Ethiopian Business Review

Cursed Business, Blessed Money

Khat has become one of Ethiopia’s most lucrative exports, recently surpassing even coffee. However, the impact of Khat becoming more profitable is that farmers are starting to steer away from traditional staple crops in favor of growing it. Even so, the government still doesn’t have a cohesive strategy or supports to ensure that the country is getting the greatest possible benefits, as EBR’s Ashenafi Endale explores.

For years, Ethiopia has been trying to diversify its export commodities, which were dominated largely by traditional and agricultural items. As a result, aggregate export revenues have been predictable for at least the last seven years, with Ethiopia bringing in an average of three billion dollars a year. However, lately, there have been tectonic shifts within Ethiopia’s traditional export commodities. 

For at least the last century, coffee has dominated the country’s exported commodities.  This is in spite of the fact that the share of coffee out of the total export earnings diminished from 60Pct ten years ago to 30Pct currently. However, its export volume rose by 32Pct during the same period. Other agricultural commodities such as oilseeds and pulses are also gaining momentum , although not as much as that Khat is enjoying. 

In the last ten years, the volume of Khat shipped out of Ethiopia showed a 117Pct increment from 22.4 million kilogram to 48.8 million kilogram. This has had a dramatic effect on the country’s bundle of export items. Even more, khat has overtaken coffee as the largest export item in terms of value from October to November 2018, according to export performance reports.

In just that month, khat generated USD107 million in export revenues for the country, according to Yosef Masresha, Khat and Forest Products Marketing team leader at the Ministry of Trade and Industry, while coffee exports brought in USD53.04 million, according to data from the Coffee and Tea Authority. 

Khat, a controversial stimulant plant, developed in the Horn of Africa, mainly in Ethiopia and Kenya, and also in Yemen. As unexpected as this latest export performance was, there were multiple reasons for it. After the unrest and instability that rocked the country over the past two years, peace was gradually restored to many parts of the country. Eastern and western Hararge zones, the main khat production and export belt, also experienced political turmoil. The state of Somali, the main throughway for khat exports before reaching Somalia, (the destination for 75Pct of Ethiopia’s khat exports), experienced intense ethnic clashes that took hundreds of lives, until the region’s president was arrested in August 2018. Officially, Ethiopia exports an average of 50,000 tons of khat every year to some 95 countries. 

“It was almost impossible to export Khat until October, 2018. Many exporters are still out of business because they already gave up. Private exporters are still not perfectly sure about the conflict,” says Adugna Regassa, a livestock and agricultural commodities exporter based in Adama town. 

There were 180 Khat exporters in 2017/18, almost all of them based in Harar and Dire Dawa. “The number of exporters fluctuates quite often, because the nature of the business is on and off,” explains Yosef.

Part of the reason for the fluctuation is that much of the Khat trade is carried out underground. According to insiders, a large part of the Khat export business is secretly monopolized by a network run by top government officials, which is also part of a huge underground economy that comprises illegal hard currency circulation and other contraband trade. It is to be recalled that before his resignation in April 2018, former Prime Minister Hailemariam Desalegn disclosed that the administration was facing difficulties in governing the state due to the pressure of the underground networks on the country. 

“During the time of the conflict, Khat was largely exported as a contraband commodity. But after the current administration’s efforts to curb illegal trading, the contraband market started dying out. Much of the Khat export carried out now is legal, and has  contributed to the increase in hard currency revenue,” says Yosef. “If the underground trade is fully addressed, hard currency from export can still improve.” 

Another factor that contributed to Khat outperforming coffee as an export commodity was the increase in the price of the commodity by almost 25Pct. Currently one ton of Khat sells for USD5000, while a ton of coffee fetches USD1,500.But in terms of volume Khat exports didn’t change over the last five years. In 2012/13, a total of 47,167 tons of Khat was exported, and generated USD271.5 million. These figures declined slightly to 47,023 tons and USD263.179 million in 2017/18, during the unrest. 

“For the last couple of years, the gap between the global khat supply and demand has been very wide. That is why the export performance revived immediately after the political problems in the eastern part of Ethiopia were resolved,” stressed Yosef. “If the performance we saw in the past month continues throughout the rest of the year, Khat will beat coffee at the end of the fiscal year, which will be historic. “The Ministry expects earnings from the commodity to reach at least USD300 million by the end of the first half of the 2018/19 fiscal year.  

