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Analysis: Manufacturing makeover: With introduction of new policy, gov’t takes steps to fuel industrial growth

With its new policy rollout, the administration of Prime Minister Abiy Ahmed is taking steps to enhance the manufacturing sector’s competitiveness, with a strategic goal of increasing its GDP contribution to 17.2% by the year 2030 (Photo: MoI/Facebook)

Addis Abeba – In a strategic push to revitalize its economic landscape, the government is on the brink of implementing a newly approved manufacturing policy.

With the Council of Ministers‘ endorsement secured last week, this strategic blueprint, designed to escalate production and productivity within the manufacturing sector and to carve out a larger slice of the national economic pie, is now primed for action.

Over the last two decades, Ethiopia has directed its industrial policy toward export-oriented and labor-intensive sectors. These industries have reaped the benefits of various incentives, such as reduced land lease rates, concessional loans, tax advantages, and easier access to foreign exchange. Despite these efforts, the manufacturing sector’s economic contribution has remained minimal.

The country is now shifting from its previous focus on export-oriented industrialization to a new policy developed since 2020. This policy aims to adjust national priorities by promoting both exports and import substitution, striving for a more balanced industrial approach.

Melaku Alebel, the Minister of Industry, recently highlighted the importance of small, medium, and large enterprises (SMEs) in the context of national economic growth. He stated the imperative to develop the manufacturing sector, asserting, “However, there is a need to support these enterprises, taking into account their importance.”

Officials have indicated that the policy will be instrumental in coordinating the efforts of various government entities, including executive bodies at federal and local levels, the manufacturing industry council, the private sector, and other stakeholders crucial to realizing the policy’s objectives.

For the successful enactment of the policy, a comprehensive legal framework consisting of five proclamations, nine regulations, and eight guidelines is being prepared by the relevant authorities.

The ministry has identified the executive bodies charged with implementing the policy and has clearly outlined their roles and responsibilities.

In partnership with the Manufacturing Industry Development Institute, the ministry also gave a five-day training session for its staff on the policy last month.

Ethiopia’s manufacturing woes

The Ethiopian manufacturing sector has faced significant challenges, including recent macroeconomic instability and security issues. Although the government maintains an optimistic perspective, data indicates a notable decrease in the sector’s productivity and capacity utilization rates.

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The policy aims to adjust national priorities by promoting both exports and import substitution, striving for a more balanced industrial approach.”

Melaku Alebel, Minister of Industry

These declines are also attributed to issues such as restricted access to finance and a scarcity of foreign currency.

Betelehem Gezahegne, a senior manager at Kality Metal Products Factory, asserts that there is no lack of demand for the factory’s products, even as prices continue to rise. “Our primary struggle is with the manufacturing and delivery of products to the market,” she stated.

Kality Metal Products Factory, a venerable institution in Ethiopia’s industrial landscape with a history extending beyond fifty years, currently finds itself unable to fully meet customer demand, despite a steady increase in interest in its products.

Located 20 kilometers from Addis Ababa, Kality Metal operates with a registered capital of 879 million birr. The factory underwent a change of ownership in 2012 when it was sold to Tsehay Industry S.C.

The factory uses imported steel sheets in coils as its major input to produce both standardized and custom metal products. Its diverse output includes galvanized corrugated iron sheets, steel profiles for doors and windows, and the construction of bodies for trailers and cargo trucks.

Betelehem says that it has been some time since the factory has been able to open letters of credit (LCs) at commercial banks to facilitate the import of raw materials. “We are facing a severe challenge in importing the necessary raw materials due to a shortage of foreign currency.”

In an effort to address this impediment, Kality and similar metal factories are endeavoring to meet a portion of their raw material requirements through domestic sources.

Steel manufacturers are acquiring scrap metal from the Public Procurement and Property Disposal Service, which is supplied at fixed prices. However, this source of scrap metal only fulfills a small part of the overall demand.

Solomon Mulegeta, general manager of the Ethiopian Association of Basic Metals and Engineering Industries, told Addis Standard that a significant portion of metal industries are currently operating at less than 40% of their potential capacity.

Solomon outlines that domestic manufacturers are facing a plethora of obstacles, including deficits in foreign exchange and financial resources, along with the proliferation of contraband goods within the market. “Manufacturers of corrugated iron sheets and steel bars, in particular, are imperiled by the illicit trade,” he stated.

The association represents a collective of 70 metal manufacturing industries within Ethiopia.

The contribution of the manufacturing sector to the Gross Domestic Product (GDP) has seen a reduction from 5.9% in 2019 to 4.4% in 2022, significantly impacted by a series of adverse events such as instability, scarcity of foreign currency, and limited access to finance.

These events have precipitated the shutdown of 446 manufacturing firms out of an approximate total of 5,000, as detailed in a December 2023 report by the United Nations Development Program (UNDP). The worsening security situation has been a considerable factor in this closure.

The general manager of a well-established textile factory, with operations extending beyond three decades on the outskirts of Addis Ababa, informed Addis Standard that the facility has recently been compelled to shut down due to insufficient support from governmental entities.

The general manager emphasized that obtaining financial assistance to address the increasing operational expenses has been particularly burdensome. “Even though we communicated the factory’s condition to the pertinent governmental agencies, we have yet to receive any form of response,” he reflected.

Amidst various challenges, the administration of Prime Minister Abiy Ahmed maintains a steadfast belief in the manufacturing sector’s promise.

During a recent press briefing, Melaku announced that out of the 446 manufacturing industries, 376 recommenced operations, facilitated by the collaborative support rendered under the “Ethiopia Tamrit” initiative.

