News

Advancing the Home-Grown Economic Reform Agenda

The project closing workshop on "Supporting the Implementation of the Home-grown Economic Reform (HGER) Agenda” was held at the Capital Hotel in Addis Ababa on February 6, 2024.

 

Researchers from the Policy Studies Institute (PSI), Addis Ababa University, the World Bank, IGC and the Ministry of Planning and Development participated in the HGER 1.0 project. Various stakeholders also attended the closing workshop.

 

            Dr. Kiflu Gedefe , HGER 1.0 Project Coordinator 

In his opening remarks, Mr. Demeke Abate, Director of Economic Reforms at the Ministry of Finance, explained that the country has started implementing the home-grown economic reform from 2019. He mentioned that the Ministry of Finance had outsourced HGER 1.0 project to PSI, which then examined the progress of the home-grown economic reform in three pillars: the macro aspect, the structural aspect and the sectoral aspect.

 

    

Mr. Demeke Abate, Director of Economic Reforms at the Ministry of Finance

Mr. Demeke acknowledged that despite the country's achievements under the home-grown economic reform, there was still work to be done due to unforeseen circumstances. He expressed his belief that without the implementation of the home-grown economic reform project, the country would have faced serious problems. He emphasized that the reform had enabled the country to withstand various shocks.

 

                            H.E. Prof. Beyene Petros, the Director General of Policy Studies Institute

Mr Demeke also addressed the different plans of the various organizations involved in the reform. He explained that PSI's role was to develop a common planning framework for the different organizations' plans and to develop a monitoring and evaluation template to monitor the progress of all these organizations.

In his statement, Mr. Demeke mentioned that his ministry usually hires international consultants. However, in an effort to promote research capacity building in the country, the Ministry of Finance had decided to award this particular project to PSI. He expressed his conviction that PSI has demonstrated great potential for conducting high-level research in the future.

 

   Dr. Tewodros Makonnen,IGC, Ethiopia

Mr. Demeke expressed the Ministry's satisfaction with the HGER project carried out by PSI, despite some delays. He mentioned that it would have been better if PSI had started developing the monitoring and evaluation framework earlier. Nevertheless, he argued that the delayed M&E framework could still serve as a benchmark for the upcoming HGER 2.0.

He also acknowledged PSI's flexibility throughout the project, as it was able to conduct additional research activities, such as tax audits assessment by the Ministry of Finance. He also commended the PSI research team for producing the 1.5 and 3-year reports as well as the consolidation report and implementation strategy

 

                                                 Dr. Alekaw Kebede

In his remarks, Mr. Demeke thanked the French funder AFD for supporting the research project. He also acknowledged that the research team had successfully produced six independent research papers and two consolidated reports.

Next, H.E. Prof. Beyene Petros, the Director General of Policy Studies Institute, in his welcome address thanked the Ministry of Finance for awarding the HGER 1.0 research project to PSI. He pointed out that there was a misconception that government activities should not be scrutinized by a government institution, but as far as he knew, the government had never interfered in the work of the semi-autonomous PSI. He also said that PSI is now carrying out many projects for the government in various thematic areas of research.

 

              Dr. Alekaw Kebede & Dr. Tewodros Makonnen

Prof. Beyene acknowledged that the project had been delayed and attributed this to various factors such as the COVID-19 pandemic, internal crises in the country as well as research and sabbatical leaves of researchers. He also recalled a day when the State Minister of of  the Ministry of Finance expressed his frustration with the delay of the project and asked for advice to speed up the progress of the project. This brought the attention of the new PSI's management , who then restructured the staff and contracted experts from  various organizations including Addis Ababa University to work quickly and deliver the agreed results.  

sOLOMON.jpg

Mr. Solomon Tilahun, Researcher of PSI, presenting.

In his remarks, H.E. Prof. Beyene gave advice to the researchers on the six research reports. He encouraged them to disseminate the reports and make them available in various formats to the public. He emphasized the importance of disseminating the research results widely.

 

Dr. Dessalegn Anshiso, Researcher at PSI

In addition, Prof. Beyene expressed his hope that the researchers would refine the research reports based on the discussions held. He encouraged them to consider the feedback and suggestions from the discussion to improve the quality and accuracy of the reports and publish them in international journals.

Next, Dr. Kiflu Gedefe then gave an overview of the project. He explained the background of HGER 1.0, the objective, implementation, timeline, work packages, project results, conclusions and future opportunities.

In explaining HGER 1, Dr. Kiflu said that the country had experienced significant economic growth and poverty reduction since the mid-2000s. The achievements had been driven by public investment, infrastructure and the construction sector. Later, the country’s various flagship projects experienced budget constraints and project implementation problems, making it difficult to sustain the economic growth and poverty reduction achievements.

