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The Economic Repercussions of Ethiopia’s Conflict

Ethiopia’s economy had navigated through downturns and the 1980s famine under the Marxist regime led by Gen. Mengistu Haile Mariam, steering towards growth and reform that lasted for decades. Ethiopia became one of the fastest growing economies in the world, with an average growth rate of 10.8 percent between 2004 and 2014. 

However, the country’s engagement in the Tigray war in tandem with the Covid-19 pandemic caused the Ethiopian economy to suffer extremely difficult conditions, leaving more than 5 million people dependent on emergency food aid and 400,000 in imminent danger of starvation. The ongoing civil war in Ethiopia undermines prospects for the economic recovery achieved in the past years.

On 12 August 2021, as the economic repercussions of the war aggravated, the National Bank of Ethiopia (NBE) took proactive steps, suspending lending and transfer transactions and stopping direct importation, after the foreign exchange rate for the US dollar rose from ETB52 to ETB75 following the government’s announcement of general mobilization to fight the Tigray People’s Liberation Front (TPLF). These measures came against the backdrop of difficult economic conditions Ethiopia has been suffering for months amid a rise in food prices, forcing significant numbers of citizens to flee for fear of a famine and end internally displaced. Further, this situation forced the Ethiopian government, through its embassies abroad, to impose forced contributions on Ethiopians.

Amid the growing internal and external pressures Addis Ababa was facing, the Ethiopian government incurred expenses to utilize Mercury Public Affairs’ services of consultation and management of government and media relations. In addition, Mercury Public Affairs supports the Ethiopian government in reinforcing its presence internally and externally, particularly given the increasing pressures the Congress and Biden’s administration are placing on the Ethiopian government to stop violence in Tigray.

Indicators of the Economic Crisis in Ethiopia

Indicators of the economic crisis in Ethiopia can be identified as follows:

Rising Debt

Like many sub-Saharan African countries, evidence suggests that if the Tigray war continues, the Ethiopian economy may lose resilience to clear its debts with multiple international parties. In recent years, Ethiopia has borrowed heavily from China and due to the financial distress it was suffering, it entered into long and complex debt restructuring agreements with China.

In May 2021, Moody’s downgraded Ethiopia’s long-term issuer and senior unsecured ratings to Caa1, reflecting its concerns over Ethiopia’s ability to pay back its debts. It should be recalled that, in February 2021, the Ethiopian government sought the assistance of the World Bank and the International Monetary Fund (IMF) in debt relief under the G-20 debt framework aimed at helping Ethiopia affected by war and Covid-19. When it comes to external debts, Ethiopia has no room for maneuver; so, the Ethiopian government is likely to experience a balance-of-payments crisis and the treasury will not be able to finance its deficit by selling treasury bills because the state is forcing banks to float the public debt at low interest rates.

The conflict has placed a heavy burden on the Ethiopian economy, causing the risk premium on Ethiopia’s dollar debt to double this year and confidence of investors to cool with the government’s pleas for a debt restructuring. The premium demanded to hold Ethiopia’s 2024 Eurobonds instead of U.S. Treasuries has risen to 987 basis points, the highest in Africa after Zambia, which is already in default. However, given the economic and humanitarian considerations, the cost of the war put too much of weight on Abiy Ahmed’s government. The war and its repercussions burdened the Ethiopian government with large debts.

Dwindling Foreign Support

In early 2020, Africa Quartz indicated that the Ethiopian economy is slowing down and is on the way to rapid economic collapse. As the economic situation worsened in the wake of the war and Covid-19 pandemic, the IMF lowered its forecast for global growth rates for many countries in the world, including Ethiopia. Instability and the conflict in Tigray – motivated by ethnic clashes and power struggles, among other drivers – could cause investors to step back for concerns about repercussions of the Tigray war and the economic impact of the government’s growing debt. Achieving economic growth is unlikely with Ethiopia’s most investment-friendly province turned into a battleground for a whole year. Ethiopian government officials are as concerned as foreign investors about a decline in foreign support. In January 2021, the European Union suspended €88 million ($107 million) of the approved budget for Ethiopia due to the government’s war against Tigray.

Inflation

The Ethiopian government underestimated the economic consequences of the Tigray war. At the beginning of the war, it is believed that the war’s economic impact would be limited to Tigray. However, only 10 months after the start of the war, the Ethiopian Ministry of Trade and Industry admitted that the closure of factories and mining sites in Tigray had extended to other provinces, causing the inflation rate to climb to 25 percent, up from 18 percent before the war. This worsening situation has led to depreciation of the Ethiopian birr on the black market relative to foreign currencies, which made companies wait so long – sometimes for a year – to access to foreign currency through formal channels and obtain their allocations from state-owned banks.

Despite all of these indications of Ethiopia’s severe economic downturn, the Ethiopian government is still escalating the conflict with the TPLF, a position that has been sharply criticized by regional and international actors as it threatens any mediation attempt or the possibility of stopping armed operations. 

That said, the economic downturn – if further exacerbated – remains one of the factors that will force the Ethiopian government to review its policies of addressing internal conflicts.

Salah Khalil
A researcher at Al-Ahram Center for Social and Historical Studies

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