By Asefa Belachew*
Introduction and Background
Ethiopia’s sugar shortage has become very pronounced in recent months. Since October/November 2017, it has become common to see long lines of people particularly women and children, but also a few men, waiting patiently in line for their sugar ration. In Addis, observers have noted such sites in Gulele, Cherkos and Yeka. During the same time, sugar had become a flash point (the trigger issue) for the violence in many towns in Oromia Region1.
Ethiopia depended on imported sugar for many years as the domestic production did not meet the increasing level of consumption. Traditionally, the sugar mills used to be closed between mid-June and mid-September for repairs and maintenance. During those months, attention was focused on the plantation of the sugar cane for the next harvest. Almost all the workers in the farms and crushing operations went on compulsory annual leave. Imports bridged the shortages during those lean months. From the time that imports became important (since the early 1990s), the Ethiopian Sugar Corporation imported sugar and distributed it through established channels. If the Corporation had such a long experience in managing the seasonal flows since the early 1990s, why did it fail this time? What are the underlying factors that exacerbate the need for imports and boost aggregate supply? Why did Ethiopia fail this time despite the promises of GTP1 and GTPII, the first of which has already concluded, and the latter is in its mid-term of implementation? In responding to these and similar questions, this essay takes a broader and longer perspective.
The consumption of sugar was popularized in the late 1950s and early 1960s. The Wonji Sugar Factory, the first production unit in the country, invested a considerable amount of money in advertisement and free distribution2. In the early 1950s and 1960s, Ethiopia’s per capital consumption was less than 2 kilos per year. Between the 1960s and early 2000, consumption per capita increased very slowly and hovered between 3-4 kilos per capita per year. With the increased income, consumption made modest increase until 2017. The estimated per capita consumption in 2017 reached 8.1 kilos, a pittance compared to the per capital consumption in Kenya, The Sudan, Djibouti and Somalia. Theirs had reached anywhere between 10-20 kilos since the mid-1990s. For instance, Kenya’s yearly per capita consumption was estimated to have reached 19.2 kilos in 2017 and that of The Sudan 26.8 kilos. Ethiopia’s per capita consumption however is very much understated, as will be discussed later, as the consumption estimates depend on domestic production and imports made through official (recorded) channels. If sugar being imported through unofficial channels are added, Ethiopia’s per capita consumption is only slightly lower than that of Kenya. This points to great opportunities for growth in sugar consumption in Ethiopia provided productions are adequate.
Households get access to sugar through their Kebele stores which is usually rationed at some government determined price (more on this issue later) based primarily on family size. Those households whose consumption exceeded the ration amount buy sugar at higher prices from private stores and groceries in the major cities and towns. There is also some informal neighborhood trade where some households sell part or their ration to their well-to-do neighbors.
In aggregate, Ethiopia’s consumption increased from about 330,000 tons in 2010 to about 820,000 tons in 2017. The growth in population, relatively faster urbanization, the higher number of educated people as well as the impact of higher income contributed to the fast pace of growth. The impact of the substitution of sugar for honey in some end uses like Tej-making would also be substantial considering the rising price differences between the two.
Sugar Production and Imports
Production of sugar in Ethiopia started in 1954 with the establishment of Wonji Sugar Factory. Wonji Shoa, the second factory, started production in 1962. The combined yearly production of the two companies in 1963 had reached 70,000 tons. Metehara Sugar Company started production in 1970. By 1971, the combined production of the three climbed to 122,000 tons. Fincha came on stream in the early 1990s to push the yearly production to 200,000 tons. With production at Tendaho, Arjo-Didesa, Kessem, and partial production at Omo-Kuraz, domestic production was estimated to have reached 500,000 tons of sugar in 2017, which was about 60 percent of the consumption. When the latter group of companies operate at full capacity and when Wolkait and Tana Belles commence production, the yearly capacity is expected to reach 4 million tons.
The EPRDF Government had a very ambitious and unrealistic goals in GTPI which ran between 2009-15. With the opportunities created by African Growth and Opportunity Act (AGOA) of the U S government, and everything but Arms (EBA) arrangement of EU, sugar was expected to be among the major foreign exchange earners. Together with clear prospects for import substitution, sugar was expected to boost manufacturing production and ameliorate the foreign exchange constraints.
