Report No. 23294-ET The Federal Democratic Republic of Ethiopia Developing Exports to Promote Growth April 25, 2002 Poverty Reduction and Economic Management 2 Country Department for Ethiopia Africa Region Document of the World Bank GOVERNMENT FISCAL YEAR: JULY 8 - JULY 7 Currency Equivalent Currency Unit = Ethiopian Birr US$1= Birr 8.02 (March 31, 2002) ABBREVIATIONS AND ACRONYMS AAWSA Addis Ababa Water and Sewage Authority ACP African, Caribbean and Pacific countries ADLI Agricultural Development-led Industrialization AGOA African Growth and Opportunity Act BMW Bonded Manufacturing Warehouse COMESA The Common Market for Eastem and Southem Africa COMTRADE United Nations Commodity Trade Database CSRP Civil Service Reform Program EAL Ethiopian Airlines EBA Everything But Arms EEPCO Ethiopian Electric Power Corporation EIA Ethiopian Investment Authority EPRDF The Ethiopian Peoples' Revolutionary Democratic Front EPZ Export Processing Zone ESL The Ethiopian Shipping Line ETC Ethiopian Telecommunications Corporation EU European Union FAO United Nations Food and Agriculture Organization FAOSTAT FAO Statistical Database FIAS The Foreign Investment Advisory Service FDI Foreign Direct Investment GDP Gross Domestic Product GNP Gross National Product GSP Generalized System of Preferences [CD Inland Container Depot ICO Intemational Coffee Organization ICRG International Country Risk Guide Index IDA Intemational Development Association I-PRSP Interim Poverty Reduction Strategy Paper ISO Intemational Standards Organization MFA Multifibre Arrangement MNCs Multinational Corporations MTSE Maritime and Transit Shipment Enterprise MVA Manufacturing Value Added NBE National Bank of Ethiopia NFS Non-factor Services NGO Nongovemmental Organization ODA Official Development Assistance OECD Organization for Economic Co-operation and Development PRGF Poverty Reduction and Growth Facility SSA Sub Saharan Africa UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organization Vice President: Callisto Madavo Country Director: Ishac Diwan Sector Director: Paula Donovan Sector Manager: Fred Kilby Task Team Leader: Miria Pigato CONTENTS SUMMARY AND RECOMMENDATIONS ...............I.................. INTRODUCTION ..1 1. MACROECONOMIC AND TRADE PERFORMANCE IN THE 1990s ......................................5 Background ..........................................................5 Trade policies and performance ..........................................................8 Conclusion ......................................................... 14 2. EXPORT SECTORS ......................................................... 15 Improving the performance of agricultural exports ......................................................... 15 Developing manufactured exports ......................................................... 20 New market access opportunities: The African Growth Opportunity Act and the Everything But Arms Initiative ......................................................... 24 Improving competitiveness ......................................................... 26 Conclusion ......................................................... 31 3. THE OUTLOOK ......................................................... 33 The extemal environment ......................................................... 33 Outlook for key current account revenues ......................................................... 36 Conclusion ......................................................... 39 4. A STRATEGY TO PROMOTE RAPID EXPORT GROWTH .................................................... 41 A Strategy for rapid export growth ......................................................... 41 Immediate measures to benefit from new market opportunities ......................................................... 41 Policies to improve the business environment and accelerate global integration ................................ 46 ANNEXES ......................................................... 51 ANNEXI ......................................................... 53 Statistical Tables ......................................................... 53 ANNEXH..73 Telecommunications .73 Power.75 Urban Water Supply and Sanitation .76 ANNE X m ...............79 Export Incentive Schemes ................. 79 Export Finance ................. 85 BIBLIOGRAPHY .91 BoxEs Box 1: Is Diversification into Manufactured Exports Possible? Box 2.1: The Coffee Sector Box 2.2: Commodity Exchanges Box 2.3: Implications of the COMESA Agreement Box 2.4: High Transport Costs Penalize Exports Box 2.5: Innovation and Learning in a Steel Company in Ghana Box 4.1: FDI and Development Box 4.2: The Investment Code FIGURES Figure 1.1: Ethiopia - REER and Terms of Trade Indices 1979/80 - 1999/00 Figure 1.2: Trends in Export and Imnport Volume, 1992/93 - 2000/01 Figure 1.3: Trends in Manufacturing Output and Exports 1981-2000 Figure 2.1: Coffee Exports Figure 2.2: Oilseed Exports Figure 2.3: Pulses Exports Figure 2.4: Annual Wages in Clothing Industries for Ethiopia and Comparators in 1997 (US$) Figure 3.1: Non-Energy Conunodity Price Index (US$) Figure 3.2: Coffee Prices, Monthly, 1990-2001 Figure 3.3: Export Unit Values-Hides & Skins Figure 3.4: Export Unit Values-Dry Beans TABLES Table 1.1: Macroeconomnic Indicators, 1981/82-2000/01 Table 1.2: Tariff Reform Table 1.3: Trade Indicators, 1981/82-2000/01 Table 2.1: Agricultural Export Earning Growth, 1990-99 Table 2.2: Ethiopian Chat Exports Table 2.3: Ethiopia And Comparators' Manufacturing Production And Exports (1998) Table 3.1: Indicators Of The External Environment Table 3.2: Merchandise Trade, Volume (1995 Prices) Table 3.3: Outlook For Current Account Revenues This report was prepared by a team led by Miria Pigato (AFTP2) and cornprising Robert Keyfitz, Sibel Kulaksiz, Sanjaya Lall, Donald Mitchell, Yung W. Rhee, Andrew Singer and Gaiv Tata. The team visited Ethiopia during July 2-12, 2001. The report benefited from comments by its peer reviewers Faezeh S. Foroutan, Larry Hinkle, Dorsati Madani and by Alan Gelb (Chief Economist), Fred Kilby (Sector Manager) Dominique Guillaume (IMF) and Duvvuri Subbarao. It was desktopped by Tanisha McGill. The report was discussed with Ethiopian Government officials in February 2002. SUMMARY AND RECOMMENDATIONS 1. This report proposes a strategy to promote growth and poverty reduction through export development. It supports the strategic directions embodied in the Interim Support Strategy Paper (I-PRSP) and re-affirmed in the recent Fourth Congress of the Ethiopia People's Revolutionary Democratic Front (EPRDF). These documents stress the importance - within a broader development strategy - of improving economic governance and the environment for investment, making Ethiopia an active participant in the world economy. The report reviews the performance of trade policies and exports in the 1990s; discusses the new market opportunities; presents the outlook for the intemational economy; and proposes a sequenced strategy for launching an export drive that would lead to higher growth. The report's main conclusion is that while the economy has responded well to stabilization measures and is opening up, it still has a long way to go. Reforms to increase exports must be broad based - that is extend well beyond trade and investment liberalization to include the regulatory framework, the quality of supporting infrastructure and the overall economic govemance. Ethiopia's macroeconomic program brought improvements but participation in the global economy remains minimal 2. Ethiopia's structural adjustment program of the early 1990s was broadly successful. After a decade of declines, real GDP per capita picked up to average two percent a year during 1992-2000. Trade and exchange rate reforms resulted in a 6.3 percent annual growth in real exports. However, despite recent reforms, Ethiopia's participation in the global economy is minimal. Per capita real exports were less than $15 in 1999 - just marginally above the value in the early 1980s - and well below that for Sub Saharan Africa ($163) and low and middle-income countries ($379). Ethiopia's exports remain dominated by coffee (which represents about 60-70 percent of merchandise exports), and a few other agricultural goods. Product concentration increased in the 1990s, and there has been little market diversification. Though halved over the past 10 years, average tariff rates at 19.5 percent, are higher than in most developing countries. The trade to GDP ratio rose from 22 percent of GDP in the late 1980s to 46 percent of GDP in the late 1990s but is still lower than the 61 percent average for SSA. And much of this increase was due to a rise in imports, which was made possible by increased reliance on official and private flows. Finally, Ethiopia has failed to attract any significant foreign direct investment flows, despite reforming its investment code twice during the 1990s. 3. The reforms of the 1 990s have not led to a diversification away from agriculture nor have they spurred manufactured exports. This is a matter of serious concern, as Ethiopia, like many other African countries, faces declining or slowing growth in global demand for its agricultural products, and falling and unstable prices. The share of manufactures in merchandise exports rose in the early 1990s, after the devaluation of the exchange rate, and then declined after 1996. The result is that manufactures exports have remained as insignificant as they were in the 1980s, less than 10 percent of merchandise exports. By comparison, between 1985 and 1999, Vietnam increased the share of manufactures in merchandise exports from 16 percent to 52 percent. For China the share of manufactures in merchandise exports rose from 49 percent to 90 percent. Reforms were not deep enough 4. It is likely that as the initial competitive advantage given by the 1992 devaluation tapered off, enterprises felt the negative effect of the removal of government subsidies and preferential access to credit and of competition from imports. It is also likely that market deregulation and other reforms were not deep enough to reduce supply constraints and stimulate a sustained growth in the private sector, including attracting foreign direct investment, or to stimulate foreign trade. For example, foreign investors and exporters alike complain of lack of competition, administrative weaknesses and cumbersome regulations and procedures. Trade finance is weak. Transport costs are some of the highest among developing countries. And exporters report that customs continue to inspect 100 percent of all containers and sometimes insist on holding up export consignments for 24 hours for security reasons. Why export? 5. The emphasis on export development is not new in Ethiopia. Indeed, it is very much at the center of the Government's growth strategy - re-affirmed in the Interim Poverty Reduction Strategy Paper (I-PRSP) and in the recent Federal Government Action Plan for 2001/02. For a country like Ethiopia with a small urban population, agricultural exports provide an opportunity to achieve more rapid agricultural growth than is afforded by reliance on domestic market demand. Besides an increase in demand, there are other benefits from exports. For instance, exporters are exposed to the discipline of world markets as well as to innovations in products and processes. This, together with the development of business networks, favors the flow of knowledge and skills, which increases productivity. Export receipts ease foreign exchange constraints, allowing a country to import capital and intermediate goods that cannot be domestically produced. This can lead to high rates of investment growth within a sustainable balance of payments. 6. The positive impact of export led growth on poverty reduction was particularly strong in the 1970s and 1980s among labor-intensive Asian exporters such as Thailand, Indonesia, Taiwan and Hong Kong. Similarly, in the 1990s, the countries that achieved a large-scale reduction in poverty (China, India, Vietnam, Uganda) were those that became more open to foreign direct investment and trade. They managed to combine the opportunities offered by world markets with a growth strategy that mobilized the capabilities of domestic institutions and investors. Acceleration in the pace of reforms is necessary to increase export growth 7. World GDP growth is forecast to slow to 1.3 percent this year, down from 4 percent in 2000. Short-run forecasts of the intemational environment have also deteriorated, following the events of September 11, 2001. A delayed recovery in industrialized countries could be destructive for developing country growth. However, expectations are that the slowdown will be short lived and growth will pick up over 2002. Looking toward the next decade, the global economic environment is expected to be favorable, reflecting structural and technological improvements. Market import demand for Ethiopian products is anticipated to grow at roughly the same pace as in the 1993-2000 period, 6.6 percent a year. Oil prices are forecast to decline. Coffee prices have fallen sharply in recent years and prospects for a significant rebound are poor, though they are expected to recover in the near future. Notwithstanding short-term uncertainties, long-term forecasts anticipate a favorable intemational environment that will likely have a positive impact on growth and poverty reduction in developing countries. 8. Whether growth in world markets can be translated into stronger export performance for Ethiopia, will depend on the Government's willingness to undertake reforms to improve the performance of existing export products, to diversify into new products, particularly ii manufactures, and to improve the business environment. Accelerating agricultural export growth will require reforming marketing arrangements, assisting farmers to replant trees and increase yields, and implementing effective extension services to promote better production techniques, and lower transportation costs. New market opportunities could give a significant boost to the garment sector and opening up the air travel sector could significantly increase prospects for tourism and for horticultural exports. In this 'high' case scenario, merchandise exports could grow up to 13 percent a year (in volume terms) during 2001/02-2010/11. However, on current policies, Ethiopia will not see acceleration in exports. The recent decline in coffee prices is likely to significantly affect coffee volumes in the next two years and unless strong reform measures are taken, growth in coffee volume will remain low, despite price recovery. Other sectors, including manufacturing, could also stagnate. If the current business environment is not improved, Ethiopia will miss completely the opportunities arising from global trends in trade and FDI. Under this scenario, a 5 percent increase in real exports would be expected over the next decade. A strategy for rapid export growth 9. A comprehensive strategy for rapid export growth and private sector development requires: political stability; a trade-conducive macroeconomic environment (characterized by low inflation, low interest rates and a realistic exchange rate); continuing trade reform; further financial sector liberalization; a reduced role for the State in the economy; and a functioning judicial system. Many of these policies are part of the Government's reform agenda and have been discussed in recent World Bank reports. This report focuses on specific measures to support a significant take-off in all export sectors. While all of these reforms are crucial to improving Ethiopia's export capacity, they have been grouped by sector or by other criteria. For instance, the measures called 'immediate' are described thus because there is only a short window of opportunity in which to reap the benefits of the market access provided by the African Growth Opportunity Act (see paragraph 2.29). Sectoral reforms and measures to improve the business environment should be initiated as soon as possible and continued in the medium term: * Sectoral measures to address supply side constraints that impede the further development of agricultural exports; * Inmmediate measures to take advantage of new market access opportunities, induce new export activities and create new comparative advantages; and * Policies to improve the business environment and accelerate Ethiopia's integration into the world economy. Sectoral measures are necessary to improve agriculture exports 10. Resource based exports represent about 80 percent of total exports. While they grew rapidly during the 1990s, further gains are threatened by the combination of low international prices, sector specific constraints, and an unfavorable business environment. Improvements in the coffee sector need to be made all along the production, marketing, transport and processing chain if exports are to increase measurably. For example, the development of niche markets for coffee with special characteristics (e.g. organic) should be encouraged. Coffee buyers should be allowed to inspect and test coffee before the auction and facilities to allow testing should be developed. The Government has recently signaled its intention to move from the current auction system to a Commodity Exchange System. This represents an excellent opportunity to address the entire strategy of the sector, including marketing problems, and to review the role of Government in the coffee export market. iii 11. Chat faces strong demand prospects because of its stimulant properties. While the Government does not intend to encourage such exports, because of the negative health effects, they are likely to occur. Government control of chat export prices creates an incentive for smuggling and prevents producers frorn receiving the normally higher market price. Export prices should be liberalized in order to obtain the maximum export revenue and taxes possible. There is potential to greatly expand production and exports of sesame seeds since the quality of production is good, land is available, labor costs, which are important to the manual harvest of sesame, are low and world import demand is growing. The greatest constraint is high trucking costs, amounting to 15-18 percent of the fob export price. Export prospects for pulses are also good, because of the excellent quality of Ethiopian pulses. For both sesame seeds and pulses, better marketing and promotion efforts should be undertaken. 12. Exports of hides and skins (and therefore of leather) face severe constraints because of a parasitic disease which has dramatically reduced the quality of hides and skins and the government's policy which favors domestic processing by banning exports of raw hides and skins. Control of the disease is possible and cost effective, if farmers participate. The Government should review the overall functioning of the integrated sector - from hides and skins to the tanneries and the leather industry, with a view to replace the export ban on raw hides and skins with an export duty to be progressively reduced to zero. Tariffs on imports of leather should also be lowered. Immediate measures to take advantage of new market opportunities 13. While sectoral measures are essential for improving the supply of agricultural exports, we also emphasize the need to build new comparative advantages by seizing new opportunities and attracting foreign investors that can help build on these opportunities. Ethiopia now has a window of opportunity for a significant export take-off on the basis of garment assembly. Similarly, should a number of specific constraints be addressed, horticultural products - particularly cut roses - and tourism, could pick up significantly. 14. The African Growth and Opportunity Act (AGOA) represents a unique opportunity to increase garment exports. AGOA allows exports of garments into the US, quota and duty free. Another important opportunity is represented by the Everything But Arms (EBA) initiative, under which all exports (except arms) from the 48 poorest nations of the World will be able to enter the EU free of all duties and quotas. Ethiopia is well placed to benefit from the AGOA and EBA. First, its labor market is flexible; labor laws do not represent a constraint to the exit of firmns and wages for unskilled workers are among the lowest in the world. Second, prices of inputs such as electricity and water are low by intemational standards. Finally, the recent involvement of foreign investors through non-equity collaborations is revitalizing the textile and garment sectors. 15. A number of immediate measures are necessary for Ethiopia to take full advantage of the market access opportunities embodied in AGOA and EBA, as well as in promising sectors such as cut roses and tourism: * True free trade status should be offered to exporters. This implies that the new Proclamation to Establish Export Trade Duty Incentive Schemes must be implemented effectively and efficiently. In particular, these schemes must be open to all exporters irrespective of whether the inputs exist in the country or not. We particularly recommend the speedy implementation of the Bonded Manufacturing Warehouses scheme, which is the best instrument for 100 percent exporting firms utilizing the AGOA. iv * We recognize that developing an effective financial system is a key to private sector development. Within this context, the new Export Credit Guarantee System should be implemented efficiently and the report recommends a number of changes to improve the functioning of the Scheme. The report also suggests measures to allow exporters to access the credit facilities of foreign suppliers and to improve the system of foreign exchange retention. * To lower the tax burden, it is recommended that the two percent service charge that commercial banks levy on Franco-Valuta imports be reduced. In addition, the implementation of the recent withholding tax on income should be carefully monitored to make sure that the refunds due to exporters are paid quickly. * The custom clearance system should be improved by clarifying rules and streamlining procedures. * A number of measures to improve shipping and air transport also have priority. First, the Ministry of Trade and Industry should set up a committee, including private sector operators, to monitor the prices, service quality and performance of the Ethiopian Shipping Line on a regular basis, including a review of countries covered by ESL's monopoly rights. Eventually, the requirement that shipping be booked exclusively through the ESL should be eliminated. Second, liberalize the air cargo charter market. This would improve export prospects for cut roses and other horticultural products. The Civil Aviation Authority should define the specific conditions under which air cargo charter flights may operate to and from Ethiopia. Third, liberalize the domestic air transport sector to stimulate tourism. Options include issuing additional licenses for domestic airlines or increasing seat limits for individual aircraft operating within the country to about 40-50 passengers. The report discusses a number of other measures to improve the tourism sector. * Finally, the Investment Code needs to be brought in line with the export strategy. This would include the introduction of measures to induce non-equity-involved export-oriented foreign enterprise collaboration. Measures that could be taken into consideration include: i) lifting the current minimum investment thresholds for foreign and joint venture investments for 100 percent export-oriented FDI and joint ventures; ii) eliminating the reserved areas for certain types of investment associated with exports; iii) allowing the entry of private banks providing trade and investment finance primarily for export-oriented activities; and iv) streamlining bureaucratic procedures with regards to investment permission and its renewal as well as technology agreements. Policies to improve the business environment andfacilitate global integration 16. Improve competition in the transport sector to reduce costs. Among developing countries, Ethiopia has some of the highest freight and insurance costs, relative to the value of trade. This is a function of geography (being landlocked), poor road infrastructure, which is being addressed by a substantial road development program, and a lack of competition, despite recent deregulation. This report endorses the recommendations previously made in several World Bank and other donor agency reports. Privatizing parastatal enterprises, opening the transport market to foreign operators and completing deregulation are viewed as essential to increase competition and lower transportation costs. These recommendations also apply to maritime and transit shipment services and the Government-monopoly for domestic air transport (passengers and cargo) and ground handling services. v 17. Level the playing field. There is a strong perception among private investors and exporters that a number of firms obtain special access to credit, information, and contracts. This creates an unfair disadvantage and undermines the trust in the system necessary for private investment. Implementing competition laws and anti-trust legislation would be a first step towards improving the competitive environment. The objective of a competition law should be the protection of the competitive process through: a) the prevention and elimination of monopolies, anti-competitive and un-fair trade practices, and other restraints on the efficient operation of goods and services; and b) the protection of the consumers to improve the efficiency of the production, allow individuals to participate in the market and ensure choice of prices and quality of goods and services. Enforcing competition laws would be more important still. Besides political will, this would require complementary institutions to facilitate enforcement, such as courts and functioning information processing systems to assist regulators. 18. Increase regional cooperation. Though Ethiopia is part of the Common Market for Eastern and Southem Africa (COMESA), intra-regional trade is modest. Ethiopia has not lowered its tariffs towards regional partners, fearing the negative consequences on its industries. One advantage to deeper regional integration is that enhanced cooperation could result in coordinated trade and investment reforms that would make the area more attractive to foreign investors. Similarly, reducing the time spent for custom clearance procedures, as well as opportunities for corruption, would also increase trade and improve the attractiveness of the region to foreign direct investment. 19. Improve the functioning of land markets. A functioning land market is essential for private investors and exporters alike. Investors complain about the absence of an efficient lease market, high prices for leases, and the fact that banks do not accept land as collateral. A second issue concerns the availability of industrial sites, particularly in Addis Ababa. In rural areas, the inability to use land as collateral, and the insecurity that arises from the possibility of land redistribution, limits the ability of small producers to borrow to expand or improve production. A number of measures are recommended in the report. The Urban Land Lease Proclamation (80/1993) should be reviewed to secure rights to hold and transfer leases; remove constraints on the secondary lease market and establish the use of leasehold rights as collateral. The Rural Land Proclamation No 89/1997 should clearly define lease hold and free hold rights to both peasants and nomads. It should also restrict the right of regions to redistribute and reallocate land except when it is needed for public use, and ensure it is subject to full compensation. 20. Building export capabilities. Macro reforms must be accompanied by measures to enhance exporters' capabilities to produce goods that conform to international norms for price and quality. A broad program would include: building firm capacity to absorb new and existing technologies; diffusing technology through improved standards and quality control systems; and introducing export promotion services. Ethiopia should also promote and encourage implicit forms of export-oriented technology, such as international subcontract agreements and technical/marketing agreements. 21. Investing in human and physical capital. In the long run, the ability of Ethiopia to compete and grow will depend on the accumulation of human and physical resources and improvements in the efficiency with which they are used. Ethiopia has some of the highest illiteracy rates (for the young) in the world and overall very low indicators of human capability and of infrastructures. Two areas are particularly important: investment in human capital (primary education and technical education); and investment in infrastructure to increase the existing stock as well as to improve quality. The ability to compete in the world economy depends on the cost and availability of supporting services, transport, communications, and vi finance. With respect to telecom, power and water, this report makes suggestions on how the Government might wish to address the issue of increasing service delivery in the public utility sectors on the basis of international best practices. Conclusion 22. International evidence demonstrates that countries open to international markets are capable of achieving faster growth and improved living standards. Peace, security and macroeconomic stability have returned to Ethiopia and new market access opportunities are opening up. These opportunities should not be lost. There is a need for a strategy to increase international integration and growth based on the acceleration and deepening of structural reforms, with a special emphasis on measures to encourage rapid export growth. Some of the measures proposed in this report are relatively easy, but require stepping up the implementation capacity of government agencies. Other reforms (with respect to land, competition policy, etc.) may encounter solid opposition from vested interests and require new regulatory frameworks. Nevertheless, although the road ahead will be difficult and fraught with temporary reversals, the pay off in terms of higher growth and poverty reduction will be immense. vii INTRODUCTION 1. This report attempts to comprehensively exam Ethiopia's export sectors and to develop an export strategy that will enable Ethiopia to integrate more fully with the world economy. After reviewing past reforms (chapter 1), current export sectors (chapter 2) and the outlook for the international economy (chapter 3), the report outlines the strategic steps required for launching a more sustainable export drive (chapter 4). The following section examines the rationale for concluding that exporting and integrating with the world market are desirable choices for Ethiopia at this stage of its development. Why Export? 2. Over the last half century, there has been a crucial change in thinking in the field of development economics regarding the impact of foreign trade on developing economies. The predominant view until the 1970s was that developing countries were primarily restricted to exporting primary commodities, which faced slow demand growth. Thus, with limited resources with which to pay for imports, many developing countries began producing industrial goods domestically. But over time, a number of developing countries demonstrated that it was possible to produce manufactured goods capable of competing in world markets by starting with resource and labor intensive products, and then moving up the technological ladder. This strategy proved more capable of overcoming balance of payments constraints and of supporting rapid growth. Today, the notion that exports lead to faster economic growth is central to any discussion of development strategies. Extensive research provides the rationale for pursuing an export led growth strategy'. First, access to export markets permits domestic producers to break free of local market constraints and to exploit increasing returns to scale. For example, in countries that have a small urban population, agricultural exports provide an opportunity to achieve more rapid agricultural growth than is afforded by domestic market demand. Thus, export growth represents an increase in demand and in GDP. Second, exporters are exposed to the discipline of world markets as well as to innovations in products and processes. In addition, the development of business contacts and networks provides knowledge and skills transfers, which increases productivity. Third, export receipts ease foreign exchange constraints, allowing a country to import capital and intermediate goods that cannot be domestically produced. This can lead to high rates of investment growth within a sustainable balance of payments. 3. The export led growth strategy is part of a larger body of literature relating "openness"2 to economic growth. For example, it suggests that an export strategy's beneficial impact on growth is multiplied if it is complimented with trade liberalization (Rodrik, 1999). By reducing protection, inefficient domestic producers are forced out of the market while surviving finns become more productive. Efficiency increases as competition reduces price-costs margins, as the process of specialization reallocates resources towards the activities that reflect the country's dynamic comparative advantages, and as access to new ideas and technologies, embodied in capital goods imports, increases total factor productivity. See a survey of the literature in Giles and Williams (2000) as well as Walde and Wood (1999). 2 Openness is measured through the share of trade in GDP, level and number of tariff rates, the extent of non-tariff barriers, and the degree of distortions in the foreign exchange market - i.e. the size of black market premiums. 4. The positive association between openness and growth is reported in many studies. Sachs and Warner (1995) examining a group of countries over the period 1970-89 found that open developing countries grew 4.5 percent while closed developing economies grew by only 0.7 percent.3 Dollar (1992) and Edwards (1993,1998) found similar results. Structural factors, such as an over-abundance of natural resources or the fact of being landlocked (Sachs and Warner, 1995) may make it more difficult to reap the benefits of openness. Moreover, reaping the benefits of openness very much depends on the 'investment climate' (World Bank, 200 lb). In particular, the regulatory framework for starting up firms and expanding production, the quality of supporting infrastructure (financial services, power, transport and communications) and overall economic governance (contract enforcement, fair taxation, control of corruption), are all critical. A country with a poor investment climate that liberalizes trade is likely to get more imports but not much investment and exports. Rodrick (1999) stresses that the potential benefits of openness can be realized only when complementary domestic policies and institutions are in place. Absence of good policies and institutions explain why many African countries continued to experience economic stagnation despite trade liberalization. In some countries structural reforms were not fully implemented because of the predominance of special interests (Bates, 1993). Moreover, all of them had institutional weaknesses such as inadequate judicial and legal environments and a lack of commercial and marketing institutions, together with a dearth of physical infrastructures and human capital. Is openness goodfor the poor? 5. The link between overall growth and poverty reduction has been demonstrated in cross- country analysis (Dollar and Kraay, 2000)4 and for individual countries (Srinivasan, 2000)5. The positive impact of export led growth on poverty reduction was particularly strong, in the 1970s and 1980s, among labor-intensive Asian exporters (Vietnam, Taiwan and Hong Kong in particular). Countries that became more open to foreign direct investment and trade (China, India, Vietnam, Uganda), achieved large scale reduction in poverty in the 1990s. They managed to combine the opportunities offered by world markets with a growth strategy that mobilized the capabilities of domestic institutions and investors. 