in a difficult position, unsure about their housing situation and financial future.

The story of Access Real Estate is a notorious example of unfulfilled real estate projects in Ethiopia, highlighting the underlying issues that plague the industry. Despite being led by the illustrious entrepreneur Ermias Amelga, Access failed to deliver on its promises, leading to devastating financial repercussions for investors and a tarnished reputation for the entire real estate sector.

There have been several studies conducted on the issue of real estate companies delaying projects in Ethiopia. These studies have shed light on the causes and consequences of project delays and provided recommendations for improving the delivery of real estate projects in the country.

One study conducted by the Ethiopian Construction Design and Supervision Works Corporation (ECDSWC) examined the causes of project delays in the construction industry, including the real estate sector. It found that delays in project delivery were primarily caused by factors such as poor project planning and management, inadequate financing, and issues with land acquisition and permit processing.

The study recommended that the government and private sector work together to address these issues, including improving project planning, increasing access to financing, and streamlining land acquisition and permit processing procedures.

Another study conducted by the Ethiopian Institute of Architecture, Building Construction, and City Development (EiABC) focused specifically on the issue of delays in real estate projects. It found that delays in real estate projects were caused by a range of factors, including poor project management, a lack of skilled labor, and issues with material procurement.

The research recommended that real estate companies invest in improving project management practices, increasing training and development for the workforce, and improving supply chain management processes.

The two studies suggest that delays in real estate projects in Ethiopia are caused by a range of issues, many of which are related to poor project planning and management.

Dawit Samuel, a seasoned lawyer representing frustrated homebuyers whose properties were delayed by private developers, sheds light on the real estate industry’s underlying issues. Poor planning and oversights during contract signing are only the tip of the iceberg, according to Dawit. The real problem lies in the industry’s sluggish implementation process, where authorities and courts take years to give verdicts on cases involving delays.

To make matters worse, the legal delays can take up to four years, emboldening real estate companies to take risks during the planning phase. Despite calls for a proclamation governing the real estate business, Dawit argues that the current legal framework governing the construction sector is sound. However, authorities’ failure to execute follow-up procedures on time is exacerbating the problem, according to him.

But that’s not all.

Dawit points to investment channeling as another thorn in the industry’s side. Real estate developers often funnel the money they collect from homebuyers into other ventures, hoping to expand their projects and make more profit from other income sources.

A marketing executive, who declined to be named, confirms that malpractice still goes on in the industry. The executive cites the presence of graduates along Bole Road, trying to peddle homes that have yet to be constructed, as evidence of this.

Even with a rule requiring real estate companies to sell housing units only when the construction progress reaches 70 percent, the executive says there is no one to validate whether this rule has been met, “creating a vicious cycle in the industry with a dismal track record of broken promises.”

African states adopted the Yamoussoukro Declaration in 1988 to liberalize and unify the African aviation industry. Thirty-five years later, progress has been slow.The African Union established the Single African Air Transport Market (SAATM) in 2015, setting 2017 as the implementation deadline.

However, as of today only 36 of the 55 AU members have adopted the agreements. SAATM remains far from implementation as all African governments continue to employ protectionist policies that shield their national carriers from competition.African airlines must still negotiate bilaterally for traffic rights to fly between African states.

“Kenya Airways applied to fly from Mombasa to Entebbe two years ago. We’re still waiting for traffic rights approval,” said Dalmas Okendo, Kenya Airways’ head of regulatory affairs.

He spoke at the 11th African Airlines Association (AFRAA) convention in Addis Ababa. African states impose fewer restrictions on non-African airlines, indicating a double standard. While African airlines remain small and fragmented, non-African carriers like Qatar Airways, Lufthansa, and Emirates enjoy open access.

Mesfin Tassew, CEO of Ethiopian Airlines Group, said: “African states fear unfair competition from other African carriers. They believe their national carriers will be at a disadvantage if they open up.”

The CEO added: “Paradoxically, most African states have opened up to non-African airlines while remaining closed to African airlines.”

He says big non-African airlines fly to African states with higher frequency. “When traffic rights are allowed only based on bilateral agreements, SAATM cannot become operational.” He believes African airlines remain fragmented and small due to high taxes, traffic right restrictions, and obstacles to cooperation.

African airlines make up just three percent of the global aviation industry despite there being around 200 of them. In contrast, non-African carriers dominate Africa’s aviation sector due to their larger economies of scale and privileges they enjoy in Africa.SAATM would have allowed African airlines to fly as frequently as they wanted to African destinations. “Why have African states signed SAATM at the AU level if they are not going to implement it?” Mesfin asks.

When asked by The Reporter about what leverage AFRAA has to change African states’ rigid position, Abderahmane Berthe, AFRAA’s Secretary General, said, “We cannot force member states to open up their spaces or implement SAATM.”

After a long wait, however, the convention’s panelists and attendees appear to have lost faith in SAATM. They also stressed the need to pressure governments to allow competition and cooperation in their airspace.

“Unfortunately, it is not happening, but ET Group is pushing Ethiopian authorities to open up the airspace,” Mesfin said, adding that they have given authorities the green light to open the airspace to African airlines. In the past, he says, everything was based on bilateral air service agreements.

Opening up means granting traffic rights to airlines that currently lack access to Ethiopian airspace, he explains. Rwanda Air has not flown to Ethiopia yet. If they want to fly now, authorities in Ethiopia are willing to allow them.

“Kenya Airways flies to Addis Ababa twice daily, and if they want to double that, Ethiopian Airlines is fine with that. Morocco’s Royal Air is asking to fly to Addis, and Ethiopian Airlines gave consent,” Mesfin explained.

Reducing restrictions on traffic rights and hefty taxes would allow African airlines to charge less for flights. Currently, only 10 percent of Africans can afford air travel, according to research presented at the convention.

African airlines could have a greater voice in negotiations with global aircraft, fuel, and spare parts suppliers if they joined forces and made bulk purchases. Boeing would have less bargaining power with a unified African airline than with a single aviation company ordering an aircraft.

Many agree that opening up and cooperating are essential for African airlines to recover quickly from the pandemic. Implementing SAATM could enable African airlines to serve 16 million additional passengers, generate USD 4.2 billion in additional revenue, and create nearly 600,000 new jobs.

Ethiopian Airlines is a prime example of how cooperation can boost profit and efficiency. It is now trying to form partnerships in Nigeria and the DRC following its success in Togo. After signing an agreement with the DRC government, it is preparing to establish a new national carrier.

According to Mesfin, Ethiopian Airlines has an agreement to establish a new DRC flag carrier. “Congo Airways, fully owned by the government, exists but the government is dissatisfied with Congo Airways’ service,” he said.

