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Ethiopian
Leather Scum
Wondirad Seifu, February
22, 2013, Ethonlines
Value added is an objective concept. But it seems losing
its meaning in the Ethiopian leather sector or suffering from some flaws
like under invoicing. Besides, the government policy is failing, though it triggers
to orchestrate All African Leather Fair. In the mean time, the county’s
plan period to attain USD 500 million per year from export of leather is
coming to an end, fostering only USD 100 million. Since the sector’s market
structure is extremely skewed, the fate of 30 or so tanneries is at risk,
although, for the time being, they are enjoying playing in the currency
market instead of gaining out of their productivity. What went wrong?
Ethiopian leather sector is one of the traditional industries
operating since 1926 while freely polluting the environment. Until recent
time its export value is next to coffee, the country’s loyal export
commodity since 1000 years ago. But now leather slips to the rank of 5th
or 6th in the list of export commodities. Embarrassingly, it is
much below from the export proceeding of the narcotic green leaf, called, ‘Khat’
Though the sector is moving at a snail pace, still it
has received massive amount of investment from the government as compared
to other sectors. For example it has privileged with about 130 million birr
worth of leather development institute which is provide with 40 million birr budget; probably to
invent synthetic leather. Besides, it has been offered a variety of policy measure
by the government in order to drag it up along the value added ladder. Unfortunately,
it lacks satisfactory level of performance.
Conventionally, there are four products that are
supposed to yield value added in the production of leather from hide and
skins; namely, pickle, wet blue, crust and finished lather, in ascending
order. According to the international experience, each product has attached
a value added at a rate of 100% at a minimum.
Wishing for value added,
Ethiopia had banned export of hide and skins in 1987. As a result, about
three dozen of pickle and wet blue tanneries were joining the sector, but
they took about 25 years to generate USD 97 million per annum.
The wish goes, and in recent time the government banned
(or put heavy tax on) pickle and wet blue leather from export with a purpose
to extract further value added. Therefore, only crust leather was privileged
to enjoy the export market. But yielded a very marginal pay off, USD 99 million.
Still, the lust goes and triggers another ban on crust leather. And so,
only finished leather was allowed for export market. Odd enough, it yields
almost no value added. The export proceeding from finished leather was only
USD 100 million, excluding leather goods worth of USD 12 million. Where the value added has gone?
I was really wondered to hear the tanneries ability to
build finishing capacity within a short period of time as it involves heavy
investment and complex operations. Our local media were also restless to
voice such achievement day in, day out, irrespective of proof of evidences.
Likewise, our National Bank declares its statistics to
confirm such controversial achievement. According to the Bank’s annual
report the weight to area ratio of leather export is dramatically reduced. This
infliction point also corresponds to the time when crust and finished
leather (dry leather) were banned from export. Technically, this means that
the industry is shifting to higher stage of production. But it does not
mean that the sector is producing only finished leather unless indicated in
the Bank’s report as crust or finished.
Sadly, if one judges the value with its corresponding
output, it is automatic to sense the bleakness of the Ethiopian leather
sector. Dose the international
experience failed to be feasible in the country? Or does it lose its power
in the invoicing system? Or the truth is charred with
too much statistical cooing? Not to mention, the economic theory that assign
African as a supplier of raw material.
Although, the tanneries operating in the country have vowed
for such achievement, they are ceaselessly laminating for being suffering
from shortage of raw material to the extent of working bellow a quarter of
their installed capacity, ignoring their
breakeven even point. Please note that the tanneries raw material base is
nearly constant at the supply of twenty million skins and two million hide
for over three decades. In fact, exports of live cattle, contraband and
traditional use have seriously affected the supply chain.
At present there are 33 or so tanneries in the country.
However, only very few have been privileged to take up the lion share in
the market. For example, Pitards, a British based
leather firm has claimed over USD 50 million from the export market. ELICO,
a tannery operated by the mysterious tycoon, Mohamed Ala-Moody is said to
take up about USD 20 million, and a certain Chinese company has started snatching
over USD 25 million. Obviously, these three tanneries alone controlling
over 95% of both export and local market. But I don’t know exactly how much
Pitards retards or Ala-Moody dominated the sector.
From economic point of view such monopolistic
competition would not lend itself to optimum utilisation of recourses and
could left the rest of tanneries at risk, which most likely happen in the
near future. International experience shows that fair competition for a
tanning industry would take its symmetrical shape if the market share of
four tanneries is below 20 per cent.
On the other hand, the government’s policy offer that
put a regressive tax system on raw skins and leather sector’s products is
not free from flaws. For example, a 150% tax imposition on export of raw
hide and skins would cause great challenge for the country striving to join
World Trade Organisation. But the worst is what the country is losing from
the international price of raw hide and skins. That is to say raw hide and
skins are sold in local markets much bellow the international price. So
that it would have been beneficial to lift the ban and sold at raw.
Putting differently, the annual supply of 20 million raw
skins, each at USD 8, could generate a total value exceeding the proceeding
from export of finished leather. Of course, we shouldn’t deny the advantage
of gaining efficiency from international competition.
At the end of the day it is the quality of raw hide and
skins that suffers terribly. In hind sight, the quality of raw hide and
skins was at its best level before the export ban was put on place in 1987.
During the time, when
free trade was in the service of raw hide and skins, its original producer,
the peasant was highly conscious to take care for the skins quality. Hence,
best grade raw skins constituted about 70 % as opposed to the current level,
below 20 %.
Indeed, the subjectivity of leather grading and absence
of independent institute to check the quality of export leather seems to
encourage the fleet of hard currency through the art of under invoicing and
re-grading. Plus, tanneries seem ignoring the quality of raw hide and skins
as they opt to play in the currency market. As Birr is steadily devaluated
against Dollar, tanners are now enjoying to act as that of the speculators.
Not needless to mention the benefit they are deriving
from the global price hike at the expense of quality, which is exacerbated
by the absence of grading system in raw hide and skins market. In this
regard, both governmental bodies, the Ministry of Agriculture and Standard
Agency seem denying recognition for the existence of the leather sector.
Summing up, unless the ban of raw hide and skins is
dismissed and the sector is exposed to free trade with proper system in
place, gaining value added of USD 500 million from the leather as per the
countries Martial or Growth Transformation Plan will remain indefinitely in
a wish list.
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