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Tax breaks for agriculture

Ethiopia imports over 5,900 items annually, these include: finished goods, raw materials for light industries, fresh food items for processing, and packed agricultural products. Ethiopia, which primarily exports agricultural products, currently has exported 220 items. Imports of food items have significantly increased. Eighty percent of Ethiopia’s labor force and foreign currency earnings come from agricultural exports. The government says agricultural development and achievement will lead to industrialization. This is called Agricultural Development Led Industrialization (ADLI).
However, Ethiopia’s agricultural performance has been trending downward recently.
Some who work in the profession say agriculture has not been given the attention it needs by the government. They argue that political decisions have factored into Agriculture’s poor performance. The government counters that is has provided incentives for farmers and agriculture related businesses.
Figures indicate that agriculture is the country’s major economic backbone, but it has not received adequate support in terms of finance or allowing modern agricultural equipment to be imported duty free.
For example, the National Bank of Ethiopia’s (NBE) latest economic outlook for the first quarter of the fiscal year shows that the major beneficiary of bank loans was industry, which accounted for 28.8 percent. This was followed by domestic trade (18.3 percent), international trade (14.6 percent), housing and construction (12.9 percent), and agriculture (10 percent). However, agriculture and related businesses, account for 83.9 percent of exports and 80 percent of the labor force. But only 10 percent of loans have gone to agriculture.
In terms of outstanding credit,agriculture took only 18.7 billion birr or 4.6 percent, while according to the Central Statistical Agency’s recent report, farming householdshave reached 14.9 million and 566,000 new farmers become smallholder farmers every year.
The government says efforts are being exerted to scale up the utilization of improved seeds but only 15 percent of farmers are now using such seeds in Ethiopia, but, the demand for improved seeds has recently risen from eight million to 18 million quintals. At the same time less than 30 percent of farmers use fertilizer.
Regarding the fertilizer usage from the 13 million hectares that are cultivated in the country the majority or 70 percent are not using fertilizer for their farming.
Studies indicated that agriculture is dominated by small-scale farmers who practice rain-fed mixed farming by employing traditional technology, adopting a low-input and low-output production system. Land title deeds owned by small-scale farmers, accounts for 95% of the total area under agricultural use in Ethiopia, and these farmers are responsible for more than 90% of the total agricultural output.
Studies that Capital reviewed stated that policy makers and donor agencies have emphasized the use of modem farm technologies as a sole source of agricultural growth in Ethiopia. However, the cost of modern technologies is so prohibitive that few farmers in limited areas are using them. Therefore, it is high time to explore possibilities for identifying approaches that could complement existing strategies of growth.
Experts that Capital talked said there should be incentives in agriculture in areas like taxes and duties because it is a priority area for export earnings, jobs and revenue in general.
They argued that the majority of smallholder farmers have been neglected by the government. Experts expressed disagreement with the government’s policy because it providesincentives and subsidies for other parts of the economy like industry and service over agriculture.
Demese Chanyalew (PhD) is an agricultural economist, with four decades of experience, including published writings and studies. He made several assessments when he spoke to Capital about the state of agriculture in Ethiopia. Since, agriculture is the pioneer of Ethiopia’s economy, he said, the government needs to prioritize incentives in this sector more than industry or service in order for the country to really grow.
Access to finance is a major problem in his opinion.
“Initially agriculture does not have access to adequate capital. This is despite the fact that agriculture is being relied on to achieve many things in the Millennium Development Goals and Sustainable Development Goals,” he said.
Demese, who leads the consultancy firm DeMarEthio-Africa PLC, said that today the number of farmers using improved seeds is less than 15 percent out of the 17 million farmers in the country, while only 30 percent use fertilizer. This indicates that there is a fundamental exclusion from capital. “Agricultural machines are another thing that has never been implemented in the country.”
Farming is a source of 80 percent of hard currency that the country uses to import capital goods for industries and other products but agriculture fails to get two percent from importing capital goods. This indicates the agriculture is literality denied from capital from inside and outside.
Even though agriculture generates hard currency, its volume is being underutilized, according to experts.
From the total investment allocation, agriculture secured only 10 percent. Bear in mind from the stated 10 percent one percent of the contributors work in the agricultural industry, and they are unable to settle their Development Bank of Ethiopia 6.5 billion birr debt, but they took 70 or above share from the ten percent. The farmers that produce the 99 percent took the balance.
These figures indicate that smallholder farmers are excluded from finance and capital.
Gebremichael Habte, an agronomist and consultant for several local and international agribusinesses and agricultural product exporters, agreed that the major exporters in fruit and vegetables are small holder farmers.
However, they have not used any improved mechanisms to produce more products due to lack of equipment and finance.
“Big farms that we did not see exporting fruits and vegetables particularly in the regional markets are accessing several incentives including duty free and tax holidays besides accessing the finance without any preconditions,” he said.
“Based on the study we conducted about a decade ago and its recommendation it stated that to support food product producers like relevant massive producers and farmer unions to access incentives like flower farms secured,” the agricultural economist said.
He said that the stated incentive is accepted in principle and the lease finance proposed, but in reality the government is using it for industry because that is where their focus is.
