A decade ago the Ethiopian leather sector was losing about 14 million dollars annually due to poor quality hides and skins (HS). The same figure was echoed a few weeks ago despite accelerated deterioration of the same resource of late. The statistics continue to plague the industry and policy makers, defying attempts to capitalise on a promising sector.
 

Leather production in the country has great potential in terms of input supply. Ethiopia ranks first in Africa and 10th in the world in terms of livestock population, even amidst rampant disease, famine, smuggling and poor productivity in the sector.
 

The industry standard of establishing rank by counting horns reveals that the productivity of the livestock is low in Ethiopia by any standard. For instance, the country's share of the world leather trade is less than 0.5pc, which accounts for about 40 billion dollars a year.
 

Ethiopia's leather sector emerged a century ago and passed through three remarkable phases that may be described as introduction, modernisation and proliferation during the imperial, Derg and EPDRF regimes, respectively. In the current phase, the number of tanneries has jumped from less than 10 to about 20.
 

However, the contribution to the sector of these new capital investments is unremarkable as producers compete for the existing nominal profit of the sector instead of developing innovative strategies to expand the market.

The leather sector registered revenue amounting to 650 million Br in 2006 while the unit price of the sector's exports soared from 10 Br/Kg in 1988 to 43 Br/Kg in 2006 alongside Birr devaluation from two to nine against the dollar. Still, the volume of exports was nearly constant and the overall growth of the sector averaged four per cent over the past 20 years.

The major constraints to sector growth may be divided into three categories: supply, quality and product mix.

Being a by-product of meat production, the supply of HS does not respond to its price changes, meaning that a rational person will not slaughter a sheep for the sake of its skin. HS is price inelastic, valued at less than 15pc of a live animal; but it is income elastic; as earnings rise, so does meat consumption, and also supply of HS.

Accordingly, following the transformation of the country from a command to a quasi-market economy, the price of sheepskin has surged from seven Birr to around 40 Br. However, the change has not affected the supply of HS; because the country's per capita income plunged into the absolute poverty basket.

Strangely enough, the higher market price has not even discouraged the traditional uses of HS, nor its smuggling. Studies revealed that over 1.5 million HS failed to reach the tanneries and/or central markets. Illicit trade of live animals and HS has been mounting on an unprecedented scale, worth over 100 million dollars, according to the Ministry of Agriculture and Rural   Development (MoARD), albeit independent sources claimed a figure many times higher than the stated amount.

Furthermore, Ethiopia's purchasing power continues to decline and has displaced meat from many people's diets. The country's per capita consumption of meat is not more than 15kg as opposed to America's, 119kg. Although, Ethiopia comfortably beats India whose per capita meat consumption is 3.4 kg.

The national price index for meat has been galloping from 80 to 200 along with a 20pc inflation that troubles the country. Though the population grows as usual, it does not help to augment HS supply amid meagre household budgets.

In spite of a large disparity in meat consumption, a commercial fattening of livestock has been widespread at an unprecedented rate in the country. As such, it is likely to reduce the supply of HS because only a single large ox is slaughtered to produce the same quantity of meat instead of two or more lean oxen as it used to be.

In many ways, the supply constraints of HS, along with the newly established tanneries, have imposed excess capacity for leather production. As a result, the tanneries are forced to operate under half of their installed capacity. Paradoxically, they are enjoying substantial profits, which may signal the need to come up with more economically sized tanneries.
 

Ethiopian tanneries are bulky as compared to those in other countries. For example, Italy is said to have over 400 tanneries amidst its limited livestock population. Economic theory suggests that as the number of firms rises in a specific industry, so does its efficiency.

Most Ethiopian tanneries are designed on a "copy-cut" basis, are inefficient and suffer from a lack of leadership quality. Perhaps, the existing tanneries should be scaled down, allowing for more efficient smaller factories to enter, as well as tanneries specialising in certain products.

The quality trends of Ethiopian leather are also disturbing. Leather quality is noted by a grade based on the proportion of defect-free surface measured. Best quality (grades one to three) leather commands higher prices; below this level the product loses around half its value.

The share of best grade leather in Ethiopia has plummeted from 75pc to less than 25pc. However, these figures are questionable as re-grading is common in the industry.

Although, USAID has generously speculated that the Ethiopian leather sector will earn 200 million dollars annually by 2010, the decline in quality will be a major hurdle to reach this figure.

Alternatively, one may exercise a conservative projection given all relevant knowledge unchanged to avoid bias and rosy assumptions. A more sober assessment shows the targeted amount (200 million dollars) will require about 26 years at a four per cent annual growth rate, starting from the 2006 revenue of 72 million dollars.
 

However, current trends may extend this date as the volume of leather that failed to fit within the grading scale is mounting at an alarming rate. Leather of this poor quality is rejected and has no economic value.
 

Although the official value lost due to poor quality HS is limited to 14 million dollars a year, some in the industry suspect it to be much higher due to lack of statistical updates.

A number of defects contribute to poor quality HS: parasite damage, scratches, hinge cuts and poor presentation. Of these, parasite damage and scratches are the dominant ones and have a strong correlation: a parasite may cause the animal to itch with any solid object; in the meantime inflammation and scratches are formed on the skin, relegating it to a lower grade or reject rating. The poor animal is also unproductive, as the parasite harms feeding habits.

A study conducted by an international organisation revealed that a parasite dubbed 'ekek' was the most prevalent species causing harm. Although the organisation also came up with an eradication plan, so far nothing has been accomplished worthy of mention. It is imperative to eradicate ekek because it is the biggest threat to the leather sector.

Conversely, a coalition of government and non-government organisations, whose mission is to "take care of Ethiopian livestock" has focused on the many trivial defects, such as knife-cut, cruel slaying, brand mark, wrong ear tag, etc.

The trials of the leather sector cannot continue forever as synthetic leather is seen as a close and competitive substitute by many and a perfect replacement for others. Synthetic leather has captured the interest of leather goods manufacturers for not being susceptible to defects.

Another threatening revelation is the declining value-added trend of the sector. A typical leather sector's products can be categorised under four conversion phases, namely (in ascending order); semi-processed semi-finished, finished and ready to use goods. A move along each phase adds value to the tune of 400pc.

The country's leather sector exports are dominated by semi-processed leather. In 2006, the share of finished leather was only 14pc while ready to use goods represented less than three per cent.

The process of altering semi-processed leather into finished leather coincides with a loss of half of its weight. Therefore, the rise in export volume from 8.6 million tonnes in 1996 to 15.3 million tonnes in 2006 is deceiving with a view to the progress of the sector in general.

Although the Book of Statistical Abstracts published by the Central Statistical Authority poorly designated products of the leather sector, no one disputed the ranking of the sector at a lower stage of development.

While Ethiopia's leather sector has received great attention and massive investment, such as that originating from the Leather and Leather Products Institute, which is now struggling not to lose its relevance, the productivity, quality and value-added figures are disappointing.

The loser in all this is in many ways the supplier of the raw materials for manufacture, the peasant who raises the livestock. Without an efficient buyer to turn his HS into valuable goods, the peasant fetches below potential prices.
 

The government's agricultural strategy seems oblivious to the quality of HS as it includes protectionist policies that shelter the sector from competition and thus hinders its development. The two-tiered pricing system where imports and domestic leather are valued differently is heavy-handed protectionism and encourages smuggling.

It is incumbent on the government to create an environment conducive to efficient development of a sector in which Ethiopia enjoys many competitive advantages.