Unfortunately, the goal was set at very unrealistic level as production was expected to rise from 1.77 million tons from the base in 2009-10 to 4.25 million by in 2014-153. Since many factories that had been expected to be operational by 2009-10 had not come on-stream, the base year production on which projections were made was about 6 times higher than the actual production. The Policy Matrix issued in November 2010 provided lower figures for the base year (2009-2010) and 2010-11, but again even these were unrealistic targets4. According to the revised goal, the targeted production would reach 2.25 million years in 2014-15, end year of the plan. The actual production however stood at around 300,000 tons or about 13 percent of the plan. The major causes for the shortfall given by the Government were delays in the implementation of projects in the pipeline and lack of synchronization between the plantation and processing operations. Again, GTPII set ambitious goals. Its target showed sugar production to rise from 1.7 million tons in 2015-16 to 4.9 million tons in 2019-20.5 Export of sugar was slated to rise from US$138 million to US$586.2, respectively. In 2016-17, the actual production was still less than 15 percent of the plan, frustrating the foreign exchange savings and earnings goals.
Foreign Trade and Prices
Ethiopia exported sugar in the early 1960s. The export volume reached between 10-30 thousand tons between 1962-64. It was insignificant between 1965-69. It recovered and hovered 10-50 thousand tons between 1970-79, except 1974 when it was in the single digit. Between 1983-98, it oscillated between 20-50 thousand tons. A major boost was observed between 1999 and 2008. Exports were substantial, particularly reaching 128,000 tons in 1999 and 121,000 tons in 2003. Thereafter, sugar disappeared from the export trade except small and sporadic cross border trade.
Imports of sugar are partly recorded but a substantial amount is unrecorded. There was an insignificant amount of sugar import in the early 1960s. Recorded imports disappeared between 1968-92. About 15,000 tons was imported in 1993. Again, recorded imports increased until it reached 155,000 tons in 2003 and 131,000 tons in 2004. The amounts were substantial until 2011. In 2011, imports soared to 169,000 tons and continued to rise persistently until it reached 350,000 in 2017. Recorded imports alone were close to 50 percent of domestic consumption in some years.
The unrecorded imports take place across the border from Djibouti and Somalia, partly on camel back in the evenings. Since neither Djibouti nor Somalia produce sugar, their consumption is entirely dependent on imports. The illicit trade (contraband) shows as imports into Djibouti and Somalia far exceeding their consumption. For instance, since the early 1980s, there have been re-exports using the formal channel from Djibouti in 1986, and the three years between 2006-08. These amounted to 23,000 tons in 2006, 87,000 tons in 2007 and 181,000 in 2008. No export has been recorded from Somalia to Ethiopia through the formal (official) channels.
|Excess Imports of Djibouti and Somalia: ‘000 Tons|
These excess imports into Djibouti and Somalia that ultimately find their way into Ethiopia in an illicit manner (contraband) have been substantial particularly since 2009. The total magnitude of illicit sugar import increased from about 250,000 tons in 2009 to 868.000 tons in 2017. The figure for 2017 is slightly more than the aggregate national consumption from production and the recorded imports which is 820,000 tons for 20176. This indicates that there is a thriving contraband trade in sugar. If one wants to be conservative, it will not be far from real to assume a good 500,000 tons of sugar is imported into Ethiopia in an illicit manner. This has become an open secret these days.
As is evident, the Djibouti and Somalia borders are porous. In recent years however due to the operations against Al Shabaab and the EPRDF Government’s fear of OLF operations in the region, the area is heavily militarized. The question one would raise is how such a large volume of sugar crosses the border without being noticed by the customs agents and the military.
The Sudan is a major consumer and producer of sugar in the region. The Sudan is also known for its massive imports particularly after it removed the tariff on sugar imports and opened trade for the private sector in 2012. Since the imported sugar is beyond its own needs, such sugar is smuggled into Southern Sudan, Chad, Eritrea and even Egypt7. There is no record on imports into western Ethiopia from The Sudan, it is however difficult to rule out illicit trade on that side considering the price differences.
