Ethiopia, formerly known as Abyssinia, has a rich and vibrant heritage spanning over two and a half millennia. From the first known Kingdom of D’mt in 700 BC through to the Democratic Federal Republic that exists now. A proud nation, never to have been colonised by any European aggressors, Ethiopia has a history of internal power, strength and ambition. A pioneer of East African education, teaching children both domestically and sending them to Europe for further studies. All this at a time when much of Africa was still having its country border lines being drawn!
The past century has seen dramatic change to the political landscape of Ethiopia. Imperialism ended in 1974 after the Russo – Cuban alliance supported a Coup d’etat that installed a military government known as the Derg. Emperor Haile Selasse died the following year in 1975 and the period of Socialist / Marxist military rule and civil war ensued. Huge swathes of nationalisation began, bringing almost all industry and business under government control. The Government of the Mengitsu military junta finally ended in May of 1991. A transitional government then ushered in the democratic federal republic, with multiparty politics and efforts to liberalise the economy. Companies have been privatised, foreign investment courted and Ethiopia for the past decade has enjoyed an enviable 8-10% annual growth rate. It is estimated that close to $1bn flows annually in to Ethiopia making it Africa’s 3rd largest recipient of Foreign Direct Investment. However positive the figures may seem, they mask many of the key issues Ethiopia faces – presently that is one of a chronic, and I mean catastrophically chronic shortage of foreign exchange reserves – namely USD.
And you thought you had money problems!
With a GDP of roughly $80bn a year, Ethiopia is comparative to that of its southern neighbour; Kenya. Both count agriculture as their main GDP earners. Both experience an almost identical level of trade deficit. However, there is a big difference. Ethiopia’s 110m citizens produce a GDP of $80bn (70% of which comes from agriculture) their trade deficit (difference between import and export) sits at around $12bn. The current account balance is give or take, $6bn negative, Forex reserves sit at only $3.5bn. Sounds a lot right – but that won’t even cover 3 months of imports! Compare this to Kenya. It’s 50m strong population produce roughly the same $80bn GDP – more than double that of Ethiopia (in GDP per capita). Furthermore it also runs a trade deficit of around $11bn BUT it has capital reserves of around $13bn on total imports of around $18bn – that’s nearly 9 months! Even North Korea and Trinidad and Tobago have more reserves than Ethiopia.
So where did it all go wrong?
The financial woes are blamed (by Ethiopian economists) on 3 primary situations.
#1 The global slowdown over the past decade. This has reduced the export requirements for Ethiopian goods and services in to consuming nations such as USA, Europe and China. OK I get this, but , but considering nearly 30% of all exports is coffee, and we know how price inelastic and recession proof coffee can be, I just don’t buy it.
#2 Government infrastructure projects. And boy oh boy are there some of these. Roads, railways, schools, airports, hospitals and power generating damns! The GRAND RENAISSANCE DAMN (the project is so huge it requires capital letters) which began in 2011 on the Blue Nile, will generate 6GW of power. The project is already 2 years overdue and is estimated to cost close to $5bn. Honestly speaking, the final figure may be much higher – though no one may ever find out by how much. It will however more than double the country’ s electricity output. Not a bad thing considering the daily power cuts that currently plague the country. Bad news for the electricity generator importers! Still, it’s one less thing to import and wait for USD for.
#3 Ethiopian business are accused of hoarding wealth overseas in off shore shell companies based in Dubai, and Switzerland. (Other tax efficient countries are available, consult your local Tax adviser for more details). This supposed (but believable) flight of cash out of the country, coupled with a reduction in the Ethiopian diaspora repatriating cash home has also lead to calls from the Government to “cease and desist”. In April 2018 shortly after Prime Minister Abiy Ahmed came to power, he announced: “The crisis with hard currency will not be solved today, nor in the next 15 or 20 years. There is an urgent need for more cooperation with the private sector to find a solution”. This was a lightly veiled shot across the bow. For anyone too naive to understand, he later followed it up with firm accusations aimed at the business community to “ repatriate their wealth….or else”. The government has tried and failed to rein in this reserve issue. They tried (not for the first time) by devaluing the Birr by 15% last year. This did little to help – the high inflation rate quickly compensated for any short-term reprise. January 2019 inflation stood around 10%. Today it is closer to 20% – double in less than 12 months.
So how does coffee fit in to all this?
As a largely agricultural economy, Ethiopia’s fortunes rely on its hard working people farming for the future. The history of coffee in Ethiopia is as old as coffee itself. One of the few countries where coffee is indigenous, and the “ birth place of coffee” (at least where modern coffee cultivation and varietals are concerned) Coffee has risen to become the number 1 export from Ethiopia in terms of value and USD earnings. In 2018 – it represented 27% of all exports by value. This accolade puts the commodity in an enviable position for anyone with a desire for USD. In short – that is literally anyone who imports anything from anywhere. The shortage of USD in the country has spawned an exponential growth in coffee exporters in recent years. For a country exporting roughly 3-4 million bags annually, the number of registered exporters is over 500! More than Brazil for 1/10th of the volume! It has spawned other effects too. From corruption, to deliberately exporting coffee at a loss, coffee quality issues, black market green bean and suspect Forex trading practices.
“All animals are born equal, but some animals are more equal than others”
Why is USD so important?