Mesfin claims the government is eager to launch this airline soon. “We await their word. We’ll find a way to integrate the new airline with Congo Airways,” he said.

Ethiopian Airlines is also preparing to establish a national airline in Nigeria, Africa’s largest economy.

“The Nigerian government invited us to help establish a national carrier,” Mesfin said.

Ethiopian’s goal, he says, is to help Africans develop their airlines. He invites African airlines to partner to establish joint ventures.

“We’ve made major progress. We’re close to signing an agreement with Nigerian investors and the government. We were ready to establish Nigeria Air, a new carrier,” Mesfin added.

However, some smaller Nigerian airlines requested that a Nigerian court block the new airline’s establishment on the grounds it would threaten their business. The court temporarily halted formation. Ethiopian Airlines awaits the final ruling to lift the injunction and proceed with establishing Nigeria Air as soon as permitted.

Ethiopian Airlines has sought partnerships with other large African economies but they were not ready, Mesfin says, noting that Nigeria, Ghana and Côte d’Ivoire declined. “We asked them to partner with us to establish their national carriers. They said no, but smaller Togo was ready to work with us.

Today, Mesfin claims that Ghana is also asking to work with the Group.

“Nigeria is requesting that we set up an airline there. This is after they saw the success of ASKY, which is now profitable after it partnered with ET,” said Mesfin.

The Ethiopian government is also committed to expanding ET’s airport capacity from 22 million passengers per year to 100 million passengers per year within the next five years. Transport and Logistics Minister Alemu Sime stated at the convention that the new airport city will be completed within five years at a cost of five billion dollars, just 40 kilometers from Bole International Airport.

While airlines like ET utilize partnerships, the AU is developing a new strategy to convince member states to adopt SAATM. SAATM is one of Agenda 2063’s primary objectives.

African Civil Aviation Commission’s Secretary General Adefunke Adeyemi said: “We have to negotiate with African states individually to persuade them to implement SAATM. Each country has its own issues. In Nigeria, for example, there are restrictions on frequency and capacity constraints.”

Free visas on arrival are also a problem in all African countries. Inadequate aviation infrastructure is an issue across Africa, according to her. 

“We’re negotiating with customs offices, civil aviation authorities, airports, transport ministries, airlines and other relevant bodies in every African country. This way, we hope to bring all African states on board to implement SAATM,” Adeyemi asserts.

Abderahmane says Africa’s 54 states cannot have 54 international airlines, speculating “we may have five global aviation operators even at the international level.”

“The only solution is for as many regional operators to collaborate and work together as possible. We will strive for this,” he lamented.  

A bustling crowd of Adama Industrial Park employees made their way to the Commercial Bank of Ethiopia (CBE) branch inside the park’s immaculate and meticulously maintained compound on May 2, 2023. Even though their monthly salary ranges from 1,500 to 8,000 birr, they typically deposit a portion of it in the bank. The employees go to a large cafeteria for lunch, where they consume the same Enjera and wot as the investors and management.

However, within the factory sheds of the park, the silence of the majority of the machines, warehouses, and export packaging docks has become the new normal as a result of the two-year conflict in northern Ethiopia, which halted exports.

Five years ago, when Qian Anhua decided to bring Antex Group, a Chinese fashion behemoth, to Ethiopia, everything was rosy and a dream come true.

He established Antex Textile Ethiopia Plc. and rented 11 factory sheds in Adama Industrial Park. The cost of opening the park in 2018 was USD 140 million.

“I first considered Burma, Cambodia, and other countries for the investment. But after I visited Ethiopia, I decided to settle my business here. The kindness of these people really moved me. The landscape is beautiful, and the weather is perfect,” Anhua, founder and general manager of Antex Ethiopia, said.

Anhua claims his initial plan was to establish one large garment factory that could employ 20,000 individuals. “I chose Adama due to its size as a city. Then I leased all of the park’s sheds.”

Over the past five years, he has invested over USD 40 million in the sheds at Adama to improve the power, water, and other infrastructure and service provisions that were lacking when the park opened.

The company manufactures all fashion-designed apparel, sportswear, swimwear, underwear, and other textile and garment items. All of its products are exported to the US, European, and Australian markets.

Initially, the company intended to generate a half-billion dollars annually once reaching full capacity in five years. However, Antex only managed to generate USD 30 million in export revenue in the last three years.

In recent years, expectations have diminished significantly. After the US revoked Ethiopia’s privilege under the African Growth and Opportunity Act (AGOA), Antex lost its international clients, with the company ceasing exports.

“After COVID-19, things went crazy. The Tigray war hurt us too much. All our customers stopped buying from us. It is a big challenge,” says Anhua.

Currently, only seven of Antex’s factory sheds in Adama IP are operational. Two of the initial 11 facilities rented were returned to the Industrial Parks Development Corporation (IPDC), and two remain inactive.

“We stopped exporting completely after the AGOA ban. We have 4,500 workers, and we are struggling not to lay them off. We are utilizing only 40 percent of our installed capacity,” Tigist Gemechu, operational and administrative director at Antex Ethiopia Plc., said.

She says the government had recently given orders to produce military uniforms, diverging from the past trend where it used to place these orders abroad. “But since our exports dropped due to AGOA, the government has started to order locally. So we are substituting the currency the government used to import military uniforms. Though we are not generating forex for now, we are saving the government’s forex,” she said.

The company exported 2.4 million items in 2021 and only 1.3 million pieces in 2022 and 2023, following the AGOA ban, according to Tigist.

Particularly, the government’s decision to substitute the import of military uniforms has given industrial parks like Adama a new line of business. If not, these parks could have been shut down.

Antex produces uniforms for the Ethiopian National Defense Force (ENDF), regional police forces, federal police, and prison guards in massive quantities. Tigist notes that other industrial parks are also receiving orders for military uniforms, so there is competition in the market. In spite of this, she asserts that Antex is unique because it possesses machines and equipment for every stage of the production of military uniforms.

“We do raincoats, logos, embroidery, and others for the military uniforms. All seven of our factory sheds currently active are engaged in producing military uniforms for the Ethiopian government. The output is high,” added Tigist.

Investors operating within the industrial parks also requested that the government accept factory shed lease prices in local currency, as they do not export or generate foreign currency. However, the IPDC failed to reach consensus. The agreement, officials say, requires investors to pay in hard currency. Officials argue that the government cannot repay the loan used to construct the industrial park unless investors generate foreign currency.

IPDC is even considering increasing shed lease costs, according to The Reporter’s sources.

Developed and managed by the IPDC, the country’s 13 public industrial parks provide a range of business opportunities.

Currently, investors in industrial parks are also requesting permission to sell their goods in the domestic market, as the export market is somewhat stagnant. As a result of the conflict in Ethiopia and the loss of AGOA privilege, foreign investors in other industrial parks in Ethiopia have already left, while Adama IP is performing relatively better.