6. These results have been shown to apply not only to countries that rely on manufactured exports but also to those that rely on agricultural exports. For example, Vietnam maintained rapid agricultural export growth for three decades (25 percent a year during 1970-1989, 16 percent a year during 1990-1999). Poverty declined from 66 to 45 percent of the rural population between 1990 and 1998 with no significant change in inequality. Child labor declined and school enrolment increased. In Uganda, agricultural exports grew by 15 percent a year during the 1990s while rural poverty declined from 66 to 45 percent of the rural population. School enrolment doubled6. 3On the relationship between integration and growth see also: D. Ben-David (1993) and J.A.Frankel and D.Romer (1995). 4 The study investigates the link between the incomes of the poor (defined as the bottom 20 percent of the income distribution) and overall income (per capita GDP). The data cover 80 countries over 40 years. The main finding is that as overall income increases, on average the incomes of the poor increase by exactly the same rate. It also shows that openness to intemational trade as well as improvement in the rule of law (e.g. property rights) raise the incomes of the poor by raising overall per capita GDP but do not significantly influence the distribution of incomes. In India, Srinivasan concluded that 15 of the 17 percentage point reduction in the population below the poverty line during the last 40 years, can be attributed to growth and 2 percentage points to redistribution. 6 See World Bank (2001), "Globalization, Growth, and Poverty: Facts, Fears and an Agenda for Action, Draft. 2 7. That is not to say that trade liberalization is without costs. The impact of trade reform on the poor depends on whether the poor are employed in sectors that are linked to international trade or consume products whose prices or availability are affected by international trade. Trade reform can lead to a reduction in sector employment and/or output, and forced closure of units unable to compete with imports. Matusz and Tarr (2000) summarized the fmdings of over 50 empirical studies and concluded that the adjustment costs of trade reform (particularly an increase in unemployment) tend to be small relative to the benefits. Similarly, Dollar and Kraay (2000) found that there is no systematic relationship between changes in openness to international trade and changes in inequality. This means that while trade liberalization produces winners and losers in the short run, losers are not disproportionately from among the poor. What should be exported? 8. International experience shows that success in exporting often involves starting from a small entry point for a specific product and finding a niche market to grow and expand sales. The success often creates the conditions or know-how for other successes. Exports in Chile more than doubled from 1985 to 1990 as the country moved away from copper exports into high value agricultural and horticultural products (e.g. grapes, apples), processed vegetable products and fish.' Kenya has been successful in establishing an internationally competitive cut flower industry from a very low basis. While there is plenty of evidence of export success utilizing a variety of products (including agricultural), international experience indicates that manufactured exports, as well as some non-traditional exports, have higher demand elasticity than resource-based exports and are less susceptive to price variability. Moreover, the prospects for dynamic productivity gains are much higher in the manufacturing sector.8 Box 1: Is Diversification into Manufactured Exports Possible? Can Africa diversify away from resource-based primary commodities into labor intensive products? Many researchers argue that in a globalizing world the main determinants of comparative advantages for manufactured exports are natural resources endowment and human capital, rather than labor (Wood and Mayer, 1998; Wood and Berge, 1997). Theory predicts that Africa, with its low stock of human capital and relatively high natural resource endowment, has little chance of developing a strong base of manufactured exports. But Bloom and Sachs (1998) have argued that Africa's natural resource base is not as strong as is believed and that by improving transportation it can expand manufactured exports. Others believe that overvalued and unstable real exchange rates are responsible for the low performance of African exports (Williamson, 1997; Elbadawi and Helleiner, 2000). Collier (1997, 1998) has developed a theory pointing to the policy induced high transaction costs of doing business in Africa. Elabadawi (1999) corroborated the 'transaction costs' theory by empirical evidence (using a panel of 41 countries over the period 1980-95). This study found that poor policies and weak institutions have led to very high transaction costs for local transport (poor roads and railway conditions causing delays), intemational transport, insurance charges, and telephone and Intemet communications. This has restricted the ability of African countries to diversify away from primary commodities. Moreover, repeated policy failures and policy reversals have increased the risk of doing business. Other factors adding to the high transaction cost environment are power outages, bribery and corruption, violence, restrictive trade and tariff policies, slow regional integration, and restrictive regulations and practices, often aimed at generating rents for favored groups. 7See Jaffee, S. and Gordon P. (1993) and Pritchett, L. and N. Ghei, (1997). 8See Elbadawi (2000). 3 Strengthening domestic institutions andpoliciesfor integration 9. How can Ethiopia's Government help the economy to achieve sustained export growth? Sustained export development can only be based, in the long run, on open trade and foreign investment, and market determined prices. But integration is not merely the result of trade and investment policies. Thus, it is crucial that the Government continues with the long-term policies that ensure macroeconomic stability - low inflation, low interest rates, a realistic exchange rate and financial sector liberalization. It is also crucial that the Government improves the investment climate - by addressing infrastructure weaknesses, economic governance and corruption, inefficient regulation and poor financial services. 10. Within this context there is room for an active role by the Government to stimulate the private sector to take advantage of new market opportunities and to expand export growth. Many distortions in the Ethiopian economy result from market failures, such as sector monopolies, or discriminating policy interventions that act as a tax on producers and create rent-seeking behavior. Finns that sell in the domestic market remain relatively unaffected, as they are still shielded from outside competition. The impact of these distortions falls predominately on exporters, as selling prices are determined in international markets. While the Government needs to deal with the market failures and policy distortions directly, this will entail a long and sustained effort. In the short term, the Government can help mitigate some of the market failures in the export market due to externalities and economies of scale in information gathering and dissemination. Chapter 4 in this report provides a number of suggestions on how the Government, by stepping up reforms and transforming the role of the state, can take full advantage of new market opportunities and increase export growth. While this is certainly a demanding agenda, it is a necessary one to increase growth and accelerate the efforts of poverty reduction. 4 1. MACROECONOMIC AND TRADE PERFORMANCE IN THE 1990s Background 1.1 With a population of 64 million people, and an income per capita of $100 (compared with $480 in SSA), Ethiopia is the second largest country in SSA and one of the poorest in the world. The country has a long history of state planning economic management, which is partly responsible for the pervasive poverty of today. The military Govermment that ruled between 1974 and 1991 maintained stability, at the cost of economic growth, through control of prices and exchange rates, investment and trade as well as rationing of domestic credit and foreign exchange. The economy suffered from droughts (every three years on average) and significant reversals in the terms of trade, as well as the tragedy of a long and devastating civil war. As a result, at the beginning of the 1990s Ethiopia had lower income levels than in the 1960s, high inflation rates, unsustainable fiscal and external balances. Moreover, its social indicators had deteriorated to among the lowest in the world. Stabilization program brought improvement 1.2 The new coalition that took power in 1991, the Ethiopian People's Revolutionary Democratic Front, laid the ground for a radical departure from the socialist development policies of the 1970s. The Government adopted a stabilization program, and introduced an extensive program of structural reforms: devaluation of the exchange rate, trade and domestic prices liberalization, a revision of the investment and labor laws and modest financial sector deregulation. With the creation of the Ethiopian Privatization Agency in 1994 the Government began privatizing small and medium scale state-owned enterprises. The 1994 Constitution established a democratic, federal and decentralized system of Government. The first-ever national elections were held in May 1995, and the ruling coalition was confirmed in power. 1.3 Over the period 1991/92 and 1996/97, the stabilization program was broadly successful. The exchange rate was realigned and the balance of payments improved; the fiscal deficit was substantially reduced, the result of a marked increase in revenues. Despite the sharp exchange rate depreciation (140 percent vis a vis the US dollar in October 1992) and the liberalization of domestic prices, inflation declined from a 20 percent peak in 1991/92 to less than 4 percent in the late 1990s. Because of the existence of under-utilized productive capacity, the increase in the demand for non-tradables that followed the devaluation stimulated production, rather than translating into higher prices. This trend was reinforced by the absence of wage pressures. Indications are that the wages of both civil servants and unskilled labor in Addis Ababa declined in real terms in the early 1990s9. 9 See: Adugna, Abebe and Shan Manikkalingam (1997). Table 1.1: Macroeconomic Indicators, 1981/82-2000/01 Fiscal years 81/82-85/86 86/87-90/91 91/92-95/96 96/97 97/98 98/99 99/00 00/01 (annual percentage change) Real GDP -0.4 3.9 4.6 5.2 -1.2 6.3 5.4 7.9 Real GDP per capita -3.0 0.9 1.8 2.5 -3.9 3.6 2.7 5.2 Inflation rate 4.6 8.1 9.3 -6.4 3.6 3.9 4.2 -7.2 REER (1996/97=100)* 3.3 3.4 -15.9 1.4 -3.4 -3.0 0.1 Termsoftrade(1996/97=100) 9.4 -8.3 -1.6 10.5 18.1 -15.9 -33.9 -9.1 (in percent of GDP) Gross domestic investment 13.5 13.8 14.4 16.9 17.2 16.0 14.2 17.2 Gross domestic savings 5.7 7.1 5.8 7.0 7.7 1.2 -1.1 0.9 Current account deficit** -1.8 -1.5 0.0 1.1 -1.6 -7.9 -5.2 -4.9 Fiscal deficit*** -7.1 -6.9 -6.0 -2.4 -4.4 -9.2 -11.4 -4.8 Source: WB database, IMF-Intemational Financial Statistics. * Since May 1993, based on marginal rates at foreign exchange auctions; ** Including official transfers; *** Including grants: 1.4 Political stability and improved security, as well as the availability of external resources and the change in economic incentives engineered by the reforms stimulated the growth of investment and savings. After a decade of slow economic growth, real GDP per capita picked up. However, with agriculture representing about 50 percent of output, economic performance remained highly vulnerable to shocks. GDP contracted in the drought years, 1993/94 and 1997/98. Nonetheless, productivity increases were obtained in agriculture through the implementation of an agriculture development-led industrialization (ADLI) strategy, which included the implementation of a strong extension and fertilizers program.10 The positive performance of agriculture, combined with the new Government programs to address rural poverty and a substantial shift in public expenditures from defense to social sectors and infrastructures resulted in a significant reduction in rural poverty. Evidence from Household Budget Surveys suggests that the number of poor people (living on less than half a dollar per day) declined by 16 percent between 1985 and 1995. The political and economic situation worsened in the late 1990s 1.5 In May 1998 Ethiopia and Eritrea entered into a border conflict, which later intensified into a war. The economic situation deteriorated during 1999/00. The war brought destruction of lives and of infrastructures. The fiscal deficit climbed to 11.4 percent of GDP, largely the result of skyrocketing military expenditures, and donors almost completely withdrew their resources. In addition, Ethiopia continued to suffer from the effects of the drought and of a pronounced deterioration in the terms of trade (almost 20 percent a year during 1998/99-2000/01), much of which was due to a fall in coffee prices. The exchange rate came under pressure and foreign exchange reserves declined to only 2 months of imports. Faced with widening fiscal and external imbalances, the authorities imposed restrictive external measures, including a 10 percent import duty surcharge, a 100 percent advance deposit requirement and bank ceilings for import permits. These restrictions were lifted at the beginning of 2001. ' Non agricultural output grew at a higher and steadier rate (7-8 percent a year) than agricultural output and accounted for about 64 percent of total GDP growth during 1991/92 and 1996/97. 6 1.6 On December 12, 2000, Ethiopia signed a peace agreement with Eritrea that ended the two year war. The Govemment began demobilizing the army and reconstructing damaged infrastructure and key public services. It resumed its reform efforts through the preparation of an Interim Support Strategy (Report No. 21189 ET), including a medium term economic strategy aimed at maintaining macroeconomic stability and promoting the recovery of growth. The program is supported by a three years arrangement under an IMU Poverty Reduction Growth Facility (PRGF) and by IDA support, as articulated in the I-PRSP. The program's objectives, based on the I-PRSP, are to increase economic growth to around 7 percent per annum, reduce inflation to low single digits, and raise the import reserve cover to about four months. Real GDP growth in 2000/01 reached 7.9 percent, inflation turned negative and both fiscal and external imbalances declined more than anticipated in the program. International perception ofpolicy reform 1.7 Sound macroeconomic policies and an improved investment climate are reflected in the evolution of a number of indices that are conventionally used to measure changes in political and financial risk. Table 1.22 reports the International Country Risk Guide Index (ICRG), an overall measure of political risk, and two of its components: the first measures the degree to which business transactions involve corruption" ; the second measures the 'rule of law "2. Data are up to the year 1998, just before the outbreak of the war with Eritrea. All indices are on a 0-100 scale, with higher scores indicating lower political risk, sounder political and judicial institutions and, less corruption. From 1991-94 to 1995-98, the overall political risk and the 'rule of law' indices increased from 34 and 23 to 60 and 79 respectively, suggesting a significant improvement. However, like in many transition countries, corruption appears to have worsened during 1995-98. International evidence suggests that where the private sector is small and market enforcement mechanisms are weak, liberalization and privatization often create opportunities for public officials and other insiders to exploit their privileged access to information for private gain (Kaufmann and Siegelbaum, 1996). Another reason that may explain the worsening in the index is that the enhanced rule of law makes corruption more transparent, increasing the number of cases that are prosecuted or brought to public attention. The Government of Ethiopia is extremely determined to fight corruption and rent-seeking behavior. It has identified the main determinants of corruption in a poorly functioning legal and judicial system, a low paid civil service, weak budgetary and financial controls and an outdated procurement structure"3. A poorly functioning customs administration and a complex regulatory system also appear to be sources of rent-seeking behavior. The Government launched in 1996 a comprehensive Civil Service Reform Program to build a modern, efficient and ethical civil service. Efforts to pursue the reform, which is a key objective of the I-PRSP, have now intensified within a comprehensive program for building institutional and human capacity in the public sector. 1.8 Table I.22 also reports the Institutional Investor Index, a measure of a country's creditworthiness which is mostly determined by economic rather than political variables.'4 The " Lower scores of the corruption index indicate that high-ranking government officials are likely to demand "special payments". Also, illegal payments are generally expected throughout lower levels of govemment in the form of bribes connected with import and export licenses, exchange controls, tax assessment, policy protection or loans (see Knack and Keefer, 1995). 12 I.e. the degree to which the citizens of a country are willing 'to grant to the established institutions the authority to make and implement laws and adjudicate disputes'. 13 See World Bank (1998). 14 The information for constructing the index is provided by 75-100 leading international banks that grade each country on a scale 0-100, with 100 representing the least chance of default. Individual responses are weighted using a formula that gives more importance to responses from banks with greater worldwide exposure. Haque et al. (1998) indicates that this index is determined primarily by economic events and not by political variables. 7 score for Ethiopia has improved but still remains extremely low (15.7 in 95-98, up from 9.2 in 1991-94) in view of the fact that 100 indicates an absence of financial risk. Ethiopia continues to be viewed as a risky investment location despite reform. Trade policies and performance 1.9 Important objectives of the Government in the 1990s have been to liberalize trade, increase external competitiveness and export growth, and encourage private participation in trade. Table 1.2 shows the various phases of tariff reform. Duties were progressively lowered between 1992 and 1998. There are now six tariff bands and the maximum and weighted average tariff rates are 40 and 19.5 percent respectively. However, the latter remains much higher than the average weighted tariff rate for less developed countries (11.3 percent) in 1999. The Government intends to reduce the weighted tariff rate from 19.5 percent to 17.5 percent by January 2003. Table 1.2: Tariff Reform Description Pre-reform Period Aug.1993 Jan.1996 Dec.1996 Jan.1998 Dec.1998,- 2001 Maximum tariff rate 230.0 80.0 60.0 50.0 50.0 40.0 Number of tax exemption categories 327.0 138.0 169.0 170.0 168.0 167.0 Simple average tariff rate 79.1 35.0 28.8 24.3 24.3 20.0 Weighted tariff rate* 41.6 29.6 24.6 23.6 21.5 19.5 Number of tariff bands 23.0 9.0 8.0 7.0 7.0 6.0 Tariff dispersion 225.0 75.0 53.0 45.0 45.0 35.0 Memo Un-weighted Average Tariff Rates, 1999: Less Developed Countries: 11.3 Industrial Countries: 4.0 Source: Ministry of Finance of Ethiopia, World Bank database. * Excluding free and others duty rates. 1.10 In addition to tariffs, a number of excise and sale taxes are levied on imports15. Total customs duties and taxes represent 22.5 percent of total revenue. Collected tariff rates (in relation to GDP) appear to be in line with those of other African countries (11.5 percent in Ethiopia, 12.6 percent in Kenya, 9.5 percent in Tanzania, 5.5 percent in Uganda for 1998)16. Besides trade liberalization, a number of other reforms were undertaken during the 1990s to reduce the export bias and improve the competitiveness of the economy. They include: * The nominal official exchange rate was adjusted and an auction system introduced in May 1993. The auction and the official rates were unified in 1995. Other measures included: elimination of export proceeds surrender requirement in 1998; removal of all restrictions on external current account transactions pertaining to business travel, education and health in 2001; introduction of an inter-bank foreign exchange market (and termination of the wholesale foreign exchange auction) in October 2001. * All export subsidies and all export taxes were eliminated, except for a 6.5 percent tax on the value of exports of coffee. * A duty drawback system was introduced in 1993. It never worked well and duties were rarely refunded. In June 2001 Parliament approved a Voucher 15 These include excise taxes (ranging from 120 to 150 percent of c.i.f. value) and sales taxes (with rates ranging from 4 percent for a selected list of agricultural goods and "essential" items such as - pharmaceuticals, books, and printed matter, hides/skins, and cotton - and 12 percent for all other goods). 16 See IMF (1998). 8 Scheme and a Bonded Manufacturing Warehouse Scheme - to exempt exporters from payment of import duties on imported inputs; and an improved Duty Drawback Scheme (see details in chapter 4 and Annex III). When implemented, the new system will provide exporters with duty free access to inputs at world prices. * New trade finance measures included: i) removing restrictions on foreign suppliers and partners' credit and on importing inputs without payment from foreign collaborators; ii) allowing all exporters of manufactures to obtain foreign commercial borrowing; iii) easing the constraints on debt-equity ratios for exporters; and iv) allowing banks to open issuance import letters of credit for exporters with confirmed letters. In May 2001 the National Bank of Ethiopia (NBE) issued an Amended Directive on Export Credit Guarantee Scheme allowing participating banks to charge market interest rates, limiting the maximum collateral requested to new entrants and simplifying eligibility criteria (see chapter 4 and Annex III). * Regulatory barriers were eased by eliminating all export license requirements. Export price controls were replaced with ex-post price verification for all exports (except for coffee). * Controls on production and marketing of exports were removed, allowing the private sector to participate in foreign trade activities. The private sector was allowed to engage in the trading, marketing and export of coffee (although any single private party can engage in only one stage of coffee production) and in freight forwarding and clearing. * A financial sector reform was initiated in 1992/93. A new regulatory and supervisory system gave the National Bank and the Commercial Bank of Ethiopia greater autonomy in their operations. Private bank and insurance activities were allowed. Sector specific interest rates were abolished, deposit rates were set as a positive floor and the lending rates were liberalized. Despite these changes the financial sector is far from being competitive and market determined. The Government is now pursuing a deepening of the financial sector reform with Bank and Fund assistance. * The Investment Code was modified twice. However, foreign direct investment (FDI) remain extremely low (see table I.l)'7. A recent FIAS review (FIAS, 2001) as well as a study by UJNCTAD (2001), noted the low rate of realization of approved investments, and the absence of export-oriented manufacturing ventures. On the basis of indicators such as FDI per capita, or FDI in percent of GDP, Ethiopia performs worse than countries such as Djibouti, Sudan, Rwanda and Burundi. Competitiveness improved 1.11 A country's international price competitiveness can be evaluated using the real exchange rate. Between 1991/92 and 1999/00 Ethiopia's external competitiveness - measured by the change in the consumer price index-based real effective exchange rate (REER) - increased by about"8 70 percent. The increase in competitiveness after the nominal devaluation in 1992 was maintained and improved in the following years through a combination of tight monetary and fiscal policies and containment of wages and civil service salaries. Figure 1.1 suggests that since 17 Though in 1999 they increased significantly - because of the construction of the luxury hotel Sheraton in Addis by a Saudi investor. 18 See: IMF (1998). 9 their peak in the mid-1980s, Ethiopia's terms of trade have fluctuated around a declining trend, thus contributing to the decline in the real exchange rate. Because of its export structure, concentrated on a few agricultural products, Ethiopia's ability to reduce volatility induced by terms of trade fluctuations is limited. However, good macroeconomic management has helped to smooth out the impact of adverse external price shocks on the real exchange rate. Figure 1.1: Ethiopia - REER and Terms of Trade Indices 1979/80 - 1990/00 350- 300 _ =- 200 - 150 _____ ______ _ 100--- 50 - - _ o - ri r % N 00 1 CD 0CD 0 V 0 0 0 0% 0 N00 0%O=,rCY, a,N a,00 -|+- REER -U-TOT openness has increased but remains low 1.12 Overall, exchange rate and other structural reforms had a positive impact on trade (Table 1.3). During the 1990s the annual average growth in real exports was 6.3 percent a year. However, Ethiopia's real per capita exports remains among the lowest in the world - approximately 14-15 dollars in 1999 - just marginally above the value in the early 1980s (see Table 1.7). In 1999, the average real per capita exports in low and middle income countries was $379. The trade to GDP ratio (the 'openness ratio') increased from 22 percent of GDP in the late 1980s to about 47 percent of GDP in the late 1990s. Despite this improvement, Ethiopia's openness ratio is lower than the average for SSA (61 percent). Moreover, the improvement was due to a strong increase in imports, as well as a strong increase in non factor services rather than in merchandise exports. During the period, merchandise imports increased from 12.5 to 25.3 percent of GDP. By contrast, merchandise exports increased only from about 4.5 to 7 percent of GDP. Table 1.3: Trade Indicators, 1981/82-2000/01 Fiscalyears 81/82-85/86 86/87-90/91 91/92-95/96 96/97 97/98 98/99 99/00 00/01 (annualpercentage change) Real Exports (GNFS) 4.6 -3.3 9.2 28.9 2.6 -11.9 7.7 -2.7 Real Imports (GNFS) 7.3 0.9 3.3 15.3 4.0 13.3 4.6 1.7 (in percent of GDP) Total Exports+Imports (GNFS) 26.6 22.4 29.0 40.7 41.0 43.3 46.1 46.5 Marchandise exports 6.6 4.5 5.0 9.4 9.2 7.5 7.6 7.0 Merchandise imports 15.5 12.5 15.9 20.5 20.7 24.2 25.2 25.3 (in 1995S) Real exports percapita 14.4 14.0 11.2 16.9 16.9 14.6 15.3 14.6 Source: WB database, IMF-Intenational Financial Statistics. 10 1.13 During the period 1991/92-1996/97, Figure 1.2: Trends In Export and Import Volume export volume increased 1992/93 - 2000/01 at an annual average rate of 16 percent, leveling 150 off towards the end of 100 the decade, because of a reversal in the terms of 50 _- _ _ _ _ trade. Imports volume rose sharply after the o mid 1990s. Much of the 1992/93 1994/95 1996/97 1998/99 2000/01 increase was in capital _ and intermediate goods IF-.-+ Export Volume Index -Ir- port Volure Index necessary for investment. This reflects both improved public and private access to foreign exchange and lower import tariffs. Finally, the reforms had a positive effect on the marketing of exports, with the share of private enterprises in export marketing increasing from 16 percent to 80 percent between 1991-92 and 1996-9719. The structure of exports has changed little 1.14 An empirical analysis of Ethiopia's trade performance is complicated by the poor quality of trade statistics. Balance of payment data, collected by the NBE, are relatively comprehensive, but do not cover manufactured exports in detail. The United Nations COMTRADE Database does report data on manufactures, but Ethiopia, like many other African countries, often fails to report its trade data to the UN. By analyzing trading partners imports from Ethiopia, however, a picture of Ethiopia's exports can be developed20. 1.15 Tables 1.14 and 1.15 show the composition of the top 10 exports in the last twenty years, according to COMTRADE and NBE sources respectively. Both tables suggest that product composition has changed very little, and coffee has maintained its dominant position, representing between 50-70 percent of merchandise exports. The NBE category 'leather and leather products' includes raw hides and skins, whereas in the COMTRADE data they are shown separately. Despite the recent decline, due to the outbreak of a skin disease (see Chapter 2), they remain a significant export. Oilseeds and chat show a good performance. The latter, which is mainly exported to Djibouti and Somalia, has increased its share in total merchandise exports from about 4 percent in the early 1990s to above 15 percent in 1999/00. Chat is not picked up in the COMTRADE data, as it is exported mostly to Djibouti and Somalia, two countries not covered in this COMTRADE exercise. 1.16 Export concentration increased. Table I.9 shows that the number of export categories (accounting for at least 0.5 percent or more of all exports) declined from 18 in 1990 to 12 in 19 See T. Assefa and M. Woldeyes (2000). 20 Trading partners covering at least 90 percent of trade include: OECD members, Hong Kong, China, Republic of Korea, Singapore, Mexico, Malaysia, Brazil, Turkey, Indonesia, Israel, Hungary, Poland, Philippines, Pakistan, Argentina, Colombia, Chile, Peru, Cyprus, Ecuador, Egypt, Bangladesh, Kenya, Guatemala, Malta, Macao, Mauritius, Uruguay, Romania, Trinidad and Tobago, El Salvador, Honduras, Panama, Nicaragua, Barbados, Bolivia, Greenland, and St Lucia. It is recognized that import data from trading partners are more reliable than export data declared by many developing countries. However, these data present two problems. First, export statistics are normally reported in free-on-board values while import data are recorded on a cost-insurance-freight (c.i.f.) basis. The latter, drawn from reporting of trading partners, overstates the level of developing countries exports, although trends, shares, and growth rates are not affected. Second, since global coverage is less than 100 percent export performance in markets where partner country data are not available can not be gauged. 1998. Moreover, the share in total exports of the largest product increased during the period. The table also shows, for Ethiopia and a number of other African countries, the emergence of new products2l. During the 1990 to 1998 period only three new products emerged in Ethiopia, sesame seeds, dry legumes and oilseeds, all belonging to the foods category. Statistics on 'revealed comparative advantages' (Table I.10) are consistent with previous data and suggest that revealed comparative advantages increased only for coffee and oil seeds. It is also worrying that Ethiopia lost comparative advantage in many products groups, including hides and skins. 1.17 Has there been market diversification during the 1990s? Though there has been some yearly fluctuations (particularly during the conflict with Eritrea), Europe continues to represent more than half of destination markets and Asia around 25-30 percent (Table 1.8). Germany is the largest buyer of Ethiopian coffee, followed by Japan and Saudi Arabia; Italy is the largest market for hides and skins. Trade with Africa has been growing in recent years because of the chat trade with Djibouti and Somalia. The share of manufactures in merchandise exports declined 1.18 The share of manufactures in merchandise exports is often taken as an indicator of the extent to which countries are competing in the global economy. Historically, countries that integrated fast with the world economy followed a path of development in which industry and manufacturing progressively increased their share of GDP at the expense of agriculture. In most developing countries. The ratio of manufactures to Figure 1.3: Trends in Manufacturing Output and Exports merchandise exports 1981-2000 (in %) currently ranges between _ 70-90 percent. In Ethiopia, W, _- - _ --_ _ _ the share of manufacturing 61 ___- _ _ ______ _ __ in total output is low and has declined from 8 percent . _ ____ _ in the early 1980s to around 30 6 percent in the late 1990s, _ _ _ - _ _ A with a peak in 1993-94. , - _ Capacity utilization as a I Caparc intyg f u l iza ti as a 1911 1993 199U 193S 1986 1987 198 1939 199D 1991 1991 1993W99 199199 1996 1997 19 99 percentage of installed capacity was only 30 ---*+MmfO;Dd E - G percent in manufacturing, before the 1992 devaluation. It increased to about 60 percent in the late 1990s. Exports of manufactures averaged 25 percent of merchandise exports in the early 1990s, up from 10-12 percent in earlier years. However, since 1996 both the share of manufacturing in output and the share of manufactures in merchandise exports have declined. This appears to be consistent with the idea that stabilization stimulates short run output growth22 - and that this increase in output is driven primarily by increased capacity utilization and productivity improvements, rather than higher investment, for up to five years after stabilization23. In Ethiopia, it is likely that as the initial competitive advantage given by the devaluation tapered off, manufacturing enterprises felt the negative effect of the removal of government subsidies and preferential access to credit. In addition, many manufacturing firms rely heavily on imported inputs, which cannot be easily substituted with domestic inputs, at least in the short run. The devaluation did not always help in import substitution, while increasing the costs of imported inputs. It is also likely that market 21 Defined as an increase in export share from less than 0.5 percent to greater than 0.5 percent. 22 See Easterly W. (1996). 23 See Michaely, M., D. Papageorgiou and A. Choksi (1991). 12 deregulation and other structural reforms were not deep enough to reduce supply constraints and stimulate a long lasting growth in the manufacturing sector. Ethiopia's agricultural exports sufferfrom demand andprice instability 1.19 A number of studies have documented the unfavorable demand characteristics faced by traditional African exports (primary commodities and raw materials) in world markets. Empirical evidence shows that the income elasticity of many of these products is well below unity, indicating a progressive marginalization of African exports relative to exports with high income elasticity (mostly manufactures). Moreover, both the level of demand and the prices for these products are affected by cyclical changes in global economic activity, which in turn are important causes of commodity price instability. It has also been argued that there are long-term weaknesses in demand (e.g. the competition from man-made fibers replacing natural fibers) which cause real commodity prices to fall relative to manufactures' prices. 