02/10/2024
Diplomatic feud, overtaxation drive khat export trade underground.
September 28, 2024
Revenues down 55 percent since 2021 Ethiopia’s lucrative khat exports to neighboring Somalia have gone completely underground as the trade reels from the effects of the diplomatic fallout between the two countries and cumbersome taxes levied by regional administrations.
Somalia, which has long been the largest export destination for Ethiopian khat traders, has an estimated daily demand of 500,000 kilograms of the stimulant leaf and used to buy up close to 80 percent of Ethiopia’s total khat exports.
However, a quota system recently introduced by the government of President Hassen Sheikh Mohamud limits imports from Ethiopia at around 100,000 kilograms a day. But even this volume is making its way to Somalia on illicit trade routes through a porous and extensive border.
Meanwhile, more and more khat grown in Kenya is making its way to Somalia, creating market disruptions.
“Ethiopia used to export khat to Somalia legally. After Hassen Sheikh was elected, khat exports officially stopped. But khat is still making its way to Somalia illegally,” said Mohammed Ahmed, CEO of Biftu Adugna Business S.C.
The company exports up to two tons of khat daily.
“Somalia has stopped purchasing khat from Ethiopia but up to 100,000 kilograms is flowing there daily through contraband,” he told The Reporter.
Mohammed disclosed only one company is still engaged in legal khat exports to Somalia, but it is only doing so through a branch in Somalia.
“Somalia is covering demand from Kenya now,” he said.
Exports to Djibouti have also gone partially underground, with an estimated 15 tons, equivalent to half of demand, making their way to the small coastal nation illicitly each day.
On the domestic front, a controversial tax levied by regional administrations on the stimulant leaf has become a chronic challenge for traders and played a role in ailing khat export performances.
Data from the National Bank of Ethiopia (NBE) reveals that Ethiopia exported 4.6 million kilograms of khat in quarter two of 2023/24, a full 38 percent drop from export volumes recorded in the same period of the preceding year.
Revenues also dropped 14 percent to USD 46.3 million during the second quarter of 2023/24 despite a surge in prices, according to NBE data. One kilogram of khat sold for USD 10 in 2023/24, as opposed to USD 7.2 the year prior.
The conditions pushed khat’s share in total merchandise export earnings to six percent from nearly seven percent the year before.
Ethiopia generated its highest-ever revenues from khat exports in 2021, with traders bringing in USD 402 million. The figure dropped to USD 248 million in 2023, and then to USD 180 million in the just-ended fiscal year.
“The problems facing the khat industry are multifaceted,” said Mohammed during an interview with The Reporter. “The federal government does not recognize khat as a commodity. Over the past two or three years, several problems have piled up in the khat industry. None of them have been solved.”
The federal government turning a blind eye to regional administrations’ power exercise in levying taxes on khat produced within their jurisdictions has also become a challenge for traders. The Oromia regional administration, in particular, is heavy handed with the tax, according to sources.
“Regional states are levying taxes on khat export. Even the federal government cannot levy taxes on export products, let alone regional administrations. We have no idea why they’re doing it. Is it consumption or production tax?” asked Mohammed.
He disclosed khat traders managed to convince regional officials to lift the tax last year but it has reappeared. The tax rates vary and are levied not in terms of percentages but in terms of weight.
This year, regional tax officials are charging 17 birr per kilogram of khat. It is down from the 30 birr per kilo levied last year, but still winds up constituting up to half of the retail price for one kilogram of khat, according to sources.
Khat exporters want to see the federal government sort out its trade dispute with Somalia.
“There are no efforts underway to normalize trade relations with Somalia and resume legal exports. The only thing done recently is the price revision for official exports to Djibouti,” said Mohammed.
Officials recently increased tariffs on khat exports to Djibouti to eight dollars a kilo from the previous six.
“But this increment is consumed by local taxes. The exporter is not benefiting,” said Mohammed.
He says the khat trade is struggling to cope with the enormity of these problems.
“Khat farmers, especially in eastern Ethiopia, are suffering. Domestic khat prices in these areas have fallen as exporters are discouraged by the taxes, and discouraged to export. Somalia’s decision to stop importing Ethiopian khat is also another factor,” said Mohammed.
A lack of buyers is pushing domestic prices down, according to him.
He urges Ethiopia to take a lesson from Kenya, where local consumption is low and customs procedures and taxes are accommodating.
“Ethiopian khat exporters compete with local consumption. It highly affects us exporters. The local consumption is much higher than what is exported. Only a small amount of khat grown in eastern Ethiopia is exported. The rest is consumed domestically. Addis Ababa alone consumes as much as Somalia and Djibouti combined,” said Mohammed.
Dozens of heavy trucks loaded with khat enter Addis Ababa every day, while only three are used to transport the commodity to Djibouti.
A crackdown on the trade by officials at the Ministry of Trade and Regional Integration over the last couple of years has left only five companies and around eight individuals engaged in khat exports.
Newly introduced rules could see the numbers drop even further. The Ministry has decreed that khat exporters cannot renew their export permits unless they can present evidence of generating at least USD 250,000 in revenues over the just-ended fiscal year.
“No government official is supporting the industry. We tried everything but regions refuse to lift the taxes on exports. The Trade Ministry said the taxes would be refunded if the khat is exported, arguing they are being levied to discourage domestic consumption. But even after we export the khat, our requests for refunds are ignored,” said Mohammed.
“There is no effort underway to resume exports to Somalia, which has been further complicated following the MoU. But the basic problem with exporting to Somalia is there is no bank relationship or government office level relations between the two countries. So when we export the khat first and request for payment, the Somalis refuse to pay,” said Mohamed.
Officials at the Trade Ministry and regional administrations did not respond to The Reporter’s request for comment.