Despite the challenges posed by ongoing conflict, a lack of foreign currency to import inputs, a lack of manpower, and a high turnover rate, Anhua says he never considered leaving Ethiopia.

Exporters are unable to compete on the international market due to the extremely high cost of industrial inputs on the domestic market.

The investor asserts he cannot leave Ethiopia because he has made too many investments here. According to him, this has caused him to have conflicts with his family over the past two years. “My family and I own the entirety of Antex Group. My family wanted to close the business in Ethiopia, but I resisted under tremendous pressure,” he said, adding that he cannot spend a dime without his family’s approval.

“I am still losing money on this project. I am fighting with my family to stay patient. I am asking for a last chance,” said Anhua. “I am spending USD 400,000 from my own pocket every month to import inputs.”

The prolonged conflict in Ethiopia has become a significant deterrent for foreign investors, Anuha claims. He asserts that the greatest challenge in Ethiopia is social instability. “It is a threat to all of us. The conflict of the past five years is extremely discouraging to me. When I hear about a conflict in Ethiopia, my heart stops.”

This decade is the last opportunity for Ethiopia and Africa to industrialize and catch up with the rest of the world, according to him. “Whether you speak Amharic, Oromifa, Tigrigna, or another language, all the people are Ethiopian. We have to compromise. If there is a crime, let the court handle it. If Tigray committed a crime, let that go to court, not to Parliament. The Parliament’s job is to argue about how to develop the economy.”

He asserts that society relies on the elite, and they “must lead society in the right direction.” He contends that Ethiopia, despite claiming to follow China’s development path, does not adhere to what China did correctly.

“China has never had conflict or war in the past four decades, internally or externally. But 40 years ago, everybody in China was fighting each other, just like Ethiopia now. Even now, the US is pushing Taiwan to fight China. But China kept everything quiet. Who is benefiting from the Ukraine-Russia war?” he asked.

“Everybody gives you problems, but you must maintain peace inside and outside. You can disagree, but you must not fight,” he said, adding, “All the ethnic groups in Ethiopia have different ideas. But after all, they have one bigger family and one country. So their ultimate interest is one, which is developing Ethiopia.”

The greatest impediment to industrialization, structural transformation, and economic development in Africa, according to Anhua, is conflict and instability. Besides achieving peace, he cites infrastructure construction as China’s greatest accomplishment over the past four decades.

“If Ethiopia wants to emulate China, it must take these two steps. Ethiopia has expansive, gorgeous, and fertile land. However, it is devoid of development. There is a daily food shortage. Why not develop the land? “Do not wait for someone else to develop it for you,” advised Anuha.

Before the cultural revolution, he claims, the Chinese were also engaged in interethnic conflict. “After the 1980s, we ceased fighting and shifted our focus to economic development. Every developing economy must study China’s successes and avoid its failures. The Ethiopian elite must steer society in the right direction, Anuha adds.

However, he concurs that developing nations must also maintain positive relations with all global powers, striking a balance and avoiding war at all costs. “You keep the markets open. Maintain security’s silence. The investors will arrive on their own, motivated by self-interest. We must disregard what politicians say and concentrate on economic development.”

Ethiopia, he says, must liberalize its markets to attract a variety of investors. “However, FDI will not arrive unless peace is maintained and infrastructure is built,” concluded Anuha.

But this didn’t just appear out of thin air.

This is a result of the increasing role played by MFIs (microfinance institutions) in the financial sector. Credit to the market has reached an all-time high, with the number of MFIs having reached 41 by the end of the past fiscal year and another 40 in the process of being formed.

But there is a price to pay for this.

The interest rates that MFIs are imposing are unprecedented. The highest possible rate is 26 percent, which is over twice the national average for bank loans. The rate is expected to rise as resources become more expensive to mobilize.

Although MFIs have never had a problem finding borrowers, this situation discouraged many from taking advantage of the financing opportunity they provided because of the difficulty in obtaining loans from traditional financial institutions like banks and credit unions.

“I was taken aback when I saw the loan agreement. I had second thoughts after seeing the 26 percent interest rate on the agreement,” claimed a lender who took 600,000 birr for a two-million-birr automobile. “It is very expensive.”

MFIs in Ethiopia charge substantially higher interest rates than their counterparts in neighboring countries. In Kenya, the average lending rate in 2022 will be less than 20 percent. Rwanda, Tanzania, and other East African countries have similar figures.

The outstanding credit of MFIs in Ethiopia amounted at 72.9 billion birr at the end of the previous fiscal year. They have around 5 million active customers. The five largest MFIs (Amhara (rebranded as Tsedey Bank), Oromia (rebranded as Sinqee Bank), Addis, Somali, and Dedebit) control more than 80 percenr of the MFI market. They are all affiliated with the state.

Nisir Microfinance, on the other hand, is among market leaders among private MFIs in Addis Ababa. Early this year, its outstanding credit topped one billion birr. According to Dawit Wakgari, the company’s CEO, it has now reached 1.3 billion birr.

Despite agreeing on the high interest rate, Dawit believes the MFIs have made significant progress in terms of credit disbursement.

“The lending rate appears high at first glance, but it comes with a high cost of mobilizing deposit,” Dawit explained.

According to Dawit, MFIs pay up to 17 percent on time deposits to meet client credit demand.

“The cost of mobilizing resources has reached its peak, becoming very expensive,” Dawit stated.

Other industry insiders concur.

Abdulaziz, the CEO of Ray Microfinance, is one of them.

“Not only is the cost of mobilizing deposits high, but so are the operating costs, because MFIs use a manual system,” the CEO explained.

The cost of mobilizing deposits is also high among banks. This explains why banks encourage people on the street to obtain bank accounts. With MFIs relying on banks and certain investors ready to save their money in time deposits, the lending rate among microfinance institutions has gone up.

“Sometimes, we take an 18 percent loan from a bank to borrow some of our customers,” Dawit continued.

Insiders in the industry, however, are concerned that the current practice among MFIs will cause them to drift from their mission of reducing poverty and increasing access to finance.

“Mission drift is clearly happening in Ethiopia now, though it may be beyond the MFIs’ control,” said an expert who has conducted numerous studies on the industry.

To boost their pool of resources, the expert advises MFIs to mobilize resources primarily from the general public.

Borrowing at a high interest rate and then charging another interest rate should not be their business model, according to the expert.

“Either they change their current market behavior or the central bank assists them in doing so by pushing the Development Bank of Ethiopia to offer some credit till they become financially sound,” the expert concluded.

Given the implications that a delay has on the business decisions that are made, companies want their financial transactions to be processed in real time rather than at some point afterwards. It is the same in Ethiopia, although obtaining such a service has been akin to treading a tightrope for a long time.