Regarding the tax incentive, the government is giving attractive schemes for several local and international investors. In agriculture the government is providing tax and duty incentives but the number of investors is very limited and they contribute less than one percent to agriculture.
Many who work in farm related businesses argue this point Gebremichael says “if you are an agricultural investor you can import any piece of agricultural equipment duty free. For instance, a tractor, while the other person who is belongs to a group of smallholder farmers or an individual that wants to import a tractor to rent to farmers is expected to pay the duty and other taxes to import the product.”
“How can agriculture grow without allowing and imposing high restrictions and tariffs on the wide range of the farming contributors to imports or easily accessing semi or fully advanced ethnologies,” Gebremichael inquired.
“Even though investors are supported in many ways the household farmers are the major hard currency earners for the country, for instance the fruit and vegetable export to Djibouti or Somaliland is from householder farmers,” the agronomist said.
“At the same time even though the investors secured incentives there is not that much success stories coming from them,” the expert argued.
Demese says statistics indicate that 73 percent of the employment is from agriculture, while some agricultural related businesses would increase that percentage to 78 percent.
However, the government stated that about 80 percent of the tax revenue, including high tax payers are source of 75 percent of government revenue on tax and duty, Demese argued.
They argued that Ethiopian farmers pay the most taxes in the country. “The government has to stop its elitist approach and accept the reality to understand agriculture,” he said.
“These stated companies are tax collectors for the government in the form of VAT or TOT. This shows there is a massive amount of tax. The industry and trade companies which are allowed many tax cuts are bankrupt,” the agro economist said.
“We shall see this according to macro economics; consumption, tax and saving in one direction regarding national wealth and investment, consumption and government expenditure on the other side. When we see the first component the country’s GDP tax ratio is 12 percent, while net consumption is from 65 to 70 percent that shows consumers are generating the majority of tax,” Demise explained. Farmers are not even exempted tax when they buy things like pickup trucks for their farms.
“This shows who should benefit from tax exemption,” he said.
Experts at donor and nongovernmental organizations add that supporters who want to provide agricultural equipment like irrigation pipelines are unable to attain their target because the products will be unaffordable for farmers due to tax imposed on freely imported products.
“There are some institutions that want to support the farmers’ productivity by supplying modern equipment, but they are unable to meet their target due to the tax are imposed on the products which escalates the price of the product and makes it expensive for the farmers,” on expert said.
Demise argued that smallholder farmers must modernize and commercialize farmers since they are 99 percent of local consumption or export producers. He explained that prudent measures had to be supported. “The farmer is trying to modernize production. They have difficulty finding equipment to improve their production but they don’t get the products from the market since it is not imported as a priority or they are expensive due to high tax and duties like other goods,” he said.
For instance, the Adama assembled tractors were not able to be owned by farmers due to lack of finance, according to the expert.
Demese claimed that tax exemption is secondary. He said the priority was making high quality and reasonably priced agricultural products, from seed to tractor, accessible to farmers.
“We have frequently argued that agriculture has to have the privileges that other economic sectors have. Agriculture products like veterinary products, animal feed and others are taxed while hotel investors can import TV’s and other products for free. It is ridiculous,” he said.
He stressed that the tax exemption rules need reformed especially when it comes to agriculture.
According to the data from Ministry of Revenue in the first six months of the current budget year, the government has given 65.8 billion birr. Demise said that the stated exempted amount was not given to agriculture. Instead it went to industry and service. However, it was supposed to be for agriculture, he said.
Experts said that from diary to crop production the farmers must be equipped with modern tools through tax subsidies or exemptions.
Regarding modernization, the farmer is far from accessing from the biggest tractor to seed or animal feed due to lack of incentives and exemption on tax. People who work in agricultural businesses that Capital spoke with said that unless farming in modernized to improve their production and irrigation, then development is not possible, and goals won’t be met. They said that the government has to reconsider its policy that focuses on the agriculture than the so called industry and other s meanwhile the later shall also get support but to be considered as secondary.
Farmers who have between two and five hectares of land will be included in the incentives, according to the expert.
Irrigation support is crucial but it needs to be followed up closely to help farmer’s cultivating stimulant products like khat.
Demise said that the government seems to be getting back on track. At least now we are listening to each other, which is priority for growth. “Surprisingly last May the government organized a think tank event, through its own initiative, and assessed areas including agricultural and rural transformation. They examined reasons for the country’s failure to achieve the results they wanted and weaknesses in agriculture. Then they came up with a list of solutions,” Demise, one of the four presenters at the event explained. He said that shows things are improving.
Capital learned that the Ministry of Agriculture is forming a think tank chaired by the minister himself which will include several sub committees made up of business and government representatives working in many agricultural sub-sectors.
Eight intervention areas have been selected for agriculture. These include: extension work, research, capacity building, transforming to a modern system, marketing and finance; mechanization, sustainable natural utilization and conservation; linkage and coordinating.
Capital has attempted to obtain information from the pubic relations head at the Ministry of Finance, which is responsible for drafting incentive laws. Capital also attempted to speak with the Ministry of Agriculture, which works on tax issues. Both agencies declined to comment and said that they are not aware if incentive laws for smallholder farmers are being drafted.
Recently PM Abiy Ahmed said irrigation will get more attention but details have not been specified yet.


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