Ethiopia is putting its textile sector at the centre of a five-year development strategy that seeks to position the country as a low-cost manufacturing hub. Under the second phase of the Growth and Transformation Plan (GTP II), the government aims to boost earnings from textile exports from an estimated $427 million in the first GTP I (2010-15) to $1bn by 2020.
Given its low electricity and labour costs, Ethiopia is attracting the interest of global textile manufacturers, which are looking to relocate operations from Asia where worker wages are rising. The GTRP offers a range of fiscal incentives, including a five-year duty waiver on imports of heavy machinery and spare parts, and reimbursement of VAT on local goods. Despite being landlocked, Ethiopia’s proximity to Europe via the Suez Canal is another advantage of its budding textile industry, which has attracted Turkey’s Ayka —the sector’s largest player accounting for 57 percent of 2014 export earnings worth $111.45mn—and fashion brands H&M and Primark. Kanoria Africa Textile, a subsidiary of the eponymous Indian conglomerate, has also moved into the market, and is planning to start yarn and denim fabric production at its $35mn factory in June.
However, the government could struggle to meet its ambitious $1bn target, which it had planned to reach under the first phase of the GTP. Textile manufacturers only exported 20-30 percent of total yarn, fabric and apparel production last year, well short of the government’s 80 percent target, owing to poor price competitiveness. This reflects high production costs, notably for local cotton lint (Ethiopian Birr 34-36/kg compared with Ethiopian Birr 26/kg for lint imports), and low productivity rates, owing to the lack of skilled labour. Ethiopia’s textile value chain is also beset by erratic cotton lint production, which totalled just 45,200 tonnes in 2012/13, owing to lack of area planted with cotton and low prices. Although cotton lint production meets current demand, textile manufacturers will need to import lint from Pakistan or India if textile production is scaled up, which will further weigh on the cost competitiveness of Ethiopia’s exports.