When discussing the strides that have been achieved when it comes to the provision of financial services, industry veterans in Ethiopia’s banking sector almost always bring up the difficulties that the country faced in the 1980s and early 1990s. At that time, individuals were even required to present three witnesses in order to open a bank account.

Customers had to wait for days in order to acquire even the most basic banking services, which may take weeks. This pattern, which had been present for more than two decades, was reversed as a result of the partial liberalization of the sector, which made it possible for the private sector to operate within the industry.

In a nation that once had only two state-owned banks, there are now 32 operational banks with an aggregate deposit balance of over 1.5 trillion birr; this represents a great improvement over the situation before, which saw only two banks. A significant advance has also been made in the realm of digital technology in the past four years.

The widespread use of digital transactions is attributable to the proliferation of payment solutions and even mobile money service providers. The concept of mobile banking is becoming increasingly common in Ethiopia. However, not everything has been changed. Some holes are still causing problems for businesses.

Insiders refer to it as RTGS, an acronym that a lot of businesses are averse to. A real-time gross settlement, often known as RTGS, is a type of electronic money transfer in which the actual transfer happens in real time.

In theory, it is a system for the transfer of funds between banks that allows transactions to take place in a continuous manner and for each transaction to be handled in an individual manner without any delay.

RTGS grants the recipient the ability to swiftly and safely access any monies that have been transmitted. It is often administered on a national level by the central bank. Transactions can only take place between participants located within the nation governed by the central bank. The mechanism is typically designated for transactions involving greater amounts of money where it is critical to transfer the funds as swiftly as possible.

But this principle does not necessarily hold true for Ethiopia, as per the experience of traders.

Abay Kiros is a businessperson who works in the garment sector. Because of the nature of his firm, it is expected of him to make transfers to other businesses; nevertheless, doing so has proven difficult for a considerable amount of time. Abay, who alleges that it takes at least three days to transfer funds from one bank to another via RTGS, says “the delay has affected my productivity as well as my relationship with partners and clients.”

Yared Seyoum, another merchant in Addisu Gebya who deals in the sale of traditional garb, ran into the same problem when he was trying to make a transfer.

“I had to wait for more than five days in order to receive 50,000 birr that had been provided to him via RTGS by a business partner,” Yared explained to The Reporter.

Customers had the opportunity to make bank-to-bank transfers by utilizing Ethswitch, which is a national system operator that possesses a system that has connected all of the different types of financial institutions. However, the maximum amount that can be transferred using Ethswitch is less than 100,000 birr, which makes the system less useful for companies that conduct a high volume of transactions.

Tellers at financial institutions typically place the responsibility for a delayed RTGS transfer on their co-workers who provided the final authorization. The moment a consumer walks into a branch with a complaint, the employees there immediately point the finger at the finance managers working at the head office.

A teller at one of the private banks was quoted as saying, “As a teller, all I can do is tell customers to wait because I am powerless to do anything else.”

The banker is confident that there is no connection between the delay and the RTGS system.

“The system is efficient and has been proven globally,” the Banker said, adding, “The delay is the result of the liquidity shortage that has been haunting the industry for the last three months.”

There are also unethical activities in the sector, such as the habit of finance managers at some banks knowingly delaying the transfer of cash during the bank’s closing period and at times when the bank is experiencing a liquidity crunch.

Abay, the trader, has the same kind of suspicions as well.

“The depositor has the right to make the transfer at any point in time, so there should be a consequence when banks deliberately delay funds. There should be a consequence when banks deliberately delay fund, no matter how good their liquidity position is,” he concluded.

Contributed by Daniel Nigussie

At Chereta, such products are put up for auction by traders. The traders, in turn, obtain the clothing from individuals that the authorities regard as contrabandists. Mitiku was never interested in joining those at the top of the market chain because of the legal risk it poses. He has instead been reliant on supplies that he got from Chereta traders.

Now, he believes the business is too lucrative to ignore, and he is developing an interest in joining individuals who are bringing in the products through informal means, despite the fact that this practice is prohibited.

“To do it, you need a lot of money, several millions, and an extensive network in the regional administrations and their security apparatus,” he said, seemingly accepting the fact that he is only able to sell the clothing on the streets during weekends.

In his own words, the convenience and expansion of the business in recent years, the diversification of both import and export contraband items, and the enormous profits they are earning are what attracted him to the contraband trade.

However, the industry’s dense web of connections is making it challenging for him to break in. He has no choice but to only witness the rapid growth of such lucrative businesses within his circle.

The increase in inbound and outbound contraband trade has recently been the subject of intense debate among top government officials, including Deputy Prime Minister and Minister of Foreign Affairs Demeke Mekonen, who indicated that it now poses a threat to national security.

“Contraband is one of the barriers preventing us from fully utilizing our capacity and resources. Smuggling of all our resources, including human resources, is now the most serious national security threat, negatively affecting our economic, sociological, and political situations,” Demeke said a month ago.

Last week, a discussion between media professionals and officials from the Ministry of Revenue and the Ethiopian Customs Commission was held as part of the new campaign announced by the Ministry of Revenue. Much of the conference was devoted to Customs Commission officials detailing how the contraband trade has grown more rapidly than ever in recent years.

During the past eight months alone, the Commission has been successful in seizing contraband items worth almost seven billion birr. Of this total, 5.3 billion birr worth of contraband items were confiscated while being imported illegally, and 1.6 billion birr worth contraband were confiscated in the process of being illegally exported.

It is the highest amount ever recorded.

Mulugeta Beyene, deputy commissioner of the Commission’s legal compliance section, detailed how contraband activities have evolved and continue to pose a security concern to the country.

The Commission confiscated illicit goods worth a billion birr four years ago, two billion birr the following year, and three billion birr two years ago. Mulugeta revealed that four billion birr worth of contraband was captured last year.

Figures provided by Commission officials illustrate how dramatically the contraband is rising, just four months before the current fiscal year ends.

During the course of his presentation, the Deputy Commissioner shared that the main corridors used for smuggling either into or out of the country at large. He made the accusation that the regional governments were not being sufficiently steadfast in their oversight of the activities.

The eastern part of Ethiopia, including the Somali region and Dire Dawa, is believed to be the country’s main corridor for contraband trade, with over a thousand kilometers of border in the area. The other corridor runs through southern Ethiopia, bordering the Oromia and Southern regions.

Agricultural products are smuggled out of Ethiopia through the Shashemene, Hawassa, and Moyale corridors, while electronic items are smuggled into the country along the same routes, as detailed by Mulugeta.

