EDRI Working Paper 019: Ethiopia’s export promotion and the misalignment of the tariff and exchange rate regimes

Abstract

By examining how much aligned the tariff and exchange rate regimes are with the export promotion in Ethiopia, this study tries to shed some light on why the export performance of the country and particularly that of manufacturing sector remained poor despite continued government promotion and support. Toward this it quantifies the extent of effective protection and defacto anti-export bias generated by the existing tariff and foreign exchange rate regimes. The disaggregated (approximately 2-digit) industry level estimates of the NRP, ERP and anti-export bias in the manufacturing sector show wide difference among industries. With about 35% nominal duty rate, the export oriented sectors such as Textiles, Apparels, Leathers, Footwear industries are the most protected ones within the manufacturing sector. The anti-export bias estimates suggest that the value added obtainable in the domestic market vis a vis exporting is greater than 1.5 times for the Leather and Footwear industries and more than 70% for the Textile & Apparel industries. The anti-export bias in these sectors remained large, even after considering a 100% of duty drawback on imported inputs, making the domestic market lucrative relative to the export market. This study further shows that exporters are penalized by the increasing overvalued exchange rate of the Birr. Finally, it highlights the inconsistency of the tariff and exchange rate policies with the export promotion of the country and provides some recommendations to address these anomalies.