The EUDR’s Effect on Ethiopia’s Coffee Sector
A Climate Policy Blind Spot
Written by Emma Muilwijk
This May, the European Parliament will decide whether to simplify the EU Deforestation Regulation (EUDR). This decision follows a postponement last November of the implementation of the law.
The postponement was welcomed in Ethiopia, as the sector was unprepared to comply with the legislation, originally announced in 2022. Without changes to make compliance to the EUDR easier, Ethiopia’s coffee sector and its economy as a whole could be negatively impacted, as could broader EU trade relations with Ethiopia. This would disrupt local livelihoods - 25% of the population derives a significant portion of its income from the coffee sector - and economic stability, which means the EUDR also risks increasing political unrest. To mitigate the risks outlined above, the European Parliament must make compliance feasible for smallholder
farmers and the supply chain at large, and foster collaboration with nonprofits and Ethiopian agencies that are modernizing the coffee sector.
Coffee: backbone of the Ethiopian economy
The impact of the EUDR on Ethiopia is potentially significant given the enormous role the coffee sector plays in the economy. Coffee was the largest export product in 2024 and is farmed by approximately four million smallholder farmers. The supply chain for coffee is scattered across cooperatives, processors and exporters, making it difficult to implement new regulations quickly. Especially at local levels where understanding of the EUDR is still limited, replacing paper based traceability systems with the right digital alternatives will be a massive undertaking.
Ethiopia has long faced foreign-exchange shortages and high inflation, which also makes the EUDR relevant from a macroeconomic perspective. Foreign currency is hard to come by due to Ethiopia’s negative balance of payments, and thus coffee export is one of the few available methods to acquire foreign currency, which the country depends on for the import of manufactured goods and cereals. Additionally, this system serves as a source of foreign currency for Ethiopia’s banks, since exporters are required to exchange 50% of their incoming foreign currency into Birr within a month.
While half of Ethiopia’s coffee production is consumed domestically, the export of coffee is vital to Ethiopia’s economic stability and therefore tightly regulated by the government. A weekly minimum export price is set by the Ethiopian Coffee and Tea Authority in order to maximize foreign currency flows. Coffee prices within Ethiopia are higher than this price, so exported beans are sold at a loss, sometimes as high as 50%. Exporters recover these losses through a complex system, in which sister companies use the foreign currency earned through coffee export to import cereals and manufactured goods sold domestically at high margins.
The EUDR could negatively impact this entire system, since the EU is Ethiopia’s largest trading partner in coffee, with 30% of Ethiopia’s coffee export going there. This includes the highest quality beans with certifications like Fairtrade and Rainforest Alliance. ODI has estimated that if export to the EU suddenly became impossible, Ethiopia’s total exports would drop by 18.4%, resulting in a 5.8% fall in imports due to forex constraints, with a likely ripple effect of wage decreases and lower government revenue.