Contraband has a different form in the Amhara and Tigray regions of northern Ethiopia, as there is a high rate of firearms traveling around through contraband, which the Commission’s officials explained is more dangerous. Minerals and agricultural products are smuggled in this area as well.

It was unusual for a government official to criticize other state offices for allegedly refusing to assist the Commission in curbing unlawful trade. But the Deputy Commissioner laid the blame on the Regional Officers for their lack of commitment to cooperating with the Commission in preventing contraband activities.

“With all the security forces in the regions, the contraband trade proliferates. There hasn’t been any commitment among the regions, and there is an unwillingness from the security forces to make sure the rule of law is respected,” he said.

Narcotics, cigarette goods, clothing, electronics materials, drugs, food and beverages including the expired ones, cars and spare parts, individual or group firearms, bombs, cash, and minerals have all been confiscated by the Commission while unlawfully entering Ethiopia. Mulugeta explained that nearly everything, including humans, is smuggled out of Ethiopia. This may also include legally imported items such as petroleum, that are then sold in neighboring nations.

Exportable commodities such as Khat, oilseeds, pulses, and even coffee from Ethiopia are recently being smuggled out to neighboring countries, only to be exported from these countries later, as admitted by key government officials.

The mining industry is another important contributor to the unlawful contraband operations, which is to blame for the decline in Ethiopia’s export performance this year. “The hard currency Ethiopia gets from minerals is shrinking over time because it is highly susceptible to contraband,” Mulugeta added.

Contraband movements largely occur late at night, with an unlawful support group of youths known as “Abri” roaming with the merchandise. They escort the products by bribing security officials or even utilizing federal police emergency vehicles such as ambulances, according to the deputy commissioner.

Despite the authorities’ ambition to prevent smuggling, getting involved in the wider scale of the illicit trade, on the other hand, is a far-reaching desire for Mitiku and several others who are keenly interested.

This year, they have been tasked with addressing the federal government’s record-high 310 billion birr deficit during the current fiscal year, which will end on July 8, 2023. A gap of this amount appeared at the end of a period that was marked by a sluggish increase in tax revenue due to both internal and external reasons.

“Following the pandemic and domestic conflict, it has been a challenging time for Ethiopia to meet tax revenue targets and resume fiscal consolidation,” Alisa Strobel, senior economist at S&P Global, told The Reporter.

As the country was beginning to recover economically from the coronavirus pandemic, which caused a loss of income tax in the billions of birr as businesses saw a sharp decline in revenues and the dominant segments of the economy, service and construction, were hit hard, Ethiopia found itself in the midst of a civil war.

The war exacerbated an already dire situation. It caused a spike in government spending due to rehabilitation programs for victims of war and an accompanying hike in the defense budget. The humanitarian expenditure could have gone even further if it weren’t for the assistance of donors. Also, in war-torn regions, tax authorities had no way to collect revenue.

When humanitarian aid and the cost of supplying the military are factored in, even a conservative estimate of the war’s economic impact puts the loss at more than 400 billion birr. War direct damages are not included because officials have previously estimated they could top USD 20 billion (one trillion birr).

Following the speedy execution of the peace agreement agreed between the federal government and the Tigray People Liberation Front (TPLF), reconstruction is now on the table, and officials are using all available alternatives to gather resources. Between USD 20 billion and USD 29 billion has been bandied about as the likely cost of reconstruction.

The budgetary pressure will be exacerbated by higher spending on reconstruction costs too, according to Alisa.  

“A larger fiscal deficit this year is expected at around four percent of GDP,” the economist said.

One strategy adopted by the authorities to cope with the budget constraints is to reduce spending as much as possible. The education and transportation sectors both scrapped a number of their capital-intensive projects. The subsidies that had been imposed in the past to provide assistance to those in need are either partially or completely lifted.

“The decline in the government’s monthly outlay for fuel subsidies, which began gradually since July 8, 2022, will modestly support some of these fiscal pressures,” Strobel remarked.

However, Abdulmenan Mohammed (PhD), a financial specialist with over two decades of expertise, sees inflation as undermining efforts to cut expenditures. Year-on-year inflation has been above 30 percent for more than a year and even went above 34 percent last month.

“The government must work on the inflation, which is increasing government expenditures,” said Abdulmeman, adding, “The government must seriously consider restructuring the government apparatus, aiming to reduce expenditures, waste, and corruption. This helps to reduce the budget deficit and borrowing from the central bank.”

Another approach to closing the budget gap is to increase domestic revenue. Currently, tax laws are being revised. Regional and municipal governments will shortly begin collecting property tax, which will reduce their reliance on the federal government and give it more fiscal space. The VAT proclamation is being revised to include industries that were previously exempt from this form of tax. Likewise, the income tax proclamation is being revised. All changes are intended to increase tax revenues.

Despite efforts to increase revenues, certain expenditure components have already pushed government spending well beyond what can be raised locally. In recent years, debt service costs have escalated due to the approaching maturity of external loans secured during the previous decade. It’s so serious that the government had to ask external creditors to restructure their debt.

In light of the country’s budget crunch, experts believe restructuring or direct budgetary assistance is essential.

“We do expect to see an increase in project-based financing from multilateral and bilateral sources, for example, for reconstruction efforts, but direct budgetary support from the IMF or debt restructuring under the G20 Common Framework is ultimately needed. And indeed, the urgency for prompt debt restructuring is exacerbated by higher debt servicing costs over the next two years,” Strobel said.

Currently, grants from external sources appear to be growing at a snail’s pace. After reaching almost null during the war in North Ethiopia, which scared away donors such as the European Union, external grants in the form of direct budgetary support are now showing a slight increase but are still far below the sum required to finance the government’s deficit.

The ongoing delays in budget grants and external concessional loans have prompted the government to place significant emphasis on domestic financing in the form of treasury-bills and direct central bank advances, according to Alisa.

About 473.4 billion birr in treasury bills have been put up for auction by the government since the beginning of the current fiscal year. A total of 277 billion birr worth of T-bills were sold to banks and non-bank institutions (mainly pension agencies), with one-third of the bills maturing in less than six months and the remainder in one year. As of December 31, 2022, there were a total of 315.4 billion in outstanding T-Bills.

The average yield on T-bills hovered around 9.5 percent, making them the government’s main source of deficit financing, although not sufficient to close the gap. Direct advances from the central bank, which are often regarded as being the same as printing money, are currently being used to cover the gap, which remained high even after the sale of T-bills.

During the first half of the current fiscal year, the federal government borrowed 40 billion birr from the central bank as a direct advance. But direct advance is the government’s last resort, and it is highly unlikely that it will be used due to pressure from the Bretton Woods institutions.

“With a resumption of an IMF support program, it is unlikely, however, that direct central bank advances will continue in this regard. The government has overall reoriented its public spending away from productive projects and toward rehabilitation and Ethiopia’s reconstruction needs,” she remarked.

