ADDIS ABABA CHAMBER OF COMMERCE

The Immediate and Long-term Impactof Monetization of Food Aid on

Private Sector Development in Ethiopia: The Case of the Edible Oil Industry

SUMMARY OFFINAL REPORT

November 2005

Addis Ababa

Table of Contents

PAGE

1. INTRODUCTION.....................................................................................................2

2. THE EDIBLE OIL SUB-SECTOR: AN OVERVIEW..........................................5

2.1 SIGNIFICANCE OF EDIBLE OIL INDUSTRY IN THE ETHIOPIAN ECONOMY.........................................52.2 COMPETITIVENESS OF THE EDIBLE OIL MANUFACTURING SUB-SECTOR.........................................62.3 POLICIES AND SUPPORT FACILITIES TO THE EDIBLE OIL SUB-SECTOR...........................................9

3. GENERAL REVIEW OF PL480 FOOD AID AND THE BELLMON DETERMINATION...............................................................................................11

3.1 US PUBLIC LAW 480 AND THE PRACTICE OF EDIBLE OIL MONETIZATION IN ETHIOPIA...........113.2 THE MECHANISM OF EDIBLE OIL MONETIZATION IN ETHIOPIA....................................................17

4. THE ETHIOPIAN EDIBLE OIL MARKET........................................................19

4.1 THE SUPPLY OF EDIBLE OIL..............................................................................................................194.2 THE DEMAND FOR EDIBLE OIL..........................................................................................................204.3 PROJECTED DEMAND..........................................................................................................................21

5. CONCLUSION AND RECOMMENDATION.....................................................23

1. INTRODUCTION

The rapid increase in monetization of programme food aid commodities since the practice

was introduced in the mid-eighties has generated heated debate over the medium to long

term effects of such aid on domestic production of the specific commodities involved.

The most common criticisms relate to the potential disincentive effect of food aid on

domestic production and the possibility that food aid would change consumer preferences

in favour of imported commodities and away from domestically produced similar items,

perhaps to the detriment of the growth of domestic production. Proponents of food aid, on

the other hand, suggest that it is simply another choice of development resource.

The current market difficulties facing the edible oil manufacturing sub-sector in Addis

Ababa has become a source of concern both to the Addis Ababa Chamber of Commerce

and the manufacturers. The culprit causing sub-optimal capacity utilization and closures

is said to be the flooding of the market with monetized food aid, edible oil in this case,

sold by Private Voluntary Organizations (PVOs) engaged in various development

activities in the country to generate local currency funds to cover their administrative or

operational costs.

While PVOs’ declared policy has been that monetization actions take absolute care not to

negatively affect domestic producers and the market, there is a growing concern among

domestic edible oil producers that monetization of food aid is the main cause of their

predicament.

This emanates from concerns arising from the fact that increasing volumes of food aid

provided for development projects is sold on to local markets to generate cash/local

currency. There is fear that this displaces domestic production and slashes the incomes of

local producers as a result of reduced prices. For a clearer understanding of the impact of

food aid, expounding the differences among the various types of food aid is essential. In

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this regard, three major types of food aid may be identified, namely programme, project,

and emergency food aid.

Programme food aid, the preoccupation of this report, is a donation of food produced in a

donor country to the government of a recipient country. This type of food aid is virtually

all monetized in the recipient country to generate cash through special consideration

financing or export credit guarantees. The use of export credits in connection with food

aid is essentially considered extended to recipient countries to buy food aid potentially

distorting trade and has, as such, become a contentious issue. Major issues that have

taken centre stage in the case for effective rules on food aid to guard against possible

abuses and misuses of food aid are the following: -

Damage to domestic production of recipient countries by creating disincentives

to local food producers, resulting from flooding markets and depressing prices;

Displacement of exports resulting from the dislodgment of commercial imports

in recipient countries transferring the problem from on developing country to

another;

Food aid can be used as a convenient way for export subsidies and to dispose

off surpluses in donor countries;

Food aid can be used as an opportunity to enter new markets, create new tastes

and preferences that lead to trade from which the donor country stands to benefit

directly;

Food aid monetization objective lacks clarity. It is argued that monetization is a

form of export subsidy and that monetized food aid permits little or no targeting

of distribution/consumption to the food insecure or the malnourished, hence

leading to market distortions.

Concerned about whether or not the monetization of food aid impacts negatively on the

production and marketing of edible oil in the country in contravention with the declared

policies of PVOs, the Addis Ababa Chamber of Commerce has commissioned, on behalf

of its members, a study that would enable identify the constraints facing the edible oil

industry in respect of production, marketing, and distribution with the ultimate aim of

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establishing whether or not the monetization of food aid has destabilized the domestic

market and/or impacted negatively on domestic producers of cooking oil.

This document is a Final Report for the services entered into by and between the Addis

Ababa Chamber of Commerce and BACTEC PLC., Consulting Engineers, Economists to

study the edible oil industry with a view to determining the immediate and long-term

impact of the monetization of food aid on private sector development in Ethiopia. The

main report of the study is organized as follows: -

The report first brings into perspective the edible oil industry in Ethiopia

with a view to evaluating the industry in terms of its significance to the

economy; its resource base and resource use; its domestic and international

competitiveness; main factors influencing the industry; policies and support

facilities afforded; and the strengths, opportunities, and prospects of the

industry;

A general review is made of PL480 (TITLE II), the primary statutory basis for

the U.S. Food for Peace programme, in respect of the monetization of food

aid and the completeness of the Bellman determination, reviewing the intent

of PL480, summarizing impact studies so far carried out, reviewing the

efforts made to minimize possible impacts, analyzing the terms of references

of the auction system and the practice in Ethiopia of food aid monetization;

The report furtherdeals, in detail, with the competitiveness of the Ethiopian

edible oil industry using appropriate econometric models and examines: -

o Domestic and international competitiveness of the edible oil industry;

o Factors affecting competitiveness;

o Current and long-term impacts of domestic and external competition; and

o Measures enhancing domestic and international competitiveness.

The final chapter of the report presents the conclusions and recommendations of

the study.