1.20 These hypotheses have been discussed in a recent World Bank study (Ng and Yeats, 2001) reviewing trends and prospects for traditional African exports24 . The analysis focuses on the characteristics of global demand for specific 'traditional products', defined as those in which Africa has a relatively high share in global markets, and which has been maintained for at least 10 years. The study finds that over the period 1990-99 global trade in Africa's traditional exports grew by 1.9 percent a year, about one third the rate for total trade and much slower than the 6.8 percent growth of manufactured goods. For Ethiopia, the study considers a number of traditional products (including coffee, sesame seeds, sheepskins, raw cotton and leathers) making up almost 80 percent of total exports in 1999. The study shows that in the late 1990s there was a collapse in demand for many traditional African products, including those exported by Ethiopia. Over the last decade only coffee, and to a lesser extent sesame seeds, registered a positive increase in demand. 1.21 The study also finds that demand elasticity for the traditional products exported by Ethiopia is well below unity at 0.41, but in line with demand elasticity in the region. This implies that any acceleration of income growth in the major consuming countries would likely have only a modest impact, on exports of traditional products. Improvements in market access conditions are not likely to come from industrial countries, where tariffs are already very low. However, they could come from trade liberalization in developing countries, which could generate an important stimulus to demand for traditional products. For example, average tariffs facing exports of coffee are practically zero in industrial countries, 35 percent in South Asia, 16.3 percent in Middle East and North Africa, 12.7 percent in Latin America and 0.9 percent in East Asia. 1.22 Besides low income elasticity, traditional African products face high price instability and secular declines in most prices of their commodities. Price instability can in turn have important effects on terms of trade and export earnings. For example, during the period 1990-99, annual average price changes for coffee was 22.5 percent compared with 3.6 percent for manufactures unit value. In contrast with the prices of most African products, coffee prices increased for most of the 1990s (though the sharp fall in 1999-2001 may have already reversed the earlier gains) and therefore Ethiopia experienced some improvement. 24 See Ng F. N. and A. Yeats (2001). 13 Conclusion 1.23 Ethiopia's structural adjustment program of the early 1990s has had positive macroeconomic effects. Trade and exchange reforms have decreased the export bias and increased the competitiveness of the economy. However, despite recent reforms, Ethiopia's participation in the global economy is minimal. Although nominal protection was cut by half over the last ten years, the average tariff remains much higher than in other developing countries. The trade to GDP ratio has increased, driven by the rise in imports, but remains lower than the average for SSA; and real exports per capita appear to be some of the lowest in the world. In addition product concentration has increased, with the share of agriculture commodities in total merchandise exports becoming more important. There has been no significant product or market diversification. Manufactures exports have remained as insignificant as they were in the 1980s. Like many other African countries, Ethiopian products face declining or relatively low growth in global demand, and falling and unstable real prices. Thus, if efforts at increasing and diversifying exports are not accelerated, Ethiopia may face continued marginalization in world trade, and diminished growth and industrialization prospects. 14 2. EXPORT SECTORS 2.1 Ethiopia's output and exports are highly concentrated in agricultural cornmodities, particularly coffee. This is a cause for concern as commodity prices have historically been more volatile than manufactures and have declined relative to manufactures. Additionally, commodity trade growth is slower than that for manufactures. Thus, efforts should be made not only to diversify into manufactures but also to increase diversity within resource-based exports. This chapter stresses that Ethiopia should seize the new market opportunities that are opening up and that would enable rapid export growth in manufactures and other areas, such as tourism. It also emphasizes the need to improve the perfornance of those resource-based exports that the economy so heavily relies on. The first three sections of the chapter discuss the performance, constraints and policy actions that can be taken to tackle opportunities in each sector - including tourism which is seen as an area of potential growth. The final section discusses ways of improving the country's ability to compete and grow. Improving the performance of agricultural exports 2.2 Ethiopia has traditionally relied on agriculture for a large share (80-90 percent) of export earnings, a pattern that has continued into the 1990s. Coffee, chat, oilseeds, pulses and horticultural products a-;e the most important exports, discussed below. These exports performed relatively well during the 1990s (Table 2.1), with most of the growtli due to increased volumes2s. The average export prices increased by 14.5 percent during the 1990s (the average price of Ethiopia's main export, coffee, increased 18.8 percent from 1990 to 1999). Table 2.1: Agricultural Export Earning Growth, 1990-99 Country Export Revenues Increase 1990-99 Value Weighted Unit (nmillion $) Change (%) Value Index26 1990 1999 (percent) Price Quantity Ethiopia 272.4 400.6 47.1 14.5 30.6 99.6 Ghana 412.7 531.8 28.9 3.2 24.9 79.8 Kenya 687.5 1,029.2 49.7 33.7 12.1 134.2 Tanzania 279.0 305.8 9.6 -4.0 14.2 88.6 Uganda 172.9 408.3 136.1 27.9 66.4 105.7 Source: Ministry of Trade and Industry for Ethiopia, FAOSTAT for other countries. 25 Only Kenya had significant growth in export prices. This was due to 6 percent per annum growth in prices of fruits and vegetables, and tobacco-two commodities where export volumes were rapidly expanding. 26 The Unit Value Index compares the export unit value of each country for 1999 vs 1990 to the unit values for the world using the 1990-99 countries commodity export values as weights. For example, the value of 99.6 for Ethiopia means that Ethiopia's export unit values were 99.6 percent of the world in 1999 compared to 1990 for the commodities exported. Coffee exports have substantialpotential to increase 2.3 Ethiopia's share of the world coffee market has been stable at less than two percent during the last twenty years. Brazil, the largest competitor, has maintained a share of about 20 percent. By contrast, Vietnam has increased its share from less than 1 percent in 1990 to 5.5 percent in 1999. India has also increased its share significantly (see Table 1.17). Ethiopia's coffee exports peaked in 1997/98 (reaching 70 percent of merchandise exports) and have since declined along with the decline in world prices (see Figure 2.1). The annual supply of coffee Figure 2.1: Coffee Exports in Ethiopia is variable, depending on prices, 500 weather conditions and on the biological cycles of the yields of the coffee trees (see 40 Box 2.1).Most of the coffee is cultivated, a __ while only about 10 percent grows wild, or in 2 0 semi-forest conditions. In the medium term, a sustainable increase in production would .0- require the replanting of coffee trees with . improved selection which give better yielding 1994/95 1 5/96 1'6197 1!9779 199I' 19l/00 and are resistant to coffee berry disease. This is difficult for small farmers with un-secure rights to their land (see chapter 4) as the replanted trees would not produce for up to four years. Yields could also be increased from fertilizer application. However, this is costly and would increase financial risks of the farmers, given that production is vulnerable to weather conditions. Box 2.1: The Coffee Sector Ethiopia is recognized as the origin of Arabica coffee. From there it was taken to Yemen about 1,500 years ago and to other parts of the world in the 17t' and 18db Centuries. There are about 140 local varieties of coffee grown in Ethiopia and there is significant potential for increasing coffee output through expanding planted area, and increasing the density of trees per hectare and the %ields per tree, according to Wesilake (1998). The average coffee farm is only 0.5 hectares and modem inputs and management techniques are not used. Ninety- five percent of the coffee produced is organic. Coffee berry disease is a problem in mnany areas. The current marketing system returns about 60 percent of the f.o.b. price to farmers. While this is an improvement over past years (20 percent under the Derg regime), it is low when compared with the 70 plus percent obtained in Uganda and nearly 80 percent in Kenya. Coffee trading is conducted. by the private sector in Ethiopia. Farmers sell dried cherry to collectors (sabsabies), who on-sell to larger traders (abkabies) who hull the cherry to green coffee and sell it at auction. Until recently, farmers were required to sell only to sabsabies, but this constraint has been relaxed in 1999. Coffee is processed in one of two methodsu-sn dried or wet. This first method takes farmers three to four weeks utilizing drying tables covered with mats. After drying, the coffee cherries are hulled to remove the cherry pulp to produce green coffee. The wet processing method removes the pulp from the coffee cherries on the same day as the coffee is picked. The pulped parchment is fermented in tanks, washed, and sun-dried. Foreign buyers prefer wet-processed coffee and pay a price premium, w%hich averaged 44 percent from 1989/90 to 1997/98. but is highiv variable from year-to-year. (Westlake, 1998) Processors must sell all legally marketed unwashed green coffee and washed parchmenl to exporters at one of the two auctions at Addis Ababa or Dire Dawa. 2.4 In Ethiopia all coffee must be classified either as export quality (and therefore exported) or as domestic quality. This policy is intended to prevent undermining the reputation of Ethiopian coffee on the world market (Westlake, 1998). However, there are unintended consequences. When domestic prices are higher than international prices, farmers are likely to 16 illegally divert more of their production into the domestic market. Estimates suggest that this could amount to 25 percent of production and half of exports.27 2.5 All legally marketed coffee is sold through a coffee auction. Since 1998, however, this requirement has been relaxed to allow producers' cooperatives to sell directly to foreign buyers and to allow specialty coffee to bypass the auction. At least one cooperative is known to have created a successful relationship with a European importer. Originally, the auction system was introduced because of its many advantages, including providing equal competition between small and large scale exporters, ensuring sale to the highest buyer, and ensuring transparent information with respect to price and quantity. But there are drawbacks, which the Government is trying to address. For example, the system prevents direct trading between processors and exporters. However, exporters involved in special markets (e.g. gourmet, semi-washed or organic coffee), have recently been allowed to buy directly from the suppliers. Moreover, exporters involved in processing and washing activities have been allowed to re-acquire the coffee they supplied at auction. The auction still inhibits exporters from making long-term contracts with importers since they cannot be assured of buying at auction the type of coffee they contracted to supply. 2.6 The inability of buyers to inspect and test coffee is another constraint that further reduces confidence in quality. The Ethiopian Coffee and Tea Authority assesses the coffee and issues grades before auction. The purpose of quality grading before the auction is to introduce better price for higher quality. However, exporters report cases where the certified coffee was later rejected as unfit for export when submitted for final inspection28. A solution to this problem would be to hold coffee in storage for 2-3 days before auction and to allow private sector testing. This would require additional storage facilities at the auction. 2.7 A system of minimal entry requirements for traders (200 Birr a license) was envisaged to promote competition among coffee buyers at auction. However, the system is being hindered by a variety of factors stemming from the relatively unregulated system. For instance, some inexperienced traders have defaulted on payment. Others have disrupted the auction by working for coffee sellers to bid-up the auction price, thus raising the price to exporters. Since bid up prices are not transmitted back to producers, the effect is to widen the trading margin and make Ethiopian coffee less competitive in the world market. The Government has now introduced a special blocked account system for coffee to make sure that the exporters have sufficient resources before they are allowed to buy coffee. 2.8 Another constraint to the current system relates to the "Minimum Differential Price" imposed on coffee exports by a Government Committee. For any particular grade, the Committee sets the premium in relation to the New York spot price (the only price of high quality coffee available daily to buyers and sellers). In theory, the Committee could meet daily to adjust prices. However, in practice, this does not happen. In a declining price environment, Ethiopia's export prices have often been above international prices. Exporters have reportedly begun to subvert the system by rebating prices to international buyers. 27 Total domestic consumption is thought to equal roughly one-half of total production of 200,000 tons per year. This is comprised of about 25,000 tons of legal coffee rejected for export, 28,000 tons of consumption on farms, and an additional roughly 47,000 tons of illegal farm-processed marbush coffee. Altemative, according to the 1995/96 survey, the illegal marbush coffee could be closer to 90,000 tons. (Westlake, p34). 28 This may happen when the exporter buys different grade coffees of the same type and then bulk them together to prepare a mixture to be exported. The latter may still be rejected by the Central Quality Inspection as fit for export. 17 2.9 Recommendations. The coffee sector in Ethiopia is in crisis, partly because of the recent strong decline in export prices29. The Government has signaled its intention to move from the current auction system to a Commodity Exchange System. The introduction of forward contracts would increase international demand for Ethiopian coffee. Moving to a Commodity Exchange represents an excellent opportunity to address the entire strategy on coffee, including marketing problems, and to review the role of Government in the coffee export market. Before changing the system the Govemment has agreed to commission a study to review all issues pertaining to coffee marketing with a view of setting up an efficient coffee commodity exchange; and for designing a self contained regulatory framework. The study should analyze the following questions: what percent of coffee exports should be conducted through the exchange? Which coffee should be traded? Should foreign buyers be allowed in the exchange? Should current controls over price differentials continue? Are inspection and testing facilities adequate or should they be expanded? Would membership requirements be backed up by disciplinary procedures? Box 2.2: -Commodity-Exchanges- Commodity exchangeslprovide;mechanisms to,reduce the costs of identifying a market outlet or source; they improve thequality of information and the:reliability:.of qualiy stan dards; and allow more security in trade: tiansactions and easier. price risk tmsfer.. C(:Tmodit 'exchanges are organized-' market-places where trade trainsactions are centralized. The transactions.,are channeled -through one mechanism, allowing effective competition amonfg bu,yers arid sellers.. In ,developed countries .commod,i,ty exchangesl are essentiallyNcenters where future trade is organized. In many developing countriesi:, they fimction priniarily as centers :for facilitating physical trade. KeN elements for organizing a cormnodit :exchange involve.the discussion of: types of exchange and types of contracts: ownership:structiure, clearing operations, fitnancial planning. Exchanges need to be well regulated and regulations:need to be :een a tou fir and uncompromising. Source: UNCTAD) (19911). Chat 2.10 Recorded exports of chat Table 2.2: Ethiopian Chat Exports increased significantly in 1999 Year Tons US$ (million) Unit Value following the liberalization of exports US$/kg to Somalia. Chat is also legally 1993 3,001 18.70 6.23 exported to Djibouti and to the U.K. In 1995 4,90890 2.374 6.70 addition, substantial unrecorded illegal 1996 4,151 27.44 6.61 trade occurs, which may be equal in 1997 6,152 43.94 7.14 size to recorded exports. Chat exports 1998 6,559 50.66 7.72 are expected to continue to grow even 1999 14,113 65.23 4.62 without government intervention Source: Ministry of Trade and Industry because of strong demand in neighboring countries. While the Government does not intend to encourage these exports, because of the negative health effects, they are likely to occur. 2.11 Recommendations. The export price of chat is regulated. But it appears that the official price is often below the price in Djibouti and Somalia and this creates incentives to export 29 The authorities introduced a coffee export price floor below which the 6 percent export tax would not be collected. As a consequence export taxes have not been collected since May 2001; they also suspended the 5 percent withholding income tax on proceeds from coffee exports; restrictions on the domestic sale of export quality coffee were elimninated, and the transfer of coffee between regions was facilitated. In addition, banks have been encouraged to re-finance loans to wholesalers. 18 illegally. In addition, the official export price does not reflect changes in market conditions such as the increase in prices during the dry season. Thus, price should be liberalized to obtain the greatest revenue possible from exports and reduce the incentive for smuggling. Great potentialfor oilseeds 2.12 Oilseed exports surged in recent years, though they have been affected by declining world market prices (Figure 2.2). In 1999 Ethiopia ranked 25t among the top oil seeds exporters, up from the 84h place in 1990 (see Table 1.18). The most rapid growth has been in Figure 2.2: Oilseed Exports sesame seeds, where production has SD increased five-fold during the last five years, from practically zero during the early 1990s. u30 2.13 Sesame seeds are indigenous to 3 Ethiopia and are produced without fertilizer 20 or chemicals. They are exported to Europe, 1_ the Middle East and the United States. Major competitors are India, China, Burma, M99495 ]6 199617 197 .91 M99 and Sudan. Ethiopia has the advantage of I good local varieties, good growing conditions and low labor costs, which are important to the manual harvest of sesame. Sesame seeds cannot be mechanically harvested. Instead, laborers pull the plant so as not to shatter the heads and then thresh it by hand to obtain the small seeds. The abundance of cheap labor is important in the growth of production and exports. There is potential to expand production and exports even further since the quality of production is good, land is available for expansion, and world import demand is growing at more than 5 percent per year. The greatest constraint to increased production is transport costs. Total truck transportation costs are substantial, 15 to 18 percent of fob export price. Lower truck transport and other charges associated with exporting would benefit greatly the sector. The sector would also benefit from better marketing and promotion efforts. Pulses 2.14 Pulses export earnings have declined (Figure 2.3) in the late 1990s due to the downturn in international prices. Despite this, export prospects are reasonably good. Production is responsive to prices and land exists to expand production. Figure 2.3: Pulses Exports 2.15 Haricot dry beans are the major pulses export. They are well suited to Ethiopia, and the quality is among the best in the world. They are sold mostly to buyers i 12 _ in France, Germany, and the Netherlands. .3 Major competitors are Canada, China, and s the United States. The beans grow well 4 without fertilizer or chemicals and produce two crops per year. They are not subject to I"&" 1956 199Ct7 1'7198 1 9 1 9/00 major diseases. Smallholders produce them in competition with maize. The industry would benefit greatly from lower truck transport and other charges associated with exporting, and as in the case of oilseeds, from better marketing and promotion efforts. 19 Livestock 2.16 Ethiopia has the largest livestock population in Africa, estimated at about 35 million cattle, 25 million sheep and half as many goats. Exports of livestock have decreased from around $10 million a year in the late 1980s to less than $1 million in the late 1990s. Neighboring Middle-Eastern countries are increasingly responsive to health threats. They have banned imports of live sheep and cattle and raw skins from Ethiopia due to the presence of Rift Valley fever and the possibility of rinder pest. Ethiopia needs to put in place disease control programs and a third-party certification system - in order to regain access to the Middle East. It also needs to improve its abattoirs (slaughterhouses). The number of abattoirs has increased from one in the early 1990s to eleven, with four of them operating at 'export' standards. Cut Roses: building on strong natural advantages 2.17 Ethiopia is exporting a number of horticultural exports, including fresh vegetables, flowers grown in the open, and flowers grown in greenhouses, primarily cut roses. Ethiopia appears to possess a strong advantage for exports of cut roses. The clear sunny days and cool nights produce roses of premium quality, with excellent buds and strong stems. Quality roses take longer to grow (60-70 days, compared with 40 days for "commodity" roses), but they command premium prices. The market potential is huge. EU imports of cut roses tripled between 1992 and 1998. Kenya is the leading supplier, having increased exports by 1200 percent during this period. Other major suppliers are Ecuador, Zimbabwe, Israel, Colombia and Zambia. In Ethiopia, only a few farms are operating with less than ten hectares of land in total. In Kenya, by comparison, there are 1000 hectares of greenhouse production. 2.18 Recommendations. There are two constraints that need to be addressed for the market to develop. First, there are insufficient air freight charters30. Exporters report that EAL is unwilling to enter into binding contracts that commit the airline to provide specified capacity on a regular basis. Without guaranteed cargo space, flowers are destroyed. Currently, only EAL provides cargo charters and there is little competition from other airlines. Exporters complain of poor service, low responsiveness and high prices. Foreign charter companies have not yet been able to enter this market. Thus, it is crucial to move towards a liberalized cargo charter market. The longer-term solution is for the industry to charter its own regular cargo flights. In the short term, the Civil Aviation Authority should define the specific conditions under which air cargo charter flights may operate to and from Ethiopia. At the same time, cargo ground handling services should be opened up to competition. Cargo charter operators should be allowed to run their own ground handling if they wish. 2.19 Second, there are chronic delays and problems in getting the necessary approvals to import the specialized materials that are critical to the production of cut roses, such as pesticides, fertilizers and rootstocks. In some cases, four different agencies have to sign off on each individual consignment, and delays can reach six months. Thus, it is crucial that the various agencies consult with the industry, so as to find a realistic solution to this problem. Developing manufactured exports 2.20 Ethiopia is one of the least industrialized countries in the world. Of the 87 countries with significant industrial sectors benchmarked by UN1DO (World Industrial Development Report 30 The combination of Ethiopian Airlines three regular weekly flights of narrow-body 757's, with I ton capacity and Lufthansa's three flights, provides only 40 tons/week of space. This compares unfavorably with Nairobi's freight flight space of around 800 tons/week. Even with the recent addition of two regular weekly flights from British Airways, passenger flights are still insufficient. 20 2001), Ethiopia ranks lowest in terms of manufacturing value added (MVA) per capita in 1998. Ethiopia's relative position in terms of manufacturing production and exports is reported in Table 2.3. The table illustrates the small size of the manufacturing sector and the minimal technological sophistication of the export sector3?, suggesting that the economy has to struggle harder to build the necessary capabilities - operational, technical, managerial - to operate in export markets. Table 2.3: Ethiopia and Comparators' Manufacturing Production and Exports (1998) MVA per Manuf Exports Total manuf Share of complex Share of complex Country capita ($) per capita($) exports ($ m.) products in MVA products in manuf (percent) exports ( percent) Ethiopia 7.9 0.8 49 9.0 0.1 Kenya 36.6 28.3 829 24.0 7.6 Tanzania 15.8 2.9 93 25.0 1.5 Uganda 24.3 0.9 19 15.0 0.8 Egypt 326.1 36.5 2,242 39.0 8.8 Mauritius 738.9 1,433.7 1,602 12.0 1.4 China 287.0 135.4 167,681 51.0 36.6 Source: Calculated from UNIDO industrial and UN Comtrade database. Export figures are as reported by each country not based on importing partner statistics. 'Complex' products are medium and high technology products are defined in S. Lall, 2000 'The technological structure and performance or developing country manufactured exports, 1985-98', Oxford Development Studies, 28(3), 2000 2.21 While many countries use manufacturing as a driver for a rapid structural transformation of production, manufacturing in Ethiopia remains backward. It is dominated by low level processing of natural resources (about 40 percent is represented by the food and beverages sub sector) and the manufacture of simple consumer goods aimed at the domestic market32. In the past, the Government has fostered industry behind high import protection, creating large public enterprises with little managerial and technological experience. The process of exposing activities to international competition has just begun. At the moment even competition from neighboring COMESA33 countries may be devastating for many Ethiopian firms (see Box 2.3). The only enterprises that are growing are those that enjoy a cost advantage (for example, because they process local resources) or in markets where they do not face import competition. Ethiopia is not experiencing growth in those simple labor intensive activities where it may have a competitive advantage. 31 The share of high and medium technology products in MVA or manufactured exports measures technological sophistication. The remainder is made up of resource based and low technology products. 32 The Industrial Survey of Enterprises (2000) indicates that in 1999/00 there were 779 manufacturing establishments employing 10 people or more (up from 279 establishments in 1992/93). 33 The COMESA includes 20 countries. Its objectives are to establish a free trade zone (originally planned for October 2000 but now expected by 2002) and the adoption of a common external tariff structure (0 percent on capital goods, 15 percent on intermediate goods, and 30 percent on final goods) by 2004. Other objectives include fiscal harmonization, free movement of labor and capital, harmonization of product standards, and cooperation on intellectual property and investment laws. 21 Box 2.3: Implications of the COMESA Agreement In 1999 the Government commissioWed a study to assess the implications of fully implementing the COMESA agreement,,thus lowering toazero-infra-regional tariffs by October 2000. Today most countries have attained tariff reduction rates of 90; percent, including Ethiopia. Ethiopia trade. with :,COMESA countiies is low: the share'of COMESA exponis,and imports was 12.2.percent and 5.4 p,ercent of total exports and imports respectively in 1997/99, Major findings Questionnaires were sent to 90 enterprises (47 public and 43.private): 62 percent of enterprises responded to the questionnaire, representing 22 percent of total manufacturing output. The study fouhd that the revenue implications of adopting the: COMESA tariff reduction schedule would ;be negligible, with a revenue loss of less than 1 percent of total tax,,revenue. By contrast, the impact on the manufacturing industry would be important. Comparing ex-factory costs of local,products in Ethiopia with dIF value of simnilar imports originating from the. COMESA 'region, 25 percent were found to be competitive and 75 percent were found t--competitive; similarly, comparng ex-factoiy,prices versus import wholesale prices, about half were fou:d to be un-competitive. The major factors of poor competitivenss' of the manufacturing sector include: under. capacity utilization; high over-head costs (due to of high depreciation- and amortization costs, interest expenses and high rates of excise taxes): lack of standardization hnd control on imported goods. uldder in,voicing of imports; low efficiency as a result of the obsolete;technology in use; contraband and illicit trade which supply the market at lower price;' and depen'dency on imported raw materials and intermediate goods. 2.22 As already described in Chapter 1, manufactured exports are negligible, and have declined from around 25 percent of merchandise exports in the early 1990s to less than 10 percent of merchandise exports in 1999 (Table 1.13). Table 1.16 shows the product composition of manufactured export, according to the COMTRADE partners' imports database, which is the only source of information for manufactured exports. Much of the technologically advanced products such as power generating machinery and equipment should be netted out. These products would represent between 30 and 40 percent of manufactured exports and 4-5 percent of total exports during the 1990s. However, this actually reflects re-exports of products (new or used) rather than genuine productive capacity on the part of Ethiopian firms. In its own reporting to COMTRADE, in the mid-1990s, Ethiopia declared about $1.0-$1.5 million of 'machinery and equipment' a year instead of the approximately $32 million recorded by partners' imports. Hides, skins and leather 2.23 Ethiopia has traditionally been a major exporter of hides and skins because of its large livestock population. However, in recent years it has lost market shares in both hides and skins and finished leather products (see Table 1.19 and Table I.20). The outbreak of a parasitic disease called "Ekek" in livestock has reduced the value of hides and skins by causing blemishes in the finished leather. The Government in 1993 banned exports of raw hides and skins in an effort to derive the benefits of value addition. The ban has benefited the tanneries, which are now the sole suppliers of semi-processed hides and skins to the international market. Domestically, the tanneries are also protected by high import tariffs. These measures, together with the recent privatization of State-owned firms, have led to the entry into the market of several new tanneries, bringing the current number to 21. It would appear that the sudden upsurge in tannery capacity has had a dramatic impact on raw skin prices paid by the tanneries to collectors. Capacity is said now to be around 36m skins/year, compared to a supply around 14m skins/year. 2.24 Recommendations. Eventually the ban on exports of hides and skins should be phased out and replaced with an export duty which would then be reduced to zero within a pre- 22 announced schedule. Tariffs on imports of hides and skins should also be lowered as they prevent the development of a leather industry, which requires better quality leather than is available from local tanneries. Local tanneries should compete for raw hides and skins with international buyers and for sales of leather to the domestic market. 2.25 The control of "Ekek" is relatively inexpensive (4-5 birrs per goat/sheep/year), and would increase the value of leather exports. A pilot program to control the disease is underway in the Amhara Region. This pilot should be extended into a national control program, involving the participation of all farmers. 2.26 Tanneries should be encouraged to introduce differentiated payments for hides and skins. This would encourage livestock producers to care for their animals and would increase the number and quality of hides and skins sold for processing. Textiles and garments 2.27 Textiles and garments represented about 4.9 and 3.2 percent respectively of manufactured exports in 1999. There are currently 19 state-owned and 14 private owned enterprises in the sector, employing about one third (26,000 people) of the labor force in the manufacturing sector. Many of the publicly owned firms produce low-quality basic garments for the domestic market, or supply uniforms to government bodies such as the police and the armed forces. There has been virtually no investment in new machinery for at least ten years. Workers are paid, but not always at the full rate. Capacity utilization is below 50 percent in most enterprises. Firms report that the market is flooded with inferior-quality cheap imports and contraband trade. 2.28 The Government has been trying to privatize its various textile and garment enterprises for some years, without much success. Recently, however, the government started to embrace "quasi-privatization," whereby management responsibilities pass to private firms, not necessarily on the basis of outright purchase. The result has been a wave of transfers34, leaving only two textile or garment factories in government control. This new strategy represents a significant improvement from the past, one that may bring very important benefits. Foreign investors are often reluctant to assume the risks associated with equity or joint ventures before testing the policy and business environment. Partnership arrangements such as management contracts, sub- contracting, technical and marketing agreements, though they do not involve equity, can bring similar benefits, namely access to external markets, management skills, and training of the labor force. 