 

 

                      Dr. Kaleb Kebede, Researcher at PSI

Dr. Kiflu said the country faced a serious macroeconomic imbalance caused by debt, foreign exchange shortages, exchange rate fluctuations, export difficulties and inflation. After recognizing this macroeconomic imbalance, the government designed a new three-year project for 2019, which was the Home-grown Economic Reform Agenda (HGER) to correct the macroeconomic imbalance.

The Homegrown Economic Reform Agenda (HGER) consists of three pillars. These are macro-financial reforms, structural reforms and sectoral reforms with the aim of achieving macroeconomic stabilization and returning to a path of high growth. These reform measures should be comprehensive and well-coordinated in order to create a positive feedback loop.

Dr. Kiflu explained that macro-financial reform focuses on controlling inflation, reducing debt, expanding financing options, improving debt sustainability and creating a healthy financial sector and a competitive external sector. He said that the National Bank of Ethiopia (NBE) and the Ministry of Finance (MoF) are the main agencies responsible for implementing these reforms.

Furthermore, Dr. Kiflu mentioned that the structural reform was aimed at removing barriers to business and improving institutional capacity. It focused primarily on the ease of doing business. The Ethiopian Investment Commission (EIC), the Ministry of Water and Energy (MoWE) and the Logistics Transformation Office (LTO) of the Maritime and Transport Bureau were primarily responsible for implementing these reforms.

The sectoral reforms aimed to address specific sectoral problems and market failures. The Ministry of Agriculture (MoA), the Ministry of Industry (MoI), the Ministry of Tourism (MoT) and the Ministry of Innovation and Technology (MiNT) were the main ministries involved in the implementation of these reforms.

All the reforms mentioned have their own main objectives. The overall objective of these three reforms, as outlined in the HGER project, was to achieve sustainable and inclusive growth through the creation of decent jobs and poverty reduction. It was also to shift the sources of growth from public investment to private investment and from demand-led to supply-led growth.

Dr. Kiflu said PSI started the HGER 1.0 project after the homegrown economy had reachedthe halfway mark, i.e. a year and a half. He said PSI's role in this project was twofold: supporting the HGER implementation agenda and producing research reports for policy recommendations.

Dr. Kiflu explained that PSI's support for the Domestic Economic Reform Agenda (HGER) implementation aims to facilitate a comprehensive and coordinated approach to achieving the government's  three-year targets. He explained the specific objectives of PSI's support as follows:

First, he said, PSI wanted to produce performance review reports that would focus on evaluating implementation efforts. These reports would help identify challenges and opportunities for improvement related to the HGER agenda.

Second, The PSI would consolidate the HGER plans into one and establish a monitoring and evaluation (M&E) framework and a strategic plan for the implementation of macroeconomic, sectoral and structural targets. This consolidation would ensure a clear and measurable approach to the implementation of reforms. Dr. Kiflu said that this work had been outsourced to a M&E expert, although it would have been better if the M&E had been done earlier.

In addition, PSI aims to contribute to evidence-based and problem-oriented policy design and implementation through policy analysis and research. This includes conducting rigorous, needs-based policy research on selected priority areas of the HGER agenda.

To achieve these goals, Dr. Kiflu said PSI had identified four relevant work packages (WPs). As part of its support in implementing the Homegrown Economic Reform (HGER) Agenda, PSI has identified four work packages. The first work package, WP1, includes the preparation of progress reports to assess the performance of the institutions responsible for implementing the HGER agenda. This will enable a comprehensive assessment of their efforts and help identify areas for improvement.

In WP2, PSI reviewed the HGER plan documents, make suggestions for improvements and develop a consolidated plan containing a clear and measurable implementation strategy for the macroeconomic, sectoral and structural reforms. WP3  focused on establishing a monitoring and evaluation (M&E) framework to effectively track the progress and impact of the HGER agenda. Finally, WP4  involved the production of detailed, needs-based research papers on specific priority areas of the HGER agenda. Dr. Kiflu emphasized that with these work packages, PSI aims to support the implementation of the HGER agenda to ensure a robust and evidence-based approach to policy making and the achievement of government objectives.

Dr. Kiflu mentioned  that the project was carried out according to the original plan, with only minor adjustments to the results and budget. However, he admitted that the biggest challenge during the project implementation was failure to meet the set timelines for various milestones. He gave two reasons for this: First, researchers faced the difficulty of conducting extensive consultations with multiple government institutions. These consultations, while necessary, proved difficult due to the busy schedules of the government officials involved. Second, there was a temporary halt in the project implementation as the client, the Ministry of Finance (MoF), which requested policy recommendations based on the report, and the consultant, the PSI, were unwilling to provide policy recommendations, claiming that policy recommendations are made not through reports but through research. This argument should be used to reconcile their expectations.

After this alignment, the project implementation continued with a revised initial plan that clearly outlined the objectives of each deliverable. The revised inception report included the remaining tasks agreed upon by both the client and the consultant. 

Despite these challenges, Dr. Kiflu said that the project went as planned and only minor changes were made. The temporary pause and subsequent revision of the project plan ensured a shared understanding between client and consultant, allowing the project to progress effectively.