Almeda Textile Factory, which provided jobs for over 5,000 individuals, is among the industries that suffered extensive looting and damage amid the two-year conflict in the Tigray region (Photo: IndustriALL Global Union)

Melaku also disclosed that Ethiopia has garnered $131 million from the export of manufactured goods over the past five months. Melaku described this outcome as an “encouraging result.”

In a recent address to parliament, the Prime Minister lauded a similar message, underscoring the manufacturing sector’s 7% growth in the last fiscal year while adding that the average utilization of industrial production capacity has increased, rising from 47% in the last fiscal year to 55% currently.

The premier also revealed that, in accordance with the strategy to conserve foreign currency through the replacement of imported goods, the nation has attained self-sufficiency in the production of coal and beer barley.

Access to finance, forex in short supply

A survey, both qualitative and quantitative in nature, was conducted from August to November 2023, encompassing 70 firms, to gather current data regarding the adversities encountered by businesses in Ethiopia.

The findings, which were incorporated into the report by the UNDP, indicate that there are serious concerns among the business community, with over half of the participants (55.4%) perceiving a significant decline in the country’s business climate in recent years.

Merely 20% of the firms surveyed reported receiving benefits from government support. In contrast, 63% indicated they have not reaped the benefits of government assistance.

More than a third of the companies surveyed also reported facing substantial challenges, specifically a lack of access to foreign exchange.

An experienced industry expert with a tenure exceeding thirty years as a general manager in the manufacturing sector underscores that the bulk of the nation’s manufacturing facilities necessitate under $10 million each year to procure vital raw materials and to function at their maximum potential. He also asserts that the annual foreign currency needs of the relatively small number of large-scale industries will not exceed the sum of $30 million.

“Regardless of the industry’s scale, access to foreign currency and the facility to open letters of credit (LCs) at commercial banks have presented considerable difficulties for manufacturers,” he remarked.

Solomon, however, acknowledges the profound difficulty presented by the current shortage of foreign currency in the nation. Nevertheless, he suggests that it is premature to consider the problem as exceeding the country’s capacity to resolve it.

“We have all witnessed the availability of foreign currency for the importation of ready-made products,” he asserts. “Such capital can be reallocated towards the importation of raw materials for domestic manufacturers.”

Per the stipulated policy, the evolution of the manufacturing industry shall be pursued through an integrated approach, focusing on input and production-based industry clusters. This strategy will consider the utilization of existing natural resources and urban-rural connections and will be guided by an industrial map that aligns with the local development agenda.

The support encompasses enhancements to the existing foreign currency supply system that will be made to better meet the unique requirements of the manufacturing industry.

This will involve the introduction of alternative foreign exchange supply mechanisms, such as government-guaranteed foreign exchange systems, tailored specifically for the manufacturing sector’s needs.

The success of this policy hinges on the government’s commitment.”

Solomon Mulegeta, head of Association of Basic Metals and Engineering Industries

Solomon posits that policy reform could be pivotal in altering the prevailing attitude that favors the importation of finished products over the provision of foreign currency to local manufacturers for the procurement of essential raw materials.

He further proposes that the government should seek alternatives to the traditional methods of obtaining hard currency as a means to ameliorate the existing foreign exchange challenges.

As an exception to the standard foreign exchange procedures, a limited number of foreign investments have been granted permission to import raw materials through franco-valuta arrangements.

Besides the scarcity of forex, the survey reveals that for most companies (nearly 42%), the predominant obstacle is securing access to finance, which is also cited as the chief barrier to business expansion.

Only 23% of firms are able to secure bank loans as their principal financing method, while more than half rely on personal savings to fund their operations.

According to the recently ratified policy, manufacturers will have access to long-term project and operational loans featuring reasonable interest rates. The Development Bank of Ethiopia (DBE) is designated to provide an array of financial services, including long-term loans, equipment leasing, input loans, and export trade loans, all aimed at supporting viable initiatives within the manufacturing sector.

Senior executives at the DBE have recently revealed that the bank is collaborating with multiple financial institutions to streamline the financing process for manufacturing enterprises.

Last month, Yohannes Ayaleu, President of the DBE, announced a reduction in the bank’s lending interest rate, in accordance with the government’s agenda. As a result, applicants of small, medium, and corporate project loans will experience a substantial reduction in the lending interest rate, which will decrease from 11.5% to 7%.

The President also conveyed that this adjustment in the interest rate will apply to both lease finance and project finance loan services. The prevailing maximum lending interest rate within the banking sector stands at 20%.

At the press briefing earlier this week, Melaku revealed that manufacturing industries have received disbursements totaling $266 million in credit over the previous five-month period.

A source from the Ministry of Industry has revealed that, in an effort to overcome financial accessibility challenges, the government is contemplating a range of strategies. One proposed strategy is the creation of a specialized bank focused solely on supporting the manufacturing sector.

Following the launch of the new manufacturing policy, authorities have highlighted their dedication to improving the sector’s competitiveness by boosting the contribution of the manufacturing sector to GDP to 17.2 by 2030. “Significant strides are being taken to realize the target set by the government,” Melaku stated.

Despite official optimism, industry experts and stakeholders are less confident. An expert points out that, “Although it may seem achievable on paper, implementing the policy at the ground level will not be as straightforward as the government suggests.”

Solomon further emphasizes that the success of this policy hinges on the government’s commitment. “Its success also depends on the control and monitoring mechanisms put in place to ensure the support and incentives provided will yield positive results,” he added.

Melaku has indicated that the government has devised multiple strategies to monitor and evaluate the implementation of the policy effectively. These strategies consist of measures such as employing digital tracking systems and carrying out surveys. AS

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