34 The Tang Shan Textile Company of China on the basis of a Management Contract has managed the Kombulcha Textile Factory, for the past year or so. It is already exporting simple products based on local cotton, such as napkins, terry towels and bedsheets to IKEA of Sweden. The factory sub-contracts the simple sewing tasks involved in products such as napkins to Addis Garment, still under state management and ownership. The Awasa Textile Factory is also under management (for the past eighteen months) by the Wuxi Textile Company of China, again on the basis of a Management Contract. Adei Abebe Yarn Factory, Dire Dawa Textile Factory and Arba Minch Textile Factory have all been transferred over to the management control of a Turkish entrepreneur with long experience in the textile industry. The three factories will be run as a single integrated operation, taking local raw cotton, and transforming it in stages into a range of final garments. Exports of mens' vests to the USA have already started, based on local cotton. Nazaret Garment Factory has only recently been transferred on a lease basis to a Hong Kong company, Allied Hill Holdings Ltd., which also operates garment factories in China, Cambodia, Vietnam and South Africa. Exports will initially be based on shirting cloth imported from East Asia. Eventually, however, the factory hopes to use local cloth based on local cotton. Akaki Textile Factory has recently been transformed into a joint venture between Allied Hill (40 percent) and the govemment (60 percent). This will be managed by Allied Hill, and will eventually supply cloth to Nazaret Garment Factory. 23 New market access opportunities: The African Growth Opportunity Act and the Everything But Arms Initiative35 2.29 Ethiopia has a window of opportunity for a significant export take-off on the basis of garment assembly. There are many reasons to be optimistic. First, the involvement of foreign investors through non-equity collaborations is revitalizing the textile and garment sectors. Second, wages are among the lowest in the world. Third, new market access opportunities are opening up in both American and European markets. The single most important opportunity is represented by the African Growth and Opportunity Act (AGOA), signed into law in the USA, on May 18, 2000. Section 112 of the Act provides market access concessions to a broad range of SSA products. Any one of the 35 eligible SSA countries can export garments to the USA, virtually without quota limits.36 An additional concession applies only to 28 poorer SSA countries (with a GNP per capita in 1998 under US$1500). Unlike the richer group, these poorer countries can use cloth from anywhere. This makes countries like Ethiopia even more attractive as places to source garment assembly operations. This additional concession is short-lived, however, since it expires at the end of September, 2004 and it is unlikely to be renewed. AGOA represents the most significant concession on market access in decades37. The cost advantages created by the unique combination of lack of duties (typically around 17 percent for non-AGOA countries like China) and lack of quota are available to few countries, only two of which are already significant players in the US garment import market (Mauritius and Kenya). The impact on the Ethiopian economy could be dramatic. For example, Cambodia started garment exporting in 1993 and within six years, it had 600 factories operating, each employing an average of 300 workers. Bangladesh, which started its garment take-off much earlier, in the late 1980s, now has 3000 garment factories operating. 2.30 Another important opportunity is the European Union initiative - "Everything but Arms" (EBA) - approved in February 2001. This scheme provides for duty and quota free entry for all exports (except arms) from the 48 poorest nations.38 EBA has no time limitations but will be reviewed in 2005. Its sequential phase-in started in March 2001 with the extension of duty and quota-free access for 919 agricultural products originating in the least developed countries (including fruits and vegetables, meat and dairy products). Ethiopia is eligible, as are major exporting countries outside Africa, such as Bangladesh, Laos and Cambodia. Thus, although the EBA concession will help Ethiopia's exports, it is less significant than the AGOA concessions. 3 While less important for Ethiopia, given the current trade structure, it is worth noting that Japan recently expanded preferential access to its market for the least developed countries by 350 items, including textile and clothing products. Thus, about 99 percent of industrial products from the least developed countries can now enter Japan duty and quota- free. In September 2000, Canada also increased, by 570 tariff lines, the number of products eligible for duty-free treatment of exports from the least-developed countries. Thus, about 90 percent of all products from least developed countries have duty-free access to the Canadian market. 36 However, while there is no cap on garments made from US cloth, there is a global cap on garments made with African cloth. The scheme starts at 1.5 percent of total US garment imports, and rises to 3.5 percent at the end of the eight-year concession. Note that the cap is based on square metre equivalents, not on dollar value. US garment imports currently run at around $680bn., so that even at its starting level, the cap would allow these imports from Africa to rise to around $10bn., nearly twice the level of all garments, comprising all types of cloth, that Africa exported to the USA in 1999. 37 In addition to providing duty-free and quota-free access to the US market, AGOA has expanded product coverage of duty-free treatment by about 1800 tariff lines beyond the standards 4600 tariff line items that were already included under GSP. In addition, GSP benefits are extended for SSA countries until September 30, 2008, seven years longer than for the rest of the world. 38 Unlimited duty-free treatment were not extended immediately to three sensitive agricultural products, bananas, rice and sugar. For rice, duty reduction begins only in 2002. For bananas and sugar, duty free access is limited by tariff quotas. Duties will be progressively reduced on these products commencing in September 2006. 24 2.31 In August 2001 Ethiopia was made eligible for US textile & apparel benefits under Section 112 of the AGOA, thus joining the African countries that have already obtained certification - Mauritius, Kenya, South Africa, Madagascar and Lesotho. Ethiopia can now anticipate a surge in garment exports, based primarily on local cotton. Given the additional concession on the use of non-African, non-US cloth, there is a very significant opportunity to assemble garments based on imported, primarily Asian cloth. To realize this opportunity, however, factories need to import cloth free of additional costs imposed by duties. Thus, as will be discussed in Chapter 4, it is imperative that true free trade status be offered to exporters as an effective means of inducing many domestic and foreign firms into Ethiopia's manufactured export industries. Tourism has great potential 2.32 The tourism sector has the potential to generate additional foreign exchange and employment. There were approximately 140,000 tourists (defined as any foreigner who spends more than one night) in Ethiopia in 2000, the same number as for 1997, the year prior to the conflict with Eritrea. It is estimated that about 20 percent arrived for leisure, recreation and holidays39. With the restoration of peace, the figure is estimated to increase to around 320,000 over the next five years. However, several structural supply constraints need to be addressed before these ambitious targets can be met. 2.33 Ethiopia's tourism "products" focus on its rich cultural history, scenic beauty, attractive climate and handicrafts40. The tourism sector has changed significantly in recent years and there is now considerable competition in tour operations (about 70 firms) and travel agents (about 120 firms). Some 35 of the 56 Government hotels have been privatized and new private hotels have been constructed. 2.34 Transportation is a major constraint to tourism, although recent investments, such as those in key roads, have improved access to areas of interest. The Government's program to improve airport services is well advanced in upgrading and modernizing seven airports, including Addis Ababa, and others along the "historic route" in the north. But air transport services continue to be monopolized by EAL which is reported to engage in anti-competitive practices such as giving preferential treatment to domestic customers utilizing the airline on intemational segments. Anecdotal evidence also suggests excessive fare increases, flight delays, changes and cancellations. Limited competition is being introduced with 20 seat capacity planes now allowed to operate. 2.35 Recommendations. A number of measures, which the Government could implement quickly, would significantly improve economic prospects in the tourism sector: Liberalizing the domestic air transport sector. Options include issuing additional licenses for domestic airlines or increasing seat limits for individual aircraft operating within the country to about 40-50 passengers. 39 Regional Tourism Development Plan for North, East and West Ethiopia by Tourconsult/ International SA, 1995. 40 The four main tourism "products" currently offered in Ethiopia are: i) northem Historic Route which covers religious/cultural attractions (such as rock hewn churches) in Axum, Lalibela, Bahir Dar, Gondar, Harar and Dire Dawa; ii) nature based tourism in the Great Rift Valley Region focusing on four national parks and seven lakes (especially bird watching in Lakes Abyata, Langano and Shala) and wildemess safaris in the southem and eastem part of the country; iii) cultural diversity in the South where unique customs continue to be practiced by some ethnic groups; and iv) hunting safaris. 25 * Reducing the 100 percent import duties on vehicles imported by tour operators. Transportation services represent a very high cost for tour operators given the wear and tear resulting from operation on roads that are in bad condition. The import taxes on vehicles are, hence, an additional burden of significant proportion. * Allowing broader use of credit cards. At the moment only hotels rated at better than 3 stars can accept credit cards4e. This constrains the domestic linkages that can occur through tourist spending in shops and restaurants. * Opening up the tour operator business, which is currently restricted to Ethiopian firms. The presence of larger international tour operators in Ethiopia could have a beneficial impact especially in developing backward linkages in areas of current constraints (e.g. hotels and lodges). 2.36 To address the medium to long-term issues in the sector, the Government will need to develop - jointly with the private sector and other stakeholders - a vision of tourism as a sector for development and growth. Consultations over the five-year Tourism Plan will provide an opportunity to develop this vision. But the long-term sustainability of the tourism sector will also require the Government to address key risks in the deterioration of "tourism" products. In particular this will need to focus on the management of environmentally sensitive areas surrounding key tourism destinations and the management of wildlife in game parks. Improving competitiveness 2.37 Sustained export development calls for strong leadership and a wide range of economic policies. The previous sections discussed a number of sectoral measures that may help increase the supply of exports. The next section focuses on supply side constraints that cut across sectors and that are particularly relevant for exports. It also highlights possible policy changes to address these constraints and improve competitiveness. Prices and costs 2.38 Short run competitiveness is influenced by the structure of exchange rates, prices and production costs of an economy, relative to that of trading partners. As discussed in Chapter I, a summary measure of a country's international price competitiveness is the real exchange rate. Between 1992 and 1999 the real effective exchange rate declined by about 70 percent. It appears that the real depreciation of the exchange rate, as well as the program of structural reforms initiated in the early 1990s, has significantly improved price competitiveness. Maintaining a competitive real exchange rate should continue to be an objective of economic policy. 2.39 Prices of inputs such as electricity and water are low by international standards as Ethiopia has kept electricity and water tariffs down, below economic recovery levels. While this will change in the future, at the moment, both price and the supply of these services do not represent a major constraint for exports. By contrast, telecommunication services already pose a serious constraint to exports due to the high costs of outgoing international calls, difficulties in obtaining cellular service, and limited availability and high cost of internet services. There are only 250,000 subscriber lines for a population of around 65 million - an access ratio of 0.35 lines per 100 persons, almost half of the Sub-Saharan African average of 0.6 lines per 100 persons. 41 The objective of this restriction is unclear since all credit cards used in Ethiopia are issued outside the country and foreign exchange settlement is only one way (i.e. incoming foreign exchange to domestic member establishments for expenditures undertaken by card members), removing the potential for foreign exchange misuse. 26 There is a waiting list of 20,000 for mobile phones and an existing subscriber base of 24,000. There are only 2,500 internet subscribers. 2.40 The Government has recently initiated a reform program in the telecom, power and water sectors. In Annex II, the report makes some suggestions on how the Government might wish to address the issue of increasing service delivery in public utilities on the basis of lessons from recent international experience. Three lessons are particularly important. First, there has been a focus on establishing sector policies and service delivery targets and regulating the achievement of these goals while utilizing private sector participation in service delivery. Second, policies have been defined within each market segment/service from the perspective of allowing the maximum competition feasible. Third, private capital has been attracted by setting tariffs which allow for overall cost recovery and financial sustainability of the sector while separately meeting their social goals for increased equity and/or access through a variety of subsidy mechanisms. Wages and labor marketflexibility 2.41 Wages in Ethiopia are reportedly among the lowest in the developing world. While there is no minimum wage legislation, a wage of about $25 per month is currently accepted for unskilled workers. Graduate salaries range between $75 and $100 per month42. A good indicator of relative wages for export oriented activities is in clothing industries. Figure 2.4 shows wages in clothing for manual workers in Ethiopia and some comparators, including China (average for manufacturing industry and in the Special Economic Zones). Wages in Ethiopia are the lowest, though the advantage over other countries may be easily offset by differences in productivity, skills, logistics, infrastructure and business costs. Indications are that skill levels, particularly at the technical and managerial levels, are deficient and Ethiopian enterprises undertake very little in-house employee training. Figure 2.4: Annual wages in clothing Industries for Ethiopia and comparators In 1997 (USS) 1,200 1,000 800 600- 400- 200 Ethiopia Kenya China China (EPZ) Egypt Mauritius Note: Data of Egypt for 1995 2.42 Besides low wages, Ethiopia offers a flexible labor market. For example, firm exit is not constrained by excessive difficulties in releasing the labor force.43 There is no difference between 42 See Ethiopian Investment Review, www.ethioinvestment.org 43 Criteria for terninating a worker's contract are those typically found in most developing countries. The relevant legislation is contained in Labor Proclamation 42/1993, which states: "A contract of employment may only be 27 legislation governing state-owned enterprise and that governing private enterprise. Nevertheless, factory-level collective agreements may include specific terms with respect to termination that carry forward after a change of ownership or management. Overall, the current legislation does not appear to constitute a significant barrier to exit. High transportation costs 2.43 Freight transport costs are high in Ethiopia and reduce the competitiveness of exports, especially bulky commodities produced in remote areas. In the case of sesame seeds, truck transport fees are more than 15 percent of export price. High intemal transport fees preclude exports of low valued commodities such as cereals.44 Amjadi and Yeats (1995) found that in the early 1990s the cost of freight and insurance relative to the total value of exports in Ethiopia was more than three times the average of all SSA countries and nearly 10 times that of all developing countries. Following the same methodology, Tables I.23 and I.24 show estimates of the nominal shipment and transportation rates as percentages of total merchandise exports and imports45. Although caution must be taken in analyzing these figures, it appears that Ethiopia's freight and insurance costs, as well as transportation costs, are well above standards for developing countries, not only in Asia but also in SSA (with the exception of another landlocked country, Uganda). For example, in 1999, total freight and insurance costs represented 11.2 percent of the value of merchandise trade in Ethiopia, but only 4.9 percent in South Africa, 6.4 percent in Ghana, 8.3 percent in India and 2.7 percent in China. 2.44 A recent report of the Ministry of Transport & Communications46 concluded that the road network is limited in extension, poor in quality, unsafe, expensive and difficult to maintain and rehabilitate. Despite the substantial deregulation that occurred in the early 1990s - including deregulation of tariffs and routes, entry liberalization and the initiation of a privatization program that is expected to be completed by the end of 2001 - very few private companies have emerged. Private operators have been impeded from entering by the substantial presence of parastatals and their associates, the existence of trucking associations (that negotiate rates and sign contracts on behalf of their members) and the presence of share companies deriving from regional development associations. These appear to be often favored for public tenders. In addition, regulations are viewed as non-transparent to operators and transport companies are poorly organized and prepared. The report recommends the effective privatization of all parastatal enterprises, the opening of the transport market to foreign operators and investors, the complete deregulation of the entire market and the adoption of a clear framework of regulatory and enforcement institutions. terminated where there are grounds connected with the worker's conduct or with objective circumstances arising out of his ability to do the work, or the organizational or operational requirements of the undertaking". They include: (a) any event which entails direct and permanent cessation of the worker's activities in part or in whole resulting in the necessity of a reduction of the work force; (b) fall in demand for the products or services of the employer, resulting in the reduction of the volume of the work and profit and thereby resulting in the necessity of the reduction of the work force; (c) a decision to alter work methods or introduce new technology with a view to raising productivity, resulting in the reduction of the work force. 44 The current fob price of maize exports from the US is $84 per ton (World Bank, Commodity Prices, June 2001), while the domestic truck transport costs within Ethiopia exceeds this amount. 45 The shipment rate is calculated as the sum of freight and insurance (debit plus credit) to total trade (exports plus imports). The transportation rate is the ratio between all transport costs and total trade. Caution should be taken in discussing this data because of the lack of homogeneity in the way transactions are recorded. 46 Ministry of Transport & Communications, Study on Road Transport Regulations, June 2001. Report financed by the European Commission and prepared by SPT in association with CA. 28 Box 2.4: High Transport Costs Penalize Exports The efficiency of transport costs greatly determines the ability of finns to compete in export markets. Transport costs vary widely across countries. It has been calculated that it costs $1,000 to ship a 40-foot container from Baltimore to Dar-es Salaam (Tanzania), $2,500 to Durban (South Africa), $4,000 to Vienna (Austria), and $13,000 to Nepal. For 168 out of 216 U.S. trading pauners, transport costs incidence for exports outweigh tariff incidence. For most SSA countries, the tariff incidence typically amounts to less than 2 percent, while the transport cost incidence exceeds 10 percent Transport costs depend on a mixture of geographic and economic factors, such as poor physical infrastructure and thin traffic densities (associated with low income economies), as well as on policies. Transport related transactions (customs clearance, fulfillment of documentation, uncertainty about the enforceability of legal documents etc.) might greatly increase transport costs. Cargo reservation policies, competition restraining practices atnong shipping lines and port terminal operators, as well as international airline alliances can also significantly raise costs. At the domestic level, targeted infrastructure investment, regional cooperation on transportation and trade facilitation initiatives and policies to liberalize services can play an important role in improving the transport competitiveness of exporters. Source: World Bank (2001) Low technological levels 2.45 Ethiopian industry operates at very low technological levels, and its enterprises lag well behind world technological standards even in the activities in which it specializes. Much of the country's technology derives from imports of capital and intermediate goods, which have in fact increased three-fold since the early 1990s. By contrast, imports of licensed technology are negligible, and there are no signs of increase. While this is not unusual in less industrialized countries, all dynamic countries in the developing world are increasing their purchases of foreign technology rapidly. China, for instance, has raised its licensing payments nearly 40-fold in the past 13 years. Technology license payments are massive in Egypt, having increased from 189 million in 1985 to 392 in 1998. 2.46 Regulations on technology transfer agreements are covered in the Investment Code. In addition, the Council of Ministers Regulations No. 121/1993 deals with technology transfers unrelated to foreign investments. The Ethiopian Investment Authority (EIA) is revising these regulations and in June 1999 has proposed new 'Draft Guidelines for the Approval and Registration of Technology Transfer Agreements'. Both the Regulations and the proposed revision aim to increase government surveillance and control of technology contracts. The tenor of both harks back to the 1960s, when developing countries enforced strict controls on the terms and payments involved in technology contracts. The EIA proposes taking greater powers to evaluate contracts, and establishing a technical committee to evaluate each agreement in detail. This is likely to be counterproductive. Most countries have withdrawn from official interventions in technology contracts, while strengthening information support and fostering the development of a private intermediary market in technology brokering. This is indeed the approach that Ethiopia should follow. Moreover, the Guidelines should promote and encourage the implicit forms of export-oriented technology, for example through international subcontract agreements and technical/marketing agreements. 2.47 Ethiopian industry invests very little in formal R&D. As in other SSA countries, the level of technological activity is low and may be inadequate to meet the competitive pressures placed on industry as the economy liberalizes.4' Expanding standards, metrology and quality and 47 For evidence on this from Kenya, Tanzania and Zimbabwe see Sanjaya Lall (1999). 29 testing is of great importance if Ethiopia wants to industrialize. For example, standards can encourage technology diffusion and raise the quality of local inputs. The standards set by the International Standards Organization (the ISO 9000 and 14000) are becoming an important criteria by which foreign firms discriminate among countries to relocate part of their production. In Ethiopia, there is a virtual absence of ISO 9000 certificates held by its enterprises. 2.48 In many countries FDI has been a source of technology transfer. The central issue is how well the transferred technology is absorbed, utilized and diffused in the host economy, and the contribution it makes to the economy's own technological capabilities. Thus, investing in human and technical capabilities is essential for the country to be able to benefit from technology transfers. In the Ethiopian setting, FDI from other developing countries can provide valuable inputs into upgrading and restructuring the industrial sector. In low technology industries like clothing, Asian firms are already major investors in other countries.48 The case of Ghana illustrates how a formerly state-owned steel plant on the verge of bankruptcy was taken over by an Indian firm and transformed with minimal capital investment (Box 2.5). Box 2.5: Innovation and Learning in a Steel Company in Ghana Te'ma Steel was set up by the Ghanaian government in the late 1970s, smelting steel from scrap to make billets and rods for the construction industry, with a design capacity of 45 thousand tons. A British rutrn set up the plant on a tumkey basis, with practically no participation of local personnel. Staff were recruited and trained by the turnkey supplier, but the local base of steel making capabilities was practically nil. One of the two blast funmaces remained inoperable, the layout was highlly inefficient, and training was insufficient to ensure the smooth operation of the technology. At a later stage an Italian consultancy company was brought in, again on a turnkey basis, to set up an expensive casting machine and a foundry. The company also made changes to the rolling mill to enlarge the product range, thus further increasing the complexity of the operation. Again, given the lack of local capabilities, neither the casting machine nor the foundry could be brought into operation by Tema Steel, and operational efficiency declined even further. By 1991, some 17 years after starting, the plant was running at only 10 per cent of design capacity, with much of the equipment unutilized, and experiencing high costs and enormous losses. Much of the utilized plant was in a poor state, badly in need of repair and upgrade. There were very few qualified steel technicians or engineers employed, and the staff received practically no firther training. In 1991, the plant was sold to an Indian steel company, which imported 17 experienced 'steel men' (of whom only two were graduate engineers) from India to take charge of the technical functions of the plant. With very little new investment in equipment, they began to refurbish machinery, improve maintenance and improve every area of operations. The simple input of capabilities had dramatic results on Tema Steel's technical performance. Within one year capacity utilization had risen threefold, with the rolling mill working two shifts and the furnaces three shifts, 6 days per week. The blast furnace that had never been used was commissioned by changing a few controls. The first flurnace was upgraded to run continuously. The continuous casting machine was also brought into operation by inserting some missing items that the previous technicians had not even been able to identify. Vanous motors that had died from neglect were refurbished and put into use. The foundry was commissioned and new refractory products were developed. Quality management was improved to match UK standards (and so meet import competition). Training programs were launched in-house for local staff in all technical functions. The ease shows the massive imnpact that capabilities bave on the operation of imported technology. It also shows how the transfer of learning from one developing country, where considerable learning had taken place, to another where almosi no learning had occurred, can be extremely effective. Source: Lall et al (1994). A large part of this relocation of garment exports was in response to the quotas imposed under the MFA. This motive will end in 2004 as the MFA is abolished, though Ethiopia, along with other SSA countries, may still enjoy some market access benefits under the African Growth and Opportunity Act in the USA and similar provisions by EU. Wage cost considerations will continue to dictate shifts in production location for garment production - at least to sites that provide cheap trainable labor, minimal technical and managerial skills and efficient logistics. 30 Investing in human capabilities and physical infrastructure. 2.49 Indicators of human capabilities and of infrastructures (see Tables 1.25 and I.26) point to a country at an early stage of development, with low levels of human and physical capital. Life expectancy at birth in 1999 was 42 years compared to 47 years for SSA; the illiteracy rate in 2000 was 46 percent of the 15-24 years population compared to 22 percent for SSA. Physical infrastructure, such as power, transportation and communication are often worse than in other SSA countries. Since SSA generally compares poorly to other regions of the world, the shortfall on these measures is even more compelling. In the long term, the ability of Ethiopia to grow and integrate with the world economy will depend on the accumulation of human and physical resources, as well as on gains in efficiency with which resources are used. Reducing the illiteracy rate among the young should be a priority. A second priority would be improving technical education and training. Significant public and private investment would be required to improve the quality of infrastructure services and expand the existing stock. Conclusion 2.50 This chapter has proposed a number of policy measures to address sector specific constraints that impede the further development of agricultural exports. The quality of exports needs to be improved in order to offset at least some of the declines in prices. For example, while the downturn in coffee prices has not yet led to a proportionate decline in coffee export volumes, this it is likely to happen in the near term if measures to address the constraints in the sector are not taken. Equally important is to take advantage of new market initiatives, such as the AGOA and EBA and build new comparative advantages. Besides garments, cut roses and tourism appear to be sectors where rapid export growth could be engineered. 2.51 Ethiopia has a number of strengths. The labor market is flexible, and labor laws do not represent a constraint to the exit of firms. Wages for unskilled workers are among the lowest in the world; and prices of inputs such as electricity and water are low by international standards. However, a number of constraints hamper the country's ability to compete in world markets - low levels of technology, high transportation costs, low education and technical skills of the labor force and severe infrastructure deficiencies. 31 3. THE OUTLOOK 3.1 Notwithstanding short-term uncertainties, the long-term forecast anticipates a favorable international environment in the next decade that will likely have a positive impact on growth and poverty reduction in developing countries. However, the ability of individual countries to benefit from the external environment will be contingent on a number of factors, such as population growth, capital and skill accumulation. Additionally, it will depend on the capacity of policy makers to respond to new opportunities and challenges. 3.2 Whether growth in world markets can be translated into stronger export performance for Ethiopia, will depend on the Government's willingness to undertake reforms to improve the performance of existing export products, to diversify into new products, particularly manufactures, and to improve the business environment. This chapter suggests that on the basis of recent trends and current policies Ethiopia is likely to see a significant reduction in the growth rate of exports in the next decade, relative to the 1990s. An acceleration of the reform effort is needed for Ethiopia to significantly increase its export growth. The external environment 3.3 After reaching a cyclical high in 2000, growth slowed sharply in 2001. Overall, world GDP growth is forecast to slow to 1.3 percent this year, down from 4.0 percent in 2000.49 Growth in developing countries is expected to fall to 2.9 percent in 2001, nearly half the 5.5 percent recorded in 2000. World trade fell back from its record growth of 13.4 percent in 2000 to only I percent in 2001. Non-oil commodity exporters suffered from the continuing weakness in prices for coffee, cocoa and other key commodities. Oil prices eased, but remained strong, translating into deteriorating terms of trade for commodity exporters such as Ethiopia. 3.4 Prospects in the external environment of developing countries have deteriorated following September 1 1' events, reflecting the sharp weakening in consumer confidence and declining import demand in developed countries. Capital flows are subdued because of high-risk aversion in capital markets. On the positive side, developed countries have aggressively responded to the crisis with cuts in interest rates and fiscal support measures. Expectations are that the current slowdown will be short lived and growth will pick up over the course of 2002 as the strong response from US monetary authorities rekindles investment and consumer spending. Overall world growth is expected to reach 1.6 percent in 2002 (see Table 3.1). Europe's recovery particularly important to Ethiopia since it constitutes nearly 50 percent of Ethiopia's export demand. 3.5 The risks to this optimistic outlook are predominantly on the downside. Further downward stock market adjustment, uncertainty and high levels of private debt may erode confidence in the US, slowing consumer demand and leading businesses to postpone investment spending. A delayed recovery would lower industrial countries' growth significantly in 2002, with the impacts spreading quickly to developing countries via trade and investment links. 49 These numbers are from the baseline projections of the World Bank 'Global Economic Prospects' (October 2001), which take into account the September 11 th events. 