Dr. Kiflu stated that PSI produced a series of reports as part of the project results. First, a semi-annual report was prepared, which served as an inventory to assess the progress made in implementing the reform plan at that time. This was followed, after one and a half years, by a detailed performance review report containing a comprehensive analysis of the implementation of the reform.

Following the completion of the one-and-a-half-year report, a validation workshop was conducted with the participation of representatives of all institutions responsible for implementing the Home-Grown Economic Reform (HGER) agenda. During the workshop, stakeholders provided feedback and comments, which were then considered by the research team. The revised and final report has been submitted to the Ministry of Finance (MoF) and relevant institutions.

According to the revised initial plan, it was agreed to prepare a performance review report on the overall implementation of the HGER for the entire reform period. The aim of this report was to identify gaps in the implementation of the reform, highlight progress towards the objectives and address any delays and challenges. The detailed report focused on the period from July 7, 2019 to July 7, 2022 and provided an assessment of the performance of all institutions involved in the HGER. The aim of the report was to determine whether the objectives were achieved and to identify any discrepancies between the planned and achieved results. The report also identified challenges, opportunities and policy recommendations related to the implementation of the reform.

Dr. Kiflu mentioned that the report was shared and discussed with relevant stakeholders. He expressed confidence that the report was used as input for the preparation of HGER-2.0, indicating its importance for future policy decisions and reform initiatives.

Dr. Kiflu explained that an important task of the project is to conduct a comprehensive review of plan documents and develop a consolidated domestic economic reform plan (HGER) along with a monitoring and evaluation (M&E) framework and corresponding implementation plans.

In this context, the consulting firm PSI managed to consolidate the reform plans drawn up by the various institutions responsible for implementing the macro-financial, structural and sectoral reforms. The consolidated plan document summarized the implementation plans and strategies for the HGER agenda as outlined by each implementing institution. These institutions included the Ministry of Finance (MoF), the National Bank of Ethiopia (NBE), the Ethiopian Investment Commission (EIC), the Logistics Transformation Office (LTO), the Ministry of Water and Energy (MoWE) and the Ministry of Agriculture (MoA), the Ministry of Industry (MoI), the Ministry of Mines (MoM), the Ministry of Tourism (MoT) and the Ministry of Innovation and Technology (MInT).

This consolidation process has created a unified and coordinated approach to implementing the HGER agenda, ensuring coordination and harmonization between the different institutions involved. In addition, the development of the M&E framework created a systematic framework for tracking and assessing the progress and impact of the reforms.

Dr. Kiflu emphasized the importance of these efforts in providing a comprehensive and coordinated roadmap for the successful implementation of the HGER agenda, with clear strategies and plans outlined by each implementing institution.

Dr. Kiflu also emphasized the importance of rigorous policy analysis for the successful implementation of the home-grown economic reform (HGER) agenda. To address this need, the project focused on producing research papers that analyzed the key priority areas within the macroeconomic, sectoral and structural pillars of the HGER agenda. A total of eight research papers were produced as part of this project to identify policy gaps and offer reform options.

These research papers were intended to provide valuable insights into the challenges and offer policy recommendations to address these challenges. Dr. Kiflu expressed the hope that these papers would serve as valuable input for policymaking in the country and contribute to informed decision-making processes.

During the project, the PSI team, in consultation with the Ministry of Finance, submitted a list of proposed topics to the relevant institutions. In discussions with these institutions, some topics were selected as proposed, while others were modified or new topics were introduced. The research team adjusted these changes accordingly. In general, Dr. Kiflu mentioned that the project was an overall success despite a delay. It also increases the capacity of PSI as many researchers are involved in the project.

Next, Dr. Kiflu  presented the HGER Macroeconomic Performance Review Report, which focused on the objectives and major achievements of the macroeconomic reform area. The main objectives of this reform initiative focused on improving the performance of the National Bank. The key objectives included improving price stability, reducing financial risks, balancing the exchange rate and reducing the vulnerability of the Commercial Bank of Ethiopia and the Development Bank of Ethiopia. In addition, the creation of a capital market was a crucial objective.

The achievements resulting from these efforts were notable. Real depreciation of the currency was successfully achieved, contributing to an increase in export performance by more than 10 percent. The shift towards treasury bills was another noteworthy outcome. The establishment of LAMC was also a significant achievement. The year 2021 marked the establishment of the Liability and Asset Management Corporation (LAMC) with a subscribed capital of 570 billion birr. The core purpose of LAMC is to undertake the debt obligations incurred by state-owned enterprises (SOEs).Furthermore, the profitability of the Development Bank of Ethiopia experienced positive growth.

To further enhance the financial landscape, a capital market proclamation was launched, facilitating the creation of a capital market. Additionally, a national digital finance strategy was designed, promoting the adoption of digital financial services. The introduction of mobile money directives played a pivotal role in expanding financial inclusion, leading to a substantial increase in the number of opened accounts and branches across the country.