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2. THE EDIBLE OIL SUB-SECTOR: AN OVERVIEW

2.1 Significance of Edible Oil Industry in the Ethiopian Economy

CSA 2001/02 surveys on cottage, small, medium and large manufacturing industries

reveal that the edible oil sub-sector accounts for less than one percent of the number

of establishments and the number of persons engaged, about 1.2 percent of the gross

value of production, 0.7 percent of the value added at factor cost and about 3.2

percent of the fixed asset of the Ethiopian manufacturing industries. Its contribution

to the food sector in the same order is 0.5, 1.6, 5.4, 2.9, and 11.9 percent,

respectively.

This clearly indicates that the edible oil sub-sector is neither a significant contributor

to employment generation nor to the output of the Ethiopian economy.

Furthermore, the significance of the edible oil sub-sector in the economy tends to

decline. For instance, the edible oil sub-sector accounted for 1.5 percent of the value

added of the Ethiopian manufacturing sector in 1995/96, while the level of

contribution, at 0.7 percent, shrank by half in 2001/02.

No adequate database is available to look holistically into the trends of the edible oil

sub-sector basic variables. Based on the surveys of 1995/96 and 2001/02, Table 2.1

summarises the trends of the basic variables of the edible oil sub-sector in comparison

with the food sector.

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Table 2.1 Trends in Basic Variables

Items

Edible oil Food Change

1995/96 2001/02 1995/96 2001/02 Edible oil Food

Number of establishments 869 694 51,909 128,232 -20.1% 147.0%

Number of persons engaged 4,083 3,227 97,845 207,467 -21.0% 112.0%

Wages and salaries (000 Birr) 8,310 8,697 95,223 181,152 4.7% 90.2%

Gross value of production (000 Birr) 135,737 131,141 2,175,514 2,427,823 -3.4% 11.6%

Value added at factor cost (000 Birr) 33,726 24,017 668,329 825,927 -28.8% 23.6%

Fixed asset (000 Birr) 61,922 228,417 1,416,340 1,925,603 268.9% 36.0%

The above table indicates that the basic variables of the edible oil sub-sector tend to

stagnate within the two survey periods. Value-added at factor cost and number of

persons engaged in the edible oil sub-sector declined by 29 and 21 percent from

1995/96 to 2001/02.

When compared to the trends of the Ethiopian manufacturing sector as a whole, the

growth rates in the basic variables of the edible oil sub-sector are poor, an indication

that sub-sector is beset by problems.

2.2 Competitiveness of the Edible Oil Manufacturing Sub-sector

There are different types of competitiveness indicators - indicator of domestic

competitiveness, indicator of international competitiveness, and indicator of

comparative advantage. While domestic competitiveness denotes the situation of cost

advantage under protection, international competitiveness reflects the situation at free

trade prices while that of comparative advantage relates to shadow price conditions

(competitiveness measured in the absence of price distortions). Competitiveness,

domestic and international, is measured in terms of market prices while comparative

advantage is measured in terms of shadow prices (economic opportunity costs) net of

all price distortions. Domestic competitiveness reflects financial profitability at

domestic, protected, distorted prices. International competitiveness is the financial

profitability at international output prices. Indicators of the competitiveness of the

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edible oil manufacturing sub-sector have been computed using the above theoretical

formulation and CSA data. An indicator of domestic competitiveness has been

computed using three cases: without the cost of capital, namely depreciation and the

opportunity cost; without the opportunity cost of capital; and with all costs of capital.

Table 2.2: - Indicators of Competitiveness

INDUSTRIAL GROUP

1991 1993 1995

Wocc Woocc Wac Wocc Wooc

c

Wac Wocc Woocc Wac

Domestic Competitiveness

1 Manufacture of edible oils 0.953 1.050 1.182 0.954 1.086 1.293 0.913 1.096 1.313

2 Manufacture of dairy

products

0.800 0.969 1.257 0.720 0.856 1.206 0.732 0.821 0.944

3 Manufacture of grain mill

products

0.950 0.977 1.014 0.926 0.958 1.005 0.961 1.002 1.057

4 Manufacture of bakery

products

0.824 0.856 0.891 0.832 0.869 0.919 0.837 0.888 0.946

5 Manufacture of sugar 0.479 0.521 0.564 0.545 0.599 0.668 0.450 0.510 0.587

6 Manufacture of macaroni 0.824 0.845 0.869 0.778 0.802 0.832 0.836 0.857 0.882

International Competitiveness

1 Manufacture of edible oils 1.620 1.716 1.971 1.620 1.753 2.155 1.580 1.763 2.188

2 Manufacture of dairy

products

1.050 1.219 1.571 0.970 1.106 1.508 0.982 1.071 1.180

3 Manufacture of grain mill

products

1.061 1.089 1.127 1.037 1.069 1.116 1.072 1.113 1.174

4 Manufacture of bakery

products

1.491 1.522 1.486 1.499 1.536 1.531 1.504 1.554 1.577

5 Manufacture of sugar 0.531 0.574 0.593 0.597 0.652 0.703 0.502 0.562 0.618

6 Manufacture of macaroni 1.491 1.511 1.449 1.445 1.468 1.386 1.502 1.524 1.469

Note: Wocc : competitiveness without considering all costs of capital.

Woocc : competitiveness without taking into consideration the opportunity cost of capital.

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In the analysis, a value greater than one indicates that the particular sectors are

financially unprofitable at domestic, protected, and distorted prices, implying that

these sectors sell their products below their unit costs of production. As shown in

Table 2.2, the edible oil sub-sector is not financially profitable even with the current

tariff barriers Ethiopia imposes on imported products. As per computations made, the

edible oil sub-sector was unable to cover all costs of production, including the cost of

capital. Based on these computations, the edible oil sub-sector does not have cost

advantage at free trade prices. Surprisingly, the sub-sector belongs to sectors in which

one would expect Ethiopia to have a clear competitive advantage in the global

market, namely food, beverages, textiles and leather sub-sectors; it proves to be

uncompetitive in the domestic market.

Second, the likelihood that the edible oil manufactured products would be

internationally competitive, even considering the cost of capital as sunk, is limited.

