The Ethiopian government is opening up its raw coffee sector and other areas to foreign investment for the first time since 1992.
Liberalization follows years of relying solely on domestic players to bolster the national economy. The new directive aims to introduce fair competition into the market while giving local investors time to build up their capacity to compete with international investors. However, not everyone is convinced that foreign direct investment (FDI) solves Ethiopia’s problems.
According to the new policy, foreign investors can now participate in import, export, retail, and wholesale trade. Interested parties must apply for an investment permit and meet certain criteria. For coffee exports, a $10 million annual procurement history and a commitment to exporting $10 million annually for the next three years are required.
Foreign companies new to Ethiopia must commit to spending $12.5 million. Those looking to import are contractually obligated to provide logistics services that facilitate wholesale operations and modern marketing infrastructures. China, Saudi Arabia, and Turkey are currently Ethiopia's largest contributors to FDI.
Critics worry that establishing high thresholds will attract only the world’s largest trading and supermarket groups. They say small and medium investors lack the balance sheets and deep pockets required, putting local businesses at a disadvantage. However, the government says years of limited liberalization failed to produce results, and competition is necessary to create gains in efficiency.
Ethiopia’s economy is predominantly agrarian, and the majority of coffee produced is grown on small-scale farms. Large scale foreign companies could dominate the market. While liberalization proved successful for countries like Vietnam, other countries like Sierra Leone could not increase their coffee exports after opening up to foreign investors. Coffee is too volatile a commodity to be relied upon to improve export earnings.
Brazil and Colombia created centralized coffee associations, co-operatives, and export assistance programs to support small-scale farmers after liberalization.
In an article in Coffee Intelligence, coffee economist Dagmawi Lyasu states, "When trade is more liberal, a great deal of care needs to be taken to ensure the participation of local SMEs and businesses and smallholder farmers. Otherwise, in the long term, there is minimal value.”
He said, “There is a need to develop an ecosystem that can support farmers and local businesses to add value and retail coffee for both local consumption and export.”
Liberalization is one part of Ethiopia’s Homegrown Economic Reform Agenda (HGER). Deputy head of the Ethiopian Investment Commission (EIC), Dagato Kumbe told The Reporter, “There is a huge amount of interest from foreign investors. [The directive] will bring massive change in the trade system. We paid attention to how we can balance the sector for local investors as well,” he said. “We have a strategy to govern the implementation process.”