Import Substitution: The Key to Ethiopia’s Economic Resilience Amid Floating Exchange Crisis?











On Tuesday, fuel prices surged, a sharp reminder of the turbulent waves unleashed by Ethiopia’s shift to a floating exchange rate. This unshackled currency now dances to the unpredictable tune of market forces, sending shockwaves through industries and households alike. Importers grapple with relentless cost hikes, while exporters cautiously savor the promise of a level playing field. Inflation relentlessly eats away at people’s money, reducing what they can buy and pushing them to make do with less.

From small businesses fighting to stay afloat to families struggling to make ends meet, everyone is caught in a constant rise in costs, with no relief in sight. What was once a tightly controlled system has become an economic battleground, where resilience and adaptability are the only currencies of survival.

Adding to the pressure, the government’s ambitious tax policies are shaking the business landscape, exacerbating the challenges caused by the floating exchange rate.

“Although economic theory suggests that devaluation of the local currency should boost foreign currency generation for exporters, thereby encouraging them to ramp up production, this is not unfolding in Ethiopia’s context,” said Atlaw Alemu (PhD), an Economics Lecturer at Addis Ababa University. He added, “Whether the birr is devalued or not, our exports remain rigid. Meanwhile, imports continue to rise, which will only deepen the economic pain felt by society.”

He added that structurally, there is no significant interest in substituting imports. As a result, importers are more inclined to import rather than focus on local production. “Import substitution needs to be treated as a priority, with increased incentives. The process of entering this sector should be simplified,” he emphasized. He also pointed out that import substitution is not just about commercial interests; it involves broader concerns, including technology transfer. “Policymakers must approach this with caution,” he cautioned, stressing the importance of addressing hindering factors such as ethnic politics.

“For the shift to a floating exchange rate to yield results, both imports and exports must be responsive to its effects,” he added.

He pointed out that what’s happening across industrial parks in Ethiopia resembles labor export, where the focus is solely on assembling final products. “If foreign direct investment (FDI) is limited to this, it’s meaningless. FDI should create jobs, transfer knowledge, and lay the foundation for import substitution,” he stated. He emphasized that import substitution requires robust capacity building, which demands expensive capital. To encourage private investors, the government should establish a fund to promote reverse engineering, enabling companies to develop their own designs in the long run.

The country’s production capacity is only 38 percent. The remaining 62 percent is imported with a huge amount of foreign currency. The Import substitution strategy targets localizing key manufacturing within 3-10 years, targets 15 sectors critical to import independence, including vehicles, aircraft parts, chemicals, plastics, steel and sugar products.

The Ministry of Industry has identified around 96 products, including telecom equipment and a range of construction materials, to be substituted with domestic alternatives within the next decade, according to Ethiopian Business Review.