The reform faced several challenges, including the impact of COVID-19, internal conflicts and the Ukraine-Russia crisis. These factors significantly impacted the success of the reform efforts and further drove up the inflation rate in the country.

The public sector reforms were intended to achieve various goals, such as implementing prudent fiscal policies, reducing the budget deficit, improving debt vulnerability, mobilizing domestic resources and working on privatization initiatives. Several successes were achieved during this reform phase. The budget deficit declined during the initial phase, indicating progress in fiscal management. In addition, direct advances were reduced, indicating a more disciplined approach to public financial management.

Efforts were also made to optimize the treasury bill market, which led to positive results in the initial phase. Tax policies were updated, including an improvement in excise tax and customs tariff regulations. Measures were taken to improve tax exemptions and strengthen tax audits. The introduction of electronic procurement systems should increase transparency and efficiency in public procurement. A medium-term debt strategy was also developed to ensure sustainable debt management.

In line with the reform agenda, the government pursued privatization initiatives in the telecommunications sector and sugar mills to encourage private sector participation and investment. The country also sought to attract multimodal operators and promote growth in the energy sector. In addition, the establishment of the Ethiopian Investment Holding aimed to consolidate and rationalize investments in various sectors.

However, the challenges posed by the COVID-19 pandemic, internal conflicts and the Ukraine-Russia crisis had a significant impact on the success of these reforms. These factors not only posed obstacles to the reform process, but also contributed to inflationary pressures in the country.

                                 “Treasury Bills Yield as Benchmark Interest Rate in Ethiopia”

Next, Dr. Tewodros Makonnen  gave insights into the use of treasury bills as benchmarks for interest-based monetary policy in Ethiopia.

For a lay person, treasury bills are a type of loan that one gives to the government for a short period of time, usually less than a year. The government uses this money to cover its expenses, such as building roads or schools. When you buy a Treasury bill, you pay less than the face value, i.e. the amount the government promises to pay you back when the bill matures.

For example, you can buy a treasury bill for ETB 950, which has a face value of ETB 1,000 and matures in six months. This means that the government will pay you ETB 1,000 after six months and you will receive ETB 50 as interest. The difference between the face value and the price you pay is called the discount rate and depends on how much demand there is for treasury bills on the market.

Treasury bills are considered very safe investments as it is unlikely that the government will default on its debt. However, they also offer low returns as interest rates are generally lower than other forms of investment such as shares or bonds. In addition, treasury bills are subject to federal income tax, but not state or local.

Dr. Tewodros presented a study examining the suitability of the reformed Treasury bill market as a benchmark for interest-based monetary policy. The study focused on the development of the T-bill market in Ethiopia and analyzed changes in volume, yield and market participants. In addition, an empirical investigation of the relationship between real yield, real deposit rates and interest rates was conducted using an analytical framework.

First, Dr. Tewodros praised the transition to an interest rate-based monetary policy framework. However, despite this transition, interest rates did not respond sufficiently due to the ongoing repressive measures. A certain stickiness was observed in interest rate changes, indicating that volume adjustments rather than price adjustments were used to clean up the financial market. This hindered market development and required political intervention to allow interest rates to actually clear the market.

Second, the reform of the Treasury bill market led to higher yields in the post-reform period, which averaged 9.4% in 2022. This yield was two percentage points above the minimum deposit rate and attracted commercial banks to participate in the market. The interest rate adjusted sufficiently to close the gap between supply and demand. As the government needed more funds in 2022, the increasing supply of treasury bills led to an increase in the yield as demand was insufficient. This indicates a positive trend of price adjustments to close demandand supply gaps.

Third, the study examined whether Treasury bill yields could be considered benchmark interest rates based on certain characteristics. These characteristics included the use of interest rates as a basis for financial transactions, their role in the transmission of monetary policy, their reflection of borrowing costs, and their accurate representation of money market interest rates. While the Treasury bill market made progress in reflecting borrowing costs and representing money market interest rates, it did not serve as a basis for financial transactions or as an indicator of the monetary policy stance. In addition, the empirical assessment revealed that Treasury bill yields do not yet fully reflect the cost of borrowing in the market, as interest rates are only marginally responsive.

Fourth, treasury bills have played an important role in financing the budget deficit in recent years and have helped to avoid inflationary monetary financing. However, it has been emphasized that there is a threshold beyond which the volume of Treasury bills in demand may decline, limiting their role in deficit financing. In addition, increased participation in T-bills may lead to liquidity shortages in the banking system, potentially requiring liquidity injections from the National Bank of Ethiopia (NBE) and leading to an inflationary increase in cash reserves. It was also noted that over-reliance on treasury bills could crowd out the private sector and disrupt the supply of goods and services. Therefore, proper planning of the government's budgetary requirements and the proportion to be financed by treasury bills was considered essential.