The cost of capital does not significantly influence the competitiveness of the edible

oil sub-sector, though it is an important factor in the production process.

The edible oil sub-sector has not been performing well in all aspects of its operational

parameters. The dismal performance of the edible oil sub-sector is easily discernible

from the low capacity utilization. Capacity utilization in the edible oil sub-sector has

been by far the lowest among the food manufacturing sector industries and the

average of the Ethiopian manufacturing industries over the past few years.

A serious problem of the edible oils manufacturing sub-sector has been the lack of

market due to a host of factors including import liberalization, high production cost of

domestic enterprises, contraband, under-invoicing, low product quality, and

monetization of food aid. With the new market oriented economic system, the

domestic market was relatively left open to the competition of imports. The

competitive advantage of domestic products has fallen by the same rate of reductions

in customs, thereby pushing most edible oil manufacturing enterprises out of the

market. Rent of working premises, cost of utilities, transportation costs, and cost of

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land have escalated. High cost of production combined with reduced barriers on

imported items has further pushed domestic edible oil manufacturing enterprises out

of the market.

2.3 Policies and Support Facilities to the Edible Oil Sub-sector

The government of FDRE pursues the Agricultural-Development-Led-

Industrialization (ADLI) as a deliberate strategy. Under this strategy, agriculture is to

be the primary focus of the development effort in the short and medium term.

Agricultural production envisaged to expand through increased modern inputs such as

fertilizers, improved seeds, pesticides, and improved extension services. This is

further expected to impact positively on the incomes of the rural population,

consequently augmenting the demand for industrial goods. Agriculture would, thus,

become a source of domestic market and a reliable raw material supply base. This

strategy is anticipated to strengthen the inter-sectoral linkages between agriculture

and industry. Recently, the government has issued an industrial development strategy

which clearly identifies priority areas, such as textiles and garments industries, meat

and leather products manufacturing, agro-processing industries, construction

industries, and micro and small scale enterprises for government support.

The edible oil sub-sector falls within both agro-processing industries and micro and

small scale enterprises, thereby enabling it to benefit from the support schemes of the

government. Agro-processing industry is a sector deserving the attention of the

government. Agro-processing industry saves capital; it employs larger labour; it uses

agricultural outputs as inputs; and creates the opportunity to be internationally

competitive. Agro-processing industry is further important in the production of

processed food products that are used for domestic consumption and plays a vital role

in the expansion of small and medium scale industries.

While current strategies followed by government support the development of agro-

processing in general, the emphasis is on export oriented industries. It is true that as

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one of the agro-processing industry, the edible oil sub-sector might well benefit from

the general improvement of the environment for industrialization and direct support

aiming at the specific sectors mentioned above. The areas of direct support are

anticipated to be studied comprehensively in relation to each of the specific priority

sectors.

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3. GENERAL REVIEW OF PL480 FOOD AID

AND THE BELLMON DETERMINATION

3.1 US Public Law 480 and the Practice of Edible Oil Monetization in Ethiopia

3.1.1 The Intent of Public Law 480

The Agricultural Trade Development and Assistance Act of 1954, as amended, or

Public Law 480 (PL480), is the primary statutory basis for the U.S. Food for Peace

programme. In enacting the legislation, the U.S. Congress declared it to be the

policy of United States to use its plentiful agricultural productivity to promote the

foreign policy of the country by enhancing the food security of the developing

world through the use of agricultural commodities and local currencies accruing

under this Act to combat world hanger and malnutrition and their causes; promote

broad-based, equitable and sustainable development; expand international trade;

develop and expand export markets; and foster and encourage the development of

private enterprises and democratic participation in developing countries.

PL480 comprises in Titles I, II, III and V, which provide assistance to countries at

various economic levels according to each title’s specific objectives; the former

three provide commodity assistance and Title V provides agricultural technical

assistance.

PL480 Title II is an "Emergency and Private Assistance" programme providing

agricultural commodities to foreign countries on behalf of the people of the United

States to address famine or other urgent or extraordinary relief requirements;

combat malnutrition, especially in children and mothers; carry out activities that

attempt to alleviate the causes of hunger, mortality or morbidity; promote economic

and community development; promote sound environmental practices; and carry

out feeding programmes.

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PL480, Title II development food aid constitutes the single largest source of USAID

funding for food security programmes. As a development tool, food aid is a flexible

resource that can be used for direct feeding or in monetized (sold) form to generate

local currency for development activities.

3.1.2 Monetization

Monetization relates to the sale of food aid commodities in the beneficiary country

to obtain cash to carry out various humanitarian and development activities. Title II

food aid monetization is typically built around two objectives. First, Title II food

aid monetization is programmed to enhance food security. Second, Title II food aid

is used by a Cooperating Sponsors to generate local currency to support

development activities. The process of monetizing food aid is further believed to

foster low-cost, competitive food markets by encouraging investment in

transportation, infrastructure, and human capital (traders, entrepreneurs).

Consequently, food aid monetization is considered a good vehicle to enhance long-

term food security by encouraging the development of competitive food marketing

systems that have in-built incentives to provide the poor with affordable staple

foods, encouraging, where appropriate, the development of competitive food

marketing systems.

Among the most common criticisms of food aid monetization is the potential

disincentive effect on domestic production and marketing as a result of the

increased supply over regular commercial imports, hence causing producer

disincentives in the wake of depressed prices for the particular products involved

and that of their substitutes.

The controversy that has arisen over the potential disincentive effects of aid raised

congressional concerns resulting in the 1977 Bellmon Amendment to PL 480.

Section 401(b) of PL 480 now requires that the following determination made

before food aid supplied: -

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(a) Adequate storage facilities are available in the recipient country at the time of

the exportation of the commodity to prevent spoilage or wastage; and

(b) The distribution of the commodities in the recipient country will not result in

a substantial disincentive or interference with domestic production and

marketing in that country.

The ‘Bellmon Determination’ prescribes specific criteria to judge potential

disincentive effects of food aid taking into account a review the specific sector

involved, food needs and price effects, government policy, changes in food

consumption pattern, and the distribution effects of Title II commodities. Once a

determination is made of substantial disincentives to domestic production and

marketing, the Bellmon Amendment requires that the programme of food aid

cannot proceed until appropriate actions are taken to remedy the situation.

