Study warns of negative economic impact of EU Deforestation Regulations on Ethiopia’s coffee industry

ETHIOPIA – A recent study by the Overseas Development Institute (ODI), a global affairs think tank based in London, has raised concerns about the potential economic fallout from the upcoming European Union Deforestation Regulation (EUDR) on Ethiopia.  

The report, titled “Avoiding a ‘Green Squeeze’: Supporting Least Developed Countries in Navigating New Greening Trade Measures,” highlights significant challenges for Ethiopia’s economy, particularly its coffee industry, as the EUDR is set to take effect on December 30, 2024. 

The study warns that Ethiopia, Africa’s largest coffee producer and exporter, could face a major economic setback under the EUDR, which mandates deforestation-free supply chains and strict traceability requirements for agricultural products, including coffee. 

These stringent regulations could disrupt Ethiopia’s supply chains, threatening its coffee exports to the European Union, which currently absorbs over a third of the country’s annual coffee shipments. 

The ODI’s modeling predicts that Ethiopia could experience an 18.4 percent decline in total exports and a 5.8 percent drop in imports if the country is unable to comply with the EUDR.  

Additionally, government revenue could decrease by 3.3 percent, and GDP may shrink by 0.6 percent. These declines would likely exacerbate poverty and inequality in Ethiopia, further hindering its progress toward key development goals. 

The report underscores the potential for a “green squeeze,” where well-meaning climate-related trade policies inadvertently harm developing economies like Ethiopia. 

With over six million farmers engaged in coffee cultivation and more than ten million people involved in the broader coffee supply chain, the EUDR poses significant challenges for Ethiopia’s coffee industry, which accounts for 30-35 percent of the country’s total export revenue. 

To meet the EUDR’s environmental objectives, importers in the EU will be required to conduct extensive due diligence assessments of Ethiopian coffee producers.

However, with Ethiopia’s fragmented coffee cultivation system, managed mostly by smallholder farmers, compliance will be difficult to achieve without additional support. 

In response, the Ethiopian government announced a national action plan in February 2024, aimed at fostering deforestation-free coffee production.  

However, officials have requested an extension for the enforcement of the EUDR to allow time for Ethiopia to align with the regulation’s requirements. 

Semereta Sewasew, State Minister for Finance, emphasized the need for this extension to offer assurances to Ethiopian coffee buyers in the EU.  

The study also calls for country-specific support packages to accompany the EUDR’s implementation, warning that even a 10 percent increase in compliance costs could result in a nearly 1 percent reduction in GDP, representing a loss of over US$1 billion for Ethiopia. 

Without targeted assistance, the study predicts severe economic consequences for Ethiopia as it grapples with the challenges of transitioning to sustainable trade practices under the EUDR. 

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