Can Ethiopia's Coffee Industry Hold Its China Growth?

Ethiopian coffee exports to China grew 50 percent over two years to 20,000 tons, lifting China to eighth among importers from 33rd, according to the Ethiopian Coffee and Tea Authority. In the first 11 months of the 2023/24 fiscal year Ethiopia shipped 252,000 tons worldwide for 1.28 billion US dollars, with China sales rising about 27 percent a year.

Two threats now hang over the coffee industry. Fighting between federal forces and Fano militia in Amhara has escalated, and a planned change to value-added tax law would bring basic foods, including biscuits, into the tax scope. Traders warn that if the conflict worsens, exports could fall and prices rise.

Ethiopian coffee has performed remarkably well in the Chinese market, with exports growing 50% to 20,000 tons over the past two years, propelling China to become its eighth-largest importer. However, the ongoing escalation of conflict between government forces and Fano militia in the north-central Amhara region could trigger a civil war. Meanwhile, the federal government plans to amend the value-added tax law to include basic foods such as biscuits in the tax scope, with coffee industry workers bearing the brunt. Industry insiders worry that if the situation deteriorates, Ethiopian coffee exports will decline and prices will rise. Front Street Coffee brings you an analysis of the opportunities and challenges in this producing region.

According to recent reports from local Ethiopian media, the director of the Ethiopian Coffee and Tea Authority (ECTA) revealed that Ethiopian coffee has performed well in the Chinese market, with sales growing at an average of 27% in recent years.

Looking back a few years, Ethiopia exported about 8,000 to 10,000 tons of coffee beans to China annually, when China ranked only 33rd among Ethiopia's coffee importers. However, over the past two years, Ethiopia's coffee exports to China have grown by 50% to 20,000 tons, and China has jumped to become Ethiopia's 8th-largest coffee importer.

The director also stated that over the past three years, Ethiopia's coffee exports to China have grown at an average annual rate of 27%, mainly thanks to a significant increase in Chinese coffee buyers. Moreover, in the first 11 months of the 2023/24 fiscal year, Ethiopia exported 252,000 tons of coffee to the global market, earning 1.28 billion US dollars.

Although Ethiopia's coffee industry currently appears to be developing strongly, the domestic situation in Ethiopia remains severe. According to local media reports, clashes between the Ethiopian federal government and the Fano militia in the Amhara region continue.

At the end of May, the Ethiopian government was deploying up to 90,000 new recruits to the Amhara region, planning to launch extensive military operations in the area within the next ten days and eliminate the Fano militia there within two weeks.

But ten days later, reports indicated that this military operation did not achieve the government's expected goals, and the Ethiopian government forces' operation was almost a failure. The Fano militia also launched attacks on multiple locations in Bahir Dar, the capital of Amhara region, and according to the Fano militia's public relations head in a media interview, they claimed to have killed many government soldiers in the city.

Currently, the Ethiopian government has not taken actions such as negotiating with the Fano militia, but some "peace conferences" have been held in many towns in the Amhara region. The Speaker of the Ethiopian House of Federation is calling for an early end to the "mutual killing" and for the disarmament of the region's state of emergency.

However, for some coffee farmers, the current conflict is concentrated in the north-central Amhara region of Ethiopia and has not yet affected them. But multiple sources indicate that the Fano militia has not been weakened and is continuously expanding. If the government continues not to negotiate with the Fano militia, the situation will intensify and eventually lead to civil war.

In addition, recently the Ethiopian public has also been dissatisfied with the government. It is said that as Ethiopia's fiscal year is about to end, legislators are proposing amendments to the value-added tax (VAT).

It is understood that the budget proposal mentions major government expenditures totaling 971 billion birr, so the federal government aims to collect 502 billion birr in taxes, mainly including amending the current VAT and excise tax laws, as well as implementing new taxes such as real estate tax and green tax.

Regarding the new tax law, some participants believe that VAT is a "pass-through tax," which will increase business costs but ultimately be passed on to consumers, exacerbating price inflation and being detrimental to commodity exports. Moreover, VAT will also include basic foods such as biscuits in the tax, which goes against the original intent of tax law to protect vulnerable groups, because for workers in many industries, including coffee cultivation, biscuits are a common food source.

Although this VAT is currently under discussion, officials expect the bill to pass, with its provisions taking effect early next year, which will impact multiple industries. For this reason, coffee industry insiders say that Ethiopia's future situation is highly uncertain, and the current situation will lead to a reduction in Ethiopia's coffee exports in the future and an increase in coffee prices.

The above content is compiled by CoffeeHunters, a coffee news website.