Ethiopia’s foreign exchange earnings may be improved using strategies that boost its export capabilities. It also needs to attract foreign direct investment (FDI) for production of goods for export. These export items have to be competitive in the global markets. Such measures may improve the overall balance of trade of the country.
There are, however, several appropriate strategies that Ethiopia may apply for improving its foreign exchange earnings. Some of these strategies would be: diversification of exports; agricultural sector development; manufacturing and industrialization; services sector growth; trade facilitation and policy reforms; foreign direct investment (FDI); enhanced financial instruments; skills development and innovation; regional economic integration; risk mitigation strategies. The uses and benefits of each of the above strategies have to be considered seriously by the Ethiopian government policy makers.
The strategy of diversification of exports focuses on the promotion of non-traditional exports. This requires identification and promotion of new export products beyond the traditional ones. Experienced entrepreneurs have to be attracted to invest in the production of export items. Of course, identifying proper investors and markets for the new exports is of the essence. New products imply adding value and improving on existing products in the country.
Also it is of paramount importance to explore new economic sectors with the potential to produce and export new products. This measure presupposes the establishment and promotion of export processing zones in Ethiopia. These zones may attract foreign firms that encourage local production for export, and create employment opportunities for the local people. This process may generate income, which leads to demand for goods and services in the local markets. This requires promotion of sectors for new investment. Investors may be attracted to these sectors through provision of incentives for FDI.
Agricultural sector development and growth may require investment. This sector is the backbone of the Ethiopian economy with linkages to different economic sectors. It is, therefore, necessary to support and provide incentives to agribusiness initiatives that add value to agricultural products. Such products may be major foreign exchange earners in existing and new markets.
Marketing intelligence provides new opportunities in external markets. This requires advance preparation for processing, packaging, and branding to meet international market standards. In this regard, it is essential to identify and promote high-value agricultural products that have strong demand in international markets. Along with these agricultural crops, it is important to encourage export oriented manufacturing and industrial enterprises. Owners of these enterprises have to be given special support as they are foreign exchange earners.
It is, therefore, crucial to promote and develop export-oriented manufacturing industries that produce goods with a competitive advantage in global markets. To support these enterprises, the state has to improve infrastructure, including transportation and energy. Such efforts would support industrial growth and reduce production costs. The provision of infrastructure, including roads, water, and electric storage facilities is very crucial for the export sector.
Apart from the productive sectors mentioned earlier, it is useful to expand the services sector. The promotion of tourism through investment in the sector helps to attract tourists to historic parts of Ethiopia. In this regard, improvement of infrastructure and marketing attracts more international visitors.
The flow of tourists into Ethiopia generates foreign exchange, which the country needs for importing basic goods and services. In like regard, Ethiopia has to expand its services to promote and facilitate export. It may develop and promote sectors like IT, software, and business processes for outsourcing with the objective of earning foreign exchange. Along with improvement in the service industry, the facilitation of trade through simplification of procedures attracts investment to Ethiopia. This demands the streamlining of customs processes for reducing trade barriers. This makes it easier for businesses, public as well as private, to engage in global trade.
Concerned agencies have to evaluate and adjust tariffs and non-tariff barriers to encourage imports and exports. The removal of trade barriers would definitely improve competitiveness of Ethiopian businessmen dealing with international trade. Also, those engaged in foreign direct Investment (FDI) have to be encouraged to focus on sectors with high growth potential. There is a need to actively promote Ethiopia as an attractive destination for FDI, focusing on sectors with high growth potential.
Foreign investors are attracted by other countries with provision of tax holidays. It is a precondition to design investor-friendly policies and strategies. It is extremely essential to implement policies and strategies that facilitate foreign investment, such as tax incentives, property rights, and regulatory transparency. Opaque transactions would contribute to illegal operations which must be discouraged by concerned agencies. Contrabandists and illegal operators deny the country of its opportunities to attract formal investment.
In addition to FDI, local investment has to be encouraged through improved access to finance for businesses. In this regard, special attention is given to small and medium-sized enterprises to encourage them in expanding and entering global markets. One way of assisting them is through export credit facilities. The concerned agency has to establish these facilities to provide financial support to producers of exportable items. This initiative has to be accompanied by skills development and innovation, including investment in relevant and appropriate education and training schemes. The development of a skilled labor-force is carried out through investing in education and training programs. Such schemes ensure that the labor force is fully equipped to meet the demands of emerging manufacturing industries in the country.
A workforce that is available in the labor market with the right skill demanded by the market would easily be employed and earn better income. This, however, is possible only if research and development schemes are in place to match the supply of and demand for labor in the various sectors of the economy.
Research and development should also be applied to encourage innovation in key sectors to create new products and services with global appeal. This process generates employment and income for skilled workers in different regions of Ethiopia. This has to be extended to the neighboring countries through regional economic integration. Strengthen economic ties with neighboring countries and regional economic communities enhance intra-Africa trade. In this regard, there is a need to explore participation in regional customs unions and trade agreements to diversity market access.
Diversification of export markets is based on avoidance of over-reliance on a few markets by diversifying export destinations. This ensures the reduction of vulnerability to economic crises in some regions. There is, therefore, a need for developing and implementing strategies for risk management. Some of these strategies include hedging, to protect against fluctuations in commodity prices and exchange rates. Hedging is a mechanism that helps to limit losses and maintain assets. This can be used to survive difficult market periods. It gives protection against changes such as inflation, interest rates, currency exchange rates and others. It can be an effective way to diversify trading groups with numerous types of assets. This undertaking demands proficient and skilled personnel to manage market crises.
To avoid market crises, it may be advisable to hold foreign exchange accounts. Holding funds in a foreign exchange account can be helpful to diversify investments or to transact frequently in foreign exchange. Foreign exchange accounts offer investors the opportunity to invest or have access to a broader range of accounts with higher interest rates. These are generally seen as an investment, and can appeal particularly to investors that wish to diversify their assets. It is, however, important to realize that the income from interest rates may be eroded by fluctuations in the exchange rates, fees and taxes. It is also important to understand that there is tax liabilities that come with FDI used locally in Ethiopia. It is, therefore, advisable to get professional advice to make sure compliance with all legal requirements.
The enhancement of foreign exchange earnings requires measures that are holistic and coordinated. These measures help in controlling earnings and expenditures of foreign exchange in line with the rules and regulations of the government. This mechanism involves all transactions related to import and export in the various sectors of the Ethiopian economy. Implementing these mechanisms should be part of an overall and comprehensive strategy that deals with the distinctive and unique challenges and opportunities in the economic features of the country. Moreover, continuous evaluation and revision of these strategies will be helpful to guarantee and to ensure their efficiency and effectiveness through time. The effectiveness of these strategies is reflected in the enhancement of FDI that contribute to more foreign exchange earnings, high productivity, output and employment in Ethiopia.
BY GETACHEW MINAS
THE ETHIOPIAN HERALD WEDNESDAY 29 NOVEMBER 2023