Among the main policy conclusions of the study is that it is important to support the responsiveness of interest rates in order to promote the use of interest rates in monetary policy. It was emphasized that the interest rate charged by the Commercial Bank of Ethiopia (CBE) plays an important role in setting market interest rates since the CBE has a significant share of deposits. Controlling inflation to ensure positive real interest rates was also crucial. It was recommended to promote the popularity of treasury bills as a benchmark interest rate by encouraging the participation of individuals and businesses. Adequate planning for covering the fiscal deficit through T-bills and coordination between the Ministry of Finance and the NBE in financing the fiscal deficit were deemed necessary. In addition, coordination between various instruments, including mandatory government bonds and DBE bonds, together with open market operations (OMOs) is essential to ensure that liquidity is in line with the government's financing plans. Dr. Tewodros concluded that developing the ability to coordinate these various interventions and plans is essential for effective monetary policy and government financing.

                                        “Ethiopia’s tax-to-GDP Ratio: Why is it low and what can be done?”

Dr. Alekaw Kebede then discussed Ethiopia's tax-to-GDP ratio, exploring the reasons behind its low figures and proposing potential solutions.  In a recent presentation titled "Ethiopia’s Tax-to-GDP Ratio: Why is it low and what can be done?", Dr. Alekaw Kebede highlighted the concerning trend of Ethiopia's declining tax-to-GDP ratio and discussed the factors contributing to this situation. The study aimed to investigate why Ethiopia's tax-to-GDP ratio is relatively low compared to its peers and suggest potential measures to address the issue.

Dr. Alekaw emphasized the global significance of tax revenue mobilization as a reliable source of finance for governments. Recognizing this, the Ethiopian government has prioritized the enhancement of domestic resource mobilization through tax policy and administration reforms. However, despite these efforts, Ethiopia's tax-to-GDP ratio continues to decline, necessitating a closer examination of the reasons behind this trend.

The study's findings revealed that Ethiopia's tax-to-GDP ratio has been decreasing after reaching a peak of 12.73 percent in 2014/15. Prior to 2015, Ethiopia's tax-to-GDP ratio performed better than that of countries such as Malawi, Côte d'Ivoire, Uganda, and Tanzania. Ethiopia's tax share was comparable to countries like Cameroon and Burkina Faso. However, since 2015, while the tax-to-GDP ratios of other countries have either improved or remained stable with minor changes, Ethiopia's ratio has continuously declined, reaching 9.23 percent in 2020. Furthermore, the study found that Ethiopia's tax structure differs from that of its peer countries.

Several factors contribute to Ethiopia's low and declining tax-to-GDP ratio. One significant reason is the structure of the economy and changes in the drivers of growth. The low productivity and subsistence nature of Ethiopia's agriculture make it challenging to impose taxes, with agricultural tax representing only a negligible portion of GDP. Additionally, changes in the drivers of economic growth over the past six years have resulted in tax revenue not growing as fast as the overall economy, as these drivers are non-taxable. The study also identified inflationary pressure and a failure to adjust tax revenue plans to inflation as potential contributors to the low and declining tax-to-GDP ratio.

The study highlighted the low performance of tax authorities and poor tax policy design as another factor. Tax administration at the federal level has been ineffective, and taxpayers are not fully compliant with tax laws. The study referenced empirical evidence from the Ministry of Revenues, which showed that a few large taxpayers contribute significantly to tax collection at the federal level, while smaller taxpayers contribute a disproportionately small amount. This imbalance in tax burden distribution indicates that the majority of the tax revenue is borne by large taxpayers, leading to an unequal sharing of the tax burden among individuals and businesses.

Tax expenditures, resulting from tax incentives, have also negatively affected the budget and tax policies. Abuse of the incentive system by beneficiaries has led to a substantial loss of tax revenue. Weak coordination between federal and regional tax authorities, low tax compliance, ineffective tax law enforcement, and reduced government incentives to focus on domestic tax revenue maximization due to access to public debt, remittances, domestic debt, and foreign direct investment (FDI) have all contributed to the low tax-to-GDP ratio. Additionally, constraints in tax administration, such as a lack of technology and digitalization, and the prevalence of the informal economy, have had a negative impact on the ratio.

In conclusion, Dr. Alekaw stressed that Ethiopia's tax-to-GDP ratio is lower than that of peer African economies and continues to decline. To address this issue, he proposed several measures. These include adjusting tax revenue plans and performances for inflation, limiting tax expenditures and monitoring their effectiveness, improving value-added tax (VAT) efficiency through enhanced tax compliance and updated tax policies, reviewing excise taxes and considering implementing them on telecommunication services, improving measures for taxing the wealthy, harmonizing tax authorities and law enforcement bodies, and establishing strong political leadership and commitment. Implementing these measures would help enhance tax revenue mobilization performance and ultimately increase the tax-to-GDP ratio in Ethiopia.