3.6 Despite the uncertainty over the next 12 - 18 month period, the longer-term fundamentals for the world economy remain positive. Structural and technological underpinnings in both developed and developing countries are anticipated to evolve in a favorable way, leading to average world GDP growth in 2003-11 of 3.3 percent. World trade will also resume its expansion, although below the rate of the late 1990s. The strongest gains will be in manufacturing and services, with commodity exporters realizing much more modest gains. Table 3.1: Indicators of the External Environment (annual percent change) 1993-00 2001 2002 2003-11 Real GDP World 2.8 1.3 1.6 3.3 OECD 2.6 0.9 1.1 2.9 Real imports World 8.0 1.8 4.2 7.1 OECD 8.2 0.9 3.2 7.0 Ethiopia's trade partners 6.3 2.5 3.5 6.6 Trade prices Coffee 11.4 -28.8 1.6 6.9 Oil 8.3 -11.4 -16.0 -0.4 Muv -1.0 -4.6 4.0 1.8 Ethiopia's: terms oftrade -3.1 -9.1 1.0 1.6 Source: Preliminary Staff Forecast 3.7 Table 3.1 highlights elements of the global outlook that are important for Ethiopia. Ethiopia's trade partners are expected to increase their demand for imports by 3.5 percent in 2002 and by 6.6 percent during 2003/11, just above import demand growth in the 1990s. After the sharp fall in recent years, coffee prices are expected to increase, but, at a lower rate (on average) than in the 1990s. The terms of trade for Ethiopia are forecast to improve, the combined effect of lower oil prices and the recovery of commodity prices. Commodity prices 3.8 Between 1980 and 2000, commodity prices declined by 18.4 percent in nominal terms and by 35.0 percent in real terms (see Figure 3.1). Over the past century commodity prices have declined by roughly 1.1 percent a year relative to manufactures prices50. This is due to several factors, including the more rapid growth in the technology of commodity production,5' lower income elasticities of demand for primary commodities compared to manufactures,52 and government policies that have subsidized commodity production.53 The prediction that real commodity prices would increase because of limited natural resource supplies has not occurred and does not appear likely to occur in the foreseeable future. Commodity prices will recover from their exceptional weakness in the recent past, rising somewhat in real terms vis-a-vis 50 World Bank, Global Commnodity Markets, January 2000. 51 Martin and Devashish (2001), in a study of nearly 50 countries for the period 1967-92, found that total factor productivity growth in agriculture was nearly double the rate of growth in manufactures-an average of 2.6 percent per year for agriculture compared to 1.5 percent per year for manufactures. 2 The income elasticites of demand for commodities are generally low-between 0 and 0.4. For example, a recent academic debate concerned whether the global income elasticity of demand for rice (the basic food staple for Asian consumers) was zero. In contrast, the income elasticity of demand for manufactures has been generally estimated to be greater than one. B3This is well documented in the European Union, Japan, and the United States. 34 manufactures prices, but, reflecting inelastic demands and stiff competition on the supply side. There is no anticipation of a strong reversal of the long term declining trend. Figure 3.1 Non-Energy Commodity Price Index (US$) 275 .... R,.i 125 75 50- g9m0 292 2984 19" 198 1990 1"2 24 2 1990 2YIW Note: The index of prices is a valued weighted index of major primary conunodities in US dollars deflated by the Manufactures Unit Value Index of G5 countries. 3.9 Coffee prices have Fig-re 3.2 C offS.., .., M o.2tby, 1990-2002 declined sharply in recent years 600 .. .. . .. (see Figure 3.2) because of large : increases in coffee production . and exports from traditional ! Ao. ,-.v''-'_-. exporters such as Brazil and new D entrants such as Vietnam. 0 __ Rob-t_ _ Between July 1998 and June ,,o ,. .- ,0 , .- 2001, coffee export prices declined by almost 50 percent. A significant price recovery is unlikely, though modest growth is expected. The sector faces slow growth of coffee demand and declining per capita consumption in Europe and the United States, which account for 90 percent of imports. The decline in arabica coffee prices has been less than that of robusta prices, but prices are correlated because of the substitution of coffee types. Ethiopia's coffee export prices were closely linked to world prices over the past 20 years54. Ethiopia has had a quality premium that has allowed it to obtain 29 percent higher coffee prices than the world average over the past 20 years55. This premium rate could be sustained and increased if the quality of future coffee exports is improved relative to the world average. 54 Ethiopia's coffee export unit values (E-EUV) were regressed on world coffee export unit values (W-EUV) using calendar year data from 1980 to 1999. The regression was estimated using ordinary least squares. The results show that 80 percent of the variability in Ethiopia's coffee export unit values is explained by the variability in the world coffee export unit values. There is no statistically significant trend (at the 10 percent level of significance) in Ethiopia's export unit values relative to the world's export unit values. The intercept term indicates that Ethiopia's export unit values have averaged $827.94 more per ton than the world average and this was equal to 28.9 percent of the average world export unit value over the estimation period. E-EUV = 827.94 + 0.8937 * W-EUV + 6.1995 * Trend R2=.80, D.W.=2.14 (t=8. 10) (t=0.52) Data on export unit values were obtained by dividing coffee export earnings in US dollars by coffee export volumes in metric tons using data from FAOSTAT. 55 Note: Arabica coffee prices are the International Coffee Organizations (ICO) indicator price for other mild Arabica New York and Bremen/Hamburg, ex dock, and robusta prices are the ICO indicator price New York and Le Harve/Marseilles markets, ex dock. 35 3.10 The price outlook for Ethiopia's chat and sesame seeds exports appears to be good, because of limited international competition and rapid demand growth. While little reliable data is available, chat prices are likely to be linked to income levels in Ethiopia's neighboring countries. Sesame seeds face a relatively strong demand. Demand in Europe grew by almost 6 percent per year during the 1990s, as well as in neighboring African countries and in Asia. Ethiopia had a price premium of about 14 percent during the 1990s relative to the world market average, up from 9 percent during the 1980s. 3.11 The prospect for overall hides and skins prices is only fair, but the outlook for high- quality hides and skins is relatively good.56 Ethiopia's export unit values for raw hides and skins were very favorable prior to the ban on raw hides and skins exports in the early 1990s and the outbreak of the parasitic disease (Figure 3.3). Price prospects for high quality skins remains good and Ethiopia can expect to regain its price premium relative to the world market if it can control the parasitic disease and improve quality. Flgure 33 Export Unit Values-Hides & Sldns (S/ton) Figure 3A Export Unit Values-Dry Beans (S/ton) 18500 ~~~~~~~~~~~~~~~Wold iiopla 6000- - ------------------------------ 084 0 ------- ------- '- 4 CO -X- World - _\ i _ p1[ ---------------------- 0 0 1980 1985 1990 1995 1980 19S5 1990 1995 3.12 Dry bean export prices have followed the general trend in commodities such as grains and are unlikely to sustain price premiums over major agricultural commodities. Ethiopia's export unit values have varied greatly relative to the world market in response to year-to-year quality and the types of beans being exported (Figure 3.4). 3.13 Gold prices have been under strong pressure from central bank selling for several years and are unlikely to increase much above the current $270/toz level in the foreseeable future. Production costs have steadily declined with the expanded use of technology and new low-cost mines continue to be brought into production. Demand has not been strong enough to offset the flow of new supplies. Prices rose about 7-10 percent following the September 11'h events, but quickly fell back to previous levels afterwards. Outlook for key current account revenues 3.14 Merchandise Trade. The outlook for merchandise trade extrapolates from the analysis presented in Chapters 1 and 2. We present a base case and a high case scenario (see Table 3.2). The base case is constructed extrapolating from past trends and assuming the continuation in existing policies. It indicates relatively lackluster prospects for merchandise trade, which is expected to grow at only 2.7 percent over the next two years and 5.9 percent afterwards. However, the potential exists to improve export performance substantially through sectoral reforms, more extensive deregulation and market reform. These are indeed the assumption in the high case scenario, i.e. an acceleration of structural policies at the sectoral level, as well as an improvement in the business environment. Increased competition, improved access to credit and 56 UNCTAD, World Comunodity Survey 2000-01, Geneva, 2001. 36 lower transportation costs could contribute substantially to export performance. For example, in the base case it is assumed that Ethiopia stands to benefit significantly from the AGOA agreement (base case), with increased growth in exports of textile and clothing. However, these gains could be multiplied if a number of measures are put in place, namely ensuring access to inputs at world prices, improving export finance and attracting FD1F7. In the base case scenario, chat is assumed to grow at the same rate as the growth rate of GDP in Djibouti and Somalia, and oilseeds and pulses58 are expected to grow at the same rate as world demand for these products. For hides and skins and leather products, Ethiopia is expected to maintain a constant world market share over the coming decade.59 Fruits and vegetables may not realize their export potential, unless the specific sectoral constraints are addressed. For all these products export performance could improve significantly if appropriate reforms are implemented. Table 3.2: Merchandise Trade, Volume 1995 Prices (annual average percent change) 93/94-00/01 01/02-02/03 03/04-10/11 01/02-02/03 03/04-10/11 Base Case High Case Chat 24.7 -0.9 3.7 1.8 6.5 Coffee 5.5 -9.1 5.3 -3.4 11.1 Fruits and vegetables 13.5 -6.4 6.3 -2.7 9.9 Gold 2.3 4.7 7.5 11.6 14.4 Leather and leather products 10.2 0.7 2.0 2.5 3.7 Oilseeds 80.5 9.8 5.4 16.1 11.7 Pulses 43.4 2.7 4.2 6.6 8.1 Textiles, footwear, clothing 16.1 47.4 10.0 64.6 26.6 Total 10.7 2.7 5.9 9.0 14.8 Source: staff estinates 3.15 Predictions for coffee are pessimistic. In the absence of policy changes, coffee volumes may fall sharply over the next few years. This prediction is derived from the estimate of a supply function for coffee, based on the relative (world) price of coffee compared to domestic production costs (GDP deflator). It is notable that due to strong lagged price effects, real exports are forecasted to fall steeply in 2000/01 and 2001/02, in the base case, then grow at 5.3 percent thereafter.60 A fall in the growth rate is still to be expected in the next couple of years even in the " In fact, Ethiopia derived little benefit from EU preferences extended to ACP countries. 58 Exports of oilseed and pulses showed spectacular rates of growth in the early 1990s, which cannot be maintained in the long run. High rates of growth were the result of a sharp devaluation of the exchange rate, and the removal of regulatory constraints and taxes on exports, measures that helped divert substantial quantities from illegal to legal trade and gave incentives to increase exports, relative to domestic sales. For example, oilseed exports increased from $0.3 million in 1992/93 to $7.6 million in 1993/94 and to $45.7 million in 1997/98. Exports of pulses increased from $1.0 million in 1992/93 to 16.5 in 1994/95. 59 Other assumptions in the base case are as follows: current production of gold is less than a tenth of potential gold production and exports could quadruple. A relatively conservative estimate is that production will grow around 8 percent per year, with exports doubling over the coming decade. Price forecast is for growth of around 0.5 percent per year over the forecast period. 60 The supply function for coffee was estimated on the basis of the price of coffee relative to the GDP deflator. With positive estimated coefficients on the relative price terms, a rise in the coffee price relative to domestic supply costs (as provided by the GDP deflator) raises exports. Empirically, lagged prices have the greatest impact, which may be explained by the timing of the coffee harvest, or incentives to increase the usage of fertilizer or other inputs. The current price and two lags were included in the equation fitted over the period 1981/82 - 1999/2000, giving the result: log(Xc) = 3.39 + .12 * log(Pc/PG0p) + .43 * log(Pc/PGDpp)1 + .63 * log(Pc/PGDP)I2 (14.1) (0.5) (1.5) (2.4) 37 high case scenario. However, as suggested in the high case, Ethiopia's excellent growing conditions, quality reputation, and low cost could be exploited more effectively to increase world market share. This would require far reaching reforms of marketing arrangements (which could increase the price premium received by Ethiopian exporters over the world price), an effective extension service to promote better production techniques and increase yields, incentives for growers to ensure that the best qualities are sent for export and a reduction in transport costs. Coffee exports could grow by 11.1 percent a year during 2003/04-2010/11, which would double the volume of exports over the forecast period. In the high case the growth rate of merchandise exports could reach 9 percent during the next two years and 14.8 percent afterwards. 3.16 Current Account Outlook. Table 3.3 shows Ethiopia's current account performance in recent history and projections to 2010/11. Projections are based on recent World Bank price forecasts. Two scenarios are presented, a base case - indicating continuation of existing policies and a high case - taking into account an acceleration of reform efforts. Current account revenues grew at a 2.9 percent rate during the second half of the 1990s. Coffee and private transfers represented the largest single line items, each accounting for roughly a fifth of inflows. Non- factor services (NFS) accounted for a quarter to a third of revenues in 1995/96 - 1999/00. Travel and transport generated over half of NFS export revenues, largely deriving from the activities of Ethiopian Air Line and Ethiopian Shipping Line. Tourism grew significantly prior to the war with Eritrea and has good potential. Official and private transfers represent nearly 40 percent of revenues, while factor income is small. Private transfers consist of worker remittances, which have grown rapidly over the past 5 years, and transfers from NGOs and other organizations. 3.17 As in the previous section, the high case scenario presents more optimistic estimates, which depend on the acceleration of reforms61. Growth in transport services is likely to depend on the growth of merchandise exports and tourism. If appropriate reform measures are implemented, the rate of growth in tourism may be about one third higher than in the base case. 62 The outlook for official transfers is more pessimistic. Official development assistance (ODA) fell as a share of industrial countries' GDP during the 1990s, on average growing at 3 percent below the rate of GDP growth, and the trend is not expected to reverse. Ethiopia's total ODA also declined slightly in proportion to low income countries, mostly because of the war with Eritrea. However, as the policy environment in Ethiopia continues to strengthen, it is reasonable to expect the share of total ODA will not only stabilize but also increase. 3.18 Volatility. Ethiopia's current account flows have been highly volatile in the past due to price and supply shocks, low diversification, civil disruption and shifts in policy regime. Table 3.3 shows standard deviations of growth rates for each category of current account receipts during the 1990s. Taking historical volatility as a benchmark, a 95 percent confidence intervals for average annual growth of inflows to the forecast horizon 2010/11 would be 5.2 percent ± 13.2 R2 = .61 ; t-statistics in parentheses. Xc is real coffee exports, PC/PGDP is the price of coffee relative to the GDP deflator. The equation indicates a rise in coffee prices will induce a supply response, with the long run supply elasticity equal to 1.2. Using projected coffee prices and Ethiopian inflation and exchange rates gives the export forecast shown in the figure. 61 The projections are only illustrative of possible trends. In the base case, it is assumed that the categories 'Government' and 'Other' are likely to grow at the rate of OECD nominal GDP. Private transfers and income are forecast to increase at the rate of nominal OECD GDP. Growth rates for these variables are projected to be higher in the high case scenario. 62 The World Travel and Tourism Council anticipates real growth of tourism at 5.5 percent annually, which would imply an income elasticity of demand for Ethiopian tourism expenditure of around 1.5. In the base case, travel receipts are projected to grow in proportion to tourism expenditure, and transport receipts at an average of tourism and merchandise trade. As no services deflators are available, foreign currency prices are held constant in real terms. 38 percent3 in the base case. Thus, while the base case calls for growth to average 5.2 percent during 2001/02-2010/11, historical experience indicates a very wide range of possible outcomes, from as low as -8 percent to as high as 18.4. Table 3.3: Outlook for Current Account Revenues Base case High case 1995/96- 1992/93- 1995/96- 2001/02- 2003/04- 2001/02- 2003/04- 99/00 99-00 99/2000 02/03 10/11 02/03 10/11 Share in Standard percent deviation growth rate, in percent Merchandise exports 32.5 30 5.0 1.4 10.6 7.8 20.3 - Coffee 20.2 37.9 -1.0 -17.7 15.1 -12.5 21.4 - Other 12.3 30.9 15.1 12.1 8.7 19.2 20.0 Non-factor services exports 27.3 9.2 7.5 2.6 5.9 4.3 9.1 - Transport 13.0 38.7 -3.6 2.7 6.9 6.3 12.3 - Travel 2.3 8.8 22.5 3.4 6.3 4.0 9.2 - Govermment 4.8 40.2 29.2 2.4 4.9 2.6 5.1 - Other 7.2 15.6 13.3 2.4 4.9 2.5 5.0 Income 1.8 42.6 -26.0 1.6 4.9 3.9 7.2 Transfers 38.4 30.8 0.4 -2.2 3.7 -1.8 4.0 - Official 17.9 39.7 -6.7 -7.9 1.9 -7.1 2.7 - Private 20.5 25.2 7.6 2.3 4.9 2.3 4.9 Total credits 100.0 21.1 2.9 0.2 6.5 2.5 11.6 Conclusion 3.19 Forecasts of the international environment in the short run are highly uncertain, with the possibility of a delayed recovery in industrial countries, higher oil prices and a continued decline in commodity prices having a dampening effect on growth prospects of developing countries. In the medium term, the global environment is expected to remain positive. The analysis in this chapter suggests that Ethiopia will not achieve a significant increase in exports during the next decade unless it accelerates the pace of sectoral and structural reforms. 63 The standard deviation of growth of total current account credits during the 1990s was 21.1 percent. A 95 percent confidence interval for growth over the next ten years may be calculated as average growth ± 2* a/410 = 5.2 ± 2* 21.1/3.2 = 5.2 ± 13.2 where a is the estimated standard deviation. 39 4. A STRATEGY TO PROMOTE RAPID EXPORT GROWTH A Strategy for rapid export growth 4.1 The emphasis on export development is not new in Ethiopia. Indeed, export development has been at the center of Government's efforts in developing the private sector. These efforts were recently re-affirmed in the Federal Government Action Plan for 2001/02. The Government is pursuing what has been called a 'two track approach' (World Bank, 1997) - one to develop and diversify natural resource exports and the other to develop manufactured exports. This approach is also sustained and recommended in this report. A comprehensive strategy for rapid export growth would include: political stability; a trade-conducive macroeconomic environment, characterized by low inflation, low interest rates and a realistic exchange rate; continuing trade reform; further financial sector liberalization; a reduced role for the State through privatization and deregulation; and a better functioning judicial system. Many of these policies are part of the Government's reform agenda and have been discussed in recent World Bank reports 64. This report focuses on specific measures to support a significant take-off in exports: * Sectoral measures - discussed in Chapter 2 - to address supply side constraints that impede the further development of coffee, chat, hides and skins; * Immediate measures to take advantage of new market access opportunities, induce new export activities and create new comparative advantages; and * Policies to improve the business environment and accelerate Ethiopia's integration into the world economy. Immediate measures to benefit from new market opportunities Ensuring access to inputs at worldprices 4.2 Access to inputs at duty-free world prices is the most important requirement for rapid export growth. In Ethiopia, a Duty Free Importation Scheme and a Duty Drawback Scheme were introduced in 1993. However, as in some developing countries, the schemes failed to provide fast, duty-free repayments to exporters. In July 2001, Proclamation249/2001 to Establish Export Trade Duty Incentive Schemes was approved. It includes three schemes - a Voucher Scheme, a Bonded Manufacturing Warehouse Scheme (BMW) - that exempt exporters from custom duties on imported input materials; and a Duty Drawback Scheme to refund duties and indirect taxes paid on inputs imported by exporters. These schemes represent a significant improvement on the previous system: they are open to all exporters with a genuine export order, including first time exporters, and those using Franco Valuta imports. A description of the Schemes is provided in Annex m, together with detailed recommendations on their implementation. Finally, it should be emphasized the importance of eliminating the foreign exchange surrender requirement for 100 percent export oriented foreign enterprises. This measure, together with the approval of an open FDI regime - eliminating capital requirements for 100 percent exporting firms - and of a BMW scheme that giving exporters free access to inputs at world prices would ensure an "export- 64 See, for example, World Bank (2000). processing -like regime", similar to that provided by countries that are competing with Ethiopia in the context of the African Growth Opportunity Act (AGOA). 4.3 The Government's immediate challenge is to make a number of refinements to the Proclamation and to quickly issue the necessary directives. The following summarizes the suggested implementation steps: * Eliminate Article 5(4) of the Proclamation, stating that these schemes are not open to those exporters who rely on imported inputs "where raw materials equivalent in price and quality to those they imported are locally available". This provision hurts exporters and represents an inefficient way of protecting the local input industry. Protection can be given by imposing import taxes on the competing input materials imported for domestic market sales. Exporters must be free to choose between duty-free imported inputs and domestically manufactured inputs. * The authorities should first accept exporters' self declared quantity input-output coefficients as the basis for calculating the amount of duty free imports needed for each exported output. Subsequently, they should estimate standard coefficients for most Ethiopian export items. This process should be concluded within one year. Fixed drawback rates can be estimated and applied to simplify duty drawback processing for selected products. * The BMW Scheme should rely exclusively on a physical examination of imported inputs and export products by Custom officials rather than on a calculation of coefficient data. The benefit of this Scheme is to bypass the administrative procedures associated with the coefficients. * According to the Proclamation, exporters can only benefit from the Voucher Scheme if they submit an annual export plan at the beginning of the year. Moreover, once the annual duty-free import amount entitlement has been used up, no further duty-free imports are allowed until the following year. Thus, it is suggested that exporters be allowed to choose between: i) the fixed starting month (January) duty-free import amount framework; and ii) a rolling plan maximum duty-free import stock framework (see Annex HI). It is also suggested that exporters be allowed to have access to the Scheme by using their export letter of credit in place of export plans. * Indirect exporters selling their entire product to direct exporters must be able to apply for the Bonded Manufacturing Warehouse Scheme or Voucher Scheme for their duty-free imports of raw materials and intermediate inputs. 4.4 This report recommends accelerating the implementation of these schemes. Perhaps the most effective of these instruments for inducing export oriented foreign and domestic investments to utilize the AGOA is the BMW65. BMW allows firms to bring imported goods into their warehouses without paying import duty, use the goods and export the output. BMW offer exporters the advantage of being free to choose locations. In many countries (e.g. Bangladesh) BMW schemes have facilitated a rapid growth of ready made garments and knitwear because of the simple input-output coefficients. 65 In many ways this is equivalent to introducing an export-processing zone (EPZ). An EPZ is an enclave in which the government supports effective mechanisms for duty-free imports, export clearances, liberal foreign exchange policies and income tax incentives. In addition, warehousing and factory facilities together with utilities and other trade-related infrastructures are made available. 42 Lowering the tax burden 4.5 Firms importing input materials for export production are eligible for Franco-Valuta imports under the written approval of NBE66. Commercial banks have levied a 2 percent service charge for Franco-Valuta imports based on import values estimated by the Customs Authority. This service charge represents an additional and un-necessary import tax. Thus, it is recommended that the 2 percent service charge be reduced (to cover only the extra costs of handling Franco-valuta imports). 4.6 The recently introduced Amendment to Income Tax (Proclamation No. 227/2001) may result in additional import tax and indirect tax burdens for exporters. Exporters are required to make 5 percent Withholding Income Tax payments for domestic and imported input purchases involving 10,000 birr and above. In the case of imported inputs, the 5 percent tax is levied on the CIF values of import (i.e., the sum of material cost, insurance, and freight). The tax authorities are supposed to refund immediately, at the end of the tax accounting year, the difference between the withholding income tax payments and the true tax liability of the taxpayers. However, international experience shows that refunds are seldom given and never on time. Without refunds, the withholding tax would be equivalent to an additional import surcharge that would severely damage the international competitiveness of Ethiopian exporters. It is therefore recommended that special attention be taken in providing fast refunds to exporters, as appropriate. Improving the Customs Clearance System 4.7 Substantial progress has been made in the implementation of a Customs Reform. Inspection are now based on automated random checks, rather than discretion. A manual of procedures has been introduced and should be followed for clearances. However, exporters continue to report a number of problems with Customs clearance when importing inputs. One problem is that the rules concerning the system are unclear or unknown to Customs officials. For example, exporters report that Customs continue to inspect 100 percent of all containers in each and every consignment. In addition Customs officials sometimes insist on holding up export consignments for 24 hours for "security reasons." These two factors together can delay a consignment for up to 48 hours, which can be a critical delay particularly for consignments shipped by air, and/or consignments that are perishable. Anecdotal evidence also suggests that import under-invoicing, as well as corruption, continue to be a problem. Improving access to export finance 4.8 In common with many developing countries, Ethiopia has a banking system that works almost exclusively on overdraft, with high collateral requirements. It has very little experience with other instruments of export finance. In the long run, developing an effective financial system is key to private sector development. The Government is preparing a financial sector reform - aimed at strengthening the regulatory and supervisory framework, increasing competition and bank soundness. The reform draws on the authorities medium-term financial sector strategy and on the recommendations of a recent IMF-World Bank report. In the short run, trade finance instruments may ease some of the obstacles faced by exporters. In recent years the Government has taken a number of measures (see Chapter 1) designed to facilitate access to pre- shipment export finance for exporters. Remaining reforms would include: (i) improving the Export Credit Guarantee Scheme; (ii) allowing exporters to access foreign suppliers or bank credit; and (iii) improving the system of foreign exchange retention. 66See NBE Directive Number FXD/07/1998, August 1998. 43 4.9 The Export Credit Guarantee Scheme. The National Bank of Ethiopia (NBE) first introduced an Export Credit Guarantee scheme in 2000. The scheme was not successful in large part because of the requirement that banks charge an interest rate 3.5 percent below the prevailing lending rate. A new, improved scheme was issued in May 2001. The scheme, which is described in Annex m, allows participating banks to charge market interest rate on covered loans and it delegates approval powers to participating banks. While the banks need some time to become familiar with the new system, the National Bank of Ethiopia should consider introducing the following improvements, which are necessary for the scheme to be effectively implemented. Currently, the scheme combines both exporters' nonperformance risks and foreign buyers' nonpayment risks. While the former is typically covered by a pre-shipment export finance guarantee scheme, the latter is normally covered by an export credit insurance scheme. Because of the mixed coverage of the two distinctive risks in one scheme, high physical collateral (20 to 30 percent of loan value) as well as high premiums (2.5 percent) are required. This is the case even for small or new exporters who have confirmed export L/Cs and who only need the pre- shipment export finance guarantee coverage. On the other hand, for the exporters who are selling to very risky foreign buyers without confirmed export L/Cs, the current premium may be too low to sustain the financial integrity of the Export Credit Guarantee Scheme. 4.10 An effective implementation of the new Export Guarantee Scheme would involve the separation of the two risks and the differentiation of the collateral requirements and premiums. Such rationalization should lead to a more attractive premium rate and collateral requirement for small and new exporters who only want cover for manufacturing nonperformance risks. Premiums to cover foreign buyers' nonpayment risks, on the other hand, could be varied in accordance with the levels of risks involved. 4.11 Enabling Exporters to Access Foreign Suppliers or Bank Credit. A September 1998 NBE Directive enabled exporters to access the credit facilities of foreign suppliers of inputs and foreign banks, contingent on NBE approval. The Directive also stipulates that the share of the foreign loan should not take the exporter's total debt/equity ratio above 60 percent (Article 3.1). The National Bank of Ethiopia has recognized that these arrangements are unnecessarily restrictive and intends to revise them. The debt/equity ratio should only be the concern of the foreign lender and NBE can audit compliance on an ex-post sample-checking basis. As long as foreign credit financed export earnings are more than sufficient to pay back the foreign loan, the exporter should be allowed to simply register the loan and proceed. 4.12 Foreign Exchange Retention. At the moment exporters may retain 10 percent of their export earnings in a foreign exchange account that pays no interest. They may also retain the remaining 90 percent of their foreign exchange for up to 28 days, after which they must sell it to the comrnercial banks or through the foreign exchange auction. This measure is maintained because of fear of capital flight. However, the unintended consequence is that it provides a strong incentive for exporters to find ways of holding at least some of their proceeds in accounts abroad. Most countries have found it almost impossible to stop such practices by determined exporters who travel regularly and have good contacts abroad. At the very least, market interest rates should be available to any exporter who places export proceeds into a Retention foreign exchange account. Also, exporters should have longer than 28 days in which to utilize the non-retained foreign exchange. Removing regulatory constraints in shipping 4.13 In the transport sector regulations that increase transaction costs for exporters and importers should be eliminated. For example, the National Bank of Ethiopia requires commercial 44 banks to book shipping space with the government-owned Ethiopian Shipping Line (ESL)67 - provided that ESL serves the originating port concerned68- in order to open an import letter of credit. This requirement adds to exporters' costs and should eventually be eliminated. As an immediate measure, the Ministry of Trade and Industry should set up a committee, including private sector operators, to monitor the prices, service quality and performance of ESL on a regular basis, including regular review of countries covered by ESL's monopoly rights. In Chapter 2 a number of additional measures that the Government can take to improve the transport sector have been recommended, including the liberalization of the air cargo charter market and of the domestic air transport sector. Changing the incentive regime for FDI 4.14 In an integrating world, trade and investment tend to complement each other. Countries open to trade attract more FDI in export activities. In turn FDI increase host countries' export competitiveness by raising skills and capabilities in the host economy and by creating backward and forward linkages to local firms that can restructure existing industries. FDI are particularly important in the services sector, where they can help improve the efficiency and reduce the costs of utility service provision. Labor-intensive FDI are major generators of employment, especially among women and the unskilled. Moreover, foreign investors often become strong supporters of further efforts to liberalize the economy, as this is essential to improving their competitiveness in export markets69. Box 4.1: FDI and Development Empirical studies of the impact of FDI on development are concerned with either the overall effect (on growth or net welfare) or:with specific aspects of FDI impact on..employment, techuology; trade and so on. Econometric analysis.relating FDI stocks and/or flows to host country rates of growth concludes that the.overall impact is positive. For example, cross-country regressions for the period 1970-89 (Borensztein et al., 1998) show that a I percentage point rise in FDI increased domestic, investment in developing countries by 0.5-1.3 percent; and a one percentage point rise in the ratio of FDI. to GDP increased the rate of per capita income growth of the host country.by 0.3.percent to .0,8 percent. Wacziarg (1998) estimated that a one percent,increase in the FDIVGDP ratio was associated with an increase in GDP per-capita of 0.3-0:4 percent. By contrast, analysis of the net social welfare effects of FDI often lead to the opposite conclusion. Lall and Streeten (1977) found that a substantial portion of foreign investments in sample developing countries had negative net social effects on their host economies. Moran (1998) reviews swevral studies:in 30 countries, coverirtg about 200 FDI projects over a period. of 15 years. .: He finds that a large proportion (up to 45 percent) had negative welfare implications on the host country. MNCs can be harmful when they engage in practices like tax evasion (by transfer pricing), predatory behavior, against local competition, benefit from monopolistic power by raising entry barriers, crowd out domestic entrepreneurs, give., inadequate attention to potential local suppliers, or fail to exploit the export competitiveness 6f the 'local affiliate. In most of the cases, the negative effects arise not from foreign ownership per se but from the lack-of competitiveness of input and output markets in the host country and from distortions in the domestic incentive framework. Source: Pigato (2000) 4.15 Ethiopia's development strategy assigns a small role to FDI. In fact, the Investment Code (see Box 4.2) excludes FDI from large areas of the economy - to fulfill the desire to encourage and protect domestic investors. FDI is allowed in just a limited number of activities where the Government believes it may add value and is subject to specified capital requirements. In 67 Exporters report that commercial banks require all imports to be purchased on an FOB basis (i.e. with shipping costs paid by the buyer, not the seller). In practice this means that exporters have to use ESL since it is the only company accepting payment in local currency, rather than in foreign exchange. 