For economist Girum Kassa, securing lasting peace stands out as the most effective method for preventing Ethiopia’s economic misfortunes.

“Political will and commitment for a lasting peace are crucial currencies that Ethiopia needs more than ever. Once political stability is ensured, we can secure budgetary support from bilateral and multilateral agreements, among others, to stabilize the economy. Plus, additional investment programs could be forged,” Girum emphasized.

Every weekend, gold miners in Benishangul Gumuz regional state, Ethiopia’s top gold producer, travel from mining sites to Asosa, the capital seat of the region. Asosa zone, Metekel zone, and Kamashi zone are the major gold sources of the region, which is part of the gold belt that lies beneath Sudan and the north-western part of Ethiopia.

The miners spend the whole week digging in the fields, but on the weekends, they have to drop the gold they mined at the Development Bank of Ethiopia (DBE) branch in Asosa. All the gold mined has to be submitted to the central bank, but the DBE represents the central bank in the case of Benishangul.

Currently, there are 30 artisanal miners and 77 special small-scale mining licenses active in Benishangul. Each special small-scale mining license consists of a minimum of five individuals. But at least 35 percent of the region’s population is engaged in traditional gold mining as their primary source of livelihood.

However, the amount of gold these miners delivered to the government substantially dropped. In the past eight months, between July 2022 and March 2023, the region supplied 332.4 kilograms of gold to the central bank via the DBE branch, according to data from the Ministry of Mining. However, last year during the same period, over 20 quintals (2,000 kilograms) of gold were supplied from Benishangul alone, according to Awoke Tesfaye, communications director at the Ministry.

Of course, Benishangul fares better compared to the gold supplied by other regional states. There are 96 special small-scale miners in the Oromia regional state, 41 in the Southern Western regional state, and 47 in Gambella. However, gold supplied from all the regional states to the central bank in the past eight months has been slashed by more than half. This is a free fall from the 8.7 metric tons (8,700 kilograms) of gold Ethiopia exported last year.

“The amount supplied by artisanal miners and special small-scale miners has substantially dropped from last year,” said Awoke. “Most of the gold is going to the contraband market, due to several factors.”

From Benishangul alone, up to 120 tons (120,000 kilograms) of gold could be harvested annually, according to data from the region and the Ministry. But to do this, at least seven large-scale commercial miners have to be operational in the region. Currently, Midroc Gold is the only operational industrial-scale miner, having supplied 205 kilograms of gold in the past eight months.

A significant amount of gold from Benishangul and Gambella flows largely to Sudan and South Sudan. On the other hand, the gold from Oromia and southern Ethiopia is smuggled out of the country via Kenya’s and Somalia’s borders.

Ethiopia’s border with Sudan and South Sudan remains largely porous for informal activities. Especially Benishangul, which shares over 700 kilometers of border with the two countries, has become the epicenter of smuggled gold.

The contraband network, which is based on well-established informal agreements, stretches from gold suppliers on the Ethiopian side to money and machine suppliers on the Sudanese and South Sudanese sides.

According to The Reporter’s assessment, particularly on Benishangul, the parallel market involves several factors, but mainly, the central bank’s gold purchasing price is discouraging the players. The informal market players are offering a much better margin.

Currently, the official price the central bank offers for a gram of gold is 3,800 birr in Asosa. However, the parallel market offers between 5,800 and 6,000 birr per gram. This price is offered by the informal players on the Ethiopian side. Once the gold is smuggled across the Sudanese border, it is sold for anywhere between 7,000 and 10,000 birr per gram.

“The illegal market is offering a much higher margin. Miners and gold suppliers in Benishangul have no interest in supplying gold to the Ethiopian central bank. They only give a small amount of what they find to the central bank just to get their license renewed. If a miner finds one kilogram of gold, it is totally smuggled out. It does not come to NBE,” said an official of the Benishangul regional government, who assisted in the assessment.

He says that the gold contraband is attributable to corruption in the government system, loopholes in the mining law, and external factors.

Basically, there are gold suppliers, who are licensed intermediaries that collect gold from the miners and supply the gold to the central bank branches in the area. To get the license, they are required to have the capital to purchase at least 250 grams of gold at a time. So, usually the suppliers deposit one million birr in their account, whether it is borrowed money or genuinely their money. Once they get the license, the account is usually emptied. After acquiring the license, they collect gold from miners but usually supply the gold to the informal market.

In some regions, the number of suppliers is higher than the number of miners. Currently, there are 134 gold suppliers in Oromia, 106 in Benishangul, 41 in Gambella, and 20 in the south-western regional state, according to the data from the MoM. But the official from Benishangul says the figure reaches up to 420 in his region alone.

“Most of the gold suppliers and miners have relatives in government positions. Otherwise, you cannot get the license in the first place. Each miner and supplier has a relative at the customs office, mining office, economic office, or other post,” the official stated. The official says that their network stretches from the local level up to the national level.

“Some gold suppliers have international licenses,” added the official. He says that apart from the smuggled gold, it is also sold to jewelry owners, including in Piassa, Addis Ababa.

“Ethiopian officials at cluster, kebele, woreda, regional, and even federal levels are in the network. Only relatives of the officials in this network get gold mining and collecting licenses. There is almost no regulation for gold collectors. This loophole was intentionally left open.”

Since June 2022, the National Bank of Ethiopia (NBE) has bought gold from the miners, adding a 35 percent premium on top of the monthly average price of gold in the international market. The margin was only five percent before that. Shortly after the NBE’s decision, gold supply to the NBE improved. However, this could not continue, as the informal buyers offer a higher premium than the NBE’s 35 percent.

Ethiopia’s revenue from gold has been plummeting over the decade. However, it climbed to USD 546 million in the 2021–22 fiscal year, just before it dwindled by 59 percent during the first half of the current fiscal year.

“I found the gold using my own energy, time, and ability. I have to sell it to those who offer me better rice. Why should I sell it to the government, which offers an unfair price?” asked Hamid Mohammad (name changed on request), a gold miner in Benishangul.

Hamid and several small-scale miners in the region say the government demands gold without providing the necessary support.

“We need a lot of machines to mine the gold. Drillers, crushers, soil millers, washers, and other mining machines are required. There is no machine-lease financing system for the mining sector in Ethiopia. But our informal gold clients provide us with such technologies on loan. Then we provide the gold and pay the debt,” he said.

The miners take these machines, supplied by gold smugglers, to the other side of the border. After using the machines, the gold is directly supplied to the gold smugglers in Sudan, who supplied the machines. So it is an informal contract. The international smugglers supply the machines, the Ethiopians supply the gold, and the debt is wiped.