Following the presentations, the participants posed several questions to Dr. Tewodros and Dr. Alekaw. The questions covered a range of topics such as tax expenditures, the duration of data collection, the official and parallel exchange rates, treasury bills, the fiscal impact on agriculture, shock forecasting, price stability and more. The two researchers then answered all the questions.

Next, Dr. Kiflu presented the HGER Performance Evaluation Review Report, which focused on the objectives and key achievements of the structural reform area. The proposed research topics related to structural reforms were presented by the PSI team. They were first presented to officials from the Ministry of Finance (MoF), followed by relevant officials from the Ethiopian Investment Commission (EIC) and the Logistics Transformation Office (LTO) of the Ethiopian Maritime Affairs Authority.

                      “Improving Ethiopia’s Resilience to Trade Shocks: Lessons from AGOA Suspension”

Dr. Kiflu provided insights into improving Ethiopia's resilience to trade shocks and drew lessons from the suspension of the African Growth and Opportunity Act (AGOA). In a recent presentation titled “Ethiopia’s Resilience to Trade Shocks: Lessons from the Suspension of the African Growth and Opportunity Act (AGOA),” Dr. Kiflu examined the sources and impacts of trade shocks in Ethiopia, focusing on the impact of the AGOA suspension. The aim of the study was to assess the impact of AGOA suspension on Ethiopia's clothing and apparel industry.

The study used survey data from 169 companies in Ethiopia and found that 28% of these companies experienced a decline in exports to the US market following the AGOA suspension. In addition, the share of exports to the US market fell by 14 percentage points in 2022. The study also found that 24% of companies shifted their exports to the domestic market, while 14% explored alternative foreign markets. In addition, the suspension led to job losses as 16% of companies laid off workers, particularly affecting female workers. When analyzing the data based on AGOA usage status, it was clear that companies dependent on AGOA were more affected as 63% of them reported a decline in exports and 39% had to lay off workers. In contrast, companies that did not use AGOA experienced a smaller impact: only 13% reported lower exports. These results suggest that AGOA-dependent firms faced greater challenges in adapting to the suspension. The study also identified similar patterns in terms of investment cuts and supply chain disruptions.

In order to mitigate the negative consequences of the AGOA suspension for affected companies, the study recommended the implementation of various policy measures. In the short term, it would make sense to support companies through measures such as tax exemptions, business loans and rent or utility subsidies. In the long term, the study suggested that Ethiopia should strengthen its regional integration through the African Continental Free Trade Area (AfCFTA) and diversify its export composition and trading partners to reduce dependence on unilateral trade agreements. In addition, the study highlighted the need for gender-sensitive policies, robust social safety net programs, a crisis management framework and a strong trade information system to minimize the potential impact of future trade shocks. Finally, the study recommended that the government explore diplomatic means to restore Ethiopia's claim to AGOA.

                                      “Trade Finance in Ethiopia: Exploring the Challenges and Possible Solutions”

Next, Mr. Solomon Tilahun discussed the challenges and potential solutions related to trade finance in Ethiopia. In his presentation on trade finance in Ethiopia, Mr. Solomon discussed the objectives, methodology and key findings of a study conducted to assess the trade finance situation in the country. The aim of the study was to identify existing challenges and propose solutions to improve the trade finance ecosystem. The research was based on a desk review and analysis of survey data from 285 import and export companies, 17 commercial banks and the Development Bank of Ethiopia.

The survey covered various aspects related to trade finance, including the extent of use of trade finance, trade finance instruments used, barriers to import and export, barriers to the growth of banks' trade finance portfolios, financing methods used by companies and contributing factors to rejection trade finance, as well as issues related to logistics costs and lead times for imports.

Mr. Solomon presented the main findings of the study on trade finance in Ethiopia. First, access to trade finance and its cost were identified as key challenges for companies engaged in international trade, with delays, high costs and stringent collateral requirements being the main barriers. Secondly, the rejection rate for trade finance applications was found to be high, with insufficient collateral, low creditworthiness and lack of foreign exchange being the main reasons for rejection of applications. Small and medium-sized enterprises (SMEs) were particularly affected. Third, the trade finance market in Ethiopia seems to favor large companies, discouraging smaller companies. Surprisingly, rejection rates were similar for large and micro enterprises. Fourth, businesses relied on alternative sources such as equity, informal borrowing and microfinance institutions for trade finance, indicating limited awareness of new solutions. Finally, default rates on trade finance transactions in Ethiopia were lower than the African average due to limited grace periods, high collateral requirements and limited availability of foreign exchange. Mr. Solomon then made a number of policy recommendations including capacity building, risk mitigation tools, credit infrastructure reforms, promotion of alternative trade finance instruments, adoption of technology solutions, streamlining of internal processes, regulatory reforms and support for SMEs to address the identified challenges and improve trade finance in Ethiopia.

Mr. Solomon emphasized that improvements in the trade finance ecosystem, collaboration between key players and the introduction of innovative solutions are crucial to close the financing gaps of importers and exporters in Ethiopia. The involvement of logistics solution providers, technology providers, financing institutions and government agencies is crucial to make the trade finance process more efficient, accessible and cost-effective. He emphasized the importance of digital solutions, partnerships and regulatory reforms to drive this change and increase the supply and demand for trade finance in Ethiopia.