68 This applies unless ESL itself issues a waiver, allowing the importer to use one of its competitors. 69 By contrast, countries with high protection and large markets attract foreign investors attracted by a rentier position in a protected market. 45 addition, the Investment Code focuses on FDI and joint ventures while ignoring the critical importance of other modes of export-oriented foreign enterprise collaboration. The Foreign Investment Advisory Service (FIAS) of the World Bank and IFC recently finalized a report, "Ethiopia - Foreign Investment Promotion Strategy Framework". We concur with the main recommendations of the FIAS report. We agree that in the medium term the list of sectors restricted to FDI should be drastically and carefully reviewed. In particular, FDI should be allowed in services sectors (banking, financial services and infrastructure) as the advantages of new or improved products and services to the economy are likely to be larger than the benefits of continuing this reservation policy. We also agree with the recommendation that the minimum investment requirement should be eliminated. 4.16 Within this context, a number of immediate improvements could bring the Investment Code in line with the export strategy. Proposed measures include: * Lifting the current minimum investment thresholds for foreign and joint venture investments for 100 percent export-oriented FDI and joint venture. This is crucial to attracting labor intensive export industries such as garments and textiles. * Excluding from the reserved areas: i) FDI designed to provide primary services to export-oriented industries; ii) foreign banks providing trade finance and investment finance primarily for export-oriented activities; iii) foreign capital goods leasing companies providing imported capital goods leasing services in the export-oriented industries; iv) foreign trading companies primarily for export- oriented industries' import and export activities; and v) export-oriented FDI in the SME sectors. * Promoting export-oriented non-equity based foreign collaboration. * Streamlining bureaucratic procedures with regards to investment permission and its renewal as well as technology agreements. Facilitate work permits 4.17 At the moment both the Ministry of Labor and the Ethiopia Investment Authority (EIA) have jurisdiction over work permits for foreigners and expatriates70. To improve efficiency there should be only one approving authority and a clear set of rules for obtaining these work permits. The Investment Code (and therefore the EIA) should cover both FDI and foreign technical collaboration arrangements. Thus, the EIA rather than the Ministry of Labor should have responsibility for granting work permits for foreign technicians sent by foreign partners in the context of subcontracting and foreign collaborators. A voluntary reporting procedure of the subcontract agreement would be more efficient than the current approval procedures. Policies to improve the business environment and accelerate global integration 4.18 The measures discussed above would help Ethiopia take advantage of new market opportunities and jump-start a program of export expansion. However, the success of the export strategy would depend on the implementation of the trade, exchange rate and sectoral policies 70 Section 174 (Employment of Foreign Nationals) of Proclamation No. 42/1993 states: 'Any foreigner may only be employed in any type of work in Ethiopia where he possesses a work permit given to him by the Ministry (of Labor)'. However, the EIA is the approval authority for work permits for expatriates employed by the investors approved by the EIA. In addition, Ethiopian firmns with subcontract agreements with foreign collaborators must obtain foreign technicians' work permits for on-the-job technical and marketing training of local workers from the Ministry of Labor. The EIA does not serve as the approval authority for work permits for expatriates sent by non-equity-involved export- oriented foreign collaborators. 46 discussed in previous chapters as well as on an improvement in the business environment for both domestic and foreign investors. The next section discusses a number of economy-wide policies affecting both commodity and manufacturing exports that we believe would help Ethiopia improve the business environment and accelerate its integration in the world economy. Increase competition in shipping andforwarding markets 4.19 Transport issues have appeared in many parts of this report and their resolution is crucial for export competitiveness. Ethiopia landlocked situation is clearly a disadvantage7". But evidence shows that policies, more than geography, are the causes of high transaction costs. For example, the ESL has a near monopoly and evidence suggests that its rates are often higher than those offered by competing carriers. The government-owned Maritime and Transit Shipment Enterprise (MTSE) also continues to enjoy a total monopoly over forwarding services for transit goods. Exporters claim that MTSE still operates as the de-facto exclusive agent for ESL for all imports through the Port of Djibouti, thus continuing an arrangement that operated in the Port of Assab. ESL recently joined an international shipping consortium, and claimed the exclusive right to take consortium containers out of Djibouti and into Ethiopia, thus strengthening its monopoly power72. A different approach is now needed. While the Government's desire to maintain the national shipping line is understandable, the negative impact of this protection on the users should be minimized. Ensuring that the markets for shipping services and transit forwarding services work efficiently will be key to this new approach. Both ESL and MTSE should be progressively prepared to compete without protection, implicit or explicit. At the same time, ESL's monopoly right to take consortium containers into Ethiopia should be seen as anti-competitive behavior. The consortium should release containers to a range of transit operators, possibly on the basis of bonds, to ensure containers are returned. Building export capabilities 4.20 In many developing countries, the spread of new technologies, even in labor intensive export sectors, is reducing the importance of labor costs in total costs and putting a greater premium on quality, speed, and reliability of delivery. Therefore, macro reforms must be accompanied by measures to enhance exporters' capabilities to produce goods that conform to international price and quality norms. A broad program would include: building firms capabilities to absorb new and existing technologies, diffusing technology through improved standards and quality control systems and providing export promotion services. 4.21 Private support mechanisms for providing technological and marketing services (such as industrial and exporters' associations, chambers of commerce, etc.) are usually more effective than public institutions with weak institutional capacity, and limited direct expertise in providing support to small and medium enterprises. Pro-active efforts by governments to promote exports should not include the delivery of export services. However, public financial support could be given to facilitate the establishment of associations that responds to the needs of SMEs, or to industrial associations that provide services. " Limao and Venables (1999) find that higher transport costs and weak infrastructure explain a significant portion of Africa's poor trade performance. In particular the median transport cost for land-locked countries is 58 percent higher than the median for coastal countries. 72 In addition, a new Directive, FXD/16/2001 states that goods shipped in containers would in future be shipped on the basis of a single document of title, that would consign the goods right through to an Inland Container Depot [ICD] within Ethiopia. In principle, shipment to ICD's on a single document is generally beneficial to those importing goods. However, through consignment would be made compulsory. Given the protection already enjoyed by ESL, and implicitly extended to MTSE up to the Port of Djibouti, the inevitable effect of this new directive would be to extend this protection one stage further, right up to the ICD's within Ethiopia. 47 Level the playingfield 4.22 Not all companies have equal opportunity in Ethiopia. A few firms dominate domestic production and exports as a result of numerous barriers to entry for new participants. Some of these barriers are government based, while some others are the result of collusive agreements. Some of these firms are the so called "party companies". Many of these companies were initially created as foundations or NGOs and have, since the end of the war, been re-organized into financial and industrial interlocking groups73, registered to party members, NGOs or regional governments. While much of the evidence is anecdotal, there is wide spread perception that some of these companies dominate in many sectors of the economy, having special access to credit (through the Commercial Bank of Ethiopia), as well as to information and govermnent contracts. As recognized in the 2001/02 Action Plan, the absence of a level playing field undermines the trust in the system necessary for private investment, reduces domestic competition and produces rent-seeking behavior. Ethiopia does not have the adequate regulatory and institutional framework to address competition issues in a coherent fashion. Likewise, there are no mechanisms in effect to address anti-competitive constraints caused by business practices and arrangements. The introduction of a new competition law and of anti-trust legislation would be the first step towards improving the competitive environment. The objective of such a law should be the protection of the competitive process through: a) the prevention and elimination of monopolies, anti-competitive and un-fair trade practices, and other restraints on the efficient operation of markets for goods and services; and b) the protection of the consumers to improve the efficiency of the production, allow individuals to participate in the market and ensure choice of prices and quality of goods and services. Political will to enforce this legislation is key, together with the establishment of complementary institutions, such as courts and information processing systems to assist regulators. Increase regional cooperation 4.23 Ethiopia is a member of the Inter-Governmental Authority on Development and of the COMESA. There is very little trade between Ethiopia and COMESA countries, in large part because of similar production structures, lack of infrastructure and of trade informnation. Ethiopia has not been very active in implementing regional agreements, fearing the consequences on its local manufacturing industries. However, regional integration may offer many advantages. Regional coordination of tariffs and fiscal measures would enhance the credibility of national policies, reduce the time spent for custom clearance, reduce opportunities for corruption and increase the attraction of the region to FDI. Ensurefunctioning land markets 4.24 A functioning land market is essential for investors and exporters alike. In Ethiopia, the Constitution74 provides the State with all land ownership rights, while land administration is the responsibility of the Regions. Private investors in urban areas experience difficulties in acquiring land leases at market-determined prices and in using land as collateral, even though the law allows this. Banks tend not to accept land as collateral. If the land is not used within a certain time limit, and for the purpose it was requested, the region has the right to claim it back. This deters the use of land as collateral. In December 2001, the Addis Ababa City Government 73 See Devarajan S. D. Dollar and T. Holmgren (2001) and World Bank (1998). 74 Article 40 (3) says that 'right to ownership of rural and urban land, as well as of all natural resources, is exclusively vested in the state and in the peoples of Ethiopia. Peasants have the 'right' to obtain land without payment and the protection against eviction from their possession' (Article 40,4). Conditions for lease holding permits, duration and termiination of leases, redistribution of land are specified in the Urban Land Lease Holding (Proclamation No. 80/1993) and in the Federal Rural Land Adrninistration (Proclamation No. 89/1997). 48 sponsored a conference to discuss the implementation of land policies and regulations. Findings from the conference are being used to prepare for a revision of existing legislation. 4.25 Another issue concerns the availability of industrial sites, particularly in Addis Ababa. In recent years many long-term industrial leases have been sold, and a number of factories have either already been built or are under construction. Leases were signed on the understanding that services such as access roads, electricity and water connections would be provided. However, the main new industrial area is still almost completely without access roads. The Government wants to develop land for industrial use (foreign investments for industrial estate development75). 4.26 In rural areas, the inability to use land as collateral, and the insecurity arising from the possibility of land redistribution, limits the ability of small producers to finance expansion or improve production. The difficulty in obtaining clear title to land prevents exporters from investing in new crops or replanting trees because they fear investments could be lost in a land dispute. A number of measures could be implemented to alleviate these problems. As indicated in its 2001/02 Action Plan, the Government intends to designate special areas for private investment in commercial farming. It also intends to develop a land lease strategy for commercial farms. But a comprehensive review of the Rural Land Proclamation No 89/1997, with the objective of clearly defining legal rights - leasehold and freehold rights, title transferability and mortgageability - is required. The right of the regions to redistribute and/or reallocate land must be restricted. Finally land should not be redistributed or re-acquired by government except in very well specified cases of public use (e.g. construction of roads, schools, etc.). In this event owners should be compensated for both the land and improvements. 75 The Council of Ministers Regulations to Amend the Investment Incentives Regulations (Council of Ministers Regulations No.36/1998) state that machinery and equipment necessary for setting up industrial estates as well as equipment and materials to be used directly for the construction of industrial estates and not locally produced shall be allowed to be imported free of custom duty. 49 ANNEXES STATISTICAL TABLES Table 1. 1: Ethiopia: Balance Of Payments Table I.2: Ethiopia - Merchandise Exports Value, Volume And Price Table 1.3: Ethiopia - Merchandise Imports Table I.4: Ethiopia - Exports And Imports Of Non-Factor Services Table I.5: Ethiopia - Export Value And Volume, Prices, Exchange Rate And Terms Of Trade Table 1.6: Ethiopia - Export Share In Gdp, 1990/91 - 2000/01 Table 1.7: Per Capita Real Exports, Selected Countries (Constant 1995 $) Table I.8: Ethiopia - Value Of Merchandise Exports By Country Of Destination (In Percent Of Total) Table I.9: Changes In The Concentration Of Exports, Selected Countries Table I.10: Ethiopia - RCA Indices Table 1. 11: Manufactures Exports As A Share Of Total Merchandise Exports, Selected Countries Table 1. 12: Ethiopia - Exports Of Manufactures* Table I.13: Ethiopia - Manufactured Exports As A Share Of Total Merchandise Exports* Table I.14: Ethiopia - Product Compositions Of Exports (Comtrade Database) Table I. 15: Ethiopia - Product Composition Of Exports (National Bank Of Ethiopia) Table 1. 16: Ethiopia - Product Composition Of Manufactured Exports Table 1.17: Top Coffee Exporters Table 1.18: Top Oil Seeds Exporters Table 1.19: Top Leather And Leather Manufactures Exporters Table 1.20: Top Hides And Skins Exporters Table 1.21: Top Vegetables And Fruits Exporters Table I.22: Ethiopia - Policy And Financial Risk Ratings Table I.23: Nominal Shipment Rate*, Selected Countries Table 1.24: Nominal Transport Rate*, Selected Countries Table I.25: Comparative Indicators Of Human Capability Table 1.26: Comparative Indicators Of Communications And Infrastructure Provision 52 ANNEX I Statistical Tables Table 1.1: Ethiopia: Balance of Payments (in $ millions, unless otherwise indicated) 1995/96 1996/97 1997/98 1/ 1998/99 1999/00 2000/01 Trde balance -732 -711 -755 -1.074 -1.125 -1164 Exports of goods 412 599 602 484 486 441 Coffee 273 355 420 281 262 175 Other 139 244 182 203 224 266 Imports of goods 1,144 1,309 1,357 1,558 1,611 1,605 Fuel 148 147 143 111 250 275 Non-fuel 996 1,162 1,213 1,447 1,361 1,330 Nonfactor services (net) 139 133 139 114 149 129 Exports of nonfactor services 373 412 435 430 498 516 Imports of nonfactor services 234 280 296 315 349 387 Income (net) -44 -97 -66 -52 -60 -51 Of which: Gross official interest payments 2/ 84 -127 -89 -82 -76 -70 Private transfers (net) 313 258 317 289 410 379 Current account balance, excl. official transfers -324 -417 -365 -723 -626 -707 (in percent of GDP) -5.4 -6.5 -5.6 -11.2 -9.8 -11.1 Official transfers (net) 392 226 261 213 291 395 Current account balance, ind. offidal transfers 68 -191 -104 -510 -335 -312 (in percent ofGDP) 1.1 -3.0 -1.6 -7.9 -5.2 -4.9 Capital account balance (ncd. errors & ommissions) -104 -529 -403 37 -31 260 Foreign direct investment (net) 0 60 7 136 51 52 Other investment (net) -21 -544 -350 -281 -30 207 Official long-term loans 116 -366 -333 -263 -10 193 Disbursements 255 150 151 212 182 320 Amortization 2/ 139 516 485 474 191 127 Other public sector long-term (net) 3/ -66 -178 -17 -18 -20 -12 Other (net) -72 0 0 0 130 26 Errors and omissions -83 -44 -60 182 -183 -25 Overall balance -36 -720 -507 -473 -366 -52 Financing 36 720 507 473 366 52 Central bank (net; increase-) -300 340 146 -15 44 39 Reserves (increase -) -289 306 171 -23 63 12 Liabilities (increase +) -12 34 -25 8 -19 27 Commercial banks (net; increase-) 218 -184 -136 36 181 -26 Changes in arrears -133 -3,824 52 122 40 -810 Debtrelief(ParisClub2,Naplesterms)4/ 252 4,388 445 330 101 849 Financing gap 0 0 0 0 Exceptional financing 5/ 0 0 0 0 Remaining gap 6/ 0 0 0 0 Debt relief (Paris Club 3, Naples termns) 0 0 0 0 HIPC relief 0 0 0 0 (of which multilateral assistance) 0 0 0 0 Memorandum items: Exports of goods (percent change) -9.2 45.4 0.6 -19.6 0.4 -9.3 Export price index (percent change) -20.7 6.8 11.4 -18.5 -16.7 -7.8 Export volume index (percent change) 14.5 36.1 -9.7 -1.4 20.5 -1.6 Total imports of goods (percent change) 7.6 14.4 3.6 14.8 3.4 -0.3 Import price index (percent change) 4.5 -3.4 -5.7 -3.0 25.9 1.5 Importvolumeindex(percentchange) 3.0 18.4 9.9 18.4 -17.9 -1.8 Nonmilitary, nonfuel, noncereal imports (percent change) 21.3 27.7 -4.7 16.6 -1.1 0.9 Gross official reserves 888.0 583.0 412 434 349 337 (in months of imports of goods & nonfactor services of 6.7 4.2 2.6 2.7 2.1 1.9 Extemal debt 7/ 9,871 5,092 5,151 5,308 5,452 5,731 (in percent of exports of goods and nonfactor services) 1,258 504 497 581 554 599 (in percent of GDP) 165 80 78 82.4 85.3 90.4 Termsoftradeindex(1996/97=100) 90.5 100.0 118.1 99.3 65.6 59.7 (percent change) -24.1 10.5 18.1 -15.9 -33.9 -9.1 GDP (in millions of U.S. dollars) 5,993 6,383 6,564 6,439 6,388 6,342 Real GDP growlh 10.6 5.2 -1.2 6.3 5.4 7.9 Exchange rate (against the U.S. dollar) 6.33 6.50 6.86 7.53 8.15 8.34 Source: Ethiopian authorities, and IMF staff estimates. 1/ Beginning 1997/98, all data pertain to the period July 8-July 7: prior to that, data cover the period JuIY I-June 30. 2/ Includes debt service to Russia on ruble-denominated debt before up-front discount through 1999/2000; thereafter aftcr up-front discount. 3/ Ethopian Airlines and other public entrprises. 4/ Includes 1997 Paris Club rescheduling aweement (including Russia) under Naples tenns, covering maturities througb end-1998. 5/ Special (post-conflict) programs for reconstruction and demobilization, and balance of payments support. 6/ The remaining gap in 2000/01 is expected to be fully covered by Paris Club rescheduling on Naples terms ageed in ApriL the gap in 2001/02 - 2002/03 by enhanced HIPC Itiative 7/ efore 1999/2000. post-debt relief; thereafter, pre-debt relief. Table 1.2: Ethiopia - Merchandise Exports Value, Volume and Price (Value in S mnillions; Volumie in thousands of nmetric tons, price in S/kg) 1980/81 1981/82 1982/83 1983/84 1984/8 1985/86 1986/87 1987/88 1988/89 1989190 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 Estimate Coffee 253.3 232.0 239.6 285.2 225.3 321.2 253.3 212.2 302.6 195.7 129.7 81.3 125.8 158.3 287.8 272.9 355.0 420.0 281.2 262.0 174.7 Volume 88.4 80.2 87.6 91.2 73.8 70.0 80.2 71.2 92.1 81.9 58.2 32.2 63.4 73.0 82.2 97.6 123.2 120.0 101.2 116.6 96.0 Price 2.9 2.9 2.7 3.1 3.1 4.6 3.2 3.0 3.3 2.2 2.2 2.5 2.0 2.2 3.5 2.8 2.9 3.5 2.8 2.2 1.8 Pulses 11.4 14.9 13.9 10.0 8.2 6.1 4.1 7.8 7.9 17.4 7.6 0.2 1.0 4.8 16.5 12.2 11.9 15.0 13.5 9.8 8.2 Volume 24.5 35.5 36.2 27.6 20.0 7.6 4.4 12.5 11.9 23.4 14.8 1.4 1.5 9.8 26.1 29.0 30.5 30.9 29.8 23.5 25.0 Price 0.5 0.4 0.4 0.4 0.4 0.8 0.9 0.6 0.7 0.7 0.5 0.1 0.6 0.5 0.6 0.4 0.4 0.5 0.5 0.4 0.3 Oilseeds 13.7 9.4 7.4 13.5 7.6 3.7 4.7 10.6 .5.3 4.1 1.8 0.2 0.3 7.6 8.0 6.6 11.4 45.7 36.1 31.4 30.7 Volume 16.4 12.2 11.5 33.6 12.5 5.6 8.2 17.8 5.4 6.9 2.6 0.2 0.4 10.4 11.9 7.8 14.1 66.6 51.4 43.1 52.0 Price 0.8 0.8 0.6 0.4 0.6 0.7 0.6 0.6 1.0 0.6 0.7 1.0 0.7 0.7 0.7 0.8 0.8 0.6 0.7 0.7 0.6 Sugar and molasses 4.7 3.4 5.0 4.9 4.5 5.0 6.1 7.2 4.8 18.1 7.9 0.9 1.2 4.4 0.4 0.0 0.7 0.0 0.2 2.9 8.0 Volunme 29.1 15.8 56.6 39.0 43.1 45.5 43.0 28.1 25.1 43.7 30.7 2.5 13.1 15.2 1.2 0.0 13.2 0.0 6.6 17.2 56.0 Price 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.4 0.3 0.3 0.1 0.3 0.3 0.3 0.1 0.0 0.0 0.2 0.1 Leather and leather products 44.8 47.5 37.3 45.3 46.1 57.7 52.3 64.3 59.7 64.8 44.5 28.3 31.5 35.1 59.8 50.8 57.3 50.5 32.4 35.2 74.0 Volurne 8.9 10.2 7.7 9.8 10.1 12.0 10.2 8.6 9.7 8.6 5.7 3.7 5.6 6.3 9.9 7.6 8.6 7.9 5.8 8.6 12.0 Price 5.0 4.7 4.8 4.6 4.5 4.8 5.1 7.5 6.2 7.5 7.9 7.7 5.7 5.6 6.1 6.7 6.7 6.4 5.6 4.1 6.1 Livea-nirmals 4.7 4.0 7.9 7.1 9.3 9,1 7.6 15.6 11.4 5.2 2.5 0.2 0.3 1.8 1.2 0.1 1.7 1.5 0.8 1.7 0.3 e.~ Volumie 3.5 2.8 5.3 4.7 6.6 7.4 5.0 14.1 13.6 4.3 2.2 0.1 0.3 1.8 1.2 0.2 1.3 1.3 0.9 1.8 1.0 4~' Price 1.3 1.4 1.5 1.5 1.4 1.2 1.5 1.1 0.8 1.2 1.1 1.9 1.0 1.0 1.1 0.8 0.8 0.6 0.9 0.9 0.7 Meat,.canned and frozen 3.0 2.6 5.0 2.8 1.9 1.9 2.6 2.5 1.0 0.6 0.5 0.0 0.1 0.1 1.0 1.9 3.7 4.3 4.2 4.0 2.0 Volume 2.3 0.4 3.1 2.8 1.0 1.1 1.5 .1.7 0.6 0.2 0.3 0.0 0.0 0.5 0.4 0.9 1.7 1.9 2.1 2.0 1.0 Price 1.3 5.9 1.6 1.0 2.0 1.6 1.8 1.4 1.7 2.4 1.8 1.6 2.5 0.3 2.2 2.0 2.2 2.3 2.0 2.0 2.0 Fruits and vegetables 1.8 2.7 1.7 2.0 2.9 2.9 6.2 5.7 4.3 2.0 5.8 3.1 0.6 1.2 2.9 3.3 7.0 4.6 5.4 5.4 5.0 Volume 5.1 7.8 6.4 7.0 9.9 9.2 12.1 10.9 10.2 8.6 13.0 7.2 6.1 17.2 19.4 19.0 21.8 17.0 19.4 20.7 15.0 Price 0.3 0.3 0.3 0.3 0.3 0.3 0.5 0.5 0.4 0.2 0.4 0.4 0.1 0.1 0.1 0.2 0.3 0.3 0.3 0.3 0.3 Petroleum pmducts 36.8 26.0 33.3 35.7 31.9 21.4 13.2 17.4 9.1 12.7 13.1 9.1 7.1 12.4 15.2 9.8 12.8 1.5 0.0 0.0 Volumie 203.8 169.2 216.9 207.2 194.2 182.9 192.3 216.2 183.0 140.9 140.4 78.7 108.8 207.1 163.4 114.5 118.1 21.0 0.0 0.0 Price 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Chat 20.1 15.0 3.4 12.7 18.8 27.6 0.0 33.5 39.6 59.2 76.0 61.0 Volume 3.0 2.6 0.5 1.9 2.8 1.8 3.7 5.0 6.0 8.7 15.7 11.9 Price 6.7 5.8 6.7 6.7 6.7 15.7 0.0 6.7 6.6 6.8 4.8 5.5 Gold n.a. u.s. n.a. u.s. m.a. ias. o.a. n.s. 7.4 9.7 35.7 19.3 34.8 31.9 16.5 10.8 64.0 0.0 23.2 31.9 28.0 Volume n.a. n.a. u.a. n.a. nas. sea. n.a. u.s. 0.7 0.9 3.5 2.0 3.5 2.4 1.8 0.8 5.1 0.0 3.1 4.6 4.3 Price n.a. u.s. sea. nas. n.a. sea. sea. nas. 10.5 10.8 10.2 9.4 9.8 13.6 9.4 13.5 12.5 12.0 7.5 6.9 6.6 Otber exports and re- 37.1 33.4 40.1 42.5 22.2 17.3 34.1 30.5 30.3 18.7 12.3 8.1 7.0 3.3 16.7 43.3 39.7 19.4 28.0 25.6 49.0 exportsl/ Total 411.4 375.9 391.1 449.1 359.7 446.3 384.2 373.7 443.8 365.6 276.4 154.1 222.4 279.6 453.6 411.8 598.7 602.1 484.2 485.9 440.9 Souree:National Bank of Ethiopia. Quarterly Bulletin. VoLl2, No.2,1996/97 &VoL. 13. no.41997/98, Statistical Abstrat 972, 1982 andEIMP. n.a. Not available. Note: Data based mAfinly on monron records. In 1996/97, there was a onetiamexport of gold stack. I/ Includiag teatiles, essene oils. kat, spices asd otbers. Table I3: Ethiopia - Merchandise Imports (in S nIaion5) 191/92 I992/93 I993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 In In In In In In In In In In percent percent percent percent percent percent percent percent percent percent of of of of of of of of of of Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Trade merch. Value imp. Value imp. Value imp. Value imp. Value imp. Value imp. Value imp. Value imp. Value imp. Value imp. Consumer Goods 302.3 34.6 334.7 31.8 291.3 31.8 340.0 32.0 310.0 27.1 275.4 21.0 279.5 20.6 429.7 27.6 426.0 26.4 493.7 30.8 POLand Other Energy 120.4 13.8 198.0 18.8 222.3 24.3 168.9 15.9 147.9 12.9 147.0 11.2 143.2 10.6 110.5 7.1 250.2 15.5 275.0 17.1 (L Intermediate Goods 129.9 14.8 115.5 11.0 144.2 15.8 203.7 19.2 228.7 20.0 358.9 27.4 348.3 25.7 338.7 21.7 224.7 14.0 291.3 18.1 Primary 17.1 2.0 20.6 2.0 14.9 1.6 20.9 2.0 29.0 2.5 26.7 2.0 27.8 2.0 27.1 1.7 19.8 1.2 25.0 1.6 Manufactures 112.8 12.9 94.9 9.0 129.3 14.1 182.8 17.2 199.7 17.5 332.2 25.4 320.5 23.6 311.6 20.0 204.9 12.7 266.3 16.6 Capital Goods* 319.7 36.5 382.0 36.3 238.6 26.1 333.7 31.4 410.7 35.9 515.5 39.4 581.7 42.9 643.2 41.3 470.4 29.2 508.1 31.7 Miscellaneous 2.5 0.3 21.6 2.1 18.2 2.0 16.7 1.6 47.0 4.1 12.6 1.0 3.9 7.7 35.8 8.3 239.4 14.9 37.1 2.3 Total Merchandise Imports 874.8 100.0 1051.8 100.0 914.6 100.0 1,063.0 100.0 1,144.3 100.0 1,309.4 100.0 1,356.6 100.0 1,557.9 100.0 1,610.7 100.0 1,605.2 100.0 Total Imports of Goods and Services 1,074.0 1,263.2 1,100A 1,272.0 1,378.4 1,589.0 1,653.0 1,873.0 1,960.0 1,992.0 Source: Ethiopian authorites and IMF. Includes military purcbases in 1997/98 and 1998/99 Table 1.4: Ethiopia - Exports and Imports of Non-factor Services 1990/91 1991/9 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/20 2000/01 Exports of nonfactor services ($ millions) Transport 166.9 207.4 196.1 192.8 224.5 224.7 215.6 205.0 180.4 194.3 225.7 Travel 4.9 3.4 8.0 11.3 15.0 23.0 31.3 35.2 41.5 51.8 50.1 Govermment 43.5 41.0 29.9 24.7 29.8 40.4 74.4 82.9 68.7 112.4 124.8 Other 51.4 47.0 50.7 47.3 60.9 84.5 90.8 112.1 139.0 139.4 115.8 Total exports of nonfactor services 266.6 298.8 284.7 276.1 330.1 372.6 412.1 435.2 429.6 497.9 516.4 Exports of nonfactor services (percentage change) Transport -20.1 24.3 -5.4 -1.7 16.4 0.1 -4.0 -4.9 -12.0 7.7 16.2 Travel -36.6 -30.4 134.3 41.1 32.3 53.3 36.1 12.5 18.0 24.7 -3.3 Govemment 13.1 -5.8 -27.0 -17.4 20.4 35.8 84.2 11.4 -17.1 63.6 11.0 Other 0.5 -8.5 7.9 -6.7 28.6 38.9 7.5 23.5 24.0 0.3 -16.9 VfI Total exports of nonfactor services -12.9 12.1 -4.7 -3.0 19.5 12.9 10.6 5.6 -1.3 15.9 3.7 Imports of nonfactor services ($ nillions) Transport 101.4 110.3 97.7 83.5 97.5 106.0 109.9 123.4 132.0 165.9 170.3 Travel 9.8 7.5 9.4 13.2 17.4 28.4 41.4 31.9 40.3 57.7 69.2 Govenmment 10.2 9.2 10.0 9.1 12.1 17.5 17.2 16.5 17.7 5.8 10.5 Other 75.4 72.2 94.3 80.0 81.9 82.1 111.1 124.6 125.4 119.7 137.4 Total imports of nonfactor services 196.8 199.2 211.4 185.8 209.0 234.1 279.6 296.4 315.4 349.1 387.4 Imports of nonfactor services (percentage change) Transport -14.5 8.9 -11.5 -14.5 16.8 8.7 3.7 12.3 7.0 25.7 2.7 Travel -13.6 -23.2 24.6 40.5 31.8 63.2 45.8 -22.9 26.3 43.2 19.9 Govermment -1.9 -10.4 9.0 -9.0 33.0 44.6 -1.8 -3.8 7.0 -67.2 81.0 Other 59.4 -4.3 30.6 -15.2 2.4 0.2 35.3 12.1 0.7 -4.5 14.8 Total imports of nonfactor services 4.9 1.2 6.1 -12.1 12.5 12.0 19.5 6.0 6.4 10.7 11.0 Source: IMF Table I.5: Ethiopia - Export Value and Volume, Prices, Exchange Rate and Terms of Trade (1996/97 constant $) Years Value of Export Export Import Real Effective Terms of Exports Volume Price Volume Exchange Rate* Trade 1989/90 61.1 69.6 87.7 74.5 200.9 125.9 1990/91 46.2 53.5 86.2 80.3 266.6 114.3 1991/92 25.7 28.2 91.1 69.9 234.4 123.7 1992/93 37.2 48.2 77.1 87.5 120.2 84.0 1993/94 46.7 55.9 83.5 74.6 106.1 89.1 1994/95 75.8 64.2 118.1 82.0 105.1 119.3 1995/96 68.8 73.5 93.6 84.5 98.6 90.5 1996/97 100.0 100.0 100.0 100.0 100.0 100.0 1997/98 100.6 90.3 111.4 109.9 96.6 118.1 1998/99 80.9 89.0 90.8 130.1 93.7 99.3 1999/2000 81.2 107.3 75.6 106.8 93.8 65.6 2000/01 73.6 105.6 69.7 104.9 59.7 Percentage Change Years Value of Export Export Import Real Effective Terms of Exports Volume Price Volume Exchange Rate* Trade 1990/91 -24.4 -23.1 -1.7 7.9 32.7 -9.2 1991/92 -44.4 -47.3 5.7 -12.9 -12.1 8.2 1992/93 44.7 70.7 -15.4 25.1 -48.7 -32.1 1993/94 25.7 16.1 8.3 -14.7 -11.7 6.1 1994/95 62.3 14.7 41.4 9.9 -1.0 33.9 1995/96 -9.2 14.5 -20.7 3.0 -6.1 -24.1 1996/97 45.4 36.1 6.8 18.4 1.4 10.5 1997/98 0.6 -9.7 11.4 9.9 -3.4 18.1 1998/99 -19.6 -1.4 -18.5 18.4 -3.0 -15.9 1999/2000 0.4 20.5 -16.7 -17.9 0.1 -33.9 2000/01 -9.3 -1.6 -7.8 -1.8 -9.1 Source: WB database, IMF-Intemnational Financial Statistics. * Since May 1993, based on marginal rates at foreign exchange auctions. Table L6: Ethiopia - Export Share in GDP, 1990/91 - 2000/01 (S millions) 1990/91 1991/92 1992193 1993/94 199419 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Total exports (GNFS) 543.0 452.9 507.1 555.7 783.7 782.8 1010.8 1037.3 913.8 983.8 957.0 Merchandise exports 276.4 154.1 222.4 279.6 453.6 410.2 598.7 602.1 484.2 485.9 441.0 Exports of nonfactor services 266.6 298.8 284.7 276.1 330.1 372.6 412.1 435.2 429.6 497.9 516.0 GDP at market prices 9,511.3 10,044.4 6,247.7 5,560.1 5,762.8 5,993.3 6,383.2 6,563.6 6,438.9 6,388.0 6,342.0 00 In percent of GDP 1990/91 1991/92 1992/93 1993194 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Totalexports(GNFS) 5.7 4.5 8.1 10.0 13.6 13.1 15.8 15.8 14.2 15.4 15.1 Merchandise exports 2.9 1.5 3.6 5.0 7.9 6.8 9.4 9.2 7.5 7.6 7.0 Exports of nonfactor services 2.8 3.0 4.6 5.0 5.7 6.2 6.5 6.6 6.7 7.8 8.1 Source: MF Table 1.7: Per Capita Real Exports, Selected Countries (constant 1995 $) 1982 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 World 655.8 738.2 916.1 930.9 953.8 972.9 1,047.0 1,125.6 1,181.2 1,286.1 1,321.5 1,364.0 Low and middle income countries 176.0 194.8 240.1 235.3 234.4 245.8 272.2 300.1 322.2 354.5 366.2 379.2 427.7 Sub-Saharan Africa 139.0 146.5 146.4 142.3 138.2 139.6 143.2 151.1 162.3 164.7 165.4 162.9 166.6 Ethiopia 13.4 13.3 14.2 11.1 9.0 9.5 10.1 13.9 13.5 16.9 16.9 14.6 15.3 Tanzania ... ... 23.5 20.4 24.3 30.6 33.1 42.7 41.7 30.5 32.6 33.4 34.3 Kenya 86.3 81.7 106.4 102.0 98.3 125.9 121.4 109.5 111.9 94.7 87.3 87.6 83.8 Ghana 88.8 58.0 76.1 80.8 80.6 91.8 92.7 92.7 128.9 130.8 141.4 154.9 160.2 Uganda 25.0 23.6 23.6 21.5 24.0 22.2 28.4 35.4 43.7 55.0 45.5 58.9 52.8 Mauritius 846.1 970.6 1,750.9 1,809.7 1,846.2 1,965.2 1,994.5 2,112.3 2,344.1 2,408.6 2,592.7 2,666.6 2,785.1 EastAsia and Pacific 98.9 109.0 171.9 195.9 218.2 236.4 280.6 322.3 343.1 398.1 413.7 440.3 526.7 Philippines 232.4 196.3 283.5 292.7 297.0 308.1 360.4 394.2 444.8 510.1 394.8 401.5 420.4 Vietnam ... ... 32.9 41.8 51.1 54.7 81.5 100.4 135.5 151.2 ... ... ... Thailand 248.2 285.6 647.5 734.1 824.8 920.0 1,042.5 1,197.9 1,124.9 1,210.4 1,280.5 1,396.9 1,598.8 Indonesia 140.2 132.5 179.3 211.2 239.1 242.8 262.5 274.2 294.4 312.3 341.6 229.8 262.4 Malaysia 1,107.2 1,311.8 2,177.7 2,459.6 2,701.3 2,939.1 3,494.9 4,055.4 4,320.8 4,444.9 4,363.4 4,83i.6 5,651.4 South Asia 19.3 20.6 29.0 32.4 34.9 38.1 40.3 48.2 50.1 52.0 55.4 55.3 58.8 India 16.3 17.3 24.0 26.1 27.4 30.8 32.7 42.7 44.9 46.9 51.8 51.7 54.3 Pakistan 37.1 40.9 58.8 76.5 84.9 83.9 84.3 79.7 79.4 72.4 66.6 63.5 70.8 Bangladesh 11.7 10.6 20.2 19.2 23.0 26.3 26.9 34.6 36.8 42.1 46.6 48.6 52.5 Soure: World Development Indicators. Table L.8: Ethiopia - Value of Merchandise Exports by Country of Destination (in percent of total) Country of Destination 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Preliminary estimate Europe 59.8 45.0 54.5 41.2 41.5 53.4 52.8 50.8 48.8 54.3 40.9 European Union 47.1 38.7 52.5 40.3 40.9 52.8 51.7 48.6 43.2 46.2 38.0 Belgium and Luxemburg 3.4 3.0 4.8 1.3 3.0 1.8 1.7 2.0 3.6 4.1 3.5 France 5.0 2.7 6.8 5.0 3.7 4.9 5.0 3.4 3.2 3.2 4.7 Gefmany 23.8 17.2 28.1 9.7 19.7 31.7 29.1 29.7 20.6 24.9 18.2 Italy 6.8 7.6 6.8 6.4 7.6 8.1 8.6 7.4 7.8 7.9 6.9 Netherlands 5.9 2.6 2.4 1.4 2.1 2.1 1.6 1.3 1.5 1.9 1.5 United Kingdom 1.8 2.9 3.2 16.3 4.6 3.5 3.6 3.1 2.9 2.5 2.4 Eastern Europe 9.9 4.8 0.6 0.2 0.3 0.4 0.5 1.3 3.9 3.4 1.1 Other Europe 2.7 1.5 1.3 0.6 0.3 0.2 0.6 0.9 1.7 4.7 1.9 Western Hemisphere 15.6 13.6 6.1 4.6 10.0 7.6 7.0 6.8 11.9 9.6 5.6 United States 14.9 10.8 5.5 3.9 9.1 6.5 6.4 6.1 11.4 8.8 4.9 Other 0.7 2.8 0.6 0.7 0.9 1.2 0.6 0.7 0.6 0.8 0.7 Asia and Middle East 18.6 27.6 34.1 45.5 34.3 29.2 28.4 29.7 23.5 24.5 35.2 China, People's Republic of 1/ 0.0 0.0 0.3 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.2 Japan 11.0 14.8 23.1 21.5 19.0 14.5 13.0 12.0 11.2 10.1 13.2 Saudi Arabia 5.6 10.9 8.5 20.1 9.9 5.3 9.0 10.6 8.6 8.8 11.7 Other 2.0 1.9 2.2 3.9 5.3 9.2 6.3 7.1 3.6 5.5 10.1 Africa 6.0 12.7 5.2 7.2 13.4 9.1 11.5 12.4 13.2 10.4 18.0 Other 2/ 0.1 1.1 0.1 1.5 0.8 0.7 0.2 0.2 2.5 1.2 0.2 Source: IMF and National Bank of Ethiopia, Quarterly Bulletin, various issues. 1/ Excluding Hong Kong, SAR. 2/ For 1998, "Other" includes some countries reported separately in previous years. Table 1.9: Changes in the Concentration of Exports, Selected Countries Share in Total Exports New Export Products Number of (percent) over the 1990-98 Period2 Exporter Items oves Product Exported' Largest Product 1990 1998 1990 1998 Ethiopia 18 12 63.4 71.1 Sesame seeds, Dry legumes, Oilseeds Tanzania 25 26 31.9 23.6 Fish fillets, Frozen fish, Precious stones, Men's shirts, Tobacco Uganda 6 12 91.7 73.0 Fish fillets, Cut flowers, Tobacco, Salted fish, Gold Kenya 19 26 30.6 29.9 Prepared fish, Knit trousers, Shell fish, Tobacco, Men's Shirts, Cement, Toys and Games, Salted fish Mauritius 24 20 31.4 22.9 Frozen Fish, Garters, Woven cotton, Synthetic precious stones, Passenger motor vehicles, Wine, Fish fillets, Pulpwood, Frozen Fish, Iron plate, Bovine meat Source: Yeats and NG (2000) 'Items are defined at the four-digit level of the SITC Revision I system. To be included in the tabulation of an export product, the item had to account for one half of one percent or more of all exports. 