Within the overall Title II development commodities delivered to Ethiopia over

the past few years, the amounts of monetized edible oil averaged 3,100 metric

tons per annum. This represents approximately 15% of the total oil imported as

food aid of an estimated 21,000 metric tons.

3.1.3 Disincentive Analyses for Title II Edible Oil in Ethiopia

USAID/Ethiopia commissions annual Bellmon studies to address increasing

concerns over the distribution and monetization of food aid, particularly as they

relate to impact on domestic food production and prices. The Bellmon analysis

undertaken annually considers the disincentive effects, if any, of monetized food

aid on domestic production and marketing based on a detailed analysis of the

market situation in the country. Disincentive analyses to domestic production and

marketing and the feasibility of monetized vegetable oil distributed by the

Cooperating Sponsors and WFP during the course of a given period review

production, consumption, and market characteristics to serve as a basis for

establishing the nature of the distribution and monetization processes as well as

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their potential impact on the market, hence make a determination to allow or

disallow commodity disbursement. An aspect of the study, in this regard, is

drawing a national balance summary relating to edible oil.

A national balance summary of the Bellmon study presents the annual national

production and consumption of edible in the country. The analysis made for 2005

depicts Ethiopia as a net importer of edible oil during the five years covering

1999/00-2003/04, commercial imports accounting for a substantial proportion of

all imports. While commercial imports of oil have remained virtually stagnant,

even with drastic declines assumed in contraband trade, domestic production has

been erratic, indicating that there is a steady niche market for commercial imports

of oil. It is also revealing to note that the share of domestic production in total

supply reached seventy percent in 2003/04 when food aid oil was at its lowest.

Although lower, the share of domestic production in total supply increased to

almost fifty percent in 2001/02 when food aid oil declined from 18.7 thousand

tons in the previous year to 10.9 thousand tons the following year [see table

below].

Table 3.1 Components of Edible Oil Supply and National Balance Summary

[MT]

  1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Net Domestic Oil Production 35,102 22,915 26,193 24,541 59,171 21,912

Food-Aid Oil 10,880 11,845 6,472 20,676 8,405

Monetization Oil 4,937 6,870 4,500 3,060 3,298

Commercial Imports 13,024 12,221 13,090 13,525 12,945

Contraband Imports 4,333 4,333 4,983 3,239 810

Total Domestic Supply 68,276 58,185 55,238 65,041 84,630

Total Per Capita Consumption (kg) 1.00 0.79 0.75 0.90 1.14 0.86

Commercial Per Capita

Consumption 0.86 0.59 0.63 0.65 1.08 0.68

(Source: Bellmon Study, 2005)

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3.1.4 Domestic Oil Processing

The study further reviews the Ethiopian oil processing sector and establishes that

there exist a large number of small to medium scale oil seed crushing units and a

much smaller number of larger oil mills. The study estimates that there are over

500 small presses in Bahr Dar alone and an estimated small presses of at least 160

operating in Addis Ababa, almost entirely operating with out license.

While not backed by a detailed analysis, the study asserts that smaller oil mills

tend to be more efficient, out competing larger producers, a significant portion of

whose production is reported to be sold to the military and as locally purchased

food aid, by as much as 30% in price.

Industry processing capacity, estimated at greater than 100,000 metric tons by the

study, remains largely unused. Addis-Modjo Oil Mills alone is reported to have a

designed capacity in excess of 45,000 MT oil per annum. Most large plants are

estimated to be operating at between 30 and 50% of designed capacity, primarily

as a result of high cost and low availability of oilseeds locally.

Edible oils produced by local oil mills, mainly neug oil, rapeseed oil and cotton

seed oil, products fall into two broad categories of quality. While larger mills

produce higher qualities of consistent taste and packaging, the products of the

smaller mills, sold in bulk, are inconsistent in quality and may contain blends of

different oils based on available raw material.

3.1.5 Processing Efficiency

Successive Bellmon analyses reports assert that the efficiency of the Ethiopian oil

processing industry is low when compared with international standards. While

recognizing the importance of a critical analysis of the efficiency of the local

processing sector for an objective assessment concerning disincentive effects on

domestic production and marketing, these assertions have been made only in

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conjuncture with annual requests by PVOs for monetization rather than systematic

medium to long term analyses of the impact of monetization of edible oil on

domestic producers and traders.

3.1.6 The Edible Oil Market

While the study establishes that almost all beneficiaries monetize some proportion

of the oil that they receive, it concludes that this does not lead to a significant

disincentive effect to domestic production and marketing. This arises from

findings that no locally produced edible was available in shops visited in Amhara

and Tigray regions and that what ever oil that was available in the market were

FFP oil, largely, and commercially imported oil. Findings in Oromiya and

Hararghe regions reveal that FFP oil is sold alongside both imported and

domestically produced refined and unrefined oil. Here, too, the study suggests that

FFP oil does not compete directly with domestically produced edible oil. Where

there was no domestic edible oil available, the competition was between FFP oil

and commercially imported oils.

Even with ‘a very significant proportion of the FFP oil provided to rural

beneficiaries’ finding its way back into urban retail outlets, the study concludes

that there is no evidence to show that it is undercutting or competing with

domestic edible oil, suggesting should FFP oil be withdrawn, it would only be

replaced by additional imported oil and not by domestic products. In contrast, the

study recognizes that FFP oil competes with commercially imported oils for

certain and may significantly affect commercial imports.

It is further interesting to note that the Bellmon study considers the monetization

of edible oil in the light of the gap in demand that is not being met by domestic oil

production, arguing that in the absence of monetized edible oil the supply gap

would widen, hence leading to even greater increases in prices. The study also

asserts that increased edible oil deficit would only result in increased imports

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rather than production from local oil mills, paying, as a clear indication of its

focus only in the short term, not much attention to the root causes of the

suboptimal operation that pervades domestic producers and much less about what

needs to be done to reverse the situation in keeping with the greater objectives of

the industrialization of the country by developing a sector whose natural

comparative advantage is recognized by the Bellmon study itself.