Dr. Kiflu presented the HGER performance evaluation report highlighting the objectives and key achievements of the sector reform area. According to the speaker, in selecting the policy research topics for the sectoral area, consultations were conducted with key stakeholders to ensure their buy-in and to align the identified topics with their needs for informed decision making. The PSI team prepared motivational statements and research questions for the proposed topics in the agriculture and manufacturing sectors and held discussions with the relevant agencies.

For the agriculture sector, the team held extensive discussions with Ministry of Agriculture (MoA) officials on the proposed topics. The MoA officials specifically selected the research topic on the contribution of cluster farming (CF) to agricultural transformation and smallholder farmer livelihoods in Ethiopia. Their insightful comments helped the team to reformulate the research questions. Since the Agricultural Transformation Agency (ATI) is heavily involved in the implementation of CF, the team also presented the CF research topic to the CEO of ATI. The CEO supported the research topic and emphasized its timeliness and relevance for both the Ministry and ATI to promote the coordinated implementation of CF and ensure its sustainability.

A similar approach was taken to identify the most relevant research topic for the Ministry of Industry (MoI). After the team presented their ideas, the MoI team had internal discussions and pointed out that they had another pressing research topic that was different from the topics proposed by the research team. The MoI officials explained that their current priority was to conduct a strategic study on import substitution and expressed a desire for the PSI team to contribute to this study by addressing some of the research objectives they had identified.

Contributions of Cluster Farming to Agricultural Transformation and Livelihood of Smallholder Farmers in Ethiopia: Situation and Way Forward”

Dr. Desalegn Anshiso discussed the contribution of cluster agriculture in transforming agriculture and livelihoods of smallholder farmers in Ethiopia and gave an overview of the current situation and suggested a way forward.

Dr. Desalegne spoke about the agriculture sector in Ethiopia and highlighted its importance in poverty alleviation, foreign exchange earnings, improved input supply and job creation. However, the sector faces challenges such as low productivity, limited access to modern inputs and technologies, inaccessible markets, ineffective extension systems and vulnerability to climate shocks. To address these issues, the Agricultural Commercialization Cluster (ACC) program was introduced to transform subsistence farming into a market-oriented cluster farming system.

Dr. Desalegne focused on assessing the contribution of cluster agriculture to agricultural transformation and livelihood security of smallholder farmers in Ethiopia. A mixed approach was used, combining quantitative and qualitative data collection and analysis. The quantitative analysis used secondary data from ACC performance assessment reports to examine trends over time in key performance indicators.

The results showed a general trend of increasing yields for the priority commodities during the ACC implementation period, except for sesame. The highest yield increases occurred in the first two years of the program. This yield increase resulted in a larger marketable surplus for most commodities. Farmers' access to agricultural inputs varied during the ACC implementation period, with the largest increase observed in the use of the farmer hotline for production and market-related information. However, access to agrochemicals decreased. The proportion of farmers accessing mechanization services more than tripled, while the use of improved on-farm storage technologies declined. Access to financial institutions, savings accounts and working capital loans decreased significantly. The use of irrigation methods declined, while employment opportunities for women and youth increased.

The qualitative analysis provided a deeper understanding of the quantitative results by highlighting the strengths, weaknesses, opportunities, threats, challenges, level of coordinated implementation and future development considerations of cluster agriculture in Ethiopia. Based on the mixed research findings, Dr. Desalegne presented key policy recommendations to promote large-scale adoption and sustainability of cluster agriculture.

These recommendations included identifying priority commodities based on their suitability, real-time market demand and consultation with farmers. Farmers should understand and adopt specialized and market-oriented farming, which may mean selling most of their produce and buying other commodities. The study also emphasizes the need to support the shift from rainfed to irrigated agriculture and promote the adoption of climate-smart agriculture and integrated land management practices.

Dr. Desalegne emphasized the importance of acting and responding quickly to ensure efficiency and avoid disruptions in priority commodity clusters and value chains. This includes providing improved agricultural inputs and mechanization technologies in the required quantity, quality, time and place. Improving storage facilities at household, kebele and woreda levels is crucial to minimize post-harvest losses. Access to rural road infrastructure plays a crucial role in reducing distribution costs and increasing the competitiveness of key raw materials.

The existing hotline for farmers can serve as a platform for coordinating value chain actors and enable a reliable flow of information. Quick responses to the challenges faced by cluster farming participants are essential to sustain their enthusiasm and ensure the success of future development and poverty reduction initiatives in rural areas.

Dr. Desalegne emphasized that the efforts of ACC implementing partners at all levels must be highly coordinated. High-level coordination between top managers minimizes negotiation time and resources. But middle levels and grassroots employees should also be involved in the planning, implementation and monitoring of cluster agriculture in Ethiopia. Extension staff who communicate directly with farmers should be provided with up-to-date information so that they can participate in meaningful discussions and be seen as reliable sources of information for farmers' production decisions.

