- Ethiopia's MSMEs Strained by Input Costs and Financing Woes
By Yared Seyoum
Abraham Tewedaj sighed as he surveyed his small poultry farm at Ferensay Legasion, Addis Ababa. When he had started this business three years ago with a microloan, there was optimism for expansion. But now, with limited space and no access to more financing, his dream seemed further away than ever.
"There is no finance. There is no way to get a working shed," Abraham said in frustration. His situation highlighted the immense challenges small businesses face in Ethiopia trying to drive jobs and economic growth amid youth unemployment.
Abraham had diligently repaid the initial 50,000 birr loan from a state microfinance institution that allowed him to start with just three chickens. Through hard work, he scaled up to 500 birds, the additional income enabling repayments on time.
Hoping to increase production, Abraham now sought more land and capital. But affordable land near towns was scarce as urbanization accelerated. Rents doubled in two years, pushing his future plans out of reach. Banks also declined further loans, unwilling to lend to small farmers.
Abraham's predicament reflects the struggles of Ethiopia's over 2 million micro, small and medium enterprises (MSMEs). Forming over 80 percent of businesses and employing the majority, MSMEs are key to addressing Ethiopia's entrenched youth joblessness problem.
With 2 million youth entering the workforce annually, integrating them sustainably depends on MSME growth. Their vital self-employment and wage creation role is undermined by constraints like Abraham's—a lack of conducive infrastructure and accessible financing holding businesses back.
Harsh realities on the ground
For leather goods maker Habtamu Geremew in Addis Ababa, financing woes compounded difficulties. His small workshop produced bags and accessories, but credit access was near impossible.
"Banks demand excessive collateral we can't provide. Even if approved, lending rates over 25 percent make profits unrealistic," Habtamu said. With limited funding options, investments in capacity and new lines remained out of reach.
A First Consult survey of over 300 firms found only one-third successful in securing bank-MFI loans, waiting over two months on average. Real estate dominated as collateral due to systemic biases, despite central bank directives allowing movable assets.
This deprived most MSMEs - Ethiopia's engine of job creation—of over 70 percent of the labor force through self-employment. Government data notes that 71 percent of MSMEs are micro-enterprises, rarely graduating stages due to lack of supportive ecosystems.
Compared to regional peers Kenya and Ghana, with over seven million MSMEs each supporting lower unemployment, Ethiopia lags behind with just 2.2 million enterprises and 55 people per business on average.
Inflation squeezes viability
Prolonged inflation has further exacerbated constraints. Abraham saw chicken feed prices surge 30 percent in a year alone, eating profit margins. Across sectors, 93 percent of firms reported severe raw material cost hikes.
Rents jumped for Abraham and Habtamu's leased spaces. Though utilities, freight and other input prices rose sharply too from macroeconomic volatility impacts.
Over half the firms surveyed raised prices to maintain margins. But demand fell notably, inflicting moderate to severe declines on 86% of businesses - with reportedly higher sensitivity among service consumers.
In such a challenging environment, sustaining operations has become increasingly difficult without supportive policy interventions. The viability of many successful ventures is under threat, risking job losses if inflation isn't stabilized and operating costs reduced to manageable levels through coordinated and multi-pronged reforms.
The Raw Materials Crisis
Raw materials form one of the largest cost components for many small businesses in Ethiopia. Rising raw material prices, which 93 percent of businesses cited in a First Consult survey last year, have had the greatest impact on production costs. As global commodity prices surge and supply chains face disruptions, unreliable access to affordable raw materials has intensified into a major impediment for stable operations.
For manufacturers in particular, spikes in raw material costs have been disruptive. As one garment factory owner noted, "Our biggest challenge is the availability of raw materials. Importing has become much slower, forcing long periods of idleness." With production dependent on timely delivery of fabrics and inputs, unpredictable delays strain capacity utilization.
Smaller processors without supply contract protection or scale to negotiate favorable terms have suffered the most. Volatility in global commodity exchanges quickly feeds through to local costs. Attempts to maintain margins by passing on even a portion of increased expenses to consumers has led to reduced demand across sectors, according to surveyed firms.
However, this demand contraction has differed between manufacturing and services. The majority of companies (59.6 percent) raised prices in response to higher input costs. But the decline in demand was more pronounced in the service sector, implying consumers have more elastic preferences for discretionary purchases compared to necessities.
Rising raw material costs have compounded challenges for import-reliant industries lacking local alternatives. Textiles, garments, leather and agriculture-based ventures depend on imports for over 80 percent of major inputs, according to First Consult’s survey. However, currency devaluation against input currencies and global bottlenecks have made imports less affordable and arrival timelines unpredictable.
Farmers have been acutely impacted, including poultry producer Abraham Tewedaj, who complained feed ingredient costs due to shortfalls. Without mechanisms to absorb volatility, small firms struggle to maintain operations, threatening employment and growth prospects if conditions persist.
Experts’ view
While entrepreneurs display perseverance, enabling conditions are crucial to helping Ethiopia's small firms achieve their potential as the backbone of inclusive growth and development.
Concerted efforts are needed to rationalize commercial land access and rental markets; incentivize tailored financing suitable for various business segments; streamline processes, simplify operations, and expand.
Stabilizing prices of key inputs like raw materials through import subsidies, stockpiles and local production promotion will provide much needed relief. Targeted utility subsidies or working capital facilities could aid viability in the interim.
If coupled with skills development and common facility programs graduating microfirms to higher levels, Ethiopia's vast enterprise base stands poised for sustainable growth, powering prosperity for all. Success stories of perseverance like Abraham's could be replicated nationwide.
With challenges addressed through coordinated multi-stakeholder collaboration, the untapped promise of small businesses driving jobs and innovation across communities remains within reach. It is time for bold reforms to propel their potential further for society's benefit.