The analyses conducted further conclude that annual monetization volumes

requested by the Cooperating Sponsors have no discernible disincentive effects on

the market. The studies suggest that monetized edible oil does not compete with

both locally produced and other imported oils because of the high quality standard

of the product fetching prices exceeding import parity, opening the possibility for

increasing the volume that could be monetized annually.

3.2 The Mechanism of Edible Oil Monetization in Ethiopia

There are rules, policies, and directives on how to engage in the monetization of

Title II edible oil in Ethiopia. These are guided by the following: -

The Bellmon Determination or Disincentive Study;

USAID/USDA Monetization Field Manual;

MOTI/DPPC Regulations and Guidelines;

Monetization Commodities Reference Guide;

Monetization Commodities Specification Guidelines; and

Ethiopian and USA Regulations and Bilateral Agreements on Food Aid.

The Ministry of Trade and Industry controls the monetized oil market by setting lot

size, number of transactions, and import parity price threshold for each auction.

This is done in close collaboration with the Monetization Management Unit [MMU]

to maintain an open market and ensure that price threshold set is respected. Oil is

monetized in lots of 10,000 kilogrammes each, averaging 30-40 lots per sale.

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The import parity price determination and the threshold price for monetization set

by the Ministry of Trade and Industry has as a basis international border prices,

including duties and taxes, port handling charges, inland transport, and profit

margin.

The import parity price determination made is revised on a quarterly basis. Based

on October, 2004 cost buildup, the profit margin left to the wholesaler is much

below ten percent. As the price paid to MMU must include duties and taxes, traders

are required to pay both duty [30%] and VAT [15%]. MMU, after having received

payment for the net price after deduction of VAT, requires traders to produce VAT

payment receipts before they can take delivery of the edible oil that they have

purchased. While the implementation of monetization under this mechanism

effectively obliges the trader to pay VAT on the monetized oil purchased, the

question remains at which point and who pays the duty for the monetized oil. To

avoid the potential anomaly resulting from the participation in the monetization

auctions of non VAT registered traders, it is now a requirement that all participating

traders should be VAT registered.

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4. THE ETHIOPIAN EDIBLE OIL MARKET

4.1 The Supply of Edible Oil

As noted already, total supply is taken at the summation of domestic

production/sales and imports net of any exports and/or re-exports. For our purposes,

total supply is considered the summation of domestic production and imports,

assuming that what is produced during the year is sold during the same year.

Table 4.1

The Supply of Edible Oil

[‘000 Kilograms]

Year Domestic Production Imports Total Supply

1994 4,217 19,199.1 23,416.1

1995 5,755 17,095.2 22,850.2

1996 4,870 6,774.0 11,644.0

1997 5,321 2,859.8 8,180.8

1998 8,679 5,216.2 13,895.2

1999 6,579 11,745.1 18,324.1

2000 6,637 24,889.5 31,526.5

2001 8,329 11,807.6 20,136.6

2002 7,993 19,664.5 27,657.5

2003 8,027 61,491.9 69,518.9

Source: - Domestic production: CSA, Report on Large and Medium Scale

Manufacturing and Electricity Industries Survey, various issues.

- Imports: from Tables 4.5

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Total annual supply of edible oil over the years 1994-2003 fluctuated between a low

of 8,180 tons and an extraordinarily high of about 70,000 tons. The underlying

reason for the continued fluctuation in supply is food aid coming into the country

following chronic drought situations afflicting the country. According to an

Ethiopian Privatization Agency sector profile of the edible oil industry, relief edible

oil in 1994 accounted for 16,651 tons or 86.7 percent of total imports. The figure for

1995 was 14,011 tons, accounting for 81.9 percent of total imports. Commercial

imports through regular channels during these years, hence, computed to only 2,500

tons or 13.3 percent in 1994 and 3,000 tons or 18 percent in 1995, perhaps picking

up a bit following declines in food aid. The share of imported edible oil in total

supply declined sharply in 1996/97 and 1997/98 to thirty-five and thirty-seven

percent, respectively, but has since been on the increase, reaching an all time high of

88.5 percent in 2003.

The origins of the imports of edible oil are diverse and varied. Countries of origin

are far and wide, including such countries as Singapore, Malaysia, U.S.A., Canada,

Turkey, Egypt, Germany, Italy, Belgium, Greece, the Netherlands, Spain, Kenya,

Djibouti, United Arab Emirates, Saudi Arabia, Yemen, and Iran.

4.2 The Demand for Edible Oil

Ideally, domestic demand is taken at the difference between total supply and total

sales minus exports, re-exports, and stock at the end of the year. This, however, is a

difficult exercise in a situation where food aid pervades, as is the case here.

Consequently, two approaches have been used in the determination of the demand

for edible oil in Ethiopia. One is household income, consumption and expenditure on

edible oil based on the latest CSA Household Income, Consumption and Expenditure

Survey. The other is a primary research in the form of a sample survey of wholesale

and retail trade in selected major towns.

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Based on the analysis of income and expenditure presented above, current demand

for edible oil in urban Ethiopia, projected at 11.7 million according to The 1994

Population and Housing Census of Ethiopia, would compute to 56.2 million liters or

some 56,000 tons. At an annual consumption of 700 grammes of edible oil per

person [Table 4.10] current demand in rural Ethiopia [with a projected population of

61.4 million] would be an estimated 43,000 tons per annum, mainly in the form of

unrefined oil.

Added together, current annual demand for edible oil in the country as a whole

would be an estimated 99,000, say 100,000 tons. This is certainly paradoxical when

one considers the tremendous excess capacity inflicting the domestic edible oil

industry.

4.3 Projected Demand

Estimated demand levels based on both CSA household income, consumption, and

expenditure surveys as well as the extrapolation of annual sales volumes based on a

sample survey undertaken have been shown earlier to tally to the point of perfection.

Based on these estimates, current demand for edible oil in urban Ethiopia is

reckoned to be about 56,000 tons per annum or 4.8 kilograms per capita. Current

demand for edible oil in rural Ethiopia, at an annual consumption of 700 grammes of

edible oil per person computes to an estimated 43,000 tons per annum.