2These item's share went from under to over one half of one percent during the 1990 to 1998 period. Table 1.10: Etiopia - RCA Indices 1998 RCA* Indices SITC/Product Exports ($000) 1990 1998 Change (Net RCA Change = -6) 05 Vegetables and Fruit 9,167 2.02 1.19 -0.83 06 Sugar and Honey 0 1.57 0.00 -1.57 07 Coffee, Tea and Cocoa 377,302 81.99 109.30 27.31 21 Hides and Skins 28,162 59.40 48.19 -11.21 22 Oil Seeds 51,035 1.07 31.42 30.35 26 Textile Fibers 764 1.37 0.36 -1.01 29 Crude Animal and Vegetable Materials 3,155 4.98 1.47 -3.51 43 Processed Animal and Vegetable Oil 1,198 6.67 4.28 -2.39 53 Dyes and Tanning Products 4,726 1.33 1.52 0.19 55 Perfumes and Cleaning Products 110 2.14 0.03 -2.11 61 Dressed Leather 20,241 23.65 9.74 -13.91 71 Power Generating Equipment 7,178 1.81 0.49 -1.32 87 Precision Instruments 7,167 2.76 0.73 -2.03 94 Zoo Animals 3 2.93 0.06 -2.87 Source: Yeats and NG (2000) Computed from partner countries data as reported in United Nation COMTRADE, SITC Rev. 2. * "Revealed" comparative advantage Measures of "revealed" comparative advantage may help assess a country's export potential. The RCA index of country i for product j is measured by the item's share in the country's exports relative to its share in world trade. That is, if xij is the value of country i's (global) exports of j, and Xtj is the country's total (global) exports its revealed comparative advantage index is: RCAij = (xij/Xtj)/(Xiw/Xtw) where the w subscripts refer to world totals. RCA indices are sometimes computed only for processed goods or manufactures because trade in agricultural products is often distored by export incentives or trade barriers which may obscure whether a country has a comparative advantage or disadvantage in these goods. If the index is less than unity this implies the country is at a revealed comparative disadvantage in the product if it exceeds unity the country has a revealed comparative advantage in the good. 61 Table 1.11: Manufactures Exports as a Share of Total Merchandise Exports, Selected Countries 1980 1985 1990 1995 1996 1997 1998 1999 Ethiopia* 5.0 9.1 22.5 15.7 20.7 11.9 8.7 10.1 Ghana 4.2 5.5 12.7 19.4 26.0 19.6 24.5 27.9 Kenya 11.4 15.5 17.4 26.0 24.3 25.0 21.8 21.9 Mozambique 17.7 31.7 48.0 9.3 5.4 17.3 15.1 20.0 South Africa 33.9 30.3 27.4 36.0 37.2 35.8 38.8 38.0 Tanzania 10.3 8.1 14.2 13.4 10.8 13.7 13.0 12.8 Uganda 3.9 1.0 1.1 0.8 1.2 1.7 3.3 2.2 Egypt 6.9 8.7 24.2 33.6 29.8 36.9 41.1 37.1 Bangladesh 67.5 68.3 78.2 87.7 87.6 89.0 91.1 90.7 India 60.6 53.7 70.5 75.5 71.7 73.8 75.6 77.1 Russian Federation 31.0 30.4 30.1 32.6 29.4 China 47.6 49.0 78.9 88.1 88.6 89.1 90.4 90.9 Philippines 33.5 50.0 62.6 75.7 81.0 85.0 85.8 88.4 Thailand 27.1 36.2 61.8 71.2 71.7 73.9 75.0 76.2 Vietnam 21.1 16.4 23.3 46.7 46.5 52.7 53.9 52.5 Source: UN COMTRADE Statistics - SITC 2, based on partners exports. Includes all the countries available under COMTRADE. *After 1993, excluding Eritrea. Table 1.12: Ethiopia - Exports of Manufactures* ($ thousands) 1980 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Manufactured goods classified chiefly by material (SITC 6)** 8,844.6 29,963A 18,493A 16,300.8 22,788.1 28,824.9 42,282.2 37,680.7 36,617.9 22,907.7 13,417.7 Leather (SITC 611) 8,325.1 27,557.1 16,443.5 15,712.1 22,446.7 26,658.2 40,255.7 34,755.4 30,755.1 20,199.5 10,667.6 Sheep and lanib skin leather (SITC 6115) 5,374.1 2,141.3 3,654.4 3,115.3 3,557.3 5,490.7 8,974.8 8,365.9 4,804.8 4,971.6 3,830.6 Leather of other hides or skins (SITC 6116) 2,844.3 17,500.2 8,262.4 7,981.8 11,194.3 13,452.0 20,037.0 18,279.5 21,248.0 13,350.4 4,790.5 Textile yam,fabrics,made-upart.,related products (SITC 65) 195.1 1,853.2 1,639.1 382.7 35.3 1,890.5 1,383.4 2,551.8 5,075.4 1,889.5 1,670.8 Other woven fabrics contain 85% of cotton, unbleach (SITC 65214) n.a. 1,336.1 1,405.0 244.9 n.a. 5.3 327.3 2,284.6 4,636.6 1,714.5 1,584.4 Machinery and transport equipment (SITC 7) 6,983.8 17,623.1 13,481.8 7,964.4 28,304.9 17,918.4 23,753.0 32,535.9 15,093.5 10,395.6 12,862.3 Power generating nachinery and equipment (SITC 71) 5,401.5 11,645.5 9,372.8 4,793.6 10,920.5 14,344.9 20,330.5 29,023.2 11,859.8 7,177.9 9,879.8 CN Engines&motors,non-electric (SITC 714) 265.7 11,601.2 9,328.0 4,601.5 10,715.5 13,517.3 19,781.4 28,451.2 11,825.9 7,171.9 9,691.1 Parts of reaction engines & turbo propellers (SITC 71491) 19.0 123.8 4,611.1 2,998.9 10,632.0 13,361.5 19,434.9 22,388.1 11,825.9 6,822.0 9,188.6 Aircraft& associated equipmentandparts (SITC 792) 603.4 1,588.9 2,741.8 1,359.1 16,317.7 1,298.0 1,080.7 743.9 947.3 374.1 970.6 Miscellaneous manufactured articles (SITC 8) 453.3 19,240.6 17,490.6 15,178.2 11,923.8 5,861.8 7,237.3 21,897.4 9,481.4 10,239.7 6,950.9 Articles of apparel and clothing accessories (SITC 84) 1.9 6,369.3 5,955.3 3,686.4 1,747.1 1,626.6 1,343.1 893.2 388.1 2,495.5 1,101.5 Footwear (SITC 85) n.a. 9.5 0.1 1.0 13.3 79.8 193.6 149.0 5.7 89.6 15.2 Professional, scientific & controDing instruments (SITC 87) 214.5 12,543.6 10,893.8 11,249.0 9,288.0 3,478.8 4,694.0 20,194.2 7,744.3 7,166.7 5,456.9 Navigational instruments,non-electrical, compasses (SITC 87411) 44.4 11,522.0 10,261.5 8,532.6 8,314.1 2,666.6 4,205.2 19,954.5 7,318.1 6,958.6 4,813.8 Others*** 1,7183 5,607.5 5,047.1 3,106.9 881.9 2,776.7 2,039.2 1,397.2 5,075.3 5,176.1 751.1 All Manufactures**** 18,000.0 72,434.5 54,512.8 42,550.3 63,898.7 55,381.9 75,311.6 93,511.2 66,268.0 48,719.1 33,982.0 Source: UN COMTRADE Statistics Table 1.13: Ethiopia - Manufactured Exports as a Share of Total Merchandise Exports* 1980 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Manufactured goods classified chiefly by material (SITC 6)** 2.6 10.5 8.6 9.8 10.1 9.2 9.3 8.9 6.9 4.3 3.8 Leather (SITC 611) 2.4 9.6 7.6 9.5 10.0 8.5 8.9 8.2 5.8 3.8 3.0 Sheepandlambskinleather(SITC6115) 1.6 0.7 1.7 1.9 1.6 1.8 2.0 2.0 0.9 0.9 1.1 Leatherofotherhidesorskins(SITC6116) 0.8 6.1 3.8 4.8 5.0 4.3 4.4 4.3 4.0 2.5 1.3 Textile yam,fabrics,made-upart.,related products (SITC 65) 0.1 0.6 0.8 0.2 0.0 0.6 0.3 0.6 1.0 0.4 0.5 Other woven fabrics contain.85% of cotton, unbleach (SITC 65214) n.a. 0.5 0.7 0.1 n.a. 0.0 0.1 0.5 0.9 0.3 0.4 Machinery and transport equipment (SITC 7) 2.0 6.2 6.2 4.8 12.6 5.7 5.2 7.7 2.8 2.0 3.6 Power generating machinery and equipment (SITC 71) 1.6 4.1 4.3 2.9 4.9 4.6 4.5 6.8 2.2 1.4 2.8 Engines & motors,non-electric (SITC 714) 0.1 4.1 4.3 2.8 4.8 4.3 4.4 6.7 2.2 1.4 2.7 Parts of reaction engines & turbo propellers (SITC 71491) 0.0 0.0 2.1 1.8 4.7 4.3 4.3 5.3 2.2 1.3 2.6 Aircraft & associated equipment and parts (SITC 792) 0.2 0.6 1.3 0.8 7.3 0.4 0.2 0.2 0.2 0.1 0.3 Miscellaneous manufactured articles (SITC 8) 0.1 6.7 8.1 9.1 5.3 1.9 1.6 5.2 1.8 1.9 2.0 Articles of apparel and clothing accessories (SITC 84) 0.0 2.2 2.8 2.2 0.8 0.5 0.3 0.2 0.1 0.5 0.3 Footwear (SITC 85) n.a. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Professional, scientific & controlling instruments (SITC 87) 0.1 4.4 5.0 6.8 4.1 1.1 1.0 4.8 1.5 1.4 1.5 Navigational instruments, non-electrical, compasses (SITC 87411) 0.0 4.0 4.8 5.1 3.7 0.9 0.9 4.7 1.4 1.3 1.4 Others*** 0.5 2.0 2.3 1.9 0.4 0.9 0.4 0.3 1.0 1.0 0.2 All Manufactures**** 53 25.3 25.2 25.6 28.4 17.8 16.6 22.0 12.5 9.2 9.6 Source: Based on Ethiopia's partners data drawn from UN COMTRADE Statistics. Includes the following countries' reported total imports from Ethiopia: All original OECD members, Algeria, Argentina, Bangladesh, Barbados, Belize, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Cyprus, Ecuador, Egypt, El Salvador, Greenland, Guatemala, Honduras, Hong Kong (China), Hungary, Indonesia, Israel, Jamaica, Kenya, Rep. of Korea, Macau (China), Malaysia, Malta, Mauritius, Mexico, Nepal, Nicaragua, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Romania, Singapore, SACU (South Africa, Botswana, Lesotho, Namibia, Swaziland), Taiwan (China), Thailand, Trinidad & Tobago, Turkey, Tunisia, Uruguay and Venezuela. Represents 93% of total exports. Includes re-exports. After 1993, excluding Eritrea. ** Excludes non-ferrous metals. * Covers chemicals and related products. **** All Manufactures = Chemicals and related products, n.e.s. (SITC 5), + Manufactured goods classified chiefly by material (SITC 6) + Machinery and transport equipment (SITC 7) + Miscellaneous manufactured articles (SITC 8) -Non-ferrous metals (SITC 68). Table 1.14: Ethiopia - Product Compositions of Exports (COMTRADE Database) In percent of Total Exports Product 1982-1991 1992-1994 1995 1996 1997 1998 1999 Coffee, whether or not roasted or freed of caffeine (SITC 0711) 65.4 57.5 62.8 59.0 65.7 70.5 42.3 Oil seeds and oleaginous fruit (SITC 22) 0.6 1.3 7.1 4.4 5.9 9.5 11.1 Hides, skins and furskins, raw (SITC 21) 9.7 10.7 6.5 6.9 7.2 5.3 5.5 Vegetables and fruit (SITC 05) 2.1 3.0 3.5 4.9 3.8 2.6 5.2 Leather, leather manufactures and dressed furskins (SITC 61) 5.1 9.3 8.9 8.2 5.7 3.8 3.0 Power generating machinery and equipment (SITC 71) 3.1 4.1 4.5 6.8 2.2 1.3 2.8 Crude animal and vegetable materials (SITC 29) 2.6 1.9 1.3 1.2 1.0 0.6 1.6 Professional, scientific and controlling instruments (SITC 87) 1.5 4.0 1.0 4.8 1.4 1.3 1.5 Textile fibres (except wool tops) and their wastes (SITC 26) 0.7 0.1 3.6 0.4 0.0 0.2 1.5 Ores and concentration of other non-ferrous metals (SITC 2879) n.a. n.a. 0.1 1.3 0.6 1.2 0.9 TOTAL 10 TOP EXPORTS 90.7 92.0 99.2 97.9 93.6 96.3 75.4 Source: UN COMTRADE Statistics, based on partners imports After 1993, excluding Eritrea. Table 1.15: Ethiopia - Product Composition of Exports (National Bank of Ethiopia) In percent of Total Exports Product 81/82-90/91 91/92-93194 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Coffee 62.0 55.3 63.5 66.5 59.3 69.8 58.1 53.9 41.8 Leather and leather products 13.4 15.0 13.2 12.0 9.6 8.4 6.7 7.2 16.5 Oilseeds 1.8 1.0 1.8 1.6 1.9 7.6 7.5 6.5 8.9 Chat n.a. 4.9 6.1 0.0 5.6 6.6 12.2 15.6 7.8 Gold n.a. 13.2 3.6 2.7 10.7 0.0 4.8 6.6 5.1 Sugar and molasses 1.7 0.9 0.1 0.0 0.1 0.0 0.0 0.6 2.2 Pulses 2.5 0.8 3.6 3.0 2.0 2.5 2.8 2.0 2.0 Fruits and vegetables 0.9 0.9 0.6 0.8 1.2 0.8 1.1 1.1 1.1 Meat, canned and frozen 0.5 0.0 0.2 0.5 0.6 0.7 0.9 0.8 0.4 Live animals 2.1 0.3 0.3 0.0 0.3 0.2 0.2 0.3 0.1 TOTAL 10 TOP EXPORTS 87.3 92.3 93.0 87.0 91.2 96.5 94.2 94.7 86.1 Source: National Bank of Ethiopia, Quarterly Bulletin, Vol.12, No.2, 6/97 & Vol.13, no.4 1997/98, Statistical Abstract 1972, 1982 and IMF. n..a. Not Available. Note: Data based mainly on customs records. 65 Table L16: Ethiopia - Product Composition of Manufactured Exports In percent of Total Manufactures Product 1981-91 1992-94 1995 1996 1997' 1998 1999 Manufactured goods classUfied chidly by material (SITC 6)** 382 42.0 56.1 40.3 55.3 47.0 39.5 Leather (SITC 611) 35.3 40.1 53.5 37.2 46.4 41.5 31.4 Sheep and lamb skin leather (SITC 6115) 7.9 7.6 11.9 8.9 7.3 10.2 11.3 Leather of other hides or skins (SITC 6116) 13.1 20.2 26.6 19.5 32.1 27.4 14.1 Textile yam,fabrics,made-upart.,related products (SITC 65) 1.4 1.5 1.8 2.7 7.7 3.9 4.9 Other woven fabrics contain.85% of cotton, unbleach (SITC 65214) n.a.J n.a. 0.4 2.4 7.0 3.5 4.7 Machinery and transport equipment (SITC 7) 40.2 31.8 31.5 34.8 22.8 21.3 37.9 Powergenerating machinery and equipment (SITC 71) 27.8 18.1 27.0 31.0 17.9 14.7 29.1 Engines & motors,non-electric (SITC 714) 11.6 17.3 26.3 30.4 17.8 14.7 28.5 Partsofreactionengines&turbopropellers(SITC71491) 4.1 15.9 25.8 23.9 17.8 14.0 27.0 Aircraft & associated equipment and parts (SITC 792) 4.8 10.4 1.4 0.8 1.4 0.8 2.9 Miscellaneous manufactured articles (SITC 8) 15.9 21.6 9.6 23.4 14.3 21.0 20.5 Articles of apparel and clothing accessories (SITC 84) 5.8 4.8 1.8 1.0 0.6 5.1 3.2 Footwear (SITC 85) n.a. 0.1 0.3 0.2 0.0 0.2 0.0 Professional,scientific & controlling instruments (SITC 87) 9.1 15.8 6.2 21.6 11.7 14.7 16.1 Navigational instruments,non-electrical, compasses (SITC 87411) 4.7 12.6 5.6 21.3 11.0 14.3 14.2 Others*** 5.7 4.6 2.7 1.5 7.7 10.6 2.2 All Manufactures**** 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Manufactured Exports/Merchandise Exports 13.5 23.9 16.6 22.0 12.5 9.2 9.6 Source: Based on Ethiopia's partners data drawn from UN COMTRADE Statistics. After 1993, excluding Eritrea. ** ** Excludes non-ferrous metals. Covers chemicals and related products **** All Manufactures = Chemicals and related products, n.e.s. (SITC 5); + Manufactured goods classified chiefly by material (SITC 6); + Machinery and transport equipment (SITC 7) + Miscellaneous manufactured articles (SITC 8) - Non-ferrous metals (SITC 68). Table 1.17: Top Coffee Exporters Value of Exports (S millions) and Share of World Market Country 1980 1990 199 Value % Value % Value % Brazil 2,593.9 20.1 1,590.9 18.9 1,861.5 18.9 Colombia 2,533.7 19.6 1,528.3 18.I 1,255.3 12.8 Guatemala 508.0 3.9 382.9 4.5 655.0 6.7 Vietnam 5.1 0.0 49.3 0.6 544.2 5.5 Mexico 482A 3.7 433.0 5.1 542.3 5.5 Indonesia 651.6 5.0 407.9 4.8 493.0 5.0 Germany 187.7 1.5 318.7 3.8 434.7 4.4 Costa Rica 278A 2.2 265.1 3.1 299.7 3.0 Cote d'lvoire 745.1 5.8 166.8 2.0 206.4 2.1 El Salvador 624.1 4.8 245.9 2.9 152.3 1.5 Uganda 419.1 3.2 174.6 2.1 278.1 2.8 India 108.3 0.8 181.3 2.2 279.5 2.8 Honduras 191.0 1.5 179.2 2.1 227.9 2.3 Ethiopia* 235.4 1.8 152.6 1.8 1A 1a Kenya 352.5 2.7 229.4 2.7 123.5 1.3 World 12,917.8 100.0 8,428.4 100.0 9,30.1 160.0 Source: UN COMTRADE Statistics, based on partners imports. 'After 1993, excluding Eritha. Represents 93 percent of total exports. Includes re-exports. Table 1.18: Top Oil Seeds Exporters Value of Exports ($ millions) and Share of World Muket Country 1980 1990 1999 Value % Value % Value % United States 6,235.8 66.8 4,440.2 39.70 5,847.0 40.6 Canada 664.4 7.1 846.1 7.58 1,410.8 9.8 Brazil 405.6 4.3 1,056.2 9.46 1,646.0 11.4 Argentina 529.7 5.6 818.7 7.33 984.9 6.8 France 165.0 1.7 1,162.8 10.41 563.6 3.9 China 162.5 1.7 577.7 5.17 404.7 2.8 Paraguay 86.3 0.9 365.2 3.27 307.3 2.1 Netherlands 139.8 1.5 152.2 1.36 427.2 2.9 Russian Federation 120.8 0.8 Australia 12.0 0.1 42.3 0.38 501.8 3.4 Germany 59.7 0.6 198.1 1.77 254.0 1.8 India 10.4 0.1 123.9 1.11 164.8 1.1 Ukraine 142.1 1.0 United Kingdom 7.3 0.8 113.7 1.02 100.0 0.7 Hungary 21.3 0.2 43.1 0.39 94.5 0.6 Ethlopa** 0.7 0.01 1.0 0.01 39.4 ^* (ranks 76) (ranks 84) (rauka 25) World 932.8 100.0 1,116.6 100.0 1,43.4 1on Source: UN COMTRADE Statistics, based on partners imports. Represents 93% of total exports. Includea exporst 'Alter 1998, excluding Luxembourg. * After 1993, excluding Eritrea. 67 Table 1.19: Top Leather and Leather Manufactures Exporters Value of Exports ($ millions) and Share of World Market Country 1980 1990 1999 Value % Value % Value % Italy 585.1 11.3 2,131.3 16.4 3,297.0 17.8 Korea, Rep. 56.9 1.1 429.1 3.3 1,300.1 7.0 United States 339.1 6.6 780.0 5.9 1,747.6 9.4 China 118.80 2.3 443.2 3.4 1,407.6 7.6 Taiwan 76.2 1.5 723.4 5.5 9,922.0 5.0 Genmany 447.4 8.7 851.9 6.5 830.8 4.5 Argentina 287.6 5.6 555.9 4.2 770.2 4.2 Brazil 144.8 2.8 522.5 4.0 706.9 3.8 India 302.1 5.8 686.6 5.2 591.2 3.2 Spain 290.8 5.6 488.3 3.7 482.9 2.6 United Kingdom 369.0 7.1 499.2 3.8 420.2 2.3 France 320.3 6.2 509.1 3.9 392.5 2.1 Thailand 26.0 0.5 209.3 1.6 300.1 1.6 Australia 32.7 0.6 144.7 1.1 298.5 1.6 Japan 255.9 4.9 286.1 2.2 158.7 0.9 Ethiopia* 8.3 0.2 27.7 0.2 10.6 0.1 (ranks 49) (ranks 48) (ranks 70) World 5,1703 100.0 13,175.4 100.0 18,534.7 100.0 Source: UN COMTRADE Statistics, based on partners imnports. Represents 93% of total exports. Includes re-exports. * After 1993, excluding EBtrea. Table 1.20: Top Hides and Skins Exporters Value of Exports ($ millions) and Share of World Market Country 1980 1990 1999 Value % Value % Value % United States 1011.1 21.3 1,870.1 28.3 1,430.6 29.5 France 240.7 5.1 425.8 6.4 273.8 5.7 Denmark 267.5 5.6 294.0 4.5 324.0 6.7 Australia 350.8 7.4 437.5 6.6 210.3 4.3 Canada 227.0 4.8 347.2 5.3 323.0 6.7 Netherlands 132.9 2.8 272.7 4.1 256.5 5.3 Germany 171.9 3.6 315.6 4.8 247.4 5.1 United Kingdom 240.8 5.1 347.9 5.3 174.2 3.6 Finland 448.5 9.4 142.7 2.2 167.2 3.5 Russian Federation 118.4 2.4 New Zealand 170.0 3.6 297.8 4.5 133.6 2.8 Ireland 54.1 1.1 116.6 1.8 82.7 1.7 Norway 82.7 1.7 76.3 1.2 62.0 1.3 Spain 15.3 0.3 72.5 1.1 81.4 1.7 Ethiopia* 43.4 0.9 33.9 0.5 19.6 0.4 World 4,750.4 100.0 6,602.2 100.0 4,842.2 100.0 Source: UN COMTRADE Statistics, based on partners imports.\ Represents 93% of total exports. Includes re-exports. After 1993, excluding Eritrea. ** Between 1980-1992, based on Czechlovalda data. 68 Table 1.21: Top Vegetables and Fruits Exporters Value of Exports ($ millions) and Share of World Market Country 1980 Value % 1990 Value % 1999 Value % United States 2,916.7 11.4 5,288.8 10.0 7,720.8 10.4 Spain 2,250.5 8.8 4,914.6 9.3 7,937.5 10.7 Netherlands 2,119.1 8.2 4,837.4 9.1 5,904.1 8.0 Italy 2,425.2 9.4 3,750.8 7.0 4,128.9 5.6 China 822.4 3.2 1,883.3 3.5 3,864.3 5.2 France 1,407.2 5.5 2,987.5 5.6 3,487.2 4.7 Mexico 627.9 2.4 1,813.6 3.4 3,372.1 4.5 Brazil 553.4 2.1 2,013.0 3.8 2,368.3 3.2 Chile 265.3 1.0 1,446.1 2.7 2,225.5 3.0 Germany 511.5 2.0 1,445.0 2.7 2,086.8 2.8 Turkey 702.1 2.7 1,355.2 2.5 1,995.5 2.7 Canada 238.5 0.9 573.0 1.0 1,707.6 2.3 Costa Rica 332.1 1.3 782.4 1.4 1,668.6 2.2 Ecuador 324.2 1.2 859.5 1.6 1,617.0 2.1 Thailand 914.5 3.5 1,470.9 2.7 1,614.9 2.1 Ethiopia* 11.1 0.0 9.7 0.02 19.6 0.03 (ranks 78) (ranks 95) (ranks 87) World 25,558.6 100.0 52,867.3 100.0 73,705.3 100.0 Source: UN COMTRADE Statistics, based on partners imports. Represents 93% of total exports. Includes re-exports. After 1998, excluding Luxembourg. * After 1993, excluding Eritrea Table 1.22: Ethiopia - Policy and Financial Risk Ratings ICRG Pol. Risk ICRG Corruption ICRG Rule of Law Instit. Investors 87-90 91-94 95-98 87-90 91-94 95-98 87-90 91-94 95-98 87-90 91-94 95-98 Botswana 69.4 72.6 74.5 72.9 62.5 50 83.3 83.3 75 35.3 40.7 50.2 Ethiopia 32.8 34.3 59.6 50 35.4 333 45.8 22.9 79.2 8.1 9.2 15.7 Ghana 50.1 60.2 65 50 52.1 45.8 33.3 50 50 20.3 23.6 30.1 Kenya 54 59.5 69.4 50 50 41.7 62.5 52.1 66.7 30.4 24.8 27.2 Mozambique 47.1 43.4 58.6 66.7 66.7 66.7 43.8 20.8 45.8 7.4 9 14.8 South Africa 57.2 66 76.6 85.4 83.3 75 29.2 52.1 58.3 32.9 38.8 45.7 Tanzania 55 62.6 67 56.3 66.7 50 58.3 66.7 79.2 9.8 13.3 18.4 Uganda 38.5 45.6 53.1 50 50 41.7 16.7 35.4 66.7 5.3 7.6 17.3 Bangladesh 29.7 45 58.3 0 27.1 33.3 16.7 29.2 50 18 18.9 26.8 India 43.3 51.2 64.7 43.8 41.7 50 29.2 45.8 66.7 48.1 39.1 46.1 Russia 69.1 55.5 60.6 66.7 56.3 41.7 45.8 56.3 58.3 61.7 24.5 24.6 China 61.8 70.1 66.8 62.5 72.9 41.7 50 70.8 83.3 59.9 55.7 57.4 Philippines 39.3 51.8 65.6 33.3 43.8 54.2 16.7 41.7 66.7 24.6 27.7 41.2 Thailand 58 63.5 73.5 50 50 45.8 62.5 72.9 83.3 58 62 58.6 Vietnam 48.7 59.1 71.8 47.9 50 41.7 50 54.2 83.3 .. 20.5 31.3 Source: Institutional Investors rating, ICRG for Political, Corruption and Rule of Law Index. Note: scale 0-100: a higher number means less risk, less corruption, better rule of law. 69 Table 1.23: Nominal Shipment Rate*, Selected Countries 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Sub-Saharan Africa Ethiopia 11.9 13.9 13.9 15.0 14.7 13.5 12.6 12.3 11.3 9.2 11.2 Ghana 6.0 6.0 6.2 6.7 7.0 6.4 6.0 6.0 6.5 6.3 6.4 Kenya 13.2 12.7 11.6 12.1 11.4 10.7 12.6 11.4 9.8 9.0 9.3 Mauritius 5.8 5.6 5.7 5.4 5.7 5.1 5.3 4.5 4.6 4.6 4.7 South Africa 4.6 4.8 4.1 4.6 4.6 4.7 5.4 4.9 4.9 4.8 4.9 Tanzania 11.2 13.3 14.1 11.5 18.1 11.1 11.8 16.5 9.9 12.6 ... Uganda 17.5 18.9 17.7 19.0 19.9 17.1 17.3 17.6 17.8 19.3 19.2 East Asia & Paciflc China 4.3 4.7 3.6 4.4 4.5 6.4 7.3 4.7 3.5 2.8 2.7 Philippines 5.2 5.1 4.8 4.8 4.9 4.5 5.3 5.1 4.9 3.8 3.4 Thailand 7.8 7.7 7.7 7.4 7.4 7.2 7.4 7.6 7.1 5.9 6.0 South Asia India 8.6 8.7 8.7 8.8 8.4 8.4 8.3 8.3 8.6 9.0 8.3 Bangladesh 7.8 7.4 7.2 7.1 6.9 6.7 6.9 7.1 7.0 6.6 6.6 Source: IMF, Balance of Payments Statistics Yearbook. * Nominal shipment rate = (freight credit + freight debit + insurance credit + insurance debit) / (merchandise exports + merchandise imports). Table 1.24: Nominal Transport Rate*, Selected Countries 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Sub-Saharan Africa Ethiopia 34.4 40.7 61.5 40.2 44.3 33.4 31.0 31.6 28.4 25.9 29.1 Ghana 9.5 9.1 9.5 10.3 11.1 10.6 9.8 9.5 10.1 9.0 8.9 Kenya 20.3 22.7 22.3 22.4 22.2 19.6 17.4 16.6 14.5 13.8 15.3 Mauritius 13.7 14.3 15.1 15.7 14.5 13.5 14.2 12.5 13.2 13.1 13.7 South Africa 8.3 9.8 9.1 7.2 7.0 7.3 8.0 7.4 7.6 7.6 8.0 Tanzania 12.9 13.3 14.1 11.5 18.1 11.1 11.8 16.5 15.3 15.0 ... East Asia & Pacific China 5.4 6.7 4.7 5.3 5.1 7.2 8.0 4.9 4.4 3.5 3.5 Philippines 6.5 6.4 6.6 6.4 6.1 5.2 5.7 5.3 5.1 4.0 4.2 Thailand 9.9 10.0 9.7 9.8 9.9 9.2 9.5 9.7 9.2 8.9 9.1 South Asia India 12.0 11.6 11.9 13.0 12.6 12.5 12.0 11.9 11.8 12.3 11.7 Bangladesh 9.9 9.5 9.5 9.7 9.6 9.0 9.3 9.0 9.0 8.6 8.6 Source: IMF, Balance of Payments Statistics Yearbook. * Nominal transport rate = (freight credit + freight debit+ passenger credit + passenger debit + other transportation services credit + other transportation services debit + insurance credit + insurance debit) / (merchandise exports + merchandise imports). 70 Table 1.25: Comparative Indicators of Human Capability Life expectancy at School enrollment, Bliteracy rate, adult total Illiteracy rate, youth total Labor force, children birth, total (years) primary (% gross) (% of people ages 15 and above) (% of people ages 15-24) 10-14 (% of age group) 1980 1990 1999 1980 1990 1996 1980 1990 2000 1980 1990 2000 1980 1990 2000 Sub-Saharan Africa 48 50 47 81 76 62 50 38 45 32 22 35 32 29 Botswana 58 57 39 91 113 108 42 32 23 28 17 12 26 19 14 Ethiopia 42 45 42 37 33 43 80 72 62 68 58 46 46 43 41 Ghana 53 57 58 79 75 56 42 29 33 18 9 16 15 12 Kenya 55 57 48 115 95 44 29 18 22 10 5 45 43 39 Mauritius 66 70 71 93 109 107 26 20 15 13 9 6 5 4 2 Mozambique 44 43 43 99 67 76 67 56 62 51 39 39 35 32 South Africa 57 62 48 90 122 24 19 15 15 12 9 1 Tanzania 50 50 45 93 70 66 50 36 24 30 16 9 43 42 37 Uganda 48 47 42 50 75 54 44 33 40 30 21 49 47 44 East Asia & Pacific 65 67 69 111 120 116 31 21 14 10 6 3 26 14 8 China 67 69 70 113 125 120 35 23 16 10 5 2 30 15 8 Philippines 61 65 69 112 111 116 11 8 5 5 3 1 14 11 5 Thailand 64 69 69 99 99 87 12 8 5 3 2 1 25 20 12 Vietnam 63 67 69 109 103 115 13 10 7 5 5 3 22 13 5 Europe & Central Asia 68 69 69 99 99 .. 6 4 3 3 2 1 3 3 1 Russian Federation 67 69 66 102 109 I I 0 0 0 0 Latin America & Caribbean 65 68 70 105 105 113 20 15 12 11 8 6 13 11 8 Middle East & North Africa 59 65 68 87 97 95 58 46 35 40 27 17 14 8 4 South Asia 54 59 63 77 90 100 61 53 45 48 39 31 23 19 15 India 54 60 63 83 97 100 59 51 43 45 36 27 21 17 12 Bangladesh 48 55 61 61 72 71 65 59 63 56 49 35 32 28 World 63 65 66 97 103 106 37 30 24 23 18 14 20 15 11 Source: World Development Indicators Table 1.26: Comparative Indicators of Communications and Infrastructure Provision Electric power consumption Roads, paved Telephone mainlines Internet users Radios Daily newspapers (kwh per capita) (% of total roads) (per 1,000 people) (per 1,000 people) (per 1,000 people) 1980 1990 1998 1990 1996 1980 1990 1999 1995 1999 1980 1990 1995 1980 1990 1996 Sub-Saharan Africa 434 454 454 17 15 8 10 463930 2356800 III 168 188 13 11 12 Botswana 32 52 8 21 77 1,000 12,000 99 117 130 21 14 27 Ethiopia 16 18 22 15 15 2 3 3 10 8,000 82 196 191 1 2 1 Ghana 424 300 289 20 24 4 3 8 60 20,000 159 228 234 47 13 14 Kenya 92 115 129 13 14 4 8 10 200 35,000 39 87 85 1 3 14 9 Mauritius 93 93 24 52 224 55,000 269 363 366 83 76 75 Mozambique 34 35 54 17 19 3 3 4 15,000 21 37 38 4 6 3 South Africa 3,213 3,676 3,832 30 55 87 125 460,000 1,820,000 271 303 318 51 38 32 Tanzania 37 51 53 37 4 2 3 5 25,000 81 195 280 11 3 4 Uganda 1 2 3 600 25,000 31 113 119 2 2 2 East Asia & Pacific 250 466 787 24 17 5 16 82 576,480 23,592,500 123 291 298 50 China 264 471 746 2 6 86 60,000 8,900,000 97 322 332 42 Philippines 353 344 451 17 9 10 39 20,000 500,000 43 142 146 41 54 79 T'hailand 279 690 1,345 55 98 8 24 86 40,000 800,000 140 189 185 57 81 63 Vietnam 50 94 232 24 25 1 27 100,000 93 104 106 10 8 4 Europe & Central Asia 2,652 74 86 64 125 213 887,210 10,183,500 385 418 102 Russian Federation 3,937 74 70 140 210 220,000 2,700,000 372 392 105 Latin America & 845 1,141 1,452 22 25 41 64 130 483,456 9,681,300 260 353 390 76 76 71 Caribbean Middle East & North 488 936 1,260 67 52 19 37 83 32,700 1,137,750 172 257 267 30 35 33 Africa South Asia 116 228 341 38 41 3 6 23 251,360 3,033,500 40 79 110 18 India 130 254 384 55 3 6 27 250,000 2,800,000 38 79 120 21 Bangladesh 16 43 81 8 2 3 50,000 17 45 47 3 6 9 World 1,448 1,757 2,085 39 43 78 100 157 33,845,396 241,863,648 305 397 410 102 104 Source: World Development Indicators. Annex II Power, telecomns and water supply have an important role in fostering the private sector. The Government of Ethiopia is preparing a number of studies76 to inform reform efforts in these three sectors. This Annex reviews relevant international experience in introducing private participation" in telecommunications, power and water supply. It focuses on areas that the Government may wish to review in finalizing sector strategies - sector competition policy, tariff policy and privatization. Telecommunications Background78 The liberalization of telecommunications that started in a few countries in the 1 980s turned in to a worldwide trend in the 1990s with more than ninety developing countries opening their telecommunications sector to private participation. In Sub-Saharan Africa, as of end 1998, twenty-four countries had invited private sector participation in fifty projects with a total investment of $6.42 billion (in 1998 $). Of this amount, 52 percent was for greenfield projects and 48 percent was for divestitures of existing assets and companies. Another twelve African and the Middle Eastern countries were set to liberalize their mobile phone markets during 2000. The telecommunications sector in Ethiopia has not benefited from private participation, as the sector remains concentrated in the Ethiopian Telecommunications Corporation, a public enterprise. Given recent worldwide experiences, there is considerable potential for the Government to improve sector performance through liberalization and privatization. However, experience shows that the design of the sector reform has a critical impact on the results obtained. The key lessons are: * Differing levels of liberalization are possible in different market segments - the "natural monopoly" argument for telecommunications has long been proven inadequate, including in smaller markets. *: In most countries, value-added services (e.g. fax, provision of phone equipment) have been completely liberalized. *: In the ninety-four developing countries with private participation in cellular/mobile services, thirty-eight had two operators and twenty-eight had between three to six competing operators. * In the forty-two developing countries with private participation in long distance services, twelve allowed competition. 76 These studies include a privatization options study for the Ethiopian Telecommunications Corporation, a five-year strategy for the power sector, and tariff studies for the power sector and for Addis water and sanitation services. 77 Private participation includes projects in which the private company assumes operating risk and/or development risk under one of the following: operations and management contract; operations and management contract with responsibility for major capital expenditure; Greenfield project, i.e. to build and operate a new facility; and divestiture, i.e. to purchase an equity stake in a state-owned enterprise. 78 Source of international and African data: World Bank Private Participation in Infrastructure Database and Note Number 204 of the Public Policy for the Private Sector titled Private Participation in Telecommunications - Recent Trends by Ada Karina Izaguirre, December 1999. * Of the fifty-five developing countries with private participation in local services, fifteen allowed some competition. * Clarity in the Government's sector objectives is critical because of the trade-offs involved in the liberalization process and the design of the privatization transaction. That is to say between a higher price for the sale of a monopoly vs. rapid increase in penetration possible from issuance of more than one license. Also, between tariff policy to support existing subscribers or to allow for rapid expansion of services. * The appropriate design of transactions is critical to engaging investor interest. For instance, the sale of the company with or without high debt burden; the packaging of a cellular license together with the fixed network, Government assumption of responsibilities for redundant labor and enviromnental liabilities. Recommendations The reform of the Telecom sector in Ethiopia has been under preparation for more than a year and the Government is considering a Strategic Equity Partner to acquire a minority equity stake in the incumbent Ethiopian Telecommunications Corporation (ETC). This is currently a single entity providing all telecommunication services on a monopoly basis. The Government should consider three important issues prior to commencing the search for a strategic equity partner: competition policy, cost-recovering tariffs and approach to financing rural telecommunications services. * Competition policy. International experience suggests that for maximum growth of the telecommunication sector, in addition to the privatization of ETC, the Government will need to give careful consideration to the number of competitors that the privatized ETC will face in different service segments. As has been noted, certain services (e.g. internet, payphones and value added services) could have numerous competitors while others (e.g, mobile services) could have just two or three. Competition in international, long-distance and local fixed network services is often introduced slowly to allow a longer period of time for the incumbent to adjust. The Government will also need to address how to ensure that ETC - as the incumbent competing in all market segments - will not use its market power to stifle competition. A number of solutions are possible ranging from increased regulatory authority for ETA up to the unbundling (and sale) of ETC into separate businesses. * Cost recovering tariffs and tariff re-balancing. Tariffs need to be set at cost- recovering levels in each market segment, i.e. international, long-distance and local services. In the short-term, the rebalancing is needed to prevent the incumbent from being disadvantaged, as other operators will provide services in markets with higher tariffs and not compete in markets where tariffs are below cost recovery levels. In the medium-term, tariff rebalancing is a necessity since the WTO telecommunication agreement reduces the potential for cross subsidies to subscribers using local and long-distance services. * Rural telecommunication financing strategy. In conjunction with tariff policy, the Govermnent also needs to decide on its broader strategy for financing the expansion of rural telecomnmunication services. Available choices include: 74 *: service obligations in the license to be issued to the fixed line or cellular service provider; or *: allocate a portion of all telecommunication revenues into a common pool (i.e. a rural access fund) and allow all service providers to competitively bid for the opportunity to expand rural service delivery. The latter has been successfully utilized in Latin America and has allowed Governments to leverage their limited resources. Power Background Between 1990 and 1999, more than 600 private electricity projects representing investments of $160 billion reached financial closure world-wide. Independent Power Producers made four- fifths of these investments for generation assets79. There are two main lessons from the experience of private participation in power. * There are difficulties of maintaining a sector structure where private generators sell power to state-owned enterprises. This is because of the fundamental constraints placed by subsidized retail tariffs, monopolistic market structures and sector inefficiencies in transmission and distribution. * Government guarantees for the power purchase agreements (often given to the investors selling power to state-owned enterprises) may expose Governments (and taxpayers) to substantial contingent liabilities. These lessons have increased the importance of an early focus on sector restructuring to increase competition through vertical unbundling (i.e. separating generation, transmission and/or distribution functions based on the market size and characteristics). They also increase focus on commencing sector restructuring with liberalizing and privatizing power distribution functions in order to increase private management of the cash flows generated from customers. This in turn reduces the dependence that investors have to place on government assurances. Private participation in power projects in SSA remains at a relatively early stage. Slow progress in sector restructuring, implementing cost-recovering tariffs and investor perceptions of high country risk have all been contributing factors. Five countries (Comoros, Cote d'Ivoire, Gabon, Guinea and Guinea-Bissau) have transferred the management of integrated utilities to private firms through management and operations contracts with major capital expenditure. Three countries (Ghana, Mali and Sao Tome and Principe) have awarded five management contracts. There have been nine greenfield power projects and two limited divestitures. The power sector in Ethiopia The Ethiopia Electric Power Corporation (EEPCO), a single integrated entity covering generation, transmission and distribution80, dominates the power sector. The current retail tariff levels is below cost-recovering levels and includes a cross-subsidy element to finance rural electrification. A tariff study has been launched and is expected to provide an important input into possible tariff re-balancing as well as for the computation of tariffs at generation, transmission and retail levels. The Government is currently considering a five-year Plan for the 79 Source of intemational and African data: The World Bank Private Participation in Infrastructure Database and Note Number 208 of the Public Policy for the Private Sector titled Private Participation in Energy by Ada Karina Izaguirre, May 2000. f° Non-hydropower generation below 20MW is open for private sector participation. 