Some officials in Benishangul also say that even the large-scale miners are engaged in the gold parallel market.

“Of course, the large-scale miners in the region did not launch operations officially. But they are taking out the gold. Plus, they have suppliers’ licenses on top of the gold development license they have. Therefore, they are also collecting gold from the market,” said the official in Benishangul.

For Awoke, there are several complicated factors behind the escalating gold contraband.

But Wondemagegnehu Gebre-Sellassie, a counselor at the law firm Wonde and Associates and a mining lawyer working for a number of large-scale gold mining projects in the pipeline in Ethiopia, argues to the contrary.

“Several industrial-scale mining investors are in the pipeline in Ethiopia. Some of them are at the trenching stage, taking samples of the soil in the gold reserve area for analysis. It is wrong to conclude they are taking out gold and selling it before launching operations,” Wondimagegn said. On average, he claims that it takes 10–15 years to start up an industrial-scale gold project.

Where does the contraband gold go to?

So far, the informal gold market is willing to pay a higher premium to purchase gold from developing countries, mainly in Africa. Just like Ethiopia, gold is sourced from several African countries. After leaving Africa, it mainly enters Dubai and India, becoming legal in the process. But these are not the final destinations of the illicit gold market.

At least two major hypotheses have been advanced to trace where all the gold purchased at inflated prices is going.

The first is that the gold sourced from developing economies is ending up in the reserve stocks of the BRICS (Brazil, Russia, India, China, and South Africa). This is mainly because these countries are stocking gold to back their currencies with the precious metal. Backing currency with gold is basically used to maintain the stability of the currency.

After US President Richard Nixon enacted the decision that closed the US’s gold window in 1971, which also brought an end to the Bretton Woods system, the global trend to reserve gold to back currencies has diminished.

The dollar is basically believed to be the major source of the US’s power. Currently, 60 percent of the global reserve is in US dollars.

But after the Russia-Ukraine war, the dollar’s reign is now under threat. The current expectation is that the BRICS leaders will introduce a new gold-backed currency to speed up the dedollarization process. The new currency enables BRICS members to transact without the need for the dollar as a medium of exchange.

This week, Vassily Nebenzia, Russia’s ambassador to the UN, confirmed that the BRICS nations are working on a new currency to speed up depolarization and reduce the impact of the sanctions on Russia.

“Their financial framework is not something that we can depend upon, knowing that they, at any time, can switch off; or cut off the world-wide installment framework, that dollar exchanges are not solid any longer,” said Nebenzia. “We have been talking that we ought to de-dollarize’ the world economy some time recently, and we need to include nearby monetary forms and more inside exchange with Russia.”

The project for the new currency is expected to be disclosed during the BRICS summit in August 2023. Several developing countries like Turkey, Argentina, Iran, Saudi Arabia, and others have already expressed interest in joining the BRICS new currency.

Experts say the new currency is likely to favor cryptocurrencies since it will be difficult to replace the dollar with existing currencies like the yuan or ruble.

“The BRICS countries have been purchasing gold massively in the past few years. They are stockpiling it. Otherwise, who would collect gold at such expensive prices—even more than the international prices?” asks Samson Hailu, an independent researcher. Samson says most of the gold collected, especially from African countries, finally ends up in the stocks of the BRICS countries.

However, Tewodros Mekonen (PhD), a former advisor to the NBE and the International Growth Center (IGC), begs to differ.

“We have to conduct several analyses to find out where the gold is going. We have to study what is determining the international gold price, which is already high. The price has to be decomposed to find out where the gold demand is coming from,” Tewodros said.

He says the recent economic shocks need to be analyzed to find the real price of gold. “So, we cannot say the BRICS are collecting gold just because the demand for contraband gold surged. There is no doubt that in Ethiopia, miners prefer to sell on the black market because it offers double the official price.”

Over the past week, the price of a 29-gram of gold has surpassed USD 2,000, a historic mark.

The second area of speculation regarding where the gold ends up is among the wealthy. Experts in this category argue that people who have disposable income, be it in Ethiopia or developed countries, are converting their money into gold. This is mainly due to the fluctuating strength of currencies around the world, including the dollar. Several strong currencies around the world are losing their status, following the layers of economic shocks the world has been facing since the COVID-19 crisis and the Ukraine war.

Can Ethiopia stop gold contraband?

The contraband gold market can be minimized, mainly if the government takes serious measures and clears out the corruption in the mining sector, customs, and economic bureaus, as per recommendations.

“The government can control the illegal circulation of gold at check points across Ethiopia and at customs stations on borders. However, the gold smugglers simply pass even the checkpoints because officials are also involved in the gold contraband,” says the official from Benishangul.

The official claims that several gold smugglers, after being caught at checkpoints, are released. “Of course, the vast majority of the illegal gold network remains undetected. There are armed groups that directly take the gold from mining sites and smuggle it out of Ethiopia.”

They also believe that the government should reverse the law that allows the issuance of licenses for gold intermediaries and suppliers. They say the central bank must increase its presence and directly collect gold without the involvement of intermediaries. Ensuring transparency in the licensing of gold mining is also crucial. Auditing of the amount of gold mined against the amount supplied to the NBE is also recommended. Some experts recommend the government increase the premium on gold purchases to discourage the attractiveness of the black market.

Currently, the Ministry is studying a new gold purchasing premium, which reportedly aims at increasing NBE’s purchasing premium to 85 percent from the current 35 percent.

“We have submitted the study to the NBE,” confirmed Awoke, refraining from mentioning the new figure. However, he says the MoM does not believe that increasing the premium will be a lasting solution.

“The black market premium will also increase, after some time, and exceed the official premium. We believe the contraband gold market can be stopped only by deploying security forces at the mining sites. Currently, the Defense Force and federal police forces are already being deployed to major gold mining sites,” Awoke said.

Though he is new to the sector, Habtamu Tegegn (Eng.), newly appointed Minister of Mining, also seems to understand the Achilles heel of the mining sector.

“A huge mining resource is being abused. Especially the gold contraband, which is significantly increasing. Theft of gold has increased. The government system itself is part of the problem,” he said during his first appearance as minister at the Parliament this week.

The miners, according to him, need several supports, including technology, a laboratory, and financing. “There is nothing invested in the mining sector. There can be no return without investing. It will take several years to change this situation,” he added.

Once again, the issue is now in the spotlight as the Ministry of Finance (MoF) revises the excise tax proclamation in response to the need to boost tax income and the persistent call from various interest groups to lower rate on what they call “the sin tax” on some products vital to the country.

Regulators, executives, manufacturers, associations, and stakeholders convened in one of Ethiopia’s House of People’s Representatives (HPR) venues on March 29, 2023. The Plan, Budget, and Financial Affairs Standing Committee met, presided over by its chairperson, Desalegn Wodaje, to discuss the draft amendment to the excise tax proclamation tabled before Parliament at the end of January.