A deeper consideration of the structure of oils and fats consumption in Ethiopia

reveals [see Table 4.12] that oils account for greater than ninety-two percent of all

oils and fats consumed in urban Ethiopia while that of rural Ethiopia is much lower

at seventy percent. The consumption of butter in rural Ethiopia accounts for thirty

percent of oils and fats consumed. This is much higher than in urban Ethiopia, where

the share is less than nine percent.

Based on the above structure of consumption of oils and fats, a breakdown of the per

capita volume of oils and fats [6.9 kilogrammes] designated by the Ethiopian

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Nutrition and Health Institute [ENHI] as required for adequate nutrition, would

translate into 6.3 kilogrammes of oils and 600 grammes of fats for urban Ethiopia

and 4.8 kilogrammes of oils and 2.1 kilogrammes of fats for rural Ethiopia.

Two scenarios may be perceived for the purposes of projecting the future demand

for edible oil in urban Ethiopia based on the above. One assumes an annual growth

following the established trend of 4.4 percent growth in urbanization used in The

1994 Population and Housing Census of Ethiopia. The second combines the first

assumption and bringing the current per capita consumption/demand of urban

Ethiopia from 4.8 kilograms to 6.3 kilograms per capita and from the current 700

grammes to 4.8 kilogrammes per capita for rural Ethiopia as per ENHI requirement

of oils for adequate nutrition.

Taken on their own, either of the two scenarios may be considered realistic, the only

proviso being affordability in the case of Scenario II particularly in the rural context.

In both cases, however, the supply gap with respect to the country as a whole in

relation to domestic production capacity, estimated at 72,000 tons [37,000 tons per

annum in the 10+ category and a further 35,000 tons in the mall scale and cottage

industries], as already noted, is substantial. The gap is expected to grow if new

capacities are not on stream steadily. Short of this, reverting to imports to fill the gap

would be inevitable. In either case, the projections clearly establish the growing

potential of the edible oil sub-sector as agro-processing industry over the short,

medium, and long term.

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5. CONCLUSION AND RECOMMENDATION

The Ethiopian edible oil industry is beset by a paradox in the midst of adequate

resource base and substantial production capacity which remains unused for an

excessively huge part. Imports dominate supply while domestic producers lie idle for

the most part.

As already noted, local-resource-based manufacturing activities did not reveal any

tendency of being internationally competitive, despite expected cost advantage

stemming from the apparent low cost of labour or the abundance and low prices of

material inputs and utilities, as long as they are not imported. Likewise, the likelihood

that the edible oil would be internationally competitive, even considering the cost of

capital as sunk, is limited. It is evident that the cost of capital did not significantly

influence the competitiveness of the edible oil sub-sector, though it is an important

factor in the production process.

A great deal needs to be done to break out of this paradox. One is ensuring adequate

and steady supply of raw material inputs of the desired quality and competitiveness. It

is clear from the resource base presented earlier that the potential is there to adequately

supply both domestic and export needs. Chronic shortages in supply, however, beset

optimal operation in the edible oil industry. Ensuring adequate and steady supply of oil

seeds, grains, or pulses, as the case may be, has proven to be a difficult task in the past.

This requires an impeccable extension work with producers, peasants and commercial

farms alike. It is important to note that work done in the past in respect of soy beans

has not been particularly successful despite a long-running effort, an indication of the

complexity of the task.

Another area requiring serious attention if the Ethiopian edible oil industry is to be

pulled out of the doldrums is improving quality standards drastically. Current edible

oil producers, save for a few, remain essentially producers of poorly refined oil, much

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liked in rural Ethiopia. They are not, further, gauged, for the most part, to produce

packaged, refined edible oil, hence facing serious competition from imports

particularly in urban areas where consumers are now used to packaged, refined edible

oil for prices not outrageously higher than local bulk oil.

It has been noted earlier that the supply gap in edible oil is substantial even

considering the full utilization of existing capacities. A further issue at hand with

respect to existing oil mills is, in large measure, their inability to deliver edible oil of a

standard that would be competitive with imported edible oil that the domestic market

is now exposed to and used to. The difficulty in mustering the required momentum to

acquire a steady supply of raw materials in the desired qualities and quantities is yet

another area of serious and detrimental concern.

Edible oil coming into the country is yet another serious problem facing the long term

viability of the sub-sector. The annual Bellmon Determination conducted is not an

adequate measure of the impact of edible oil acquired through food aid on long term

growth and competitiveness of the sub-sector. For the concern of the Bellmon analysis

seems to focus more on the short term behaviour of the market as it relates to

monetized edible oil which is reported to account to only about fifteen to twenty

percent of the total volume of greater than twenty thousand metric tons entering the

country each year in the recent past as food aid. Considering the very low capacity

utilization that has been pervading the domestic edible oil industry, one must contend

that the substitution of such a magnitude of food aid edible oil by locally produced

ones would go a long way in fostering the growth of the domestic edible oil sub-

sector, including the much sought after inter-sector linkage for oilseed production.

Aspects of the edible oil market in Ethiopia that further hamper the growth of the

domestic industry are illicit trade and overt under-invoicing. The extent and

seriousness of illicit trade in edible oil in eastern Ethiopia has been shown to have

driven Hamerressa out of the market completely, with no hope in sight. With the

imminent installation of bulk edible oil handling and packaging at the port of Djibouti

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by major suppliers of edible oil to Ethiopia the situation is expected to aggravate,

posing a further challenge both to trade and manufacturing.

Contraband activity is deeply entwined in the history of trade and is driven by demand

and profit. Whenever there is sufficient demand for contraband products - whether

they are untaxed cigarettes, food products, counterfeit designer clothes or pirated

music - and it is sufficiently lucrative to supply those products, organized groups step

in to meet that demand.