75 Power Sector. Private participation in the generation segment would be introduced, while EEPCO will remain the sole transmission and large-scale distribution entity in Ethiopia. To this end, the Government has already signed a Memorandum of Understanding with an Independent Power Producer (IPP) for a 150 MW hydro-power plant. EEPCO and the IPP are in the process of negotiating a Power Purchase Agreement (PPA). Over the medium-term, it is expected that EEPCO will purchase some 700 MW from IPPs and will sell up to 200 MW of this newly acquired capacity to Sudan and Djibouti through a Regional Interconnection Scheme. Recommendations * It is believed that the IPP has requested a Government guarantee to support the Power Purchase Agreement with EEPCO. The Government will need to consider two issues. First, the costs and benefits of issuing such a guarantee itself compared with seeking such a guarantee from external financiers. Second, the need to minimize the requirement for a guarantee by considering the privatization of the distribution businesses of EEPCO. * The Government should consider a competitive bidding process for future IPPs instead of the current approach of negotiating directly with investors interested in power generation investments. This would reduce the two risks inherent in the current approach. First, the Government may not be able to utilize the benefits of competition in securing the best possible terms. Second, that elements of sector strategy and policy (e.g. tariff policy) will, de facto, be decided during negotiations with the investors instead of in a systematic manner. Urban Water Supply and Sanitation Background"1 The water sector has seen the lowest involvement of private participation to-date. Between 1990 and 1997, $25 billion worth of projects have been implemented in thirty-five developing countries. Concessions (i.e. operations and management contracts requiring capital investments) accounted for 50 percent of the projects (and 80 percent of the investments). Operations and management contracts accounted for a further 13 percent, greenfield projects accounted for 30 percent (and 16 percent of the investment) and divestiture for only 6 percent of the projects (and 4 percent of the investment). In Sub-Saharan Africa, there has been almost no private investment, though eight management and lease contracts were completed during 1990-1997. The main dynamics driving these trends were fourfold. First, in the water sector, management of the overall network is a higher priority than adding capacity from additional sources of water supply. Second, investor perception of risk in the water sector is high - it includes foreign exchange risk arising from collection of revenues in local currency while investments are in hard currency and political resistance to raising water tariffs. Third, the number of potential investors is limited. Fourth, responsibility for water supply is often devolved to municipalities or provincial governments that have less experience with private sector contracting and regulation thereby increasing transaction complexity. Ethiopia: Sector Policy andInstitutionalArrangements An estimated 77 percent of households have access to safe water and 58 percent have access to sanitation services in Ethiopia82. Addis Ababa indicators are even higher (98 percent for water 81 Source of intemational and African data: World Bank Private Participation in Infrastructure Database and Note No. 147 of Public Policy for the Private Sector entitled Private Participation in the Water and Sewerage Sector - Recent Trends by Gisele Silva, Nicola Tynan and Yesim Yilmaz, August 1998 76 supply and 75 percent for sanitation) though they mask the limited availability of in-house water connections (less than 5 percent) and yard connections (around 23 percent). The Government's objectives for the water sector are defined in the Federal Water Resources Policy established in 1999. Urban water supply and sanitation services are the responsibility of regional governments while the role of the Ministry of Water Resources is limited to providing overall guidance. Decisions regarding the investment programs of specific utilities are the purview of the relevant Regional Council. The Government is currently in the process of reviewing its water supply and sanitation sector strategy. The current status report has been completed and a report recommending the future strategy is under preparation. In the case of Addis Ababa, a strategy report has been prepared for the Addis Ababa Water and Sewerage Authority (AAWSA) and a tariff report has also been completed. Its recommendations have been submitted for approval by the City Council. AAWSA has prepared - but not yet implemented - a substantial investment program (around $600 million) for developing water supply sources and wastewater management. Funding of this program has also not been firmed up, as the City Council was unable to identify suitable financing sources. Recommendations Given the more limited private sector interest worldwide in the water sector, the Government should adopt a dual strategy. First, it should enhance the ability of smaller water systems to become self-financing from internally generated cash flows. Second, it should simultaneously seek private participation for larger systems where additional investments are unlikely to be met from internally generated cash flows. In this regard, the investment program for Addis Ababa provides an opportunity for substantial private involvement in the water sector. The Government, in conjunction with the Regional government and City council, should consider the potential for private participation. This would involve the following: * Introduction of tariffs to allow for full cost recovery while at the same time addressing the issue of access to water by urban poor, as recommended by the AAWSA report. * Development of a comprehensive medium-term strategy for reforming AAWSA, including a private participation strategy. This would evaluate the possibility of introducing private participation with existing AAWSA service delivery (e.g. a concession contract for managing all or part of existing AAWSA assets) as well as for new investments (e.g. a Build-Operate-Transfer concession for new sources of water supply). 77 Annex III Export Incentive Schemes This Annex discusses the content of recent efforts made by the Government of Ethiopia to improve exporters' access to inputs at world prices and the system of export finance. Export Trade Duty Incentive Schemes The Govermnent of Ethiopia approved a Proclamation to Establish Export Trade Duty Incentive Schemes on July 5, 2001. It includes three schemes: * A Duty Drawback (DD) Scheme; * A Voucher (V) Scheme; and * A Bonded Manufacturing Warehouse (BMW) Scheme. The V Scheme and the BMW Scheme exempt duties and indirect taxes when exporters import input materials, while the DD Scheme refunds duties and indirect taxes paid on imported inputs after exports have been completed. DD Scheme. The following equations describe the functioning of the DD Scheme: Import quantity allowed for DD = Imported IOC x Completed export quantity (1) where IOC = quantity input-output coefficient (i.e., quantity of input, making normal allowance for waste, needed per unit of output). Note that IOC is a quantity coefficient, not a value coefficient. DD amount = (1) x Import price of input x Import tax rate (2) V Scheme. The following equations describe the V Scheme. The starting month is January (Jan): Maximum duty - free imported input amount = Imported IOC x Planned export quantity allowed (in Jan) for the whole year (in Jan) for the whole year (3) Maximum voucher amount approved (in Jan) (3) x Imported price x Import tax rate by Min of Fin for the whole year of input (4) Actual voucher amount (say, in Oct) = (4) - Completed x Imported x Imported x Import export quantity IOC price tax rate (Jan - Sept) (5) where the Maximum voucher amount = maximum import tax liability allowed for the whole year; the Actual voucher amount = actual import tax liability in the given month. Equation (5) assumes that " Duty liability associated with actual duty-free imports (Jan-Sept)" = (4). Three Government agencies are involved in administering a V Scheme: * The Ministry of Trade and Industry: it approves (in Jan) the annual export plan of an exporter [to determine the "planned export quantity for the whole year" in Equation (3)] as well as "imported IOC" in Equation (3). * The Customs Authority: it calculates the maximum V amount based on Equation (4). * The Ministry of Finance: it issues the maximum V amount as recommended by the Customs Authority. * The Customs Authority: it allows duty-free imports of inputs, as long as the imports are within the issued maximum V amount; deducts the duty liability associated with the completed export quantity from the duty liability associated with cumulative total imports based on Equation (5). After 12 months of duty- free imports, if the corresponding export obligations have not been completed, then the Custom Authority collects the import duties contained in the unfulfilled exports. If one assumes that all the duty-free imports allowed for the year based on Equation (3) occurred in Jan, then in Dec the Custom Authority collects import duties shown by Equation (5). BMW Scheme. Figure 1 sketches the essence of the BMW Scheme. Figure 1: Custom's Physical Control Mechanism for BMW Scheme Import Export Overseas X (Port) - o BMW lo (Port) < Overseas factory \ Inflow of duty-free Outflow of finished goods inputs - 0i Physical control by Customs The Customs Authority implements the BMW Scheme on the basis of physical controls of inflows of duty-free inputs to and outflows of finished export goods from a BMW factory, as sketched in Figure 1. A remaining issue Article 5 (4) of the Proclamation states: "Notwithstanding the provision laid-down above, persons or organizations partially or occasionally engaged in exporting their products shall not be beneficiaries of the Schemes established by this Proclamation, where raw materials equivalent in price and quality to those they imported are locally available. Directives to be issued by the Minister of Finance shall regulate the implementation of this sub- article." 80 This Article is inconsistent with the objective of the Proclamation, to ensure exporters complete freedom in choosing between duty free imports and domestic inputs. In order to implement this Article, the officials must evaluate whether locally available inputs are equivalent in price and quality to foreign-made inputs. Frequent disputes between officials and exporters on the evaluation of exporters' input choices are likely to result. This will discourage foreign and domestic firms from entering in manufacturing export business in Ethiopia. Domestic industries producing input materials can be protected through taxes levied on the competing input materials imported for the domestic market sales. It is therefore recommended that Article 5(4) be removed from the Proclamation. Implementation Guidelines of Three Schemes The Minister of Finance is to issue directives for the proper implementation of the Proclamation. In turn, the Customs Authority is to issue its own directives regarding the procedures to be followed by persons and organizations that are beneficiaries of the BMW Scheme. Finally, the Ministry of Trade and Industry may need to issue its own guidelines for carrying out the IOC administration and reviewing exporters' annual export plans for V Scheme. Handling of IOCs Sequence of Developing IOC Administration System. Initially, the exporters' self-declared IOCs should be broadly accepted; secondly, within a year the Standard IOCs for most Ethiopian export items should be estimated; thirdly, new products Standard IOCs should be added, while refining and updating the Standard IOCs of existing products. In turn, fixed drawback rates can be estimated and applied to simplify DD processing for selected products. * Standard IOCs: Article 16(1) of the Proclamation assigns the task of estimating the Standard IOCs for all Ethiopian export items within one year to the Ministry of Trade and Industry. Once the Standard IOCs have been estimated, DD Scheme as well as V Scheme should rely solely on them * Self-Declared IOCs: According to Article 16(2), self-declared IOCs reviewed by the Ministry of Trade and Industry are going to be used for V Scheme and DD Scheme. This provision should over-rule the statement in Article 8(3) that "the Customs Authority shall have the discretion to make its own decisions" in implementing DD Scheme. Even though there is a need to prevent potential abuse of self-declared IOCs by some exporters, it is important not to delay the IOC approval process creating frequent disputes with exporters. No Need for IOCs for BMW Scheme. Article 14 (6) states that exporters who want to rely on BMW Scheme must submit IOCs as part of their documentary requirements. Despite this, the implementation guidelines should make it possible for exporters using BMW Scheme to rely exclusively on Customs officials' physical checking mechanisms without requiring imported input-output coefficient data. In fact, the main benefit of this Scheme is to bypass the administrative procedures associated with the input-output coefficient data handling. Only when products manufactured using duty-free imported inputs are sold to the domestic market, underlying input-output coefficient data should be required for the purpose of calculating duties to be collected. The Ministry of Trade and Industry may wish to develop a program designed to build its IOC administration. The program would include: * Guidelines to review and approve the self-declared IOCs. 81 * A plan to estimate Standard IOCs including an assessment of staffing and equipment needs as well as ways to utilize the self-declared IOCs. * Guidelines to apply the Standard IOCs to V Scheme and DD Scheme. * Guidelines to estimate new products' Standard IOCs as well as to update and revise the existing products' IOCs. * A plan to computerize the IOC estimation and utilization tasks. * A plan to form an IOC Advisory Committee composed of the technical staff of the industry and exporters associations and public agencies with the objective of receiving their data support and technical advice on a periodic basis. * A plan to receive an expert guidance to be supported by an extemal TA program * An organizational and staffing plan needed to create a Unit in the Ministry of Trade and Industry to carry out the above tasks. Implementation of the Voucher Scheme To allow flexibility in implementing the V Scheme, it is suggested to let exporters choose between the Fixed Starting Month Framework specified in the Proclamation and a parallel Rolling Plan Framework. This is because of: * Inflexibility of the Fixed Starting Month (January) Duty-Free Import Amount Framework: First, any exporter who failed to submit his annual export plan in Jan for approval by the Ministry of Trade and Industry cannot utilize the V scheme until Jan next year. Second, once the annual duty-free import amount entitlements allowed in Jan by Equations (3) and (4) have been used up, then no further duty-free imports are allowed until January next year. * Flexibility of Rolling Plan Maximum Duty-Free Import Stock Framework: The following equations represent the essence of the procedures of V Scheme under a Rolling Plan Maximum Duty-Free Import Stock Framework: Maximum duty-free Maximum duty-free Previous duty-free import amount import stock allowed import amount allowed for which export obligations have (6) for the next 12 for the next 12 months yet to befurilfled within 12 months months of imports where Maximum duty-free import amount'allowed = Imported -OC x Planned export (7) for the next 12 months quantityfor the next 12 mnntAh' 83 The most important qualification of the extemal expert is long practical experience with actually estimating "standard quantity input-output coefficients" (not " value input-output coefficients"), because the Proclamation declared that Ethiopia's duty-free import schemes would rely primarily on " standard quantity input-output coefficients." The duty-free import schemes of such countries as Korea and Taiwan relied primarily on the " standard quantity input-output coefficients", while countries such as India relied primarily on the "value input-output coefficients." On the other hand, duty-free import schemes of developed countries including EU countries rely on "self-declared input-output coefficients" and therefore their officials do not have experiences with actually estimating standard quantity input-output coefficients. 82 The annual export plan does not have to start from January. The export plan is basically a rolling plan. Each exporter should be able to choose between (i) previous 12 months' export record as his planned export quantity for the next 12 months for the whole year (i.e., say $1 million for the next 12 months in Jan, Feb,.,Dec) without the Ministry's approval or (ii) having his planned export quantity approved by the Ministry for the whole year. Then, the tasks of the Customs Authority is to implement the Scheme based on Equations (6) and (7) - the Customs would allow duty-free imports based on (6) and (7), while they would spot check whether the exporter's inventories are consistent with Equations (6) and (7) to make sure that duty-free imports have been sold in the domestic market. Within this context, in fact, the process of issuing vouchers by the Ministry of Finance can be bypassed in order to streamline the administration. The Customs can ensure the integrity of the Scheme based on Equations (6) and (7), while allowing the maximum flexibility of exporters in managing his inventory of duty-free imported inputs under streamlined procedures. Whereas an export plan indicates intended export amount, an export L/C relects an actual export to be completed soon. Therefore, an export L/C should be given more crep1ibility than an export plan in granting duty-free imports under V Scheme. For those exporters who want to rely on export L/Cs rather than export plans, the approval of the Ministry of Trade and Industry of the export plans should be replaced by the automatic approval of export L/Cs. Parallel Use of Fixed Duty Drawback The DD Scheme in equations (1) and (2) can be defined as an individual drawback scheme that refunds import duties paid after exports have been completed on the basis of import duty payment and export completion documents. On the other hand, there is no need to present the actual impact duty payment documents in a fixed drawback scheme. The refund, based on the pre- tabulated fixed drawback rates and the export completion documents, is calculated as follows: DD amount = FDR x Completed export quantity (8) where FDR = fixed drawback rate ( i.e., duty drawback value(in birr) per unit of export quantity) pre-calculated by the Government. For export items as agricultural products that rely on very simple imported packaging materials, a fixed drawback scheme would save the administrative costs of exporters and Customs officials needed to implement the individual duty drawback scheme. Thus, it is suggested that a fixed drawback scheme be used in parallel to the individual duty drawback scheme by interpreting the DD Scheme Articles contained in the Proclamation flexibly. Methodology of Estimating FDR: The following equation summarizes the method of estimating a FDR: FDR =Y Standard x Average import taxes(in birr) paid by all (9) imported IOC exporters per unit of imported input i for input i during previous drawback accounting periods (after adjusting exchange rate and import tax rate changes) 83 For export products whose import tax burdens were incurred through locally manufactured inputs (supplied by input-supplying indirect exporters who originally paid import taxes for their imported raw materials), a FDR must be estimated: FDR Standard FDR for Indirect Export Item domestic IOC x i (I ) i for input i FDR for Standard Average import taxes paid (birr) by all Indirect = ; imported IOC x indirect exporters (11) Export Item i j for input i per unit of imported inputj during the nrevious accountinP neriods Note in Equation (11) that FDR for indirect exporters can be claimed if he exports the indirect export item directly rather than selling to the final export manufacturer as the latter's input. Since the indirect exporter is not claiming his fixed drawback entitlement, he is passing that entitlement to the direct exporter through Equation (10). In Ethiopia, locally manufactured packaging materials are represented by Equation (11), while export products using the locally manufactured packaging materials are represented by Equation (10). The IOC Unit of the Ministry of Trade and Industry may be the most suitable agency to estimate the FDRs for selected export items. Indirect Exporters' Direct Access to V Scheme and BMW Scheme Indirect exporters selling all their products to direct exporters using BMW Scheme or V Scheme must be able to apply for BMW Scheme or V Scheme for their own duty-free imports of raw materials and intermediate inputs Implementation Agencies' Self-Imposed Time Limits and One Stop Service Time Limits: The Proclamation fails to impose time limits for the implementation of the schemes. Therefore, it is necessary that the implementation directives and guidelines of the Ministry of Finance, Customs Authority, and Ministry of Trade and Industry provide time limits for approving self-declared IOCs, export plans, and exporters' applications for DD Scheme, V Scheme, and BMW Scheme. One Stop Service: Once the Standard IOCs for all export items and Fixed DD Rates for selected export items have been estimated, these IOCs and Fixed DD Rates should be published in an IOC Book and a Fixed DD Rate Book to be used by exporters and Custom officials for processing applications. Then, it appears desirable to provide an One-Stop-Service for DD Scheme, BMW Scheme, and V Scheme at the Customs Authority. It should be possible for the Ministry of Trade and Industry officials to approve exporters' annual export plans for V Scheme at the One-Stop- Service office of the Customs Authority. 84 Export Finance This section discusses the new Export Credit Guarantee System and measures to strengthen foreign credit or finance for exporters. The Export Credit Guarantee System An Export Credit Guarantee Scheme was offered by the National Bank of Ethiopia since July 1999. However, it never worked well. It required the bank granting a pre-shipment export loan covered by the Export Credit Guarantee Scheme to charge an interest rate 3.5 percent below the prime interest rate. It required new exporters seeking the guarantee coverage to provide physical collateral (20 percent in the case of producer exporters and 30 percent in the case of other exporters) in addition to a bona-fide export order from a foreign buyer and a valid investment certificate and/or trade license. And Export Credit Guarantee applications were to be processed first at financing banks and then at the NBE, resulting in long delays. Three major changes incorporated in the May 2001 version (The Establishment and Operation of Export Credit Guarantee Scheme: Revised Directives No. ERD/003/2001 which became effective on May 9, 2001) of the Export Credit Guarantee Scheme compared to the March 2000 version are summarized below: * Market Interest Rate on Bank Loans Covered by Guarantee. Article 9.1 of the May 2001 version requires that "financing banks shall charge market interest rate on pre- or post- shipment loans covered by the Export Credit Guarantee Scheme." * Physical Collateral from New Exporters at the Bank's Discretion (Up to 20%) The revised version delegates to financing banks power to require new exporters to have physical collateral up to a maximum of 20 percent for producer exporters and 30 percent for other exporters. * Financinz Bank to Make Guarantee Decision and NBE to Conduct Post-Monitorinz As Transitional Arrangements: Article 3 of the Revised Directives of the NBE states: "Upon written request of the financing bank, the Bank accepts the request and provides guarantee to the endorsed export credit amount that shall be extended to the client exporter of the financing bank." This means that approval powers for the Export Credit Guarantee Scheme has been delegated to financing banks. The role of the NBE appears to be to monitor the guarantee approvals at financing banks at export-post level based on reports submitted by banks. Remaining Issues Two issues need to be resolved for the Scheme to achieve its original objective of assuring access to pre-shipment export finance to all exporters with export orders and good faith, including small and medium exporters (SMEs) and new exporters: i. The separation of two distinctive tasks -- covering exporters' manufacturing nonperformance risks and covering foreign buyers' nonpayment risks. A related concern is to assure access to pre-shipment export finance to all SMEs and new exporters who have confirmed export L/Cs, factory facilities, and good faith to fulfill export orders. 85 ii. The creation of two separate institutions -- a pre-shipment export finance guarantee agency and an export credit insurance agency - which would follow from the separation of the two risks above. Need to Separate Two Distinctive Tasks: The original objective of the Export Credit Guarantee Scheme was to offer a pre-shipment export finance guarantee (PEFG) scheme without establishing a separate PEFG agency. However, to achieve such objective, the Export Credit Guarantee Scheme should not have covered exporters' loan default risks stemming from foreign buyers' nonpayment. If exporters applying for the Export Credit Guarantee Scheme were asked to provide confirmed export L/Cs, then foreign buyers' nonpayment risk coverage could be eliminated from the Export Credit Guarantee Scheme. However, confirmed export L/Cs are not required for the Export Credit Guarantee coverage. Thus, as summarized in Table HI. I, the Export Credit Guarantee Scheme is covering: a) exporters' manufacturing nonperformance risks; and b) foreign buyers' nonpayment risks. While (a) is typically covered by a PEFG scheme, (b) is typically covered by an export credit insurance (ECI) scheme. Instead, the Export Credit Guarantee Scheme has combined both PEFG and ECI schemes, even though the original objective was to offer only a PEFG scheme. Table mJ: Distinction Between PEFG and ECI Schemes Coverage Risk Types Exporters' manufacturing Foreign buyers' non- non-performance risks payment risks Pre-shipment stage Exporters ECI Banks PEFG ECI Post-shipment stage Exporters ECI Banks ECI Because of the mixed coverage of the two distinctive risks - exporters' manufacturing nonperformance risks and foreign buyers' non-payment risks in one scheme, the Export Credit Guarantee Scheme requires high physical collateral (up to 20 to 30 percent of loan value) from even new SME exporters as well as high premium (2.5 percent). Therefore, new or SME exporters with confinmed export L/Cs, are asked to pay for the ECI coverage while their needs were only the PEFG coverage. They may not be able to put the high collateral and may not be willing to pay the high premium. On the other hand, for the exporters who are selling to very risky markets and buyers without confirmed export L/Cs, the current premium may be too low to sustain the financial integrity of the Export Credit Guarantee Scheme. Export Credit Guarantee Application and Approval Records: Table I.2 presents the Export Credit Guarantee application and approval records during March 2000-April 2001. During the 14 months periods, only 20 exporters utilized the Export Credit Guarantee Scheme. Total expected export earnings by the end of 2000 were $ 4.7 million. The major export items for which the guarantee applications were made included sesame seeds, cumin seeds, niger seeds, oil seeds, hide & skins, chilled meat, and mineral water. Out of 44 guarantee applications, 9 applications were rejected primarily due to the difficulties of confirming foreign buyers' reliability by financing banks. The primary reason for the two default cases appears to be foreign buyers' non- payments. The greatest risk the Export Credit Guarantee Scheme has been covering is foreign 86 buyers' non-payment. This suggests that the cover treatment of foreign buyers' nonpayment risks needs to be separated from that of exporters' manufacturing nonperformance risks. Table m.2: Export Credit Guarantee Application and Approval Records, March 2000 (a) (b) (c) (d) (e) Guarantee Guarantee Guarantee Expected Expected exports by applications approvals by approvals by fees exporters covered by by exporters banks NBE collected guarantees (by Dec 2000) Amount in birr 237.2 million 135.2 million 99.6 million 1.3 mnillion $ 4.7 million % 57% of (a) 74% of (b) Nr of cases 44 35 (20 exporters) Source: NBE The Government has established a special fund of 50 million birr to back up the Export Credit Guarantee operation. It is possible that this fund can generate more than one billion US dollar additional annual exports84, if effectively implemented, very widely utilized, and exports take off. The fact that only less than 1 percent of the potential of the established fund has been utilized so far suggests the tremendous challenges the rationalization of the new Export Credit Guarantee operation would meet. Suggested Framework for the Rationalization and implementation of the Export Credit Guarantee Operation Developing Programs for the Rationalization: It is recommended that the NBE develop short- term and medium-term programs to rationalize and implement the Export Credit Guarantee operation by separating the two risks covered by the Scheme and differentiating the collateral requirements and premium charges. This may result in offering the three sub-schemes as illustrated in Table Hm.3: a. a PEFG scheme for direct or indirect exporters without ECI coverage; b. an ECI scheme for direct exporters without PEFG coverage; and c. combined coverage of PEFG and ECI for direct exporters. Such rationalization would lead to a more attractive premium rate and collateral requirement for small and new exporters who want to cover exclusively exporters' manufacturing nonperformance risks, while premiums to cover foreign buyers' nonpayment risks should be varied in accordance with the levels of risks involved. Collateral requirements and premium rates suggested in Table I1.3 are for illustrating purposes. 84 This estimate is based on the following assumptions: (a) The fund is utilized exclusively for covering exporters' manufacturing nonperformance risks; (b) The maximum fund-guarantee coverage ratio is 15; (c) The average number of annual turn-over for pre-shipment export finance is 4; (d) The fund covers 80 percent of the pre-shipment export loan defaults caused by exporters' manufacturing nonperformance risks. 87 Table m.3: A Suggested Framework for the Rationalization of Export Credit Guarantee Operation (i) 0i' (iii) (iv) Sub-scheme Conditions for approval % of defaults Physical collateral Annual covered requirement premium rate (a) PEFG only Automatic approval for those 90 % covered for Up to 10% of loan 1.5% exporters with confirned export defaults caused by amount for new L/Cs (or indirect exporters with exporters' exporters back-to-back domestic L/Cs), manufacturing factory facilities, and good faith to nonperfornance fulfill export orders (b) ECI only Selective approval based on the 80% covered for Up to 20% for loan 1.5% - 2.5% level of buyers' risks assessed defaults caused by amnount for new depending on the foreign buyers' exporters level of buyer's non-payments or risks assessed changes in orders (c) both PEFG Selective approval based on the 90% covered for Up to 20% for loan 2.5% -3.5% & ECI level of buyers' risks assessed & defaults caused by amount for new depending on the factory facility/good faith to fulfill exporters' exporters level of buyer's export orders nonperformance, risks assessed while 80% covered for defaults caused by buyers' non- payments Rationalization programs should also include: i. drafting two separate new operational guidelines for the PEFG operation and the ECI operation. Particular emphasis should be put on the guidelines for the PEFG operation to assure access to all SME and new exporters with confirmed export L/Cs, factory facilities, and good faith to fulfill export orders; ii. mraking a proposal to establish two separate funds based on the 50 million birr fund - a PEFG fund and an ECI fund; and iii. making financial plans (i.e., revenue and expenditure projections) for the PEFG operation and ECI operation. PEFG and ECI Institution Building Tasks So far, the management authority of the Export Credit Guarantee Scheme has been the Credit Guarantee Appraisal Committee composed of the Director and Deputy Director of the Economic Research Department, Director of the Supervision Department, and Head of the Domestic Economic Condition Division of the Economic Research Department (who serves as the Secretary of the Committee) of the NBE. In turn, Article 13 of the Revised Directives No. ERD/003/2001 of the NBE requires that financing banks must establish within their head offices a Special Unit which would deal with the assessment and approval of export credit guarantee applications. How can the current institutional set-up be developed into a PEFG agency and an ECI agency? First, it is recommended that the NBE establishes a Special Unit dealing exclusively with the Export Credit Guarantee Operation staffed with a PEFG Officer and an ECI Officer. The major task would be to draft short-term and medium-term programs for the rationalization of the Export Credit Guarantee operation and PEFG and ECI institution building. Second, it is 88 recommended that external financial and technical assistance to PEFG institution building and ECI institution building85 be sought. Measures to strengthen foreign credit or currency import finance for exporters Suppliers' or Foreign Partners' Credit Directive(Amended Directive) No. REL/004/98. Article 4.1 of this Directive states: " An external loan obtained by an investor shall be registered with the National Bank of Ethiopia only after it is ascertained that: (a) the acquired loan is going to finance an export-oriented investment that generates foreign currency; and (b) the equity component of the debt/equity ratio of the loan is not less than 40 percent, except when a waiver is provided by NBE." As long as an export project or transaction financed by the external borrowing for an established exporter is self-liquidating (i.e., export earnings are more than enough to pay back the loan), there is no need to impose the debt/equity ratio requirement. Therefore, it is recommended that for such transaction, the debt/equity ratio requirement be waived automatically. Further, it is recommended that new exporters who are planning to start export business based on foreign suppliers' credits or foreign banks' credits for importing capital goods and intermediate inputs be allowed to be registered with the NBE, as long as their export plans (stating that the expected export earnings are sufficient to pay back the foreign credits) are approved by the Ministry of Industry and Trade. Promoting Capital Good Leasing Business for Exporters. Proclamation No. 98/1998 allows banks to finance the importation or purchase of machinery and equipment by taking these machinery and equipment as physical collateral. This, however, is not happening. Thus, the role of capital goods leasing appears to be very critical in exporters' access to investment finance. In fact, the Capital Goods Leasing Business Proclamation (Proclamation No. 103/1998) and the Ministry of Industry and Trade Directives issued for implementing this proclamation provide a regulatory framework for contractual arrangements between the two leasing parties. In turn, the Council of Ministers Regulations to Amend the Investment incentives Regulations (Council of Ministers Regulations No. 36/1998) state that machinery and equipment necessary to be used for leasing of capital goods shall be exempt from payment of customs duty. However, no capital goods leasing company -- foreign or domestic company -- has emerged yet. Thus, there is a need to develop a strategy to promote capital goods leasing companies designed to meet Ethiopian exporters' finance needs for importing capital goods in the manufacturing export industries. Foreign Currency Import Finance for Exporters. 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