                         “Import Substitution Industrialization as a Springboard for Harnessing Competitiveness in Ethiopia”

Next, Dr. Kaleab Kebede presented  on import substitution and its role in industrialization as a springboard for harnessing competitiveness in Ethiopia. In his presentation, Dr. Kaleb highlighted the Ethiopian government's focus on industrialization as a means to boost production, create jobs, reduce poverty and achieve the goal of transitioning the economy to middle-income country status by 2025. He highlighted Import Substitution Industrialization (ISI) as one of the strategic directions chosen by the government. However, he acknowledged that it is difficult to identify strategic imported goods that can be replaced by domestic production and to assess the progress of various manufacturing industries in import substitution.

In order to close these knowledge gaps, Dr. Kaleb uses a mixed methods approach in his study that combines quantitative and qualitative data collection and analysis. The quantitative analysis relied on secondary data from reports from the Ethiopian Revenue and Customs Authority (ERCA) and the Ethiopian Statistics Authority (ESS) to examine the evolution of the volume and value of substitutable imports in the different manufacturing industries. The qualitative data were obtained through key informant interviews with experts from the Institute of Policy Studies (IPS) and manufacturers. Additionally, the study examined the experiences of other countries that have implemented import substitution strategies to draw lessons and provide context for Ethiopia's efforts.

The results of the study show that the current industrial ecosystem in Ethiopia is dominated by the food and beverage industry in terms of number of establishments, operating surplus, value added and contribution to employment. However, these industries are highly dependent on imports of key inputs, with about 46% of the inputs used by medium and large industries being imported. While the value of imports of manufactured goods such as mineral fuels, machinery and equipment has declined, imports of consumer goods such as grains and edible oil have increased. This has led to a shortage of raw materials for many industries, exacerbated by the country's limited foreign exchange earnings. Other challenges facing the industrial sector include weak administrative coordination, inefficient service delivery, lack of skilled labor and the repeal of the African Growth and Opportunity Act (AGOA) trade agreement.

Dr. Kaleb highlighted the experiences of other countries as valuable lessons for Ethiopia. He pointed out that targeted industrial development strategies, human capital development and effective institutional coordination are key factors for successful industrialization. For example, countries such as the "Tiger States" (e.g. South Korea, Taiwan, and Singapore) have invested significant financial resources into improving their education systems, resulting in higher levels of human capital development. These countries achieved their capital productivity through the adoption of foreign knowledge and technology.

Furthermore, Dr. Kaleb emphasized that while import substitution can be an effective approach for developing countries to initiate industrialization, the ultimate goal should be to build global competitiveness. He pointed to the experiences of China and Taiwan, where the government, banking sector and public enterprises played a crucial role in supporting both import substitution and export-oriented industrialization (EOI). These countries used EOI to provide foreign exchange, modern technology and equipment to support ISI. In contrast, Vietnam's import substitution policy lacked a well-coordinated industrial policy framework, resulting in limited spillover effects from foreign direct investment (FDI) and technology transfer.

Based on the findings of the study, Dr. Kaleb made several policy recommendations. These include strengthening the local industrial input supply system, prioritizing human resource development as a critical goal of industrial development, and improving the administrative support system to enhance competitiveness. In addition, he suggested using the export sector as a catalyst for import-substituting industrialization by using foreign earnings and modern technologies to support sustainable industrial development.

The workshop ended with a concluding panel discussion where participants were able to share their thoughts and insights. In his statement, Dr. Kiflu expressed that despite some delays, the project can be considered a success overall. He emphasized that important documents and policy research papers had been produced. These results were shared with all relevant stakeholders and several workshops, including a project closure workshop, were organized to disseminate the results of the studies conducted under the project. Dr. Kiflu believes that these studies and research will be useful in the design of future reform measures and policy formulation by various government agencies. The project also played an important role in enhancing PSI's internal capacity in policy analysis and reporting.

Dr. Kiflu also mentioned that the implementation of the project budget was very satisfactory and only a small portion of the budget remained unspent. All expenditures were supported by evidence and accompanied by clean and transparent financial reports. He thanked the AFD and the Ministry of Finance and their officials for allowing PSI to participate in the project.

In terms of possible follow-up work, Dr. Kiflu suggested that the performance evaluation reports, the consolidated plan, the monitoring and evaluation (M&E) framework and the implementation plan could serve as important inputs for the preparation and further monitoring of the implementation of the HGER 2.0. In addition, the research conducted as part of the project could be used for policy development by the relevant institutions. The research team intends to refine the research papers and publish them in various media such as working papers, journal articles and policy briefs to make them accessible to a wider audience.

Total Site Visitor to date

Users
5
Articles
202
Articles View Hits
22160

Contact Us

Follow Us On