While the lion’s share of exported Khat goes to Somalia, the rest goes to Djibouti, other African countries, Asia, and Europe.It was also exported to the USA and UK, before both countries banned it. Yet, it is still smuggled into those countries in various forms, according to both Adugna and Yosef. Before the ban, the UK was the third largest destination for Ethiopian Khat. 

Khat is exported, or dried. The fresh Khat is usually exported to nearby countries like Kenya, Djibouti, Somalia, and Yemen. Some countries discourage fresh Khat, since it is stronger than the dry.

Recently, some companies have started exporting bottled Khat juice, after extracting the contents in laboratories. The juice is usually smuggled into the USA, according to sources. Some even advertise the product. 

Khat (Catha edulis), releases a stimulant called cathonine when the leaf is chewed. Its stimulant qualities start to diminish three days after harvesting. As a result, fast transportation is needed to transport it to other countries, including Ethiopian Airlines. The airline introduced its flight to Yemen in 1949 particularly for this purpose. 

Cathonine was added to the list of Schedule I substances by the UN Convention on Psychotropic Substance in 1986. However, the legality of Khat varies from country to country, since Khat plant itself is not listed on any list of international controlled substances. The cathonine in Khat becomes cathine within 48 to 72 hours of harvest. Cathine has far less potent stimulant effects and is listed as a Schedule III Drug in the 1971 UN convention.

According to a committee of WHO experts in 2006, the potential for Khat dependence among users is ‘mild’, perhaps less than alcohol or cigarettes. But consistent Khat use is related to health complications like insomnia, gastrointestinal problems, and cardiovascular events, among others.

International bans and prohibitions of khat usually drive up its retail price. In the United States in 2006, a single bundle of Khat, approximately 100 gram,s cost USD45, six euro in UK in 2015, and USD16 in China in mid-2014, following bans. The price hike even incentivized suppliers, even though the benefits do not reach farmers. 

Currently, Ethiopia is the world’s largest Khat source. Over the last 15 years, the area of Khat farms increased by 160Pct, while production increased by 246Pct and productivity by 33Pct. Out of the total chat production in 2017/18, 1.29 million quintal comes from the state of Oromia, where 1.77 million farmers cultivate it on 162,330 hectare of land, according to the Central Statistical Agency. 

Khat is largely produced in Hararge zones, in southern Ethiopia and Jimma, but production has expanded to new areas like Bahir Dar, where its cultivation was minimal ten years ago. Currently, Bahir Dar is the fourth largest producer of Khat, next to West and East Hararge, and Wollo. 

Unlike any other agricultural commodity in Ethiopia, the Ministry of Agriculture and Livestock does not have an extension program, experts or a department focused on Khat production. “We do not encourage Khat production. The farms as well as the trade are growing on their own, fueled by demand alone,” says an official at the Ministry. 

Due to the growing domestic and international demand, more farmers are starting to cultivate Khat instead of other agricultural products, including coffee. According to a 2010 study by Ezekiel Gebissa (Prof) titled ‘Taking the Place of Food: Khat in Ethiopia,’ Khat income from half hectare of land is six times higher than Ethiopia’s per capita income.

“Frankly, the government only wants the hard currency that Khat generates. Illegalizing it does not mean getting rid of it, because the trade continues underground. Therefore, it is advantageous for the government to legalize it and benefit from the hard currency and tax it can generate,” elaborates Yosef. 

In order to increase the Khat export revenue by discouraging local consumption, the government has ratified a regulation which introduced a new eight percent excise tax on domestic tax traders. However, only a few towns in the states of Oromia and Amhara, like Bahir Dar, have tried to implement it. 

“There is no production problem but domestic consumption is huge, which affects the export revenue,” adds Yosef. “However, stopping local consumption is a headache.”

In Kenya, where khat production is supported by government, the benefits from export are significantly higher than Ethiopia. In Kenya, khat extracts even evolving into industries, into beer, wine, juice and flavors.

Yosef emphasizes that Ethiopia must include the commodity in the agricultural extension program and provide support. “If it can outperform coffee without any support, imagine the benefit, if supports and facilities are provided. However, the government has no support plan for Khat, at least in the near future.”

“Export incentives are necessary to discourage domestic consumption and save the youth from its addiction. If the whole Khat produced is exported, few will get the chance to chew it locally. The government needs a strategy, since all other discouraging mechanisms have failed,” asserts Adugna.


7th Year • Dec.16 - Jan.15 2019 • No. 69


 

 

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