Welcome to Addis Fortune's updates on Ethiopia's economic and industrial sectors. This edition covers the impact of the new excise tax stamp system on breweries, the Ethiopian Customs Commission's stricter duty-free import regulations, and the National Bank of Ethiopia's new directive on interbank liquidity. It also explores the difficulties faced by investors in Tigray Regional State and the struggles of the alcohol manufacturing industry with rising raw material costs and security concerns.

Breweries have raised factory gate prices by an average of 200 birr a crate, following the Ministry of Finance's new excise tax adjustments. The Ministry aims to collect 24.4 billion birr from excise tax this fiscal year, with over 37 percent expected from the brewery industry. Beverages with up to five percent alcoholic content now face a 40 percent excise tax or 28 birr a litre, adding 9.24 birr a beer bottle. However, another more pressing issue is looming for the brewers: the excise tax stamp. The Ministry introduced a rule on the backdrop of a four-year proclamation to combat counterfeiting and improve tax collection transparency. However, breweries worry that the excise tax stamp system could make products unaffordable, shrinking the industry. Ethiopian Brewers’ Association, representing major breweries like Heineken Ethiopia, BGI Ethiopia, Dashen Breweries, and Habesha Breweries, is negotiating a favourable deal, based on a study by HST Consult Plc, which warns that the proposed system may cost the industry 372.3 million dollars, with negligible benefits in preventing counterfeit products. Despite industry concerns, the Finance Ministry officials seem unimpressed.

The Ethiopian Customs Commission drastically tightened the rules for duty-free import privileges, starting July 22, 2024. Commissioner Debele Kabeta announced that only army and national intelligence chiefs, along with the Minister of Finance, retain the authority to grant these benefits. The Commissioner ordered his subordinates to halt processing duty-free imports, reserving final approval solely for his office. The decisive action disrupts a wide range of incentives designed to attract domestic and foreign investors. Customs officials plan to curb the widespread misuse of duty-free privileges, which has caused systemic and regulatory issues in revenue collection. Duty-free privileges for investors were suspended last week pending an investigation into recent allegations of illicit imports. The embargo is feared to create backlogs at Djibouti and Mojo dry ports, impacting the Ethiopian Investment Commission's strategic plans. A week before the embargo, Commissioner Hanna Arayasellasie announced over 3.8 billion dollars in foreign direct investment in the past fiscal year, an 11.5 percent growth compared to the previous year. She unveiled a two-year strategic plan to improve logistics operations and rolled out competitive incentives to attract foreign investments.

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The National Bank of Ethiopia Governor Mamo Mihiretu has initiated a new directive allowing commercial banks to trade their liquidity through interbank money market operations, aiming to enhance financial stability in the sector. The directive, introduced last week, enables banks to access short-term liquidity by borrowing and lending directly from their excess reserves. The directive outlines regulatory mechanisms for liquidity trade, including requirements, trading timelines, platforms, and mechanisms for a safe, efficient, and collateralised interbank market. Until an electronic trading platform is fully implemented, a manual book-entry system will facilitate interbank market trading, with physical certificates temporarily substituting for dematerialised securities. The central bank's three-year strategic plan includes several directives aimed at establishing open market operations to combat inflation. Recently, the central bank set an interest rate of 15 percent as the anchor of its monetary policy, three percentage points lower than the previous rate for commercial banks under liquidity strain. The law also introduces risk management measures, such as a reduction of underlying assets to mitigate market and credit risks. Transactions will be backed by collateral securities similar to those used in the central bank's refinancing operations.

In the aftermath of a devastating war that severely impacted its economy, investors in the Tigray Regional State are facing difficulties in resuming operations due to financial shortages and the inability to import duty-free materials. Over 22 investors, seeking loans of more than 10 million birr each, have been required to appear in person at bank headquarters, yet progress remains elusive. Nearly 25 other investors have struggled to access duty-free privileges essential for importing machinery needed to rehabilitate their businesses. The Tigray Chamber of Commerce has voiced profound concerns, calling for special attention to be given to businesses recovering from the war. Ethiopia's 31 banks, which have issued nearly two trillion Birr in loans and advances as of June 2023, maintain a Non-Performing Loans ratio of around 3.6 percent, below the regulatory threshold of five percent. Due to the high number of non-performing loans in Tigray, commercial banks are now implementing strict risk management policies. Business consultants argue that expecting commercial banks to reopen their doors to investors after suffering from unpaid loans is unwise.

Ethiopia's alcohol manufacturing sector is wrestling with macroeconomic and external pressures that continue to affect industry giants like Balezaf and National Alcohol brands. The sector is experiencing substantial price surges in raw materials, security concerns, lack of market access, and competition from illicit traders, all of which have undermined production and sales. Molasses, a crucial input for alcohol production, has seen its price double to 2,691 birr a quintal. Similarly, ethanol (technical alcohol) has risen by 50 percent to 212 Birr, severely impacting production costs. Established in 1905 with an annual revenue of 1.2 billion Birr, the National Alcohol & Liquor Factory has had to cut production by half due to rising raw material costs, security issues, and the influx of cheaper products from illicit traders. Balezaf Alcohol & Liquors Factory, another major player, has been operating intermittently for the past six months due to soaring raw material prices and market access issues stemming from security concerns. Operational fluctuations have led to declining sales and revenues. The factory has reduced its production by 25 percent from its 30,000ltr capacity, resulting in a 60 percent revenue drop over the past three years. Attempts to mitigate losses by doubling prices have only led to a 30 percent decline in demand.

That’s all for today. We’ll be back with more updates next week. 
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