The amendment was required due to rising government expenditure, which should be compensated by higher tax revenues, according to officials from the MoF, the institution in charge of drafting the bill.

“One of the goals of excise tax is that such an indirect tax has a big power to generate more income, and thus some goods face excise tax for this purpose,” Eyob Tekalign (PhD), state minister for the Finance Ministry, said while making his opening remarks in the meeting.

“The amendment comes as we are preparing the budget for the next fiscal year, and that requires boosting tax revenues,” Eyob pleaded with the House for urgent approval of the proclamation.

The draft proclamation makes telecommunications services excisable, with a five percent tax imposed. The government anticipates that levying the indirect tax on telecom will generate additional revenue, but how much will be collected remains to be seen.

The 71 million users of century-old, state-owned ethio telecom will be the main contributors to the excise tax. Ethio telecom earned 61.3 billion birr in revenues last year, while it generated 33.8 billion birr in the first six months of this year. Safaricom, an intercontinental operator, now serves the telecom sector with over three million subscribers. Its services will be subject to the same excise tax as ethio telecom, with its contribution expected to rise as its client base expands.

As there are new sectors that will face excise taxes, there will be those that receive a reduction.

There will be exceptions for video cameras and televisions. Both are now subject to a 10 percent excise tax due to their status as luxury items, but the draft proclamation removes them from the list of excisable products. Another change will be made to the excise tax imposed on automobiles. The adjustment was implemented to reduce the high tax on autos.

Ethiopia has the highest rate of automobile taxes among many African countries, ranging between 66 and 374 percent. Kenya has the highest rate of all car taxes at 96 percent, Rwanda has 71 percent, and Ghana has 40 percent. The current proposed measure divides new car excise tax rates into four categories based on engine capacity.

Importers of new vehicles with engine capacities less than 1,500 cubic centimeters (cc) will be charged 10 percent, while those with capacities greater than 2,500 cc will be charged 20 percent. New vehicles with engine capacities up to 3,000 cc will bear a 30 percent excise tax, two times lower than the rate faced by vehicles with capacities greater than 3,000 cc.

Many consumers were relieved to hear that the government will exempt and reduce some taxes on products, including cars and cameras, but others are worried about the still-high excise tax imposed on products like tobacco. Representatives of the National Tobacco Enterprise (NTE), whose major shareholder is Japan Tobacco International (JTI), raised the issue in Parliament about the impact of excise and other levies on expanding illicit trade activities.

Yitbarek Zekarias, chairperson of the tobacco company’s workers union, advised the government to curb the illicit trade before it has a catastrophic impact on the country as a whole. He boldly stated that the excise tax opened the door to the proliferation of untraceable products.

“The tax that aims to reduce consumption of the products has largely increased illicit trade activities in the country. This makes the legally existing company shambolic while the youth are being addicted to products that are illegal,” he said.

Representative of the tobacco monopoly, Yayehrad Abate, voiced concern about the growing role of illicit tobacco trade in the market, just after the adoption of the existing excise tax proclamation in 2020.

Notwithstanding his agreement to the implementation of an indirect tax on his company’s six goods, he encourages an investigation of whether the measures implemented have accomplished the government’s health and income objectives.

Yayehrad remembered occasions in which his colleagues and he encouraged the administration to avoid imposing a 197 percent excise tax since illicit trade regulation was disorderly. He revealed last Wednesday that the move had forced his company to cut at least 40 percent of its total production.

“Had this 40 percent of product reduction contributed to the decrease in consumption by society, we would have concluded that the objective by the government was achieved,” he said. “But according to the study we conducted, the 55 percent market share of the contraband before the excise tax adjustment increased to 65 percent afterwards.”

Yayehrad’s company’s production cut resulted in two straight years of losses and the layoff of 318 workers, he explained.

Producers of alcoholic beverages also made bold claims about the government’s incapacity to control illicit trade activities. Representatives of the National Alcohol and Liquor Factory expressed concern about the public’s potential decision to move to unregulated local alcoholic beverages as a means of avoiding the rising prices of their products.

Mekonen, one of the representatives, praised the government for lowering the excise tax on alcohol inputs. This was done in order to avoid charging the same item twice. Yet after the amendment three years ago, the rate of excise duty on these goods has gone from 60 to 10 percent.

As a result of the excise tax, Mekonnen says his consumers are more likely to buy illegally manufactured goods because his company’s products are taxed multiple times, starting with the purchase of basic input and ending with the final sale.

“Repeated taxation has severe repercussions. Among them is the expansion of locally made alcoholic beverages like Areke as well as the importation of illegally imported beverages,” he said. “The government loses a significant amount of revenue as a result of the growth of these illicit activities.”

Nebiyou Zeleke, deputy chairperson of the workers union at the National Alcohol and Liquor Factory, was worried about his union members as he talked about how they were losing their jobs. He asked if the government has a plan for the thousand people who work directly in the market and the many others working at the company if the illicit trade wins the market.

He also seemed more worried about the health consequences. “The government should realize the disastrous health effects of not being able to control the production and sale of illegal alcohol,” he said. Several consultants and people from health-related civil society groups spoke out against what the alcoholic product manufacturer’s representatives were saying.

Melaku Getachew, who works for an organization that fights non-communicable diseases, urged the representatives of the tobacco monopoly and alcohol factory to differentiate between illegal trade and excise tax.

Neither the argument made by the factory’s representative nor the labor union made sense to him because it made him think that factory-made products are better for the health than goods that are sold illegally. “I don’t think it’s fair to say that illegal goods have bad effects while your own product is bad,” he said.

Melaku felt the argument made about the staff layoffs was comical. He said that tobacco kills about 17,000 people in Ethiopia every year. He based this on a study from five years ago.

“Should we argue about the few hundred people who lost their jobs or the 17,000 people who died because of the product?” he asked. “This is a health bill to pay.”

In the middle of a debate about the role of excise taxes in illegal trades, a public health researcher, Sisay, disproved the results that Yayehrad had presented. He and his team had looked into how much of the market was made up of the illegal tobacco trade three years ago. They found that it was never 55 percent but rather 18 percent, according to the researcher.

“If the production really went down by 40 percent, it means that the goal for public health was met,” he said. “Because that was our main goal, and the world is also heading toward the endgame with tobacco. There is not a single good thing about smoking, zero benefit.”

Sisay cited a study conducted by the Ethiopian Public Health Institute. About 87 percent of the tobacco used in Ethiopia is the brand Nyala, and the price of illegally imported tobacco is higher than the price of tobacco made in Ethiopia, according to the study.

“There is still room for more taxation,” the researcher concluded.