Domestic Prices and the Incentive for illicit Trade
Sugar is very cheap on the international market. For instance, the average annual international price in 2017 was US$0.35/kilo, equivalent to Birr 8.50. The corresponding prices for 2015 and 2016 were US$0.29/kilo (Birr 5.97) and US$0.40/kilo (Birr 8.66), respectively8. Ethiopia imports sugar mainly from India, but to a lesser extent, from Saudi Arabia, Thailand, United Arab Emirates (UAE), Algeria and Tunisia. Transportation from Mumbia, the major sea port on the western coast of India, insurance and handling at both Mumbai and Djibouti cost about US$0.10/kilo (Birr 2.50). The estimated cif Djibouti cost of sugar in 2017 was therefore about Birr 11/kilo9.
Sugar being imported into Ethiopia is subject to several types of taxes. This includes 35% import duty, 33% excise tax, 15% VAT, and 10% surtax as well as 3% withholding tax on the cif. The way the first four types of taxes are computed puts the effective taxes at 127% of the cif, much higher than the sum of the statutory rate of 93%. With the 3% of the withholding tax, the aggregate effective tax rate adds up to 130% of the cif price.
On the other side, the average national price of sugar per kilo at Kebele stores was Birr 16.72, Birr 18.29 and Birr 19.92 in 2015, 2016, and 2017, respectively10. The corresponding price in private grocery stores in major cities reached Birr 40/kilo to 60/kilo11. The difference between the cif and the national price of sugar is about Birr 9/kilo using the Kebele price (additional cost of transportation and handling should be included to the tax inclusive cif price on account of the services at Djibouti and destination town), and about Birr 50/kilo using the grocery price12. If one gets a waiver from the payment of taxes to transport 10 tons of sugar (100 bags of 100 kilos each, a truck load) and sells it at the Kebele price, s/he will make about Birr 90,000 using the Kebele price and Birr 450,000 (almost half a million) using the grocery price.
The Making of Millionaires and Violence
It is common knowledge in Ethiopia that privileged government civilian and military officials or their proxies as well as Regional Officials engage in importing activities without paying the necessary duties and taxes.13 It is also alleged that government (civilian as well as military vehicles) are occasionally used for transporting contraband goods. Thus, if one manages to import 100 tons (1000 bags of 100 kilos each, 10 truckloads), s/he become a multi-millionaire with a stroke of a pen. With such large sum of money to be made, it makes it easy to bribe the officials along the way to turn their face the other side when the trucks pass by. If the estimate of 820,000 tons of illicit trade in sugar in 2017 is indeed true, it makes illicit sugar trade a lucrative business. Taking a conservative estimate of 500,000 tons of illicit imports, the revenue from such trade would amount to a staggering Birr 5 billion – a very hefty sum by any standard. If we take a very conservative estimate, 10% of the Birr 5 billion, we are still at a hefty sum of Birr 500 million.
This scenario thus creates an incentive to stifle the legal sugar trade. Given the production, synchronizing it with the import is not a difficult task as this is not the first time for legal import of sugar. Those whose task it is to manage the supply of sugar know what needs to be done. However, the loss to them or the privileged few is very high if the system works very well. Such malpractices are apt to happen when private gains do not tally with social goals. As long as such rents exist, raising yearly production to 4 million tons will remain to be a far cry. Although GTPII comes to a close in 2 years, the current production has almost frozen at 300,000 tons per year, and the goals are unlikely to be met14.
On the other side, the situation exacerbated existing inequities and caused political tensions. The recent Oromo-Somali conflict, the two adjacent Regions to Djibouti and Somaliland, and the skirmishes in Holeta and Goha Tsion are the result of or challenges to such rent seeking activities15. If and when the Regional or Zonal Officials are involved in this business, any dispute in sharing the booty will be given an ethnic coloring, and individual disagreements become ethnic conflicts. Second, those communities who are deprived of sugar will try to impound sugar that passes through their area. When and if people perceive that the situation bestows benefits to some to the disadvantage of others, they are likely to take the law in their own hands and fend off for themselves. Although the immediate causes of the hostilities in different towns during October and November 2017 could be shortages of sugar and edible oil, the underlying factor are partly the rents that arise from illicit (contraband) trade in sugar and other goods.