←

The root cause of contraband is high taxation. The potential profit for the smuggler is

the difference between the cost of the product with all taxes paid and the untaxed

product. Increasing taxation increases the incentive for criminals to begin participating

in the contraband market. The incentive for smuggling has its origins in consumers'

desire to avoid high taxes and their willingness to switch from legitimate to illegal

supplies in order to do so. Such behavior creates difficulties not only for governments

but also for manufacturers, who then lose control over their product distribution and

pricing, diminishing the value of their products.

←

Law enforcement agencies are often unable to deal with the contraband problem or

they do not view it as a priority. Large borders, the sheer size and volume of both the

legal and illegal global trade in all products, the sophistication of organized crime,

inadequately funded and trained officers and a lack of knowledge and intelligence

often conspire to make anti-contraband initiatives unsuccessful. Furthermore, criminal

organizations are often attracted to smuggling as it is considered to be a high profit,

low risk illicit activity which incurs lighter penalties than other criminal activities.

Despite best efforts, law enforcement authorities generally estimate that seizures of

contraband represent barely 11 percent of the total volume of product actually being

smuggled.

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A further cause driving contraband trade is stringent trade and regulatory control. The

unforeseen consequences of stringent trade and regulatory controls can affect the

availability and supply of a product to the market, thus stimulating contraband.

Excessive restrictions, for example on pricing, as is the case with the administratively

set prices of monetized food aid in Ethiopia, retail availability, can be factors which

promote illegal supply.

Under-invoicing of imports is, much like smuggling, a practice that harms

manufacturers and importers of edible oil alike. Moreover, under-invoicing effectively

denies the government its due revenue in the form of customs duties and other levies,

including Value Added Tax (VAT).

The act of under-invoicing is reported to have increased dramatically in recent years,

with the extent of under-invoicing reaching over seventy percent of the legal import

prices. While the Ethiopian Customs authority has established comparable value

systems for imports, this is reported to be only for purposes of levying duties and taxes

on the under-invoiced import at the comparable value for that import, hence giving the

practice, which otherwise is tantamount to contraband, a legal cover rather than

mitigating it. Many countries confiscate and black-list both the importer and the

exporter, severely impacting on future shipments to the importing country. Many

importing countries also have customs laws which consider under-invoicing to be a

violation of the country's import laws. An exporter complying with an importer's

request for under-invoicing is considered a co-conspirator. Low tariffs are considered

a good remedy for under-invoicing. It has been established in practice that as tariffs

fall, so does import under-invoicing and the demand for illegal foreign exchange. With

high tariffs, import under-invoicing and the demand for illegal foreign exchange rise.

It is clear from the above discussion that the Ethiopian edible oil sub-sector is in dire

straits and much needs to be done to reverse the situation. The following must be

considered key areas of intervention in this regard.

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5.1 Supply of Raw Material

Given the above serious considerations and while pondering on the possibilities,

as one must, relating to other options of acquiring raw materials in the desired

quantity and quality locally, looking into other viable options for input acquisition

is worth the while. One such option is acquiring crude edible oil for further

refinement from local sources or imports.

5.2 Improving Competitiveness

Setting right the basic problems facing the industry in relation to the steady supply

of raw material in the desired quantity and quality locally goes a long way in

improving competitiveness, hence growth.

5.2.1 Enterprise Competitiveness

Enterprise competitiveness is the ability to sustain a market position by, among

other things, supplying products of the quality on time and at competitive prices,

responding quickly to changes in demand using effective marketing system.

Such a level of competitiveness requires that a continuous increase in

productivity or value-added is maintained by the enterprise. To achieve

continuous increases in value-added, enterprises must have the ability to

compete on cost and quality, delivery, and operational flexibility.

An important element in improving competitiveness is building domestic

capabilities. This requires the institution of policies and support programmes

that are necessary for strengthening productive capacity at the enterprise level,

particularly that of small- and medium-sized enterprises (SMEs).

The competitiveness of enterprises also depends on the business environment

and the sophistication of enterprise operations, including inter-firm cooperation,

the institutions and laws that are in place to create an enabling business

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environment, as well as policies and support structures necessary for enhancing

enterprise capacity.

5.2.2 Micro Policies and Support Programmes for Enterprise Competitiveness

5.2.2.1 Competitiveness as a Long-term Strategy

As the main goal of competitiveness strategy is to transform the structural

position of the country in the global economy, it is a long-term exercise

requiring vision and consensus among the stakeholders and an awareness of

both the national goals and the steps that have to be taken to achieve them.

This should begin with stocktaking in terms of strengths and weaknesses of

existing policies, programmes and structures at the macro-, meso- and micro-

levels. Then, on the basis of the stocktaking, the stakeholders should design

policies and programmes that contribute to increasing the value-added of

national production.

5.2.2.2 Public-Private Sector Dialogue

An effective policy framework for enterprise development should begin with

the identification of real constraints and possible solutions. A useful way of

identifying such constraints is through public-private sector interaction and

dialogue, thus creating an enabling environment and fostering policy

coherence. Government needs to recognize and accept the role and status of

private sector organizations as partners in development and as the voices of

private enterprises. It is best that dialogue be deliberate, periodic, involve all

stakeholders, and have a declared agenda. It is important that dialogue be more

frequent whenever there are issues of concern to businesses at the local or

‘meso’ level.

5.2.2.3 Access to Finance

Finance is identified by businesses, large and small, as the most important

factor determining their survival and growth. This is particularly so to SMEs

which traditionally have difficulty in obtaining formal credit or equity, despite

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the much professed importance of SMEs to the economies of both developing

and developed countries.

It is, therefore, important for regulators of financial services to play a proactive

role in instituting a policy framework for channeling adequate funds to the

SME sector. One such framework would be for regulators to explore for

mechanisms to set quotas and targets to finance SMEs and to require

commercial banks to disclose the composition of bank loan portfolios by

different categories of borrowers. In parallel, it is important that the

government introduce special measures by way of guarantee schemes and

transparent/objective appraisal systems for SMEs and to reduce the risks

perceived by banks.

5.2.2.4 Access to Business Development Services

Important as it is, it is becoming increasingly clear that financial support alone

is not enough for achieving sustained enterprise competitiveness. Access to

business development services (BDS) for SMEs has been recognized as

important tools in enhancing enterprise competitiveness. BDS relate to all

types of support services, including training, consulting, technical and

managerial assistance, marketing, physical infrastructure, and policy advocacy.

