Ethiopia and Kenya are formalising small-scale trade

Ethiopia has established a framework for the legalisation of small-scale cross-border trade with Kenya, allowing licensed traders residing near the border to trade goods worth up to $1,000 per month under ‘simplified’ customs procedures. However, the regime introduces new complications and restrictions that will likely deter traders from choosing the legal path. 

The directive, issued by the Ethiopian Ministry of Justice and Ministry of Trade and Regional Integration last week, seeks to integrate an informal trading system that has long sustained the livelihoods of border communities into the formal economy. It outlines the implementation of the Simplified Border Trade Regime (STR), signed by the two countries in December 2025 in Moyale – the countries’ most prominent border crossing.

Trade Finance Global (TFG) spoke to Danilo Desiderio, a trade policy expert at the Horn Economic and Social Policy Institute, who supports the implementation and monitoring of STR in Moyale within a project launched by Trademark Africa. Desiderio unpacked the misconceptions surrounding small-scale trade in the region and the shortcomings of the new directive, noting that “the regime is not as simple as one would expect.”

Common misconceptions

Thousands of small-scale traders transit the border in Moyale daily, sustaining their lives through frequent, low-value transactions. “Informal trade is not a choice in Moyale. It is a necessity,” said Desiderio.

At the moment, such small-scale trade is not legally regulated in Moyale. The new scheme is not intended as a mechanism to control illicit trade: it is designed to facilitate the transition from informal to formal trade. 

Informal cross-border trade constitutes up to 95% of total trade in East Africa. 

For example, while Ethiopia’s official annual cattle exports are under 2,000, the actual number is roughly 25 times that. The country’s annual regional livestock trade is estimated at an average of $105 million, which is 100 times official values. A similar trend can be observed in commodities such as maize and dry beans, where unrecorded export numbers are sometimes 30-fold recorded numbers. 

Large-scale smuggling is also common in Ethiopia: just last week, authorities imposed fines of up to 50 million birr (roughly $310,986) to curb illegal coffee trading; in March, Ethiopian Customs Commission reported that contraband goods worth over 820 million birr (around $5.1 million), including electronics, narcotics, and foreign currencies, had been confiscated. 

Desiderio underscored how there is a general misconception that STR would enable such smuggling. In reality, the scheme doesn’t apply to large quantities of goods or goods that originate from outside of Ethiopia and Kenya. As reflected in the December 2025 agreement, STR is to meet “the demand by bordering communities to attain their basic commodities through cross border trade.” 

However, concerns over large-scale smuggling have contributed to the restrictive nature of the regime.

Limitations of STR

According to the recent directive, eligible traders must possess a border trade license, and should live in the ‘border area’, which sits within a 50-kilometre (km) distance from the border crossing on the Ethiopian side and 100 km on the Kenyan side. While this ensures border communities are ones to benefit, the sale of goods must also take place within this zone, which Desiderio argued could deter traders from opting for the legal path. 

The goods traded must be included in the ‘common list of goods’ outlined in the directive, which includes limited numbers of livestock, food and beverages, clothing, and household items. 

Traders are only allowed four trips per month, and provided the sum total traded goods does not exceed the $1,000 limit. According to Desiderio, under the current informal system, many of these traders cross the border daily. 

“If I have potatoes for $1,000 and I can make four consignments a month, one per week, but I cannot cross daily, what do I do in the remaining days of the week when I cannot use the trade regime? I go informal. What have you solved? Nothing.”

Additionally, as many of the products included in the common list of goods are perishable, traders cannot afford to take week-long breaks in selling them. 

Under STR, a key simplification is the development of harmonious custom clearance forms by both Kenya and Ethiopia. However, even these simplified forms require traders to declare details regarding product type, quantity, rules of origin, tariff classifications, and sanitary requirements. For many traders unfamiliar with the regulatory steps, this creates administrative friction. Navigating these requirements, alongside fees for pest controls and health inspections, adds new costs that dilute STR’s intended economic benefits. Goods also won’t cross duty-free, but will enjoy a 10% tariff deduction.

Desiderio emphasised that the traded quantities are often too small to incur the costs of formal trade. 

In Moyale, informal trade routes are crowded by harassment: from police to border officers, small-scale traders are frequently stopped and hassled by people looking for bribes. Many traders find it more advantageous to “bribe the officers that patrol these informal routes” than it is to incur the costs of a customs declaration, he explained. 

Desiderio revealed that although traders in Moyale showed enthusiasm publicly about the STR, during private conversations they continued to ask, “When are the benefits coming?” and indicated they might continue with the informal route. 

A January 2026 study of 384 traders across the Ethiopian capital of Addis Ababa found that while 96.6% recognise the benefits of formal trade – particularly access to finance and business opportunities – only 8.6% are actually looking to formalise. This is largely due to complicated bureaucratic procedures, high compliance costs, and distrust of formal institutions.

A pilot project

Despite establishing formal trading arrangements, the new directive “maintains a number of eligibility criteria and operational restrictions that make access selective,” noted Desiderio. The reform thereby serves as a policy experiment to see how traders may respond to different regulatory conditions and assess whether reduced procedural barriers lead to an increase in formal trade.

In the next few weeks, the governments will carry out presentations and workshops informing traders of the new regime. They will then launch a pilot project, where 50 traders from each country will be selected and registered, as a means to test the response to the new directive. Following the pilot project, the two governments will continue discussions on how to improve the regime. 

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Formalising this informal economy aligns with the broader African Continental Free Trade Area (AfCFTA) efforts, which aims to increase intra-African trade and enable continent-wide growth. 

In 2023, intra-African trade was just 16% of the continent’s total trade. Legalising informal, small-scale trade could unlock more accurate data and be a step towards boosting regional integration. 

However, the approach to Moyale goes beyond mere formalisation and seeks to reshape the structures that incentivise traders. If successful, it could serve as the blueprint for many African economies where informal trade exceeds formal trade.