Like much of Africa, Ethiopia’s economy has historically been, and still is, heavily reliant on agriculture. Over-reliance on an industry plagued by periodic drought, soil degradation, and deforestation has seen the Ethiopian government shift focus towards the growth of a newer textile industry. This may lead to Ethiopia eventually becoming a global garment manufacturing hub. Nonetheless, violent conflict in the northern region of Tigray over the last few months has threatened Ethiopia’s stability and this industry’s strong economic potential.
Over the last 6 years, Ethiopia’s textile and apparel industry has grown at an average of 51% annually, and the country has licensed over 65 international textile investment projects from foreign investors. For example, Sunshine Ethiopia Wool Textile is a manufacturing plant opened by Chinese textile and garment giant Jiangsu Sunshine Group, which invested around 980 million USD. Ethiopia’s investment appeal is largely due to low labour and energy costs, as well as the availability of raw materials like cotton, which can be sourced domestically by manufacturers who are thus exempt from paying import fees. Such foreign investment growth has also been facilitated by tax incentives put in place by the government, like customs duty tax and income tax exemptions in manufacturing. In addition, regulatory incentive schemes protect foreign investors, such as guarantees against expropriation and full repatriation of all profits. Much of the foreign investment has come from Asian countries – many Chinese, South Korean and Indian investors have opened new plants in the country. Moreover, a growing number of US and European brands are also sourcing garments there, such as Decathlon and H&M. Despite this surge in growth, Ethiopia’s market is far from saturated, offering large potential for vertical integration, with only 3% of total land suitable for cotton production cultivated according to the Ethiopian Investment Agency.
Much of this progress may however have been undermined by conflict in the Tigray region, likely deterring foreign investors. The cause of the conflict stems from historical ethnic clashes fuelled by the Ethiopian prime minister accusing the region’s ruling party of attacking a military base in Tigray. The Tigray region borders Sudan and Eritrea, the latter of which has also previously had border conflicts with Ethiopia and are presently involved. Whilst the US is demanding that Eritrean forces withdraw from the region, investors may fear the knock-on effects of the conflict on their business ventures. The conflict creates uncertainty over the ability to complete and ship time-sensitive orders, as well as increasing security risks to staff and workers. The current violence has killed thousands and displaced over a million people, with around 50,000 fleeing to Sudan. This creates inefficiency by undermining thousands of jobs in the Ethiopian economy. Some industrial parks are already currently closed due to the violence, namely ‘Mekelle Industrial Park’, which has a capacity for around 20,000 workers.
The textile industry in Ethiopia also faces other challenges. Firstly, the bureaucratic and logistical hurdles that come with a largely unskilled workforce restrict efficiency in manufacturing factories and thus limit profit. An unskilled workforce is the result of high attrition, with high worker turnover not allowing much time for training. A key reason for such attrition is the low wages paid by factories after workers were given the lowest base wage in any garment-producing country. The Ethiopian government promotes a base monthly wage of just 26 USD for workers; in contrast, the garment industry in Bangladesh offers a monthly minimum wage of 95 USD. The COVID-19 pandemic has also inevitably negatively affected production, leading to decreased orders and job losses, as well as a fear of returning to work for many Ethiopians due to COVID-19-related health concerns.
Ethiopia’s textile and garment industry has seen significant growth in recent years, holding great future growth potential. However, the current conflict may undo years of positive growth for the industry leaving little chance of recovery. On the other hand, if the government is able to cease conflict and develop the industry infrastructure further with regards to wages and training, Ethiopia could see itself as a global garment manufacturing hub in the near future.
By Hadi Ahmed
Sector Head: Jared Gibson