Interventions in this regard are specifically aimed at helping SMEs overcome

market imperfections and problems relating to access to technology, as well as

operate more competitively and with greater efficiency both in domestic and

global markets.

The organization of the delivery of BDS is best perceived as a joint effort by

public and private institutions for effective responses. From a policy

perspective, it is important to rely, as much as possible, on the private sector in

offering these services, government focusing on replacing direct provision of

the services with the development of facilitators/intermediaries

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5.2.2.5 Combining BDS and Finance

Combining financial services with non-financial services through partnerships

has proved to be an efficient way of enabling banks to lend to SMEs. BDS

providers are often better placed than financial institutions to identify potential

clients, ascertain their creditworthiness, disseminate adequate financial and

accounting techniques, pre-screen project proposals, monitor repayment, exert

peer pressure, and maintain one-to-one contacts during the entire payback

period. Thus, BDS providers and financial services complement one another,

helping to minimize both the risk and the transaction cost to creditors and

investors and making access to credit and equity less costly and less

cumbersome to SMEs.

5.3 Mitigating the Impact of Food Aid

Successive Bellmon analyses conducted conclude that annual monetization

volumes requested by the Cooperating Sponsors have no discernible disincentive

effect on the market. The studies further suggest that monetized edible oil does

not compete with both locally produced and other imported oils because of the

high quality standard of the product, fetching prices exceeding import parity and

opening the possibility for increasing the volume that could be monetized

annually.

On the other hand, it has been shown that the edible oil sub-sector has not been

performing well in all aspects of its operational parameters. Its contribution to

employment and output, growth in production and productivity, as well as

competitiveness (domestic and international) has been quite disappointing.

Capacity utilization in the edible oil sub-sector has been by far the lowest among

the food manufacturing sector industries and the average of the Ethiopian

manufacturing industries over the past few years. Not only has capacity utilization

been the lowest, the rate has been on the decrease, from 39 percent in 1997 to

13.9 percent in 2001, indicating that the sub-sector is engulfed in diverse and

immense constraints.

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No adequate database is available to look holistically into the trends of the edible

oil sub-sector basic variables. Available information on the 10+ group, for which

CSO/CSA have been conducting surveys regularly for about three decades,

indicate that the basic variables relating to the edible oil sub-sector tend to

stagnate in respect of production and deteriorate in respect of value-added despite

a tremendous increase in fixed assets. Number of persons engaged in the edible

oil sub-sector declined by between twenty and thirty percent in the recent past.

Trends of basic variables in the food sector as a whole, on the other hand, have

been positive in all respects.

The most serious problem facing the edible oils sub-sector has been the lack of

market due to a host of factors. These include import liberalization, high

production cost, low product quality, contraband, and under-invoicing, both non-

monetized and monetization of food aid adding ‘blow to injury’ aggravating an

already precarious situation.

Even with the above problems, one cannot be categorical about the impact of food

aid, monetized or otherwise, having no effect on domestic production and

marketing as successive Bellmon reports suggest regarding Title II edible oil to

Ethiopia. As already noted, the Bellmon analysis in its current form fails to

address longer term impacts of food on productive capacity and is, as such, not an

adequate measure of the impact of edible oil acquired through food aid on long

term growth and competitiveness of the sub-sector. The Bellmon analysis is more

preoccupied with the short term behaviour of the market as it relates to monetized

edible oil. A detailed analysis of the competitiveness and main constraints of the

edible oil sub-sector presented in the present study, while recognizing the

multitude of problems faced by the sub-sector, makes it amply clear that the

‘natural comparative advantage’ the Bellmon report itself recognizes Ethiopia has

can be converted into a ‘competitive advantage’ that would enable it to withstand

competition from abroad and to make it internationally competitive with the set of

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measures and support outlined above. The starting point for the Bellmon

Determination, in this regard, would be to view the issue of ‘substantial

disincentive’ to local production and marketing in respect to how much

monetization aggravates the predicaments of an already troubled industry,

regardless of the causes for the sector’s internal inefficiencies. This is much more

so when considering the altruism one is led to believe to be behind food aid as

essential as edible oil.

Clearly, any administrative intervention against market forces will have impacts

of a sort. If left unchecked or if the ramifications of short-term actions over the

long-term are sidelined in favour of immediate objectives, wider development

objectives could sustain serious damage. Unfortunately, a long-term interest in

sustainable development is not always the driving force behind food aid

allocations. The challenge is, therefore, to minimize the impact in a way that food

aid would not dislodge or bring to a halt local production and official imports.

Ideally, food aid should be provided in cash form to purchase food locally or

regionally. A very recent study published by the Organization for Economic Co-

operation and Development [OECD] reveals that shipping food aid rather than

cash to poor countries cuts the benefit of such aid by a third as a result of

substantial cost inefficiencies associated with tying food aid.

Local purchase of food aid could, therefore, go a long way in mitigating the

problems faced by the edible oil sub-sector in Ethiopia, particularly considering

the very low capacity utilization that has been pervading the domestic edible oil

industry. One must contend, as already noted earlier, that the substitution of the

magnitude of food aid edible oil currently coming into the country by locally

produced edible oil would come a long way to foster the growth of the domestic

edible oil sub-sector, including the much sought after inter-sector linkage for

oilseed production.

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Should it not be possible to influence donor policies towards the local purchase of

edible oil from domestic producers, involving the oil mills in the trade and

distribution of monetized food aid edible oil could be a way out. The proposal

here is to deliver the edible oil to be monetized to a consortium of producers at the

import parity price to be determined periodically by the Ministry of Trade and

Industry as is the practice now. The consortium would include all producers

regardless of size, represented through their trade associations. Any surplus to be

generated from the trade and distribution of monetized food aid edible oil could

be used towards improving the competitiveness of the sub-sector. The interests of

importers is best served by dealing with under-invoicing and illicit trade severely,

the latter principally through policy measures including lower customs tariffs

particularly recognizing that edible oil is an essential food item in the daily diet of

the population.

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