As the global currency of trade, the majority of importation transactions in Ethiopia are conducted in USD. From imports of baby formula to steel, nappies to aluminium, glass to Pringles – all things any developing economy needs. Without USD in the bank, importers are unable to pay for the goods they need. Exporting coffee to traders around the world brings in much needed hard currency which can then be used to import with. However, the central bank controls all of the USD reserves. This means that any importer wishing to bring in a consignment, must apply to the bank for the currency. The FX rate is controlled by the bank and is not openly traded like many currency pairs. The allocation of currency is based on 1) First come first served and 2) Priority. Herewith the issues start:
Half way through this article now and finally I bring up the C word:
1) Corruption. Priority of USD is given to Government infrastructure projects, everyone else must get in line. Those who bring in USD as part of their export business (IE coffee exporters) can have access to their USD. BUT. When dollars arrive from the export of coffee – they are immediately bought by the National bank at a rate of their choosing. When the dollars are needed to import again, they must be bought back (again at a rate of the banks choosing) It’s win win for the bank.
2) Secondly, as George Orwell so eloquently puts it; “All animals are born equal, but some animals are more equal than others”. Thus ensues the option for those who are somewhat more equal – queue jumping. Speaking anonymously, one Ethiopian banker diplomatically explains: “Brokers, importers, exporters and bankers engage, to facilitate the provision of Forex at a faster time interval than normal” – this of course has a cost to it – usually 2 or 3 birr for each dollar purchased. In short – money talks.
3) Thirdly, importers (however illegally) who are higher up in the queue can trade their USD once received to those further down the line. This is is not strictly legal, but with the help of some well-greased wheels (read – bankers) this can be actioned without too much scrutiny from the powers that be. Why wouldn’t you? Some reports suggest an LC can take up to a year to open!
What is the impact from all this on coffee?
Well first and foremost, it means that coffee is being used as a pawn, a political and economic tool in the worlds largest game of monopoly.
Due to the intense political and strategic importance of coffee to Ethiopia, it will never be left alone to function in a free market. Rarely a season passes without some meddling from Government officials. The intentions are good. The execution, generally, is not. The constant interference has brought forth such laws as the exclusive marketing channel of the ECX – we all know how that turned out! The next law that springs to mind is the compulsion for exporters to ship coffee within 3 months of purchasing it. The rationale behind this is to prevent “hoarding” of coffee to control and manipulate the market. In reality it is to speed up the realisation of USD contracts. What this in fact means, is that exporters are under so much pressure to ship coffee fast on fear of losing their export license, they either a) ship poor quality as time does not allow for effective processing, b) they ship at a loss just to get coffee moving. This has resulted in a number of Ethiopian coffees flooding the market at unbelievable prices (and an undesirable quality)
“The crisis with hard currency will not be solved today, nor in the next 15 or 20 years. There is an urgent need for more cooperation with the private sector to find a solution”
The proliferation of the Import / Export business model has, in my view, furthered this coffee price disparity. An exporter can ship coffee with a negative margin and import products for sale making a positive margin – the net result is an overall gain – and one I would wager is more substantial than profiting from the export of coffee alone. In a working model, I fear the gains on the import side far outweigh the loss on coffee export. Let the games begin.
We also need to consider the internal market. Coffee consumption in Ethiopia is one of the highest in the producing world as a percentage of production – give or take we’re talking 50%. It will surprise you not that this too is regulated by an interfering and short-sighted blithering Government. Rules have stated that all the main grade (fully washed) coffees are exported. This helps to establish a world wide brand of excellence and quality, one that even Colombia used to advocate. This leaves all low grades behind for the strong domestic demand. This demand though has created such a situation whereby a grade 4 / 5 or even UG can be sold in the domestic market at a higher price than a fully washed, Yirgacheffe Gr 2! That’s just stupidity personified.
The options for a coffee shipper are thus varied and influenced by multiple factors: 1) The current demand for USD – what do they have to import. 2) The price of export market versus domestic 3) their cash flow – domestic sales are cash, export is delayed. 4) bank financing – 8% for Birr, 15% for USD
And still the Government has not finished pontificating. New rules are under review presently. To address the issue of coffee being sold below the proper value i.e. below current ECX prices. This is an issue I hasten to add, that has been caused by the Government in the first place. All new contracts submitted to the authorities for approval must be priced at or above current ECX prices. It is already in place for other export agricultural products, but yet to be fully ratified by the Coffee and Tea Authority. This in itself poses problems – 1) it makes no consideration of time – especially with regard to forward contracts 2) there is no correlation to the NYC market for consideration. Ethiopia is in fact an outright birr / Feresulla (17kg) market for parchment – not a USC/LB fob market. But who am I to judge?
It’s fair to say, that Ethiopia has one of the most convoluted and complicated coffee supply channels in the world – and I haven’t even begun to discuss the 6am to 6pm ban on trucks in the capital, the reliance on an independent city state that was once part of Ethiopia (Djibouti) to continue offering unfettered access to Ethiopia for its import and export or the chronic shortage of food grade export ready containers in Addis. Let’s not forget the Ethnic conflicts that continue to plague parts of the country – not least the Sidama and Oromia regions – where 65% of coffee is produced. Further this there have been arrests of, and detention of Cooperative Union management without charge, and climate change playing havoc with the growing season. Add to this the excessive production and price expectation that has been forced on to producers, thanks in part to a very noisy and prolific but somewhat inadequate follow through speciality coffee industry. Second to this is the advent of the idea that roasting in Addis will add value to the coffee, pushed on to exporters and producers by an ill-informed government. 4 out of 5 shippers I met on this trip were setting up 200+kg roasting facilities. We are heading for an interesting future in Ethiopia. In a modest production season, one Co Operative union has finished the year with 62 containers left to sell with new crop coming in thick and fast and still the price idea is 80cts higher than the market will allow. But fear not. The leadership of the group intend to roast it all over the next 18 months and sell internally at 3 times the price. Good luck to them. The members they represent must be thrilled.
The money right now it seems, is in Turkish Roasting Equipment.