Illicit cross border trade particularly between Djibouti and Ethiopia existed for a long time. During the Imperia and Deng periods, goods imported in such a way were electronics (radios and tape recorders), cigarettes, distilled liquors including whiskey, as well as second hand clothes. The list of goods has now increased and includes sugar, among others. Such trade will continue as long as the difference between the landed Djibouti price and the prices in Ethiopia are widely apart and as long as the customs regulations are not applied uniformly. One solution to remove the incentive for illicit trade is eliminating or cutting the taxes on imported goods. This poses a big challenge to the Government since it involves a major loss of revenue on the portion of sugar (and other goods) officially imported. Going after the perpetrators would help but this will be a temporary solution until the culprits find other ways to circumvent the law. In any case, as long as those involved in the trade are people with political clout or their cronies, it poses a major challenge to remove such illicit trade completely. But, going after the corrupt officials will still be important.
The second alternative to wiping away the incentive for the illicit practices is to speed up the projects in the pipeline and eliminating imports all together. If and when that occurs and provided that Ethiopia could produce sugar at internationally competitive prices, imports will cease to exist in the legal and illegal markets, and together with it the massive corruption.
References and Notes
 Tom Gardner, ‘We fear for our lives’: how rumors over sugar saw Ethiopian troops kill 10 people, Conflict and development, The Guardian, November 7, 2017; https://www.theguardian.com/global-development/2017/nov/07/we-fear-for-our-lives-how-rumours-over-sugar-saw-10-people-killed-in-ethiopia-oromia?utm_source=dlvr.it&utm_medium=twitter
2 Wonji Sugar trucks visited large as well as small towns and offered free coffee and tea with sugar on the street side. They also offered two Desta candies, products of the Company, for free to hook the children.
3 Ministry of Finance and Economic Development (MoFED), Growth and Transformation Plan (GTP) – 2010/11-2014/15, (Draft), September 2010, Addis Ababa, p.17
4 Ministry of Finance and Economic Development (MoFED), Growth and Transformation Plan (GTP) – 2010/11-2014/15, Vol. II Policy Matrix, November 2010, Addis Ababa, p.9
5 National Planning Commission, Federal Democratic Republic of Ethiopia, Growth and Transformation Plan II (GTP II) – (2015/16-2019/20), Volume II: Policy Matrix, July, 2016, Addis Ababa, pp. 34-35
6 These are the Authors estimate based on imports, exports, consumption, production as well as stock in Djibouti and Somalia
7 Brough, David and Khalid Abdel Aziz, November 26, 2015, Sudan emerges as regional hub for sugar imports, smuggling rife, https://www.reuters.com/article/sudan-sugar/sudan-emerges-as-regional-hub-for-sugar-imports-smuggling-rife-idUSL8N13K3K020151126
8 World Bank, World Bank Commodity Price Data (Pink Sheet), Sugar Monthly Price – US Dollars per Kilogram, International Sugar Agreement (ISA) Daily Price, Raw, FOB and Stowed at Greater Caribbean Ports, https://knoema.com/WBCPD2015Oct/world-bank-commodity-price-data-pink-sheet-monthly-update?tsId=1000370
9 World Freight Rate, Freight Calculator, http://worldfreightrates.com/freight
10 Central Statistical Agency (Ethiopia), Average Retail Price of Goods and Services by Region and Selected Market Places, Various issues
11Based on telephone and email correspondence with a Lecturer in Economics at Hawassa University.
12 Emanuel Igunzu quotes a price of US$3.50 (birr 96.25/kilo). Emmanuel Igunza, ‘Rations are 5kg of sugar per month’, http://www.bbc.com/news/av/business-42833910/sugar-shortage-rations-are-5kg-a-month, January 25, 2017
13 Tamiru Tsige, Corruption Crackdown, The Reporter, July 24, 2017; http://www.thereporterethiopia.com/content/corruption-crackdown; and Neamin Ashenati, Targeting the Small Fish?, The Reporter, August 5, 2017;
14 Samuel Bogale Analysis: The Sour Taste of Sugar in Ethiopia, Corruption, Incompetence, and Empty Hope, Addis Standard, November 21, 2017; http://addisstandard.com/analysis-the-sour-taste-of-sugar-in-ethiopia-corruption-incompetence-and-empty-hope/
15 Yonas Abiye, Coca Cola’s sugar consignment commandeered, The Reporter, November 25, 2017, http://www.thereporterethiopia.com/article/coca-colas-sugar-c
*The author could